What You Need to Know Before Signing a Joint R&D Agreement

Joint research and development is one method to supplement what your company lacks in terms of technology, know-how, and personnel, allowing for the speedy and low-cost development of products and technologies.

While there is much to gain from other companies through joint research and development, there is also the possibility that your company’s information and technology could leak to the partner company.

Furthermore, when the results of joint development are obtained, it is not surprising that each company would prioritize its own interests and ideally want to monopolize them. In reality, a compromise must be reached at some point.

The ‘Japanese Joint Research and Development Agreement’ is concluded to discuss and establish rules for these issues in joint research and development in advance, in order to avoid unnecessary trouble.

Therefore, in this article, we will organize and explain the merits and demerits of the Japanese Joint Research and Development Agreement, and points to note in order to avoid potential troubles.

What is Joint Research and Development?

Joint research and development is a type of corporate alliance, where multiple companies with aligned interests collaborate to efficiently develop products or technologies.

In fields where technological innovation is rapid or product life cycles are shortening, there is a risk of losing out to competitors if too much time is spent on development.

Even if you invest a significant amount of money and effort into research and development and successfully complete a new product, the value of the developed product can be greatly diminished if a competing company has already completed a similar product and introduced it to the market.

While there are methods such as M&A and business alliances that require management-level decisions to develop products or technologies in a short period of time, joint research and development has less impact on management and can be approved by department heads depending on the content, making it a popular choice for many companies.

Benefits of Joint Research and Development Agreements

Clear Division of Roles and Cost Sharing

When conducting development work jointly with a third party, there are various patterns of cost sharing and role division related to development. There are patterns where only the cost is borne and the development work is done by the partner company, and patterns where the companies in charge are divided according to the development phase, and the costs necessary for development are borne by each company in charge. There is no fixed form.

Therefore, one of the important roles of a joint research and development agreement is to clarify the roles, responsibilities, and cost burdens of each company.

Furthermore, it is important to make the division of roles and cost sharing as feasible as possible, as it is possible to stipulate the right to claim damages in case the partner company neglects its obligations.

Reducing Development Costs and Risk Diversification

The benefits of joint research and development include being able to share the funds necessary for development among the participating companies and being able to keep personnel costs for development down.

In addition, it becomes possible to undertake large-scale development that cannot be handled alone, and if results are not obtained, the cost damage can be distributed among the participating companies.

Complementing Each Other in Technology, Personnel, and Research Facilities

In addition to funds, research and development requires technology and personnel that the company lacks, as well as equipment that can prototype and evaluate.

Disadvantages of Joint Research and Development Agreements

Risk of Technology and Know-how Leakage

In a joint research and development project, developers working towards the same goal inevitably have to disclose information needed by the other party. As both parties are bound by confidentiality obligations, there is a possibility that important technologies and know-how may also be disclosed.

Therefore, the biggest disadvantage of joint research and development is the risk of your company’s technology and know-how being leaked and learned by the other company.

However, on the flip side, the opportunity to learn the other company’s technology and know-how can also be considered an advantage.

In any case, careful consideration is required when determining the scope of information to be disclosed.

Difficulty in Monopolizing Outcomes

If you develop a new product or technology on your own, you can monopolize the results and gain an advantage over rival companies in your business operations.

However, in the case of joint research and development, the other company may also have rights to the intellectual property based on the results, making it difficult to monopolize. There is also a possibility that the other company may use this intellectual property to compete with your business.

Potential Restrictions on Joint Research and Development with Other Companies

During the period of joint research and development, the contract may include clauses prohibiting the other company from conducting similar joint research and development with a third party, such as a rival company (prohibition of competitive development).

However, if your company possesses basic technology, various application products and technologies can be developed. Therefore, if joint research and development with other companies is restricted, it could have a significant impact on business activities.

Key Points to Avoid Failure in Joint Research and Development Agreements

Be Careful When Setting the Purpose of a Joint Research and Development Agreement

While the purpose of a joint research and development agreement tends to be overlooked, it is crucial as it can influence many clauses, potentially granting unnecessary broad rights to the other party or imposing excessive restrictions on your company.

Relation with Non-Compete Clauses

The scope of prohibition in non-compete clauses, mentioned in the previous paragraph, can significantly change depending on the ‘purpose’ that is identical or similar.

For instance, if the purpose of joint research and development is set as ‘system development for communication devices’ and ‘development of voice recognition systems for communication devices’, the former would prohibit any joint development with third parties regarding all system development related to communication devices. In contrast, the latter would allow joint development freely as long as it is not related to voice recognition systems.

Setting the purpose too specifically can limit flexibility, requiring contract modifications even for minor adjustments. Conversely, being too abstract can unnecessarily broaden the prohibition scope, so careful consideration is needed.

Relation with Intellectual Property Rights

If the purpose is set too broadly, the other company may claim rights to patent applications based on inventions resulting from joint research, separate from the joint research and development, if the application date falls within the effective period of the joint research and development agreement.

On the other hand, if the purpose is set too specifically, there is a risk that the other company may apply for a patent independently, even if the invention they made is a result of the joint research and development, on the grounds that it is outside the purpose.

Relation with Confidentiality Obligations

Generally, in clauses that establish confidentiality obligations, the other party’s confidential information can be used only within the scope of the purpose, or use outside the purpose is prohibited.

However, if the purpose is set too broadly, even if your company’s confidential information is used in a project separate from the actual development, it would not constitute a breach of contract. Conversely, if the purpose is set too specifically, even a slight application development could potentially breach the contract.

The Biggest Point is the Handling of Results

The most time-consuming discussion in a joint research and development agreement is probably the ‘handling of results’.

There are many points that neither party can concede, such as the ownership of intellectual property rights based on the results, the right to implement, and the right to license, as they directly affect your company’s business. However, the biggest point to avoid unnecessary trouble is to agree as much as possible before starting joint research and development.

Ownership of Intellectual Property Rights

Intellectual property rights based on inventions made in joint research and development are typically held by the company to which the inventor belongs.

However, this is conditional on having provisions such as ‘the company will inherit intellectual property rights based on inventions, etc. made by employees in their work’ in contracts with employees and regulations on job inventions.

In this case, the intellectual property rights arising from joint research and development will belong to the company to which the inventor belongs, but it is also possible to stipulate differently in the contract, such as:

• All intellectual property rights belong solely to either party
• All intellectual property rights are shared
• Intellectual property rights belong solely to either party depending on the type or field of invention
• The destination of intellectual property rights is determined through discussion

The judgment on the ownership of intellectual property rights needs to be made based on business strategy, such as sole ownership of intellectual property rights related to core technology and case-by-case for applied technology.

Implementation of Intellectual Property Rights, Exclusive Rights, etc.

If you assign intellectual property rights related to basic technology solely to the other company and intellectual property rights related to applied products solely to your company, you will need to obtain a license to implement the intellectual property rights related to basic technology from the other company in order to manufacture and sell the applied products.

Since joint research and development is conducted to gain profits by utilizing the results, it is necessary to enable the implementation of intellectual property rights belonging to the other company, regardless of the ownership of the results, if necessary for your company’s business.

In the case of patents, it may be considered to stipulate the establishment of an exclusive ordinary implementation right for a certain period to prevent the basic technology from being licensed to competing companies.

Timing and Content of Result Publication

For researchers and developers, it is very important to present the results of joint research and development at academic conferences or in papers.

Since confidentiality obligations are stipulated in joint research and development agreements, if you wish to publish the results, you must stipulate it in the contract.

Also, publication before patent application leads to the loss of novelty of the patent. Therefore, even after patent application, there is a merit of not letting rival companies know about your company’s development content until the patent application is published, so it is important to agree in advance with the other party on the timing and content of publication.

Be Careful with Termination Causes/COC Clauses

A Change of Control (COC) clause is a clause that makes a ‘change in control of the company’ due to M&A, etc., a cause for contract termination.

It is not uncommon for venture companies to be the target of M&A, so the other company in joint research and development may add a COC clause as a cause for contract termination.

If a rival company acquires a venture company, there is a risk of important information leaking to the rival company by continuing joint research and development.

However, for venture companies and startups, promising joint research and development enhances corporate value, but if a COC clause is included in the contract, it is evaluated as a risk and there is a possibility that the corporate value may be impaired, so be very careful with the handling of COC clauses.

Summary: Consult Legal Experts to Navigate Legal Risks in Joint R&D Agreements

We have discussed the advantages and disadvantages of joint research and development agreements, as well as key points to avoid trouble. When conducting joint research and development with foreign companies, it is important to consider factors such as the governing law and the agreed jurisdiction.

Furthermore, if you restrict research and development on themes other than the joint research and development theme, or limit the use of the results, there is a possibility that it may constitute unfair trade practices under the Japanese Antimonopoly Act.

Given that various risks may lurk depending on the case, we recommend consulting with a lawyer who has extensive knowledge and experience, rather than making a decision on your own when entering into a joint research and development agreement.

Introduction to Our Firm’s Measures

Monolith Law Office is a legal office with high expertise in both IT, particularly the Internet, and law. When conducting joint research and development between companies, it is necessary to create a contract. Our firm handles the creation and review of contracts for various cases, from companies listed on the Tokyo Stock Exchange Prime Market to venture businesses.