In the world of increasing convergence between technologies and business sectors it is becoming common for the traditional development model, whereby one party develops and delivers technology to another, to be replaced by more collaborative structures. For example, a mobile phone network operator may partner with a bank to develop a mobile banking solution where both parties deliver not only technology but also access to customers and brands. These kind of collaborative, partnership-based projects raise legal issues not relevant to more traditional structures, and we examine the key legal (and commercial) issues that need to be considered when embarking on such a project.
Establishing the parties’ commercial aspirations
Clearly, the parties’ commercial aspirations should drive the contractual structure. Each party will need to establish what its key drivers and priorities are with respect to the project. For example the driver for one party may be to develop and market a branded product to gain market share, whereas for the other it may simply be to generate revenue. Likewise, for a successful project (and one that can be negotiated and documented relatively smoothly), each party will need to understand what the key drivers are for the other. Another key point is that each party should ensure that the lawyers who are to document the project fully understand the drivers at an early stage.
Structuring the relationship
It will need to be decided what structure the relationship between the parties will take. For example, will one be in the role of ‘supplier’ with the other as ‘customer’, or will there be a joint venture company set up with each party being shareholders? This is an area that could warrant a series of articles in its own right.
Identifying what will actually be developed and delivered
The parties will need to identify at an early stage exactly what will be developed. Will it be some new software or will the project involve enhancing an existing product? Will there be a specification? If so, which party will develop it, when and how? Will there be a project plan with milestones, and if so are dates fixed or just estimates? Will there be acceptance tests of some kind? Will source code be delivered?
Identifying what each party will contribute
What will each party’s investment be in terms of money, skill and knowledge, human resources, technological resources, existing technology, intellectual property, marketing expertise, branding and so on?
Will any existing technology, or any open third party or open source software, be used to develop the products? If so, which party will be responsible for obtaining this and any necessary licence rights? The parties should be comfortable that the terms of the relevant licences allow use of the technology by the parties in the project and also by any end-users.
Branding
The parties will need to agree how any resulting products or services are to be branded. Will they be co-branded? Will any new brands be developed? Which party will own the brands, and what control will the other party have over their registration and enforcement?
What is the intended market for the products?
Do the parties intend that the products will be commercially exploited on a worldwide basis or only in targeted territories? If the latter then who will decide where, when and how the products will be promoted? Which party will promote the products?
IPR
The relevant contributing party is likely to expect to retain ownership of the IPR in any existing technology contributed to the project, and the parties will need to agree how IPR in any new technology developed will be owned. It is common for parties to decide commercially that IPR will be owned jointly. However this raises numerous complex issues around enforcement, onward sale, sub-licensing and other areas, and is best avoided save where there is a compelling commercial reason.
The ownership of new IPR should be driven by what each party wants out of the project in the long term. This can often become an emotive issue, but it is important to remember that IPR ownership is not always the only way that a party can achieve what it wants. The following questions should be considered.
Is it necessary for a party to have the right to actually sell the IPR to a third party in the future (or to raise money on it in some other way)? If so, then it needs to own it.
Will a licence to use and exploit the IPR suffice?
What rights does the other party need to use the IPR in the future and should these be restricted?
In considering the IPR issues, it must be borne in mind that if a party is simply concerned to receive a share of any future revenue stream, the parties can agree on a percentage revenue share arrangement, irrespective of who actually owns the IPR.
If Party A wants to own the IPR so that it can stop others using them (eg its competitors in the market), this can also be achieved in the contract, separately from the IPR provisions. For example, the contract can impose restrictions on who Party B can license the system to (although the position under competition rules must be considered if any exclusivity is proposed).
If one party is insisting on owning the IPR, it may be able to achieve everything it wants by obtaining a licence instead.
How will the parties share the rewards?
The parties need to determine clearly how each party will be rewarded for its role in the project. This may seem obvious but details are often left until the last minute, often resulting in a stand-off before launch of the project. There are various possibilities.
A lump sum payment may be payable, eg if one party was responsible for developing a bespoke system to be delivered to the other party.
A revenue share may be agreed, meaning that the following should be considered:
(i) what will the shares be?
(ii) which party will collect the revenue from customers and whether the revenue share will apply on collection only (ie what happens when customers fail to pay)
(iii) the promotional and other costs each party can ‘net off’ before the share is distributed
(iv) the length of the period for which each party will be entitled to a share of revenue – will the respective shares remain fixed or vary over time (and if so, on what basis)?
(v) will the revenue split be based on specified territories or on a worldwide basis?
(vi) who will be responsible for sales and marketing, and what will the sales targets be? – if Party B has sole responsibility for marketing, Party A’s revenue will be dependent to an extent on Party B’s performance, so there would need to be specific marketing/sales targets with certain remedies for Party A (eg adjustment of revenue share, termination) if these are not met (the targets may increase over time and start off relatively low).
Another option is to combine the two approaches so that Party B pays an initial fee to Party A for its up-front development costs, while also giving Party A a royalty share of any future revenue stream from the products.
If the system is to be licensed to one party (either on an exclusive or non-exclusive basis) a licence fee is an option. The amount of the fee would depend on whether the licence is exclusive or non-exclusive, and may be fixed for a certain period (eg the first two or three years) with an agreed mechanism for the increase of the fee after that initial period (eg by linking it to the RPI). If the licence were to be perpetual and non-revocable, an up-front lump sum licence fee may be more appropriate.
Maintenance and support
Who will be responsible for maintenance and support of the products?
Exit
It is very important at the outset of any project for each party to consider when and how it may exit the project, and also the implications of the other party doing so. The implications arising from one party’s exit will differ depending on the party’s role, whether the exit occurs before or after a product is developed, and whether the exit is due to any default or non-performance by the other party. A host of issues need to be considered in these scenarios, but key considerations include the following.
• how the parties’ respective rights in the IPR would be affected, and what ongoing rights each party needs following the exit
• whether either party is entitled to recoup any costs contributed to the date of exit
• the effect the exit will have on the parties’ obligations, eg will the whole agreement be terminated or will some obligations survive or kick in?
• will the exiting party have any rights to future revenue stream and, if so, will this be adjusted following exit?
Graham Hann is a partner in Taylor Wessing’s Commercial Technology group, and specialises in advising businesses on IT projects, including outsourcings, system developments, turnkey projects, as well as on IT and commercial legal issues generally including intellectual property rights, data protection and privacy and regulation of e-commerce. Graham previously worked for Siemens: g.hann@taylorwessing.com
