On December 23, 2020, the Japan Fair Trade Commission ("JFTC") and Ministry of Economy, Trade and Industry ("METI") proposed a draft of Guidelines for Business Collaboration with Startups ("Guidelines") for the purpose of promoting open innovation and ensuring fair and free competitive environments.1 They are seeking comments from the public. Comments are due by January 25, 2021.
At the Future Investment Conference held on April 3, 2020, the Cabinet of Japan discussed the policy for promoting open innovation and ensuring fair and free competitive environments. For the purpose of achieving innovation by business collaboration, it decided to prepare guidelines that outline problematic cases and proposed remedial measures and points of view under the Anti-Monopoly Act ("AMA") to prevent startups from being required to make unilateral contractual arrangements with large companies. Accordingly, on July 17, 2020, the Cabinet of Japan made a decision that the JFTC and METI jointly prepare a draft of Guidelines and seek public comments.
In recent years, open innovation, where large companies cooperate with startups to create new value, has become important. Ensuring an environment in which startups can compete fairly and freely helps promote value creation through collaboration between startups and large companies.
Previously, the JFTC published an interim report about market research on startup business practices on June 30, 20202 and a final report ("JFTC Report") on November 27, 2020.3 For this purpose, startups were defined as businesses engaged in business activities in growth industry areas that have been in business for around 10 years or less and are unlisted. The research includes a questionnaire survey and a hearing survey. The JFTC conducted the questionnaire survey on a web basis, and received responses from 1,447 out of 5,593 startups (approximately 25.9%). It conducted the hearing survey on 126 startups, 10 experts, five investors, and three trade associations.
As the result of those surveys, the JFTC found potential AMA violations where business collaborations are taking place with startups, as well as relationships of startups with their investors and with startups’ competitors. With regard to business collaborations with startups, the JFTC Report categorized into five situations where potential AMA violations were found: (i) non-disclosure agreement ("NDA"), (ii) proof of concept agreement ("PoC"), (iii) joint research and development ("R&D"), (iv) license agreement, and (v) others (e.g., provision of customer information, payment reduction or delay, unilateral burden of liability for damages, restrictions on business partners and most favorable treatment conditions).
The purpose of the proposed Guidelines is to promote open innovation based on equitable and continuous relationships with startups and their collaborators. For this purpose, the proposed Guidelines aim to show how contracts are supposed to be executed for business collaborations with startups. In accordance with the JFTC Report, the proposed Guidelines identifies four situations in chronological order; (i) NDA, (ii) PoC, (iii) joint R&D and (iv) license agreement.
Usually, an NDA shall be executed between parties of a business collaboration before exchanging confidential information to discuss the business collaboration. The next step would be PoC to verify the realization of functions, performance, and customer value envisioned through the business collaboration, and to determine whether it is possible to proceed to joint R&D. Then, a Joint R&D contract is executed between the parties of the business collaboration which shall provide rights of each party after the commercialization in addition to the roles and cost sharing of each party involved in joint R&D, and the attribution of intellectual property rights developed or acquired. At the time of negotiating a joint R&D contract, it may not be clear whether and/or to what extent patents held prior to the initiation of joint R&D and/or the results of joint R&D will be used, and a license agreement shall stipulate the conditions for licensing the use of intellectual property rights, whether technical information is to be provided, and the handling of improved technology.
For each situation, the proposed Guidelines explain problematic cases that would arise, including potential AMA violations. In addition, they identify backgrounds of those problems into three reasons; (i) lack of legal literacy by startups, (ii) lack of literacy about open innovation by either or both parties, and/or (iii) undesirable practices in promoting open innovation on the basis of equal footing, and suggest the direction for solutions.
For example, the proposed Guidelines introduce a situation where a startup is required by its business collaborator to disclose its trade secrets without entering into an NDA, and suggest that it would violate the AMA as an abuse of superior bargaining position ("ASBP") when the business collaborator is in a superior position and if the startup has no choice but to accept the request due to concerns about the impact on future transactions, such as the termination of the business collaboration. The proposed Guidelines suspect that such a problem may be caused by any of or all of the three reasons mentioned above; (i) lack of legal literacy by startups, (ii) lack of literacy about open innovation by either or both parties, and/or (iii) undesirable practices in promoting open innovation on the basis of equal footing. Then the proposed Guidelines state that it would be important for the parties to be on the same page regarding the purpose and scope of confidential information to be exchanged by and between each party and to enter into an NDA that is feasible for both parties. More specifically, the proposed Guidelines suggests each party (a) organize what information shall be considered to be confidential information before the contract negotiations start in earnest, and (b) enter into an NDA that explicitly provides the purpose and scope of use of the confidential information.
The proposed Guidelines also refer relevant information including contract templates and manuals, such as "Model Contracts Ver.1.0 for Promoting Open Innovation between R&D-based Startups and Business Entities" that are available in English at https://www.meti.go.jp/english/press/2020/0630_002.html.
As mentioned above, the JFTC and METI are seeking public comments, which are due by 6pm on January 25, 2021 JST. The proposed Guidelines are available only in Japanese at https://www.jftc.go.jp/houdou/pressrelease/2020/dec/201223pressrelease_2.pdf.
1 The JFTC press release on December 23, 2020 is available only in Japanese; the METI press release on December 23, 2020 is available only in Japanese.
2 Please see our previous Client Alert at https://www.whitecase.com/publications/alert/interim-report-startup-businesses-practices-japan-fair-trade-commission; the JFTC press release on June 30, 2020 is available only in Japanese at https://www.jftc.go.jp/houdou/pressrelease/2020/jun/200630.html; the interim report is available only in Japanese at https://www.jftc.go.jp/houdou/pressrelease/2020/jun/200630_2.pdf.
3 The JFTC press release on November 27, 2020 is available only in Japanese at https://www.jftc.go.jp/houdou/pressrelease/2020/nov/201127pressrelease.html; the final report is available only in Japanese at https://www.jftc.go.jp/houdou/pressrelease/2020/nov/201127pressrelease_2.pdf.
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