Wednesday 20 January 2010

Collaboration and IP Rights: But What About Those Transaction Costs?

Surely one of the main themes of the past decade has been the rise of collaboration in R&D and innovation. Whatever one's slogan--"You collectively is smarter than you individually" or "No more 'not invented here'", both popular and and academic literature are replete with accounts of the challenges and rewards of collaboration as opposed to go-it-alone development. Aided by the universal reach of online communications and infrastructure, as well as the global movement of ideas, resources and manpower, collaboration is championed on both substantial and process grounds.

Against the almost epiphanic adulation in favour of such collaboration, however, there remains a dirty little secret: it is often times devilishly difficult to find a workable arrangement for the allocation of IP rights in such circumstances. Just one example --the mind-numbing exercise of distinguishing between "Background IP" and "Foreground IP" has become a common nightmarish staple in fashioning collaboration agreements. More generally, the challenge of establishing a workable framework for determining ownership of IP rights, both individually and jointly, is daunting under the best of circumstances and is a potential show-stopper in less favourable situations.

It is against this backdrop that I recently read an account in the December 7, 2009 issue of Business Week ("Can Roche Leave Genentech Alone?") of the efforts by Roche to implement its acquisition of the 44% of Genentech that Roche did not previously own (in early 2009, we discussed the Roche-Genentech acquisition on this blog here.) One comment in the piece particularly caught my attention: the observation that the acquistion will finally allow the two companies to work together in an effective manner on what is termed "personalized medicine", with the goal of developing "diagnostics", namely the development of the technologies used by doctors to ascertain better which drugs work with which patients.

What exactly was the reason that the development of these "diagnostics" did not take place before the acquisition, even though Roche already owned over 50% of Genentech? According to the article, the reason centred on the issue of IP rights. "When they were separate, Genentech and Roche rarely tried to codevelop diagnostics, because it took too long to work out patent rights and other legal logistics. 'Now there's no intellectual property discussion, there's no negotiation -- we're the same! ... You wouldn't believe how much easier it is.' "

At first glance, this observation seems to be a testimony to the frictions created by transaction costs with respect to IP rights in collaboration arrangements. In particular, as noted by Wikipedia, "Bargaining costs are the costs required to come to an acceptable agreement with the other party to the transaction, drawing up an appropriate contract and so on." Here, the argument seems to be that the bargaining costs in arranging for the disposition of IP rights in a collaborative relationship were, at least with respect to the Roche-Genentech relationship before the full acquisition, prohibitive. The result was that wide collaboration regarding diagnostics did not appear to take place.

There is something disturbing in all of this. Can it be that the transaction costs in bargaining the disposition of IP rights in a collaborative arrangement between two separate parties are so daunting that the only feasible solution is for the two parties to merge, thereby eliminating the friction in the contractual bargaining? Think about it: If the answer is "yes", then it calls into question the ability of lawyers to fashion arrangements for collaboration, other than an outright acquisition of one party by the other (was not Oliver Williamson the co-recipient of the 2090 Nobel Prize in Economics for studying this kind of thing?)

Surely (at least I would like to think "surely"), however, lawyers and their clients engage all the time in reaching an arrangement for the disposition of IP rights in collaboration agreements in situations other than an outright acquisition. Sometimes the negotiations over which party will own what IP rights in a collaboration are less rocky, sometimes more so. As the report on Roche and Genentech indicate, sometimes the collaboration dies a legal stillbirth.

Given this range of possibilities, it seems to me that the better question is how we should understand the parameters for effectively bargaining this disposition of rights in the more typical collaboration arrangement, when acquisition of one party by the other is not on the table. Against this background, we can then perhaps better understand what were the particular factors in the pre-acquisition relationship between Roche and Genentech that seem to have paralyzed any effective bargaining of IP rights between them, at least with respect to diagnostics. There may be an interesting MBA case study here to explore these questions. Any takers?


Unknown said...


Great post. As someone who spent a good portion of her IP law firm practice on fixing bad joint invention arrangements for a number of clients, this is a subject near and dear to my heart. From your post, it appears that the risk management folks (that is, the attorneys) said "no joint invention." As a result, the parties really did not collaborate and, as such, could never reap the full value of the Roche/Genetech pre-merger relationship. Put simply, it was about diversifying revenue streams, not leveraging intellectual capital. As you and I know, there are ways to manage IP in collaborations if the possible scenarios are presented to the parties (hopefully jointly) and the risks scoped out and papered ("plan for success, contract for failure"). Yes, it is scary and complicated and "risky," and we lawyers generally counsel our clients against things like this. However, the opportunities for companies in collaboration far outweigh the risks. We need to get better at helping our clients realize the value of collaborative opportunities or else they are going to do it without us. In other words, we have to lead or get out of the way!

Anonymous said...


Thanks for the great comments. You suggest for me that we need to find better ways to integrate the transaction cost approach of the economists with how managers make decisions. I am still grappling with how to do that

Mark Anderson said...

I think part of the problem with IP collaborations is that there are so many different ways of structuring the relationship, including how the resulting IP will be commercialised, and parties like to be creative. Contrast that with M&A transactions where the fundamental concept is very simple - one party buys the other party in a one-off transaction, and there is no long-term commercial relationship between two parties.

I think a better comparison, rather than between M&A and IP collaborations, would be between contractual joint ventures and IP collaborations. In both of the latter categories, there is a long-term relationship which needs to be structured and documented.