Joint Development and Background Intellectual Property

by James Arnold, Jr,  BASF Enzymes 

Both IP lawyers and non-IP lawyers alike commonly work on Joint Development Agreements (JDAs).  One of the most common provisions in a JDA is the Background IP provision.  As innocuous as the term “Background IP” may sound, there are potential pitfalls for the drafter of such clauses.

The most common understanding underlying Background IP clauses is that both parties bring certain valuable proprietary know-how and intellectual property to the table and that any of this pre-existing intellectual property is owned by the party that developed it.  From a moral perspective, this makes sense, but in reality, once parties start working together and combining know-how, it is not so easy to figure out who owns what as the project progresses until and beyond completion.

As a hypothetical example, let’s say that Party A developed a specialized machine to optimize a method of manufacturing a chemical composition.  The machine, method, and composition were all developed by Party A prior to entering into a JDA with Party B.  Party B, an expert in machine manufacturing, has certain know-how regarding mechanical components that may prove to be useful within the special machine. 

Under most “form” JDAs the parties will agree that Party A will retain ownership of the special machine, optimized method, and chemical composition prior to, during, and after the project and that Party B will retain ownership of its know-how regarding machine manufacturing processes and its proprietary mechanical components prior to, during, and after project completion.

However, what happens if the joint development effort is successful and Party B is able to use its know-how to further enhance the efficiency of the specialized machine that is adapted for optimizing a method of manufacturing a chemical composition?  Who owns this resultant IP?

Under most JDAs, the Agreement expressly provides that ownership of each party’s respective Background IP used during the project remains vested with its original owner and further that any use by the  other party is permitted solely for activities necessary to carry out the joint development work. 

With regard to Background IP that becomes incorporated into IP created during the joint development work, other provisions may be employed to define the parties’ respective ownership interests. 

As an example, the parties may include a clause in the JDA that essentially states that the parties will equally own any jointly-created inventions resulting from the joint development activities and that each party is permitted to exploit the jointly-created IP within a predefined field or area of use defined in technological, geographical, or other terms.  Further, the parties may include language that requires prior written consent from the other party to exploit jointly-developed IP outside the predefined field or area of use unless or until expiration or termination of the agreement.

Another issue to consider is this: What happens if the Background IP of one party at least partially comprises a patent with broad claims generally directed to the same subject area?  As an example, let’s say that with respect to the aforementioned specialized machine, Party A owns a patent that contains an independent claim that comprises elements A and B.  Let’s also assume that the resultant joint development work – in which Party B is able to use its specialized knowledge in the machine manufacturing arts – results in an invention that could be claimed as elements A, B, and C.   Although the Agreement spells out that both parties are able to exploit this jointly-developed invention, the reality is that Party A owns a broader patent that Party B would infringe if Party B were to actually practice the joint invention.   So how does Party B protect itself?

One common method is to include language in the JDA that states that, although each party owns its respective Background IP, the other party is granted a license to the Background IP only to the extent necessary to practice jointly-developed IP.  This essentially protects the owner of the Background IP from having to grant a broad license to its Background IP while equally protecting the other party by allowing it to fully exploit the jointly-developed intellectual property.