Risks of IP co-ownership and unclear ownership agreements

By Frank Liu, Tiantai Law Firm
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The growing awareness of intellectual property (IP) and strengthening of co-operation between enterprises is driving a rising number of enterprises to participate in market competition through collaborative development of new products. This presents both pros and cons. On the one hand, the increasing collaborative development activities help promote and stimulate the research and development of new technologies. On the other hand, problems attributable to the lack of clearly defined ownership for IP resulting from collaborative development are emerging. In addition to collaborative technical development activities, many joint ventures, co-operative ventures, and merger and acquisition deals, are also troubled by disputes over unclear IP ownership agreements.

刘建强 Frank Liu 天驰君泰律师事务所 合伙人 Partner Tiantai Law Firm
Frank Liu
Partner
Tiantai Law Firm

Scenarios of unclear IP ownership agreements. Legal risks of an unclear IP ownership agreement may be easily ignored in the early stages due to enterprises’ strong eagerness for co-operation. Especially in the case of popular and urgent projects, many enterprises consider putting off legal risk prevention until agreements on collaboration are signed. In this context, it is not uncommon that the two parties to a co-operation agreement reach consensus on co-ownership over potential IPs.

However, these agreements may fail to define ownership-related issues clearly, especially in respect of the specific model of co-ownership, and rights and obligations of the parties. At the later stages, disputes may arise due to an imbalance of commercial interests that may result from the parties’ different understandings regarding exercise of specific IP-related rights with regard to, among others, production, sales and licensing.

In the case of joint ventures and co-operative ventures, in addition to IP licensed by shareholders, or given by them as capital contribution, the ventures may create new IP during their period of existence. However, if the joint venture or co-operative venture agreement does not clearly specify in whom the IP ownership should be vested upon termination of the agreement, disputes may arise when the joint venture or co-operative venture arrangement terminates, and especially terminates early, without mutual consensus on the issue.

Risks attributable to co-ownership or unclear ownership agreement. Many agreements on projects to be developed by two or more parties may specify co-ownership of IP resulting from the collaborative development. In cases where there is no clear ownership agreement regarding IP created through joint development that involves the efforts of all parties, it is also common that the IP is co-owned. Co-ownership of IP may involve trademarks, patents, trade secrets, and other types of IP. From a legal point of view, compared with controversies over ownership in the early stage of co-operation, exercising of rights by the respective IP co-owners without a consensus in later stages may lead to higher exposure of risks.

When one co-owner exercises its rights in respect of a co-owned IP, it is difficult for the other co-owner(s) to impose stringent restrictions on the way the rights are exercised. Besides, as intangible assets, IP is capable of being replicated unlimitedly at low cost. Generally, apart from the one who is exercising its rights, all other co-owners are entitled to license the IP to third parties too. Failure among co-owners to reach consensus regarding their licensing to third parties, especially in connection with the terms and conditions, scope and territory of licences, can ultimately affect the business interests of the respective co-owners.

What is more, in the case of a co-owned trade secret, leakage by any co-owner, either intentionally or unintentionally, may expose the trade secret to the serious risk of losing value eventually. Finally, if the co-owners are unable to reach consensus in connection with the transfer of a co-owned IP, disputes may arise, regardless of whether or not the IP is eventually transferred by a co-owner to any third party.

When a joint venture or co-operative venture is dissolved upon early contract termination for any special reason, shareholders may have disputes over how ownership of IP arising during the period of existence of the venture should be vested or acknowledged, whether the IP is co-owned or not. In this case, they also face legal risks similar to the ones arising in scenarios where there is no unclear ownership agreement regarding co-owned IP.

Recommended precautions

Both co-ownerships resulting from active arrangements (for example, scenarios where parties to a collaborative development agree on IP co-ownership), and those coming into being passively (for example IP co-ownerships as a result of any succession or dissolution of a joint venture), imply exposure to significant legal risks in the event of failure to reach consensus on subsequent use, licensing or transfer of rights.

Therefore, from the perspective of legal risk prevention, enterprises are first advised to avoid IP co-ownership arrangements for their co-operation projects wherever possible. As an alternative, they may consider options that allow one party to own the IP independently and irrevocably grant to the other party an exclusive or general licence to use the IP within an agreed territory and timeframe.

For a joint venture or co-operative venture, considerations to be taken into account at the signing of the joint venture or co-operative venture contract do not only include shareholders’ potential IP licensing to the new venture, but also how or who the ownership of IP arising during the existence of the venture should be vested in, in the event of termination or early termination of the contract. As far as merger and acquisition deals are concerned, to avoid disputes over IP ownership after closure of deals, buyers need to perform exhaustive due diligence on the IP of their targets.

In summary, given the special nature of IP as intangible assets and the potential legal risks of IP co-ownership, parties to co-operation projects should ensure that their respective rights, titles and interests of, or in, IP are as clearly defined as possible. As a solution, they may use flexible and diverse licensing arrangements in replacement of co-ownership arrangements that carry comparatively higher legal risks.

If co-ownership is unavoidable, rights and responsibilities must be divided and defined clearly to minimise potential risks associated with future excise of rights, thus paving the way for future growth of the enterprises.

Frank Liu is a partner at TianTai Law Firm

Tiantai Law Firm

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