International Joint Ventures

In international joint ventures, a technology company often contributes technology rights and a foreign company contributes cash or provides services such as its distribution channels.  One of the most compelling reasons for a joint venture is the perceived need to create a separate identity for the new venture.  The foreign company and technology company typically remain independent, but may undertake the development, manufacturing or marketing of the technology and specific products for a specific region through a joint venture by creating a new corporation or partnership.  The parties usually establish a local entity in a foreign market to avoid prejudice against non-local companies.

For a U.S. technology company, Asian or European partnerships may provide the technology company with instant credibility and access to customers in markets that it would take years of effort and losses to break through independently.  The technology company also may gain manufacturing know-how, parts sourcing and related technology otherwise not available in the U.S.  Foreign ventures add legal complexities and bring into play foreign laws and regulatory approvals.

New Management Model
Management of an alliance may require new concepts and a new management model.  A key question is how to manage a strategic alliance network to promote the exchange of new information and change.  An alliance must maintain active communication channels.  New product or production methods, or market changes such as changing tastes or preferences should generate management responses.  Communications channels provide information about new kinds of production processes and new marketing concepts which provides a basis for new corporate opportunities. 

Finding New Partners
Alliances with privately owned firms are often desirable because these firms offer greater flexibility and quicker decision making than public and large corporations.  Companies may be more comfortable developing alliances with organizations with similar cultures and objectives. 

Many businesses expend considerable resources assessing potential partners in alliances.  Such companies have substantial experience in exchanging information and advice and exploring new collaborative efforts as well as engaging in short-term projects.  It is desirable to maintain a wide variety of contacts in order to build a base for future alliance collaborations.

Companies that overlook cultivating new contacts lose opportunities to participate in future alliances and alliance networks.  Many companies maintain strategic data on a variety of domestic and foreign companies in their industries to identify strengths, weaknesses, motives, culture, resources, and strategic objectives of potential partners.  Personal contacts provide obvious sources of future partnerships.

Technology Transfer Laws
When a technology company licenses technology into a developing country, the company should recognize that technology transfer laws may apply in the country.  These laws may characterize a license as a sale of technology, restrict the duration of confidentiality provisions, limit the amount of royalties which may be paid and provide that foreign choice of law provisions are unenforceable.  When such laws apply, the technology company should seek advice from local counsel and delay the release of important technology until the local government has approved the terms of the agreement.

Foreign Antitrust Laws

A technology company should review the effect of foreign antitrust rules on restrictions in its licensing and distribution agreement.  Japan and EEC countries in particular may prohibit resale price maintenance, exclusive grant backs, customer restrictions, non-competes and territorial restrictions beyond certain limits.

Technology companies should recognize that a U.S. choice of law provision may not be enforceable in a foreign jurisdiction.  Local laws in the foreign jurisdiction may override the contract in topics such as termination, technology transfers, trademarks, antitrust, consumer protection, limitations of liability and warranty disclaimers, and ownership and assignment of copyrights (including moral rights).

The agreement should ensure that the forum and the governing law are consistent in terms of language so that the governing law will be interpreted correctly.  U.S. technology companies should avoid a forum that lacks well-established statutory and case law regarding proprietary rights in their licensed technology.

Exchange Controls
A U.S. technology company must ascertain if there are exchange controls in a foreign country that would restrict a foreign company from transferring royalty payments out of the country.  In many foreign countries, license agreements must be approved by the government before U.S. dollars may be transferred out of the country.  If a foreign company is domiciled in a developing nation, a U.S. technology company should determine if there are counter-trade or offset requirements to receiving U.S. dollars from that country.

Withholding Taxes
Although sales income from a foreign country may not be subject to tax in that country, royalties paid on sales in a foreign country are often subject to withholding taxes.  For instance, there is a 10 percent withholding tax on royalty payments from Japan to U.S. companies.  Where withholding taxes apply, a U.S. technology company needs to decide whether it will gross up the royalty rate in order that the withholding tax does not affect the net amount received on royalties from Japan.

Arbitration or Litigation
A venture involving a technology company and a foreign company may agree to arbitrate disputes rather than litigate.  Arbitration is more practical for reviewing disputes due to the compound relationships between the parties and the greater expense and uncertainty of litigation in foreign forums.  Where technology is complex, the parties should require that the arbitrators have technical background in the field.  Arbitration also should offer the parties greater control over scheduling the proceedings. 

On the other hand, technology companies may prefer to litigate proprietary rights issues in the belief that injunctive relief and the discovery rules and appeal rights in court actions offer stronger protections.

Choice of Law
A U.S. technology company should require U.S. law as the governing law because the U.S. has a well-developed body of intellectual property law.  On the other hand, the foreign company may seek to have the laws of its jurisdiction apply.

In distribution agreements, the parties may choose the Convention on Contracts for the International Sale of Goods (CISG) to cover purchase and sale disputes.  The laws in the CISG differ from those in the Uniform Commercial Code.  A technology company must recognize that oral contracts may be binding under the CISG and that offers encouraging detrimental reliance by a buyer will be irrevocable under the CISG.

Choice of Language
For U.S. technology companies, if there is both an English and a non-English version of the final agreement, the governing language clause should specify that the English language version governs.         

Joint ventures are inherently complex.  International ventures particularly require consideration of a myriad of business, commercial, liability, return on investment, tax and control ramifications.  International business increases legal, tax and business complexities.  To be successful in the global market, technology companies typically enter partnering arrangements with foreign companies.  Since many partnering arrangements are between foreign companies and technology companies, it is important to understand the international implications.

Asian companies may be receptive to acquiring new technology and products from U.S. companies.  At the same time, Pacific Rim companies often focus on the long-term in investing in new technology and markets.  Asian and European companies often treat ventures with U.S. technology companies as an opportunity to diversify and become familiar with the U.S. market.  These companies may have significant experience with such ventures.

Both foreign and technology companies must obtain competent legal, tax and accounting input early in the negotiating process.  Legal restrictions in foreign countries often make certain agreements and terms impossible and tax issues may make certain legal structures more expensive than others.  Experienced counsel should structure prudent and cost-effective mechanisms for accomplishing the client's objectives.

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