Tuesday 23 June 2020

The key issues to consider when entering into a product collaboration

Product collaborations involve a range of intellectual property (IP) and other commercial issues. Where the collaboration involves one party producing a product that incorporates elements from the other party, the agreement is, at its heart, a licence agreement. However, they often require the negotiation of other commercial terms, such as supply terms where some element of the product is being supplied by one party to the other.

In our experience, these are the key issues to consider in entering into a product collaboration:

  • Do you need a confidentiality or non-disclosure agreement for preliminary discussions? We recommend putting one in place, so that the possibility of the collaboration does not come out ahead of time, and the parties feel safe sharing confidential information relevant to the collaboration.
  • What is the product? How closely does it need to be defined? What will be the process for the parties agreeing the final design or recipe for the product? In a food collaboration, the party manufacturing the product would usually do the product development work, with input from the non-manufacturing party. The non-manufacturing party would usually want the right to give final approval of the recipe before production starts.
  • What IP is being licensed? This could include:
    • patents, where the product uses an invention owned by the non-manufacturing party
    • trade secrets, if information about product production is being provided by the non-manufacturing party to the manufacturing party
    • trade marks, where the manufacturing party will use the trade marks of the non-manufacturing party on the product packaging or in the product marketing, and
    • copyright, where one party’s logos, designs or get up is incorporated in the product or product packaging or marketing.
  • Will any new IP be created and, if so, who should own it and who should be allowed to use it? In the case of a food collaboration, possible new IP includes the design of the packaging and the recipe for the new product. Ownership and rights to use will differ depending on, for example:
    • What elements the packaging incorporates, and how novel it is. If the packaging is distinctive and unique to the collaboration, then it may be that neither party should be able to use it outside the collaboration.
    • Whether the recipe is novel, or is protected by any intellectual property rights. If the recipe incorporates distinctive elements or ingredients supplied by the non-manufacturing party, then the manufacturing party may not be entitled to use the recipe outside of the collaboration.

If the overall recipe is novel and has been developed by both parties, then joint ownership of resultant IP may be suggested. This can be complicated if the parties don’t clearly define what this means.

On the other hand, if only one ingredient is novel and that is supplied by one party, then ownership should presumably sit with that party. Careful thought will be needed to understand how that ingredient can be used in the future and whether that includes use in other products.

As a related note, there is not generally any true IP protection for a generic product flavour, separate from the specific recipe for the product (which will most likely be a trade secret). We therefore tend to avoid talking about ‘ownership of a flavour’.

  • What territory is the collaboration product going to be sold in?
  • What is the term of the collaboration? Will the product be a permanent one, or will there be a limited run? Who can renew the collaboration and on what terms?
  • What will the manufacturing party pay the non-manufacturing party? This usually includes a royalty based on the net sales amounts received by the manufacturing party. The level of royalty will depend on the industry and the relative market power of the two parties.
  • Is there any exclusivity? If so, how is that defined? What would make a product similar enough to conflict with the collaboration? Does the exclusivity only apply in the territory where the product will be sold? Does it extend to related parties?
  • What assurances will the manufacturing party give to the non-manufacturing party? Where the non-manufacturing party is supplying parts or ingredients for inclusion in the product, what warranties does the non-manufacturing party give? How will a recall of the product be managed?
  • If the non-manufacturing party will be supplying parts or ingredients, the agreement will need to set out supply terms, including how ordering and delivery will work, and pricing.
  • How will the parties address any events involving one party that may affect the other party? Will the other party be entitled to terminate the agreement?
  • Should either party be able to assign the collaboration to another party? What happens if there is a change of control of the other party? For example, one party may not want the collaboration to continue if the other party is bought by a competitor.

There are a lot of moving parts in negotiating a product collaboration, some of which involve IP and some which do not. Many are specific to the collaboration in question, and any mishandling can risk the reputation of one or both parties. On the other hand, a well-managed collaboration can enhance the reputation of both parties and contribute to increased sales or royalty revenue.

At AJ Park, we understand the complexities involved in collaboration and development arrangements, and can provide specialist advice that is useful, practical, accurate and timely. We will ensure that these key issues are considered and incorporated into your agreements.