MODULE 5: STRATEGIC ISSUES IN COMMERCIALIZATION OF IP
5.1 COMMERCIALISATION OF INTELLECTUAL PROPERTY
Many enterprises develop excellent ideas and innovations but do not take steps to
commercialise them due to a lack of business skills, financial resources, market knowledge
and ultimately time.1 Commercialisation of intellectual property (IP) will be facilitated, and
prospects are more likely to be achieved, if the enterprise has given thought to
commercialisation issues as early as possible, during the development of the technology.
The importance of IP should not be under-estimated. It should be understood by enterprises
that IP is a key factor in the worth of a company and is increasingly given a substantial value
in acquisitions, disposals, securitisations, and in enforcement litigation. It also needs to be
identified and managed if companies are to maximise shareholder value.2
The point at which an enterprise shifts its focus to commercialisation can impact upon what
it can do to maximise protection of IP, the options available for commercialisation and risk
management. If an enterprise is to take this approach it needs to incorporate and
implement its strategy at the research planning stage. There are a series of other practical
issues that often have legal or commercial ramifications if they are not addressed early
enough and in an appropriate manner.
Commercialisation is the process where an enterprise takes its innovation to the
marketplace. It is important to note that in order to commercialise an innovation, a
company has to explore all options, assess them in the light of professional and other
circumstances so as to ensure maximum profitability. As Mike Herd, Executive director of
the Sussex Innovation Centre3 puts it “to turn IP into a commercial asset for your company
you must look beyond the confines of your own business and explore potential marketing
and partnership opportunities with other parties.”4
1 Mike Herd, Commercialising your IP: turn ideas into assets, 2006 available at
2 Pricewaterhousecoopers and Landwell, UK Intellectual Property Survey 2002 available at
3 The Sussex Innovation Centre (SInC) is one of the premier technology business incubators in the
Opened in 1996 it provides support for the creation and growth of technology and knowledge based\
companies. The Centre provides excellent facilities and is a thriving business incubation environment for
over 70 high growth companies working within the IT, Biotech, Media and Engineering sectors. Other
companies cover fields such as biotechnology, design media, artificial intelligence, laser development
and games technology. These businesses are working in fields as diverse as new drug discovery and
games technology. Working very closely with the University of Sussex, the Centre is a unique
collaboration between the public, academic and business sectors committed to harnessing the
economic potential of the extensive education and research resources available in the Sussex area. For
more information, visit its website at <http://www.sinc.co.uk/>
5.2 MARKET PULL, RESEARCH PUSH OR OPEN INNOVATION
It is generally considered that there are two approaches in addressing the linkage between
research and the commercialisation of the outputs of research. One approach is to lead with
the research. This is where the enterprise embarks on a research program that is designed
to address a scientific or other technological dilemma without a specific commercial
application of the solution to that dilemma. The alternative is to have a ‘market pull’
approach where the research program is driven by one or more identified commercial
opportunities. The third approach is the Open Innovation approach which will be discussed
in the following segments.
5.2.1 RESEARCH PUSH
In this scenario the enterprise may achieve its objective of developing a solution, but
converting that solution into an applied form may not be easy.
Although there has been increased focus on the lack of commercial fruit arising from a
‘research push’ approach it would be incorrect to consider this approach to be illegitimate.
As any scientist will tell you, quality research requires quality time. As any businessperson
will tell you, ‘time is money’. Balancing these tensions is the dilemma for the
commercialisation process. The research push approach can have an indirect commercial
application. In the first quarter of the 20th century the American Telephone and Telegraph
Company (AT&T) was the first company to organise a co-ordinated research program aimed
at producing a quality system, of radio transmission and reception. It did this, not in order to
derive a commercial opportunity from that technology, but to guard itself against that
technology threatening its existing core business of communications. AT&T promoted the
downside of radio.5
The research push method has implications for the handling of any IP that may be relevant
to the research program and subsequent commercialisation. Applying this approach the
enterprise needs to ask itself the following questions:
• Does it have any IP? This may require undertaking an IP audit.
• Does that IP have any actual or potential utility? Determining utility necessarily
involves an assessment of the IP in light of the objectives of the enterprise, both in a
broad business context and also in relation to the specific project at hand.
• Does the enterprise control the IP? This will involve an assessment of the origins of
IP that would be picked up by an IP audit.
• Should the enterprise do something to protect the IP or gain control of it? This will
also involve an assessment of the utility of the IP and the steps required to gain
control of it.
The research push means that the bulk of the IP work must occur after most of the R&D
work has been completed. This can place the enterprise in a difficult position if it wishes to
5 Dunford R, ‘Is the Development of Technology Helped or Hindered by Patent Laws – Can Anti-Trust
Laws Provide the Solution?’, 9 UNSWLJ 1986 p. 117 at 121.
commercialise IP resulting from the R&D phase. It may have unintended impediments such
as part of the IP being owned by students or contractors. It may have forsaken the ability to
protect the IP if results of the research have been published. It is quite common in these
circumstances for there to be an inadequate budget applied for the commercialisation
phase. The research push approach often involves budgeting for the core research itself
rather than looking at the applications of that research.
5.2.2 MARKET PULL APPROACH
In a Market Pull approach an enterprise’s research program is initiated keeping in mind one
or more identified commercial opportunities.
Let us take an example to understand this approach. A pharmaceutical company may focus
on an illness or disease and apply a research program that analyses the biology associated
with that illness or disease. In this approach the pharmaceutical company, in deciding to
undertake the research program, will have calculated the potential demand for any drug
that may be developed and the costs that such a market might bear in paying for that drug,
potential revenues that might be earned and an analysis of all the input costs required to
get the drug to the market.
The market pull approach involves asking the following questions in relation to IP and
• Does the enterprise need to undertake creation of new knowledge?
• If so, what are the prospects of IP being created?
• If those prospects are reasonable, what should the enterprise do to protect and
control that IP?
• What should the enterprise do to maximise the utility of the IP?
These questions are essential in order to know an assessment of the target market. Of
course, there is always a prospect that research will lead to a unexpected result as was the
case with aspirin, which was first developed by German chemist Felix Hoffman in response
to his father’s rheumatism. It is now one of the most common drugs used in the world for a
wide variety of physical maladies.
It is also much easier to identify the IP activities that would need to be addressed to manage
the IP under a market pull approach.
The following table identifies the relevant IP activities for the phases of research programs:
Market Pull approach – IP Activity IP ACTIVITY
PHASE Preliminary assessment of
Identification of business potential lP outcomes
opportunity (business case) Which of the research inputs
Prepare research plan involve IP?
Market Pull approach – IP Activity IP ACTIVITY
PHASE Assess whether the enterprise
controls the IP
Identify technology that may contain Assess whether there are
IP resulting from research impediments for use of the IP:
Test and demonstrate the for potential use;
technology for commercialisation.
Refine the technology Obtain any necessary IP
clearances for research, use and
Assess IP for qualification for
Revisit business case
Decide which IP should be
Protect IP - by lodging
applications for registration (if
Develop and implement non-
Review and amend the IP
Commence branding strategy
for the technology
126.96.36.199 RESEARCH PHASE IN MARKET PULL AND RESEARCH PUSH APPROACHES
Irrespective of whether a research program is the result of a market pull or research push
approach the enterprise will undertake the research program on the basis that the research
is consistent with the strategic approach for the business and the results will further its
objectives. As with any major undertaking, the research program should be planned and
implemented, applying standard project management principles that:
• identify who is responsible for the various tasks;
• set budget programs for each anticipated stage through to commercialisation;
• identify clearly the objectives, the outcomes, which include any IP. These outcomes
should be within the strategic direction of the enterprise;
• identify the source of the funds required to support the research program. This will
include identifying opportunities for third party funding such as through grants or
• undertake a risk analysis that looks at not only the successful completion of the
project but also the application of the outcomes in a commercial environment.
• set out a timetable for the planning and implementation of the project;
• establish and apply an appropriate document management system. This will assist in
identifying and assessing IP as is derived.
The risk analysis should identify whether there are likely to be any impediments in
undertaking the research as well as commercialising the outcomes of that research.
From an IP perspective this entails identifying other organisations that may have already
secured monopoly rights in the field in which the research is based.
IP searches, particularly of patents and plant breeder’s rights, are an important tool. These
searches are rarely fool proof and the results may need to be revisited on a regular basis at
each important milestone in the project.
While these searches may well disclose impeding patents to the project, it is then open to
the enterprise to try to ‘work around’ those patents. A danger in this approach is obvious.
The consequences can be destructive for the enterprise because of the risk of a court
awarding damages and injunctions. In some jurisdictions punitive damages may be payable
if the enterprise knowingly infringed another’s IP rights. A graphic example of this was the
dispute in the United States between the Polaroid Corporation and Eastman Kodak
concerning the development and sale by Kodak of its instant cameras.
188.8.131.52 KODAK AND POLAROID CLASH IN THE COURTS
Kodak had established itself as a monolith in the photographic industry, Polaroid had
secured dominance in the instant photography market. In the year 1976, Polaroid
Corporation had filed a complaint charging that Eastman Kodak Company had infringed
twelve Polaroid patents relating to integral instant cameras and film. Over the next five
years, the parties engaged in extensive discovery on the issues of liability and infringement.6
Kodak obtained legal advice from respected patent experts on the patent position. After
receiving this advice Kodak technical staff were instructed that they ‘should not be
constrained by what an individual feels is potential patent infringement’. Kodak applied a
strategy of relying on the assumed invalidity of Polaroid’s patents. Not surprisingly, Polaroid
sued Kodak and obtained a judgment that Kodak pay US $ 925 million in damages. Kodak
was forced to close its manufacturing plant and lay off hundreds of workers as well as
having to spend approximately US $ 500 million to buy back the instant cameras that it had
sold over a 10- year period. The legal fees were reported to be over US $ 100 million.7
This case study should be an eye opener to an enterprise on how to go about researching in
the market for identifying patents of their competitors which would have already secured
monopoly rights in the field in which the research of the enterprise was based.
184.108.40.206 ASSESSING THE POTENTIAL OUTPUT OF THE ENTERPRISE
The assessment of the commercialisation potential for a particular research requires
contribution from a team involving the researchers, senior executives, marketing and
6 Polaroid Corp. v. Eastman Kodak Co. U.S. District Court District of Massachusetts 16 USPQ2d 1481
10/12/1990 Decided October 12, 1990 No. 76-1634-MA available at
persons charged with managing legal risks (who are not necessarily the lawyers). Ultimately,
the successful commercialisation of the research will be advanced if the research outputs
enable the enterprise to achieve or maintain a competitive advantage. Analysis of
competitive advantage involves knowing the strengths and weaknesses of the enterprise,
the industry in which it operates, its competitors and existing or potential future
technologies with which the research outputs will be competing against.
Members of the marketing team of the enterprise will hold important information relating
to these issues. It can be expected that the marketing team will be at the coalface with
potential customers or clients of the enterprise for the research outputs. If the
circumstances enable it to do so, the enterprise will be even better placed if it is able to
obtain information from its existing or potential clients for those research outputs. Clients
will have critical information about the problems that are being addressed by the research
outputs, whether they are sufficiently important to the clients for them to pay for that
solution and they may also assist the enterprise designing the research program. A forum
that enables the enterprise to gather this information requires established relationships
between people who have the requisite trust for one another and are able to apply the
‘additional’ time to it.
220.127.116.11 ASSESSING THE POTENTIAL RESEARCH INPUTS
Each research program will have its own idiosyncrasies. Project management principles will
guide the management team to estimate the time, personnel and expertise required to
undertake that project. It will help identify whether personnel outside its organisation are
required. This early planning will enable it to ensure that ownership of any resulting IP is
secured by having the outsiders’ sign appropriate confidentiality and IP ownership
The process of research and development has many elements. It must be cost effective,
having regard to the objectives of the program and that of the enterprise itself. From an IP
perspective the critical issue will be whether the R&D is needed at all or whether it is better
to ‘license-in’ technology. The cost of the options and the timing to achieve them will
heavily influence the strategic position of the enterprise. Involving another party may also
mean that the enterprise must relinquish control, particularly from the perspective of the
commercialisation of any IP and research results. To this end the terms of any licensing
agreement demanded by the licensor will heavily influence the approach taken by the
enterprise. A good example of this approach is the establishment of ‘patent pools', where
organisations agree to cross-license to enable each of them to proceed with their various
research and business programs. This avoids litigation and is cost efficient. Enterprises
applying this strategy need to be aware of the trade practices consequences if the patent
pool effectively establishes a cartel that prevents other organisations competing against
18.104.22.168 PREPARING FOR INTELLECTUAL PROPERTY PROTECTION
At the research phase, staff of the enterprise need to have an appropriate level of
awareness about IP principles and the context in which commercialisation may occur. An
understanding of how businesses operate in the relevant industry can be a useful
background for the researchers.
Clearly, confidentiality is a significant issue at this stage. The development of science has
been fostered on the basis of a free flow of information. This traditional approach needs to
be balanced against the commercial imperatives of the enterprise. If the success of the
research program involves the engagement of other organisations the enterprise will
conceivably face a dilemma of having to decide how much information to disclose to the
other organisation and what are the costs and risks in doing so.
The enterprise will also need to consider any commercial and legal risks in undertaking
research projects which could result in competing technologies. If any of those projects
involve other parties, the enterprise will need to consider its obligations to that party as
either expressly set out in contractual documents or as imposed by relevant legal principles.
For example, does the enterprise owe fiduciary duties to other parties, (as may be the case
with many joint venture arrangements)?
Much will depend upon the nature of information. An employee may either assume or form
a view that the information is part of his or her general knowledge. The employer may not
share that view. Resolution of this issue can only involve constant and adequate
communication between the employer and the employee so that the boundaries for
disclosure are well understood by all.
Maintenance of appropriate records and other documentation can be an essential step in
protecting the relevant IP. Maintenance of laboratory books in respect of patent protection
is a good example: see Chapter 3. Well-kept records may be evidence of permission
obtained from other persons enabling the enterprise to use their IP. This should be logged in
a central location and preferably through some form of database.
Researchers also need to be wary of establishing arrangements where the research outputs
will be jointly owned. Being joined at the hip makes it difficult for an enterprise to freely
commercialise the IP. In general terms joint ownership of IP means that the enterprise
cannot scratch itself without getting the permission of its co-owner. Agreement to joint
ownership should only be established once all risks have been analysed in the context of the
whole research and commercialisation program.
22.214.171.124 CORE ISSUES
At the time of establishing the research program and through its implementation there are
some traditional core issues that will arise and that have an impact on the
5.2.3 OPEN INNOVATION
Open Innovation is the third approach which industries, corporate houses and the like are
applying in order to commercialize their internal innovations and to obtain a huge plethora
of external innovations in order to commercialize them as well. In this approach, firms work
and interact with external partners and create newer and better technologies and products
and thereby benefitting from this interaction. Commons based Peer Production is the term
coined by Harvard Law School Professor Yochai Benkler to portray a new model of economic
production, in which the resourceful energy of a large number of people is coordinated with
the aid of internet into projects without the usual hierarchical organization. Open
Innovation actually means connecting external and internal ideas/technologies.
The basic premise of Open Innovation is: Keep your valuable proprietary to yourself and
leave everything else to external innovation. Innovation is less about inventing new or
building new things and more about coordinating good ideas for commercialization.
Open Innovation can best be explained by Fig 1.1
+ External OPEN
The idea behind open innovation is that in the world there are millions of people who have
widely distributed knowledge. Industries and companies do not have the man power or the
resources to create everything on their own and nor can they rely on the research of their
respective R&D departments. Therefore companies open there R&D laboratories and
research centers to the people outside their organization in order to tap into this vast
distributed knowledge for their own benefit.
One of the basic principles of Open Innovation is that “We should profit from others use of
our IP and we should buy others IP whenever it advances our own business model”8. By
adopting such a method, the enterprise manages its IP portfolio to improvise its business
model and profit from its competitors use.
It is rightly said that we are living in a world where a particular idea becomes old within
minutes because there is be someone in a different part of the world who would have
improvised on that idea and moved on. Open Innovation has gained momentum because of
the Internet which has changed fortunes for so many companies the world over.
Internet sites like zyrist.com, innocentive.com, yourencore.com are providing a platform for
many individuals to create, innovate and discuss ideas. In this era of globalization,
companies need unique capabilities in order to leverage benefits faster and more effectively
than its competitors. This can only be done if they adopt a policy where they welcome
people from outside to generate new ideas which would not only benefit the people who
8 Henry Chesbrough, Open Innovation – The New Imperative for Creating and Profiting from
Technology, HBS Press, 2006 p. xxvi
are bringing these ideas in terms of remuneration, but also to the companies which would
reap in huge benefits and save a lot of money by not spending it in-house.
The approach in an Open Innovation model should be to prioritize an enterprise’s IP into
Proprietary and Non Proprietary IP. Those IP which are proprietary in nature should be kept
within the four walls of the company while the non-proprietary ones should be given out to
the public at large for further innovation.
In order to adopt this new and fast growing approach, the organizations need to dispel
some deeply rooted thoughts from within their organizations. “The conventional wisdom
says that sharing IP and other sources creates a public good where everyone shares in the
benefits, and there is no way to generate private returns.”9 On the contrary sharing of
knowledge can help drive innovation and create wealth. Here is a list of key benefits of open
innovation and peer production10:
• Bind External talent: These days the speed and complexity of change in technology is
so immense that no company can create all innovations which are needed to
compete with competitors under a single roof. We are witnessing a vast sea change
in technology and science which are advancing fast and companies are using and
deploying new knowledge in unanticipated ways. Many intelligent firms understand
this innovation by using peer production and open innovation to involve more
people in developing newer ideas.
• Boosting demand for complimentary offerings: Firms that encourage open
innovation and peer production can boost demand for complimentary offerings and
provide new opportunities to create added value and IP. Just as Wikipedia is gaining
popularity, which has convinced its Founder Jimmy Wales that there may be a
market for a Wikipedia branded line of books.
• Reducing Costs: With open innovation and peer production companies can save a lot
of money. In this chapter we would see how IBM and other big companies have
saved millions of dollars by adopting this model.
• Shifting the locus of competition: “Publishing intellectual property in non core areas
that are core to a competitor can undermine your rival’s ability to monopolize a
resource that you depend on. In the software industry, publishing code has enabled
IBM and Red Hat to migrate the locus of competition from operating systems to
applications, integration and services.”11
Another important principle of Open Innovation is that the enterprise should profit from
others use of its IP. The enterprise should also buy other enterprise’s IP when that particular
IP advances its own business model.12
126.96.36.199 IBM AND OPEN INNOVATION
9 Don Tapscott & Anthony D.Williams, Wikimonics, (Atlantic Books, London) p. 93
12 Supra note 8
Open Innovation has compelled smart companies to review their strategic management.
They are learning how to coexist with and profit with the open innovation phenomenon.
“And if there is one company which exemplifies this potential – along with the deep,
wrenching transforming it entails- its IBM, whose early foray into open source provides
lessons for anyone seeking to harness peer production in their business.”13
IBM has embraced Open Innovation is such a way that many organizations of its stature
have dared. IBM did not join the Open Innovation model from a position of dominance. The
company was having a rough time as many of its operating systems were failing and the
company was having a tough time in competing with its long time archrivals like Microsoft
and Sun Microsystems.
IBM in a move which was termed quite unorthodox, started showing interest in open source
software by donating huge sums of money and proprietary software code and establishing
teams to help open source community based web servers like Apache and Linux (operating
Today IBM saves billions of dollars per year over what it would cost to develop an operating
system similar to Linux on its own. In the same way Linux services and hardware represent
billions of dollars in revenue because of IBM’s investment. IBM’s support to open source has
enabled IBM to leap forward from its competitors such as Microsoft and Sun Microsystems
who charge for operating system software.
The benefits which IBM gets from helping Linux are many. Let us now look at how does it
help IBM? We all know that IBM business model is selling its hardware for servers,
softwares and services. Linux on the other hand offers operating systems (a competitor to
Microsoft), which are more or less complimentary products to IBM’s goods. Now if we look
carefully at the principles of Economics: “If the price of a complementary product goes
down, one can price one’s own product higher and sell more of it. Here, by helping Linux
acquire or use intellectual property, IBM can help Linux gain an advantage over Microsoft
and encourage more people to use Linux. Since Linux is nearly free, this will lower the
average price of the operating system, which will benefit IBM as a seller of complementary
products such as hardware, software, and service. Intel uses the same strategy when
fostering competition among hardware manufacturers of hard drives and RAM in order to
lower the price of products that are complementary to microprocessors.”14
188.8.131.52 GOOGLE AND OPEN INNOVATION
We all are familiar with the product Google came out in the early part of this decade, which
is the Google Map/Google Earth. Google Maps with its high quality satellite imagery of the
world makes it easier for people to locate places. Google found out to its surprise that
13 ibid at 78
14 This was said in a class conducted at the Information School of Berkeley
Linux and the Open Source Community are going to benefit royalty free use of patents acquired by a
newly formed company the Open Innovation Network (“OIN”),
This initiative is funded by IBM, Novell, Philips, Red Hat, and Sony.
individuals all over the world were using creative ideas and reverse engineered the Google
Map application for their services.
Google was in a dilemma, whether to sue these individuals or open its doors for more
creativity. It decided to open up its the Application Programming interface (APIs) to harness
external ideas, talent on a mass scale. By doing this Google has embarked on a journey
where it can develop innovations faster than companies who have a centralized internal
structure of operations.
Before Google opened the Maps API, several mashups15 had been created, including Paul
Rademacher's housing map, which layers Craigslist16 housing ads onto Google maps.
There’s also ingenious Chicago crime map, which lets users create custom views of crimes
from auto theft to bribery on maps as tiny as individual police beats.17
Google was delighted when it found the housing maps application doing well in the Web
2.0. It was free publicity and free product prototyping and they saw in Paul Rademacher a
promising new talent whom Google promptly hired. By taking this move Google has
acquired an Idea (Housing Maps), which is now in its Intellectual Property Portfolio. Also,
Google has saved a lot of money in its internal R&D to develop a technology to counter Paul
Rademacher’s housing maps.
184.108.40.206 AMAZON AND OPEN INNOVATION
Amazon.com has also joined this wave which is creating a revolution in all spheres of the
corporate sector. The question in everyone’s mind is: How does an internet retailing
company benefit from Open Innovation? Amazon has opened up its APIs to its e-commerce
engine in order to invite external participants to become co programmers- co developers on
its platform. Nowadays Amazon’s internal ingenious applications ranging from Web sites
that organize catalogs of CDs according to the top songs in rotation at major radio stations
to an instant messaging application that enables MSN and AOL users to ping an Amazon bot
with a request and have it message back to the person with links to relevant products, are
all developed by people who are not within the four walls of Amazon. Now another question
would come; which is why developers develop such programs for Amazon. The reason is
simple: Amazon is the biggest online retailing company in the world, with customers
numbering millions. For a software developer it makes a great customer. One may think
that Amazon would safeguard most of programming interfaces developed by the external
talent. The answer is just the opposite. By not protecting, more data would be able to be
put in the hands of the developers, and by doing so, more and more interesting tools,
15 In web development, a mashup is a Web application that combines data from one or more sources
into a single integrated tool. The term Mashup implies easy, fast integration, frequently done by access
to open APIs and data sources to produce results that were not the original reason for producing the raw
16 Craiglist is a network of online communities featuring free online classified advertisements – with
jobs, internships, housing, personals, erotic services, for sale/barter/wanted, services, community, gigs,
résumés, and pets categories – and forums on various topics. See the official website of Craiglist at
17 Ryan Singel, Map Hacks on Crack 7th February 2005 available at
applications would be built. This in turn would help Amazon eventually as it see more traffic
coming to its website, more clicks and ultimately more purchases.18
Open Innovation has gained a foothold in many leading companies of the world. Companies
like IBM have also reaped in benefits by licensing its IP under the Open Innovation
5.3 OWNERSHIP OF IP
Generally, Intellectual property of an enterprise/firm is owned by itself, which gives the
enterprise total control of any further development, exploitation of the particular
technology which has been protected as Intellectual property. Owning of one’s own IP
places the enterprise in a strong bargaining position if it is eying for venture capital funding
or government funding, license the particular IP and involve people to be involved in the
enterprise (such as managers and researches). Owning of IP allows an enterprise to
maximize its flexibility in choosing a course of action that will best profit the business.
One thing which should be kept in mind is that, the rule applied to the dealings of
Intellectual property by co owners of IP varies between international jurisdictions. If we take
India as an example, here in this country the patent laws prevent a co-owner from licensing
or assigning its share of the patent without the consent of the other owners. It is therefore
important to ensure that any agreement dealing with ownership of IP in any R&D
agreement restricts the dealing with the resultant IP unless the co-owners agree.
5.4 ALTERNATIVES TO OWNERSHIP
A question should always be asked: why should an enterprise require ownership of an
intellectual property. This involves understanding the objectives of the other parties and
having that expressed in the term sheet for their collaborative venture. Some of the options
that can be considered in these circumstances include:
• access to the IP or technology – this involves a licensing arrangement, the terms of
which would need to be clearly set out.
• return on commercialisation revenues – the parties may consider granting each
other options to participate in the commercialisation phase. This may include taking
an equity position in any spin-off company, converting ownership of the IP if certain
events were to occur or not occur or being paid a proportion of royalties received by
the party undertaking the commercialisation. The reasons for wishing to achieve
commercialisation revenues should also be understood. Is it merely to cover that
organisation’s expenses or is it a true desire to obtain profit? Is the profit motive
consistent with the objectives of that organisation? Are other forms of
commercialisation possible such as taking a security interest over the IP;
• a defensive approach to protect the party’s market share. – The party may wish to
ensure that the enterprise will not compete against it. Rather than sharing IP, this
18 Supra note 3, p. 195-196
objective can be achieved by a restraint clause being imposed in the R&D agreement
but subject to the usual principles of the restraint of trade;
• institutional policies. – The negotiating position of the parties may be driven by their
institutional policies or perceived normal commercial practices. These are difficult to
negotiate because they reflect a ‘position’ rather than an ‘interest'. Moving away
from such norms presents risks for the institution and the individuals that represent
the institution. A failure of the project can be used against them. Examples of these
positions are government agencies that apply the formula of ‘I paid for it therefore I
must own it’.
5.5 TECHNICAL EXPERTISE
In order to ensure that the technology accomplishes the intended potential and the product
which is developed can be marketed fully, it is imperative that the company is confident
enough to woe its distributors and customers that the R&D used in the development
involved many leaders in the relevant fields. This would instil confidence among the
distributors and customers that the technology/product is of high quality and standard. In
some circumstances this gives researchers who are in high demand significant bargaining
power with their employers. This may result in higher costs for the R&D project in order to
retain those researchers.
5.6 PROTECTION OF INTELLECTUAL PROPERTY RIGHTS
A substantial cost is involved in protecting the IP, which the researchers/ start-up companies
own in developing a particular technology or a product. In most of the cases the researchers
are not able to fund the protection. In that case there are instances when other parties such
as venture capital firms agree to fund the protection of IP on the condition that the
researcher/start-up company manages the process of protecting that IP, but this will only
happen if the party, which is funding the protection, gets something in return (quid pro
Now an important question arises: If the relationship between the venture parties and the
researchers deteriorates what would happen? The party, which is funding may not fulfil its
obligations to fund the protection of IP. This may prove to be quite risky for the protection
5.7 RESTRAINT TO TRADE
A participant in a research project may wish to restrain the researchers from undertaking
research for competitors of the participant in the same or similar fields as the subject
matter of the R&D project. The restraint may be broad enough to impose a restraint on the
researchers from being involved in the commercialisation of technology in those fields. This
is not an unreasonable approach having regard to the commercial position of the participant
that may be investing considerable money and resources into the project. Whether it is
offensive, either in a commercial or legal context, is ultimately a question of determining
whether the restraint is reasonable having regard to the interests of the participant
imposing the restraint.
Of course the inclusion of such restraint clauses is a product of the bargaining power of the
parties. In negotiations the researchers should carefully consider the reasons and logic
proposed by the participants for insisting on such restraints that extend to
commercialisation of the technology. If the venture parties’ objectives are to control the
commercialisation of the technology in the relevant field then it may be preferable for the
venture parties to have a right of first refusal to commercialisation.
In any event the drafting of the restraint should be carefully considered to ensure that it
would not apply to serendipitous discoveries which would usually not be part of the
equation in balancing the risks and. benefits held by all the parties.
5.7.1 ACCESS TO FACILITIES/PREMISES
The R&D may be performed by the researchers at the premises of another participant to the
R&D project. Classically, this will be the premise of the research organisations that engage
the researchers. The results of the R&D will be located there.
If the R&D results in technology that may be worth commercialising, the parties may need
to consider the basis of continued access by the enterprise to the premises and facilities of
the participants. This can often be a long time down the track from the beginning of the
R&D project. This situation may be so remote that the parties may consider it too difficult to
address it in the R&D project agreement in any meaningful way. This is particularly so when
the commercialisation vehicle is not yet known. That vehicle may be one of the participants
or a spin-off company in which the researchers are the entrepreneurs.
Options open to the researchers and the participants may include giving the researchers,
through their enterprise, options to take a licence to premises and access to the facilities. At
the time of the negotiation of the R&D venture any agreement about the terms of such
access rights may be so vague as to render the option unenforceable. Care also needs to be
taken to ensure that no unintended tax consequences arise for the enterprise, such as
stamp duty on any premises, occupation or use of the facilities.
5.8 COMMERCIALISATION AGENTS
In some collaborative R&D ventures the parties may agree to appoint a person or entity to
be the agent of the collaborative parties to commercialise the IP derived from the R&D
projects. Often this will be the lead party in the venture. There are material risks that the
parties should consider before appointing such an agent.
5.9 DEFINING THE SCOPE OF THE AGENCY
The law of agency encourages the appointing parties to clearly define the scope of the
agent’s power to bind the principals to any arrangement. This can be almost impossible to
do at a time when the parties to the research project are just commencing the R&D venture.
The nature of the IP or technology that may be derived from the venture is often not
known. Fundamental issues such as the investigation of potential markets and licensees will
not be known. So it is difficult to define in a contract with sufficient certainty the boundaries
within which the commercialisation agent must act. This often leads to unclear language in
contractual documents which can easily be read against the interests of the participants to
the research project.
5.9.1 SELECTING THE COMMERCIALISATION AGENT
As the content of the rest of this material will attest there are many issues that a party
undertaking commercialisation, must consider. Such an entity must have, or be able to
acquire, a wide range of skills and experience. Much will depend on the nature of the
technology that is to be commercialised. It can often be difficult to select with confidence
entrepreneurs or enterprises that will be able to fulfil the role for commercialising the IP
that is derived from the research project. For these reasons it is important for the
appointment of the commercialisation agent to contain sufficient triggers to enable the
parties to exit the arrangement.
The appointment of a party as commercialisation agent can also place the
commercialisation agent in a strong position. The uncertainty referred to in 2.38 means that
it is unlikely that the commercialisation agent will be placed under any obligations to
achieve milestones. It may be difficult for the venture principals to remove or replace the
Enterprises concerned about the above risks could consider the following alternatives:
• appointing the commercialisation agent on a non-exclusive basis. This will enable the
participants to use other entities that may be more suitable when the nature of the
technology is better known and to avoid using an entity that may not be performing
satisfactorily. This is hardly ideal though, because any other entity appointed to the
role will carry the risk that the original agent may encroach upon its activities and
destroy any competitive advantage that may have otherwise enjoyed;
• confining the scope of the powers of the commercialisation agent to specific tasks or
on a ‘standing offer’ basis. Greater certainty is achieved by issuing specific
instructions when the principals wish to extend the scope for the services or pursue
particular opportunities at a time when the nature of the technology is better known
or opportunities have been identified. These instructions may be triggered by using a
‘work order’ system.
5.11 PUBLICATIONS AND PUBLIC ANNOUNCEMENTS
Mere knowledge by other parties of the R&D being undertaken can cause difficulties with
commercialisation at a later date unless managed effectively. Inappropriate or premature
disclosure of developments may jeopardise the acquisition of patent protection or give
competitors early opportunity to take defensive measures, such as defensive litigation to
prevent entry by the enterprise into the targeted market or a springboard into the
competitor’s own R&D in the same or similar field.
It is common to address this’ risk by placing mutual obligations on the participants to only
publish material or make public announcements concerning developments arising from the
R&D projects if all other parties agree. This at least gives some legal remedies to the
innocent parties if those obligations were not honoured. The research contract may
stipulate time periods for the clearing of such proposals.