A confusing topic for many entrepreneurs is joint ownership of intellectual property.  It often comes up in connection with joint development arrangements, subcontracting portions of work, joint ventures, and other collaborative projects involving intellectual property development, whether it be in connection with software, cleantech, medical device, drug development, or other technology-based initiatives.

Joint ownership of intellectual property can result when two (or more) people co-invent a patentable invention or co-author a joint work of authorship.  Joint ownership can also come up as a matter of a compromise in a contract.

While it may seem fair and a reasonable compromise to declare that all intellectual property developed as part of a collaborative project should be jointly owned, many of the implications of jointly owned intellectual property are counterintuitive.  For instance, joint ownership related to patents is very different than joint ownership of copyright.

So, let us go through the basic implications of joint ownership by the default rules in the United States for patents, copyright, trade secrets, and trademarks.

Joint Ownership of a Patent

In the absence of an agreement to the contrary, each joint owner of a patent may make, use, offer to sell, sell and import the patented invention without the consent of the other joint owners, provided that the joint owner does not infringe the patent rights under a separate patent.  Notably with patents, there is no duty of accounting among the owners of the patent.  In other words, one owner can profit from the patent and does not have to share  the proceeds of the profits with the other owner(s).

To exclusively license a patent to another, however, generally requires the consent of all the owners of the patent.  Also, the consents of all owners of a patent are generally needed for patent enforcement.  This means that in many cases, any single owner can limit enforcement of the rights under the patent.

Joint Ownership of Copyright

Analogous to patents, each owner of a copyright is free to copy, distribute, prepare derivative works based on the joint work, and exercise the other exclusive rights of copyright.  Unlike patents, however, joint owners of copyright do have to account to one another for profits they receive in connection with the jointly owned copyright.  In other words, each owner has to share the profits with the other owners.

To exclusively license copyright requires the consent of all the owners of the copyright.  Also, unlike joint owners of a patent, one owner of a copyright cannot block another owner of that copyright from suing for infringement by simply refusing to join in the suit.  While each individual owner has the right to enforce the copyright in preventing others from using the copyrighted material, another owner can circumvent that enforcement by simply licensing to the “infringer” the right to use the copyrighted material.

Joint Ownership of a Trade Secret

The law surrounding joint ownership of trade secrets is not as well established as it is for patents and copyright.  As with copyright, joint owners of a trade secret likely have to account to one another for profits related to the trade secret.  Although, that conclusion is not entirely clear by case law or statute.  To exclusively license a trade secret likely requires the consent of all the owners of the trade secret.  Sometimes joint ownership can make maintaining secrecy difficult, however, which if compromised could jeopardize the trade secret status.  Although in some contexts, joint owners may have an obligation to one another to keep a trade secret confidential.

Joint Ownership of a Trademark

While joint ownership of trademarks is possible, it is somewhat unusual in that joint ownership is counter to the fundamental purpose of a trademark, which is to serve as a designation of origin from a single entity or person.  A more common strategy is a jointly owned single entity owning the mark.  When there is joint ownership of a trademark, however, as with copyright and trade secrets, joint owners of a trademark likely have to account to one another for profits related to the mark.  To exclusively license a trademark requires the consent of all the owners of the trademark.

Other Issues of Joint Ownership of Intellectual Property

There are a few other general things to keep in mind with regard to joint ownership of intellectual property.  As with the status of joint ownership itself, the parties can modify many of the default rules by addressing the particular issues in a contract, subject to certain legal restrictions such as those related to antitrust.  For example, the parties can decide that only one party is in charge of registration, maintenance, and prosecution of the intellectual property and that the parties must share all royalties in a certain manner (e.g., 70/30).

In addition, the default rules outlined above are quite different in many foreign countries.  For example, in Canada and the U.K., in the absence of an agreement to the contrary, a joint owner of a patent, while having the right to exploit the patented invention, has no right to license it to a third party without the consent of the other owners.

While joint ownership makes sense in certain contexts, many times it does not.  Often joint ownership sounds good in concept at a very high level, but when emerging companies understand the implications of joint ownership of intellectual property they frequently try to avoid it or they contract out of many of the default rules.

Whether looking for an investor, a joint venture or joint development partner, or your next CEO, a warm introduction is almost always better than a cold one.  But the quality and effectiveness of warm introductions vary considerably.  In fact, setting up the right type of introduction from the right type of person can be a test of your entrepreneurial skills. 

Elements of a Good Introduction

In essence, there are at least two elements to a good introduction: (1) the introducer is someone who the prospective investor, joint venture or joint development partner, or CEO listens to; and (2) the introducer has something persuasively positive to say about you or your company.

Types of Introducers

Using an unscientific approach, here are my tiered groupings of people from whom to make your warm introductions:

Top Tier Introducers

1. The introducer successfully concluded a recent close business relationship in which the prospective investor, joint venture or joint development partner, CEO, etc., did very well. 
2. The introducer has an on-going regular business relationship with the prospective investor, joint venture or joint development partner, CEO, etc., that is going well.
3. The introducer is someone well known to the prospective investor, joint venture or joint development partner, CEO, etc., and he, she or it wants to do business with the introducer.
4. The introducer and the prospective investor, joint venture or joint development partner top execs, CEO, etc., are close socially (e.g., families going on vacations together)

 

Middle Tier Introducers

5. The introducer currently works with or has worked with the prospective investor, joint venture or joint development partner, CEO, etc., but not closely.
6. The introducer has a good close working relationship with an affiliate or existing partner of the prospective investor, joint venture or joint development partner, CEO, etc.
7. The introducer is an acknowledged scientific expert or significant player in the industry and is known to the prospective investor, joint venture or joint development partner, CEO, etc., by reputation

 

Bottom Tier Introducers

8. The introducer and the prospective investor, joint venture or joint development partner, CEO, etc., has an on-going regular or previous business relationship that is not going well (or did not go well) through no fault of the introducer.
9. The introducer knows the prospective investor, joint venture or joint development partner top execs, CEO, etc., only through casual social situations (e.g., reception, conference, party, mutual friends)

Of course, there are situations where a “warm” introduction from a hostile source can lead to a problem, one in which a cold call may yield a better result.  But in most cases, even a positive introduction from a “bottom tier” introducer is better than no third party introduction.  For example, I’ve heard a number of venture capitalists say that they have never (ever) invested in a company that sent directly its summary or powerpoint over the transom. 

Ensuring a Positive Message in the Introduction

Just because you have someone lined up who is a top tier or middle tier introducer, does not mean you are set.  As an illustration, I have a client who was looking for an introduction to a particular potential joint development partner.  The client discovered that an MD working at one of the company’s clinical trial sites had previously done a lot of work with the targeted joint development partner.  Upon discovering this, the CEO quickly moved to ask the MD for the introduction, which the MD agreed to do.  As it turns out, the MD by his nature was very measured in his words when making introductions.  In making this introduction, the CEO later found out that the MD spent as much time disclaiming knowledge about the company and its prospects as he did explaining in a measured way the positive results of the recent trials.  While the CEO did get the meeting, he spent considerable time explaining why the MD was not more enthusiastic about the CEO’s company.

So, how do you ensure a positive message in the introduction?  Ask the introducer what he or she is going to say.  Provide the introducer with an elevator pitch length email about your company.  Provide him or her an executive summary or the bullet points to touch on during the introduction.  You should do as much work as possible for the introducer to make sure that his or her job is easy and that he or she gets the facts right.  That said, the introducer should know the basics about your company as the prospective investor, joint venture or joint development partner, CEO, etc., will likely have at least one question for the introducer.  If the introducer does not know rough headcount or revenue numbers, or whether the company has filed an IND, for example, not only can that be embarrassing to the introducer but it will also degrade the effectiveness of an otherwise good introduction.

While serendipitous introductions or connections do happen, many times a good introduction is the product of deliberate, diligent entrepreneurial efforts of finding the right person with the right connection to deliver the right message.

The next 12-24 months should be interesting in the biotech/pharmaceutical arena.  We have the large pharmaceutical companies (such as Abbott, AstraZeneca, Bristoll-Meyers Squibb, Eli Lilly, GlaxoSmithKline, J&J, Merck, Novartis, Pfizer, Roche, Sanofi, and Schering-Plough) sitting on a lot of cash.  Yet, despite all that money in the bank, the number of high profile drugs coming off patent soon from large pharma is substantial.  According to Merck’s industry numbers, drugs coming off U.S. patent in 2011 alone will cause a loss of over $51.1 billion in revenues in 2011.  The following year does not look much better with another $42.9 billion in less revenue from drugs coming off patent in 2012.  Looked at another way, 85% of the top large pharma products will lose U.S. patent protection by 2012.

So where will large pharma go to replace these lost revenue streams?  While acquisitions of large biotech companies (market caps between $5-50 billion) will likely be a partial solution, it is far from a complete solution.  

Where will the Next Blockbuster Drugs Come From?

One set of clues to the answer may be to examine where the large blockbuster drugs came from in the last decade.  Not surprising to many in the industry, the overwhelming majority of top-selling drugs were developed by companies that were different than the companies commercializing them.  According to Merck’s figures of the blockbuster drugs from the last decade,

• 60% of innovator small molecules,
• 82% of innovator biologics,
• 65% of follow on small molecules, and
• 62% of follow on biologics

were originated in a company other than the company commercializing it.  This trend seems like it will continue.  With the various numbers I have seen, the revenues from the pipeline of new drugs from large pharma is expected to be less than one third of the anticipated revenues from drugs coming off patent. 

Cash Strapped Biotech

On the other end of the spectrum, we have a number of smaller biotech companies that are very short on cash and have a number of products in the pipeline.  In the Spring of this year, it was noted by many sources that more than 1/3 of the public biotech companies had less than six months of cash left to operate.  For privately held biotech companies, the news is similarly bleak with the tight venture capital markets.  While the number of small deals, PIPEs, and mergers and acquisitions of biotech firms have picked up some in the last month or two, absent an unanticipated opening of the public markets and significant increases in venture capital or PIPEs, the day of reckoning for many biotechs is coming soon. 

Unless of course, large pharma goes on an investment or buying spree in an effort to make up their anticipated lost revenues.