Virtually every joint venture, whether for an immediate business purpose or long-term research, requires a close relationship between and among the ventures if it is to avoid being doomed to failure from the outset. Many of us in the profession, in an effort to have the client understand the importance of the issues, suggest to the client that it is like a marriage — to be successful, all parties must give and take for the benefit of the union. We may also make reference to the often-cited statistic that 50 percent of marriages end in divorce proceedings that involve matrimonial lawyers representing the sparring soon-to-be ex-spouses in dividing up the marital assets. It is becoming increasingly common for the soon-to-be married parties to engage in a written prenuptial plan. Without comment on the state of marriage relationships, it is a good and wise thing to advocate that clients adopt the same thinking while negotiating the joint venture and that they adopt it well in advance of any writing. If there comes a time when the joint venture needs to be unraveled or the purpose for the joint venture no longer exists, the benefits of a clearly thought out process for achieving that end will be appreciated and relieve a lot of the stress.
One of the earliest considerations is whether you want to make an agreement that there is no agreement until a "final agreement document" is signed. Such ventures may start informally with an exchange of letters, with term sheets or outlines of the venture. If any of these are employed, they need to be used carefully and with clear language that they are not enforceable agreements. This may seem like unnecessary advice, but the excitement surrounding the possible venture often makes the parties feel rushed and adverse to anything that may look like a potential roadblock to a deal.
Your client should be encouraged to look at the joint venture like it is a merger or an acquisition. Check the finances of the potential partner for at least the basics, like, can it afford the promised capital contribution, does it have sufficient cash flow to maintain staff for the venture, and, if it is to contribute brick-and-mortar space, can you separate any capital equipment so it is safe from creditors? Does the potential venture partner have the technical depth for the proposed venture; if not, can it afford to hire the necessary personal? What are the mile posts for the project/venture and how is success in reaching them determined? If one entity is to run the venture, what are the limits of that entity’s authority? How is information between the parties and the venture to be shared or protected? Is there any exiting confidential business information or technology, aka intellectual property, that is to be shared or transferred to the joint venture and, if so, what are the terms and conditions of its use and ownership?
As an example of how the matter can become both complicated and problematic, let’s take the issue of intellectual property that is necessary for the joint venture to carry out its intended function and should be, in the best case, transferred to the venture. If entities A and B are forming a joint venture (JV) and A and B own intellectual property that is necessary for the JV to carry out the intended function, it is important that the intellectual property is properly transferred to the JV entity. One way to achieve this transfer is to license the intellectual property to the JV entity from the current owner A or B with an assurance that the license terminates upon the termination of the JV entity. It is important in drafting the transfer language to make it clear whether the transferring entity A or B continues to have any residual rights post-transfer to utilize the intellectual property and to clearly define the nature of the JV’s rights to the intellectual property.
One of the due diligence issues that entities need to consider when entering into a joint venture that is concerned with intellectual property is the potential for infringement of third-party intellectual property rights. For example, it may be desirable to have cross-warranties that the intellectual property being transferred is not subject to any infringement notice or third-party claims that could be adverse to the functioning of the JV. The potential third-party issues can span the range from pending litigation to a claim by a programmer that an invoice is outstanding and the assignment of the work is contingent on full payment.
Another intellectual property issue that needs careful attention concerns who owns, or will own, intellectual property that is developed by the joint venture. For example, if the JV ceases to exist, what happens to the JV-owned intellectual property and is there a process for deciding who becomes the owner of the JV’s intellectual property? Consideration also needs to be given to intellectual property that is developed by the JV without use or benefit of the intellectual property transferred from A or B. Does it make sense to have A and B become joint owners? Does it make sense for the JV to license the intellectual property to A and B? Do A and B want to sell or license the intellectual property because neither of them is interested in further commercial development of it? In any event, the issue needs to be taken into consideration beforehand so that the joint venture structure has the best opportunity of meeting the parties’ expectations.
Additional intellectual property complications that can arise relate to new intellectual property that is developed by employees of either A or B that are on assignment or loan to the JV for their specialized knowledge or skill. It is often the case that the employees of A or B have signed employment agreements. These employment agreements often require an employee to assign or promise to assign to the company any intellectual property developed while in the course of employment for the company and relating to the business of the company. It can become contentious if the technology has interest to the independent business interest of A or B, or if the JV dissolves. Who is the owner of intellectual property developed by an employee of company A, while working on loan to the JV? It may be that all new intellectual property developed by employees of A or B, while working for the JV, assign their rights to the JV irrespective of any employment agreements. In any event, the joint venture agreement should address this issue before it becomes contentious or possibly fatal to the JV.
Last, but certainly not least, is consideration of what happens in a bankruptcy. Should A or B enter into a joint venture and subsequently become involved in a bankruptcy, what happens to the intellectual property that the bankrupt entity assigned or licensed to the JV during and/or after the bankruptcy proceeding? Bankruptcy is never a pleasant conversation when the parties are considering a joint venture, and bankruptcy counsel will tell you that many people fail to consider the issue and are surprised by the trustee’s actions and some of the ultimate outcomes.
The above discussion is, by no means, intended to be exclusive and exhaustive. This is provided as food for thought with the hope that counsel can encourage the parties to consider all aspects of the potential joint venture. Like a marriage, every hope for a JV is that it will be successful and full of good fortune. Like a good prenuptial agreement, the joint venture agreement should make the unwinding of the deal less painful. Such agreements are not very likely to be painless, regardless of counsel’s drafting skills. •