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Most companies are looking at ways to use technology to stay ahead of the competition and build resilience within the business. But if your primary business has nothing to do with technology, you may need some help. This could mean outsourcing technology to another company or forming a joint venture. While there are significant benefits to technology partnerships, joint ventures, mergers and acquisitions, there are also some risks – and not just to the business.
Governments are increasingly concerned that joint venture partners could pass important technology to a foreign power.
Let’s take one high-tech example – a US company has created a robotic exoskeleton that helps humans enhance mobility. The company wanted to develop its technology for medical use — to help patients rehabilitate from stroke and spinal cord injury — so they struck a deal with some biotech facilities and partners in China. That was until the Committee on Foreign Investment in the United States – known as SIFIUS – asked them to end their joint venture. SIFIUS cited national security concerns – as a foreign adversary to the United States, there were concerns that the Chinese might use this technology to make a robotic soldier suit. Think of Iron Man. So, how can you grow quickly and acquire new technology safely? And what should you pay attention to when entering into joint ventures with another company?
We spoke to Olaf Gartner and Byron Phillips for advice on what companies should consider when approaching a joint venture. Both are partners in Hogan Lovells’ litigation, arbitration and employment practices.
Q: What are some of the risks companies may face when outsourcing key business operations to a technology company?
Byron: With any kind of innovation, there are risks. We often see mismatched expectations between the parties, poor preparation of the joint venture or partnership, or whatever the association may be. There may also be a failure to really plan how to get into it and then how to get out of it at the other end. So there are many areas with potential risks. But that doesn’t mean it’s not a good idea. This is Good Idea. It’s actually how we’re going to make progress and how we use and develop technology properly for better business and a better world. There are a lot of tools available to us to help mitigate risks. And when these risks really come to the fore, to be able to deal with them in a reasonable and meaningful way.
Olaf: This is also what we see here in CE. It’s a great idea to come together and collaborate. But you really have to pay attention. In our experience, it is important to match cultures. If those in a joint venture had very different ways of thinking about the world, they could end up with a real problem. This could go on for years. So you really want to be sure at first if this is a good fit or not.
Byron: This is a very focal point. We often focus on technology in the joint venture, but in reality they are the people. And most of the time, technology is developed and controlled by people. They are the people you must bring together to make your JV project a success.
Q: According to the Litigation Scene Report, more than 60% of companies said technology development and/or deployment is an essential part of their growth strategy. Why do you think this is true and how can a joint venture fill the gap? Is joint venture always the solution?
Olaf: Certainly not permanent. and why is that? Because technology is developing so fast and many big companies are afraid of being left behind, of not developing fast enough. So you have to collaborate with small companies that are very flexible, find a good match and you have options. Otherwise, you may risk being left behind. I think that’s one of the main reasons we’ve seen so many joint ventures over the past five years in the technology sector.
Byron: And a lot of times this is a very sophisticated and reasonable company – whether it’s on the tech side or the non-tech side, realizing that a particular area is not their area of expertise. They will not be able to develop the technical or non-technical side by themselves. So it makes sense to combine the two and take advantage of those opportunities as a team.
Q: The report also shows that the uptake of technology joint ventures is growing very rapidly. Nearly half of the respondents said they are looking to implement a joint technology project in the next two years compared to only 39% in the past two years. So, do you think weaknesses and risks should be weighed in these decisions?
Byron: Yes, it is a very short answer. The slightly longer answer is that we are clearly going to see a proliferation of these joint ventures. I think everyone understands that and it’s the right thing to do for most of the companies that operate in these different places. The truth is that every company will have to understand where the risks are, how to mitigate those risks, and how to ensure that the joint venture or partnership does two things: stay on the intended path, but also evolve where it evolves needs to evolve.
Q: Byron, do you have any specific examples you can share with us when technology goes wrong?
Byron: Yeah. Although I can’t name the parties, because it’s a dispute I’ve worked on. It included a major IT infrastructure contract where the resource provided software for a large organization. This was a multi-year contract. Problems arose immediately because the organization and a number of sub-organizations within its structure all wanted the program to be tailored to their own wants and needs, and in the end to do different things for each of them. The service or product immediately did not resemble what was described in the contract and caused major problems for both parties. This is a somewhat extreme example but this is where you can see how the issues arise. Without proper planning and dialogue with all stakeholders at the outset, and throughout the project management phase, or an understanding of what the technology is supposed to do and the ability to identify where it could go wrong and what to do if it does, there can be very serious consequences. Obviously, the potential for lengthy and costly litigation or arbitration resulting from this.
Olaf: why Is there a greater potential for disputes in technical joint ventures? That’s because the product is evolving, and because the product is new, it’s the flagship. People initially have high hopes and want to do something together. But in program code, for example, it is very difficult to find problems. It’s not like you’re disassembling a car, you can take a look at what you have on your hands. With the program, you cannot touch all these intangibles. This is all part of the technology and leads to additional risks that are very difficult to verify and detect.
Q: Can you discuss some of the ways companies can look to reduce risk?
Byron: There are a number of areas that we focused on in the litigation landscape report. The first is – what is the final destination and how can you actually end a joint venture partnership at the end of its life? There is a lot of forward planning to be done. Unfortunately, often this is not done, and this causes a number of problems for all parties because you need to determine what happens to the managers who are on the board of directors of the joint venture at the end of its life. What happens to the various assets, liabilities, and intellectual property rights that are developed during the life of the joint venture? All of these things need to be dealt with at the front end in the transaction documents to ensure that they are clear enough and that each party understands exactly what will happen at the end of their life. If there are likely to be changes to this, there should be explicit variances in the transaction documentation to make sure nothing is left ambiguous in the end.
Olaf: We have a very apt example of what Byron is discussing. Right now, we have a huge dispute about a joint venture in technology that’s going on. There are about 50, 60, 70 court cases going on in parallel, and they all cover one joint venture. And they have a very clear mechanism where they have redemption rights, which is the right to return the shares to the founders if a specific funding round is not met. This means some money on a specific date or you can call back the stock. However, we still struggle because the other party agrees that they did not provide the funding, but they argue “But you didn’t need the money at this time. The project wasn’t developing enough, so the money wasn’t needed. For people to get creative. You need to try Clarify all this in the beginning to make it as simple as possible because lawyers and all the people involved will get creative and try to get away.
Byron: At this point, you should have a reasonable dispute resolution mechanism in the agreement to actually help the parties work their way through any issues they end up having, as this will help avoid very creative lawyers who are causing problems when it comes to trying to resolve a dispute.
Q: Let’s talk about the future of technology. When we talk about technology like the metaverse or AI, what are some of the risks and pitfalls?
Byron: Lots of really interesting things are happening as we move into an increasingly digital future. For example, the Metaverse brings huge opportunities for trading and an extraordinary platform for social interaction. The general consensus seems to be that it will grow organically as we see more and more companies come into play and integrate different products, services, and capabilities. Assuming several million users, it would take almost unimaginably huge databases to handle the inevitable data, which of course brings potential risks including data breaches and cyber fraud. So companies and governments will really have to move past the legal ramifications and perhaps some legal tools will have to adapt and evolve. As we operate at this intersection of business and government, it is even more important to consider legal issues with extreme caution.
Likewise, AI systems and their increasing autonomy are fascinating legal puzzles from a regulatory perspective and also from the perspective of how current legal doctrines, such as negligence and product liability, should adapt. Some jurisdictions are currently responding faster than others to legal issues arising from emerging technologies. This is absolutely certain. China, for example, appears to be acting very quickly to build a regulatory framework, which is great.
Q: So what is your general advice on how companies can mitigate risks?
Olaf: My answer may come as a surprise from a lawyer. But I say, do not pay too much attention to the law. It is very important that the JV fits, but you have to listen to your gut feeling. Make sure you have a cultural fit as this is what will ultimately lead you to the ups and downs. And the legal text is help, it is support, but it will not guarantee the success of the joint venture in the end.
Byron: Also listen to people who know how the technology is supposed to work. When you enter into these agreements, you need to make sure that you get the technical side of the business and the legal work together to make sure that the transaction documents and any other documents created accurately reflect what the parties expect to happen during the life of the joint venture. You must ensure that everyone’s interests and intentions are covered and that the technology can actually do what it needs to do and what the deal documents say it can do. Because once you get a mismatch between those, it’s almost your destiny from the start because you’re going to be playing catch-up trying to make sure the technology fits what the contract says.