To be agreed or not to be agreed in R&D agreements

Better collaborations lead to better innovation. Today, it is regularly acknowledged that external collaborations are important for companies to generate new knowledge and improve firms’ innovative performance. Innovating through R&D collaboration has several substantive benefits, such as the possibility for mutual knowledge sharing, combining complementary skill sets and reducing the costs of generating new knowledge.

Aside from the popular start-up/corporate collaboration, one form of collaborative R&D that can bring firms innovative success is university/industry collaboration. Academic knowledge is beneficial to technological change, innovation and growth in the private sector due to new theoretical insights, new techniques and new skills of a kind that industrial firms find difficult to provide themselves.

In a society where innovation is held in so high esteem, governments and public organisations also encourage R&D collaboration by providing opportunities for funding through state aid. Since risks are great in the early stages of innovation processes, many projects would never see the light of day without external financial support. Parties in publicly funded projects get the opportunity to experiment and try out new ideas before they become profitable.

Companies faced with the opportunity of performing collaborative research with unique competence provided by universities in projects funded by public institutions are right to see the benefits. They may even find that universities and participating researchers pursue different objectives from typical business interests, which seems to provide opportunities for private entities to acquire a major share of the potential outcome of the projects. But what private companies should also consider is that public partners and public funding also often mean different constraints. The diversity of interests potentially enhances the value of collaboration, but it is also a source of complications.

When considering collaborative R&D with universities and negotiating publicly funded R&D agreements, companies should therefore be aware of the limits of contractual freedom. Collaboration with public authorities means a whole new regulatory framework to consider, public funds are most likely conditional, and all collaboration must include awareness of restrictions related to mandatory competition law. In this article, we will highlight some of the basic principles which cannot be deviated from in a publicly funded R&D collaboration.

Prohibition against indirect state aid
A company which receives government support gains an advantage over its competitors. In order to prevent state subsidies from distorting competition in the internal market and affecting trade between EU Member States in a manner contrary to the common interest, Article 107(1) of the Treaty on the Functioning of the European Union (fördraget om Europeiska Unionens funktionssätt) lays down the principle that state aid is prohibited.

State aid can be directly transmitted by the state to a company, but also indirectly through collaboration with a publicly funded intermediary organisation such as a university. Consequently, where universities are included in research projects, the terms of the collaboration may not favour participating private companies so that the companies receive indirect state aid.

In this context, it is important to differentiate between research collaboration and contract research. A project is considered to be carried out in collaboration where the parties pursue a common objective based on the division of labour and jointly define its scope, participate in its design, contribute to its implementation and share its financial, technological, scientific and other risks. Where the company specifies the terms and conditions of the contract and carries the risk of failure, the relationship is instead considered contract research.

According to the Commission, no indirect state aid is awarded to participating companies if certain conditions are met. First, none is awarded if the participating companies bear the full cost of the project. In such projects, the parties will have the opportunity to negotiate far-reaching favourable terms for the private actors without risking this being interpreted as indirect state aid being granted.

However, if it is not possible to cover the full costs, companies can avoid this risk by not claiming all the results of the project. The terms should then either prescribe (a) that any intellectual property rights resulting from the activities of the university are fully allocated to it, and that no restrictions are made regarding the dissemination of the results of the collaboration which do not give rise to intellectual property rights, or (b) that any intellectual property rights resulting from the project are allocated to the different collaboration partners in a manner which adequately reflects their work packages, contributions and respective interests.

Should neither of these options be desirable, prohibited indirect state aid can only be avoided if the university receives compensation equivalent to the market price of the assets when assigning the intellectual property rights which result from its activities.

Where a university is used to perform contract research or provide a research service to a company, no state aid is transferred to the company if the university receives adequate payment for its services. This means that the university should be paid at market rates. If there is no market rate, the university should either have its full costs covered including a margin, or be paid at a rate which is the result of arm’s length negotiations and covers at least its marginal costs.

In summary, the prohibition against indirect state aid limits the contractual freedom of the parties when universities are involved in research collaboration with private actors. Since EU competition law is mandatory, these rules need to be complied with even if the participating university or researchers express no interest in owning the results. Companies considering such collaboration should be aware that if they are interested in claiming the results of the project, they come at a price.

Prohibition against agreements restricting competition
R&D agreements between companies can improve the innovative capability of the participating parties but can also restrict competition and the diversity of products.

Article 101 of the Treaty on the Functioning of the European Union prohibits any agreements or cartels between EU Member States that could disrupt free competition within the internal market. However, Article 101(3) suggests that the prohibition specified in Article 101(1) may be declared inapplicable when agreements between companies contribute to improving the production or distribution of goods, or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit. Since consumers can generally be expected to benefit from the increased volume and effectiveness of research and development through the introduction of new or improved products or services, a more rapid launch of those products or services, or the reduction of prices brought about by new or improved technologies or processes, the Commission has generally exempted R&D agreements from the prohibition (through what is known as a block exemption regulation).

Although R&D agreements are not generally considered detrimental to competition, the Commission does not exempt all types of R&D agreements (which may vary significantly in form and scope). Companies should carefully consider what conditions need to be met for the exemption to apply when negotiating R&D agreements, both in research collaboration and contract research.

The block exemption regarding R&D agreements is applicable if the agreement stipulates that all the parties receive full access to the results of the R&D for the purposes of further R&D and exploitation. This means that a company cannot expect fully exclusive rights to the results of the project. However, there are some exceptions. For instance, where the collaborating parties limit their rights of exploitation, e.g. where they specialise in the area of application, access to the results for the purposes of exploitation may be limited accordingly. Universities may also agree to limit their use of the results for the purposes of further research.

The R&D agreement shall also stipulate that each party be granted access to any pre-existing know-how accumulated by the other parties if this is indispensable to exploitation of the results. Granting rights of access to background information if required is, in other words, mandatory when negotiating R&D agreements. The access may be subject to a fee but this should not be so high as to effectively impede such access.

The rules under the block exemption apply to research collaboration and contract research in general. They are not specifically applicable to collaboration with universities. As previously stated, the rules are, in fact, less strict when universities are involved. However, these EU competition rules also need to be considered in every contract negotiation, including those with academia. Companies should therefore consider whether they actually wish to grant access rights to their background information and results before entering into an R&D agreement.

Funding agency’s general terms and conditions
Where R&D projects are funded by state aid, companies considering partnerships need to bear in mind that the funding agency most likely expects compliance with its general terms and conditions in order to receive funding. Such terms and conditions may contain details on project agreements, project reporting and consequences in the event that the conditions are not complied with. The terms and conditions always apply in relation to the funding agency, even if the contracting parties have agreed to deviate from them to some extent.

Sweden’s innovation agency, VINNOVA, funds innovation projects and research under VINNOVA’s general terms and conditions for grants. These conditions stipulate, inter alia, that a project participant who requires access to another party’s background information or results in order to use their own project results should be granted such rights to the necessary extent.

Projects funded under the Horizon 2020 programme are governed by a grant agreement that also states that the beneficiaries of the grant must afford each other access to the background information and results required in order to exploit their own results. Additionally, the grant agreement specifies that results be owned by the beneficiary that generates them.

Companies should always be conscious of these terms provided by the funding agency and carefully consider whether a project is suited to be governed by such provisions.

Principle of public access to official records
Swedish universities are government authorities. As such, they must adhere to the principle of public access to official records (offentlighetsprincipen). This means that all documents submitted to the university during a research project may become public records, which may be provided to any individual who asks for them. This principle also includes Chalmers University of Technology and Jönköping University, despite them not being public authorities. Since companies’ interest in keeping information confidential usually conflicts with the principle, it is of the utmost importance that they fully understand how this principle works.

According to the Public Access to Information and Secrecy Act (offentlighets- och sekretesslagen), information shared with universities may in certain circumstances be kept confidential, in which case the information will not be shared with any third party. Business information and research results may remain confidential in research collaborations and contract research if the company has participated in the collaboration on the condition that the information is kept confidential.

However, information can only be kept confidential under the Public Access to Information and Secrecy Act for ten years from the date the document is drafted. This means that even if the university agrees to a longer confidentiality period in the project agreement, the university has an obligation to disclose information at the request of any individual after the ten-year period has expired.

Conclusions
When considering R&D collaboration in any form, companies should always take into account any mandatory regulations limiting contractual freedom. As indicated above, if a collaboration is undertaken with public authorities such as universities or if the project is funded by state aid, there are limitations on the freedom to allocate the ownership and rights of use of any background information and research results, as well as restrictions on how universities should be compensated for their work and for how long confidential information may be kept confidential.

If the results from the collaboration are expected to be of high value, the company should consider whether it is better to cover all costs of the project in order to be able to claim full ownership of the results. Moreover, if the company’s background information is of very high value, the company should also consider funding the project itself rather than applying for external funding, since the funding agency’s general terms and conditions may state that the parties must grant each other access to their respective background information. Finally, if the value of either the results or the background information depends on these retaining confidentiality, the company should consider avoiding any public collaboration, since both background information and results must be shared with the project partners to avoid risking infringement of competition regulations. If confidential information is expected to be of value over a long period, the company must assess whether a university or other public authority is the best partner, since the information will become public after ten years (if not earlier).