May 2016

Joint Developments Raise Intellectual Property Concerns
By William A. Tanenbaum
For The Record
Vol. 28 No. 5 P. 10

In order to improve patient care and internal IT operations, medical centers often need to enter joint development agreements with software companies and other technology vendors. Developing wearable medical devices, mobile and cloud-based services, and even "software as a medical device" requires a combination of the skills used to construct each of them.

However, joint collaborations can lead to unexpected intellectual property (IP) results and business outcomes. This article addresses those surprise outcomes, with special focus on the factors medical institutions must consider when structuring joint development agreements. Joint ownership of joint developments is a common approach, but it is not mandated nor is it always an ideal result. To avoid these risks, health care organizations can pursue specific contractual avenues.

Identifying Risks
Under IP statutes, each joint owner is free to grant nonexclusive license rights to third parties without the consent of the opposite party or an advance notice. The third party can be any entity, including another medical center or technology company. It also can be a joint venture.

If the medical center provided funding and the research time of its physicians, then the technology vendor will have effectively converted the medical center's investment into no-cost research and development that the vendor can use to enter into another venture to enhance the jointly developed product or develop an entirely new commercial product. Further, the medical center may have no voice in the course of future development. Also, it does not automatically obtain the economic fruits of future successes.

IP laws complicate matters. Most combined software and hardware products and services are covered by a combination of copyright and patent. The legal standard for determining which party is the creator of copyright and which is the creator of patentable subject matter may result in unexpected outcomes.

The creator of copyright rights is identified as the "author," while the party responsible for patent rights is the "inventor." Authorship and inventorship have different legal standards and cover different aspects of the same product. To oversimplify, patent rights can apply to the hardware while copyright pertains to the software, both of which exist in most medical devices. For example, a wearable medical device features physical hardware that cannot operate without the embedded software. Software upgrades to improve the device further muddle the situation.

Determining what is joint contribution and what is an independent contribution is a complex legal matter. If both parties contributed to writing the software, then each is deemed a coauthor. In the same vein, if both contributed to hardware development, then each is considered a coinventor. However, the company is referred to as the inventor because while by law inventors must be individuals, the overwhelming commercial practice is for those individuals to assign their inventorship rights to their corporate employers.

The result is that the medical center and the vendor can be joint authors (owners) of part of the software and sole authors of another bit of software. The same holds true for patent rights. However, in the case of a software and hardware product, there will be overlapping IP ownership rights, meaning the copyright and patent rights will be required to further develop the product. Putting aside the unilateral license right, this raises a cloud over what each of the medical center and the technology vendor is free to enhance on its own.

If the technology vendor controls patent applications for joint inventorship, then it's possible that it can focus the scope of patent protection on what it wants to protect. This would inadvertently or otherwise weaken patent protection for the medical center.

Copyright rules differ from those governing patent rights. Under the "duty of accounting," the joint ownership that licenses copyright rights to a third party has an obligation to share the proceeds it receives under the license. However, patent law has no such requirement. When the licensed product consists of a combination of copyright and patent rights, ascertaining the amount due under the duty of accounting can be difficult.

Addressing Risks
There are several key components to help minimize IP risks, including the following:

Make Joint Ownership Work
How are risks mitigated? The short answer is to carefully address them in the joint development agreement and use the contract to override the default provisions of statutory law, which is permissible. If the medical center and the technology vendor are joint owners and the risk is that the vendor will grant unilateral license rights, the solution is to have the contract require the medical center's approval. The approval must require that the medical center approve the intended use and, if consistent with the transaction, that it share any commercial benefits.

Avoid Joint Ownership
Another solution is to avoid joint ownership status altogether. This can be accomplished by having one party assign all of its rights to the other, a maneuver that is usually coupled with a broad license back to the assigning party. Because the assigning party assigns all of its rights—whatever they may be—this strategy addresses complications that arise when it is difficult to determine what aspects of the collaborative work are truly joint and what parts are solely owned.

Assigning all rights to one party makes it easier to license rights to third parties. This is because the licensee receives greater assurance that there are no hidden gaps in ownership and the license will not be subject to subsequent challenge. However, the price of this assurance is steeper license fees or royalties.

Allow the Vendor to Own the IP
If the technology vendor is providing ongoing services, there are legal advantages to the medical center allowing it to own the IP, including the following:

• the work product will be written by the "A" team;

• the IP in the work product will be protected by the vendor's contractual representations, warranties, and, most importantly, the IP indemnity; and

• the work product will not be an orphan product—it will likely be upgraded and maintained as part of the vendor's core services. This removes technology integration obligations from the medical center.

There also is a financial advantage to having the vendor own the IP. Should the vendor reuse the jointly developed work in its business operations, the medical center's costs are likely be reduced to reflect the fact that it is not a research and development division of the technology company. Either alternatively or in addition to lower costs, the medical center may receive compensation from the vendor for its contributions to the collaborative work product.

Final Thoughts
While collaborations are behind many new medical technology developments, there are hidden business and IP risks associated with joint ownership of these products. However, granting the license rights and assigning the IP rights to one party are two strategies in which medical centers can reduce these risks.

— William A. Tanenbaum is head of the technology transaction practice, leader of the HIT section of the health care practice group, and a partner at Arent Fox's corporate and securities practice.