International Contracting: Avoiding Mutually Assured Destruction

Bill CatlettDirector, Office of Industry EngagementUniversity of Texas at Austin

Ty HelpinstillAssociate Director, Office of Industry EngagementUniversity of Texas at Austin

The landscape…

Often, the challenge is not figuring out how to modify a contract term, but how to get the other side to agree to the change!• Different business cultures• Different communication styles• Different levels of English fluency• Different levels of importance placed on contract • Different methods of, and terms for, funding university

research• Sensitivity toward being pushed to modify for “the

American way”

Some practical tips:• Pay attention to the tone/style of emails from your counterparts

and mimic • e.g., many Asian business cultures put great emphasis on politeness

and respect in correspondence, where we can tend to be more blunt • Ask about their protocols for reaching internal agreement • U.S. entities typically need a relatively narrow base of consensus

(you, your boss, the PI) compared to other business cultures • Use the simplest words and grammar you can• avoid nuanced wordsmithing

• Avoid the “ugly American”• Try to make as little changes as possible• Ask questions about the purpose of their procedures/policies• Outline practical difficulties based on the unique way US research

funding/rules have evolved – avoid value judgments• Don’t be afraid to laugh at your own culture once in a while.

Some practical tips:• Do your research for the country involved: culture, ADR

preferences, taxes, national holidays• Expand and freshen up your negotiation style: utilize video

conferencing. Be comfortable with silence: in many international negotiations, he who speaks first, loses.

• Drop any habit of using slang, dry humor and acronyms - leave them behind like lederhosen on a first date. Not understood and too easy to inadvertently insult non-US citizen and introduce unneeded complications in communications.

• If IP is expected to emerge from the research, pay particular care to drafting clear language. Your tech commercialization office will thank you.

Most of all….• International negotiations take more time! • Tell your faculty it may take time so they can make

appropriate financial plans• Be prepared to have the same discussion with the

sponsor more than once • Don’t expect the other side to necessarily work at the

same pace as your office

Issues and War Stories

Budgets • Non-U.S. sponsors may have different budget expectations:• Types of Costs:

• Travel first class may be OK to the sponsor – but perhaps not under University costing policies

• Sponsor may want to pay certain costs directly• Unusual “expenses” may surface, such as “honoraria” for

interviewing consultants• Can the university pay these unusual costs under its policies and federal

laws like the Foreign Corrupt Practices Act?• If so, how do you document, etc.

• Make sure the initial budget is sufficiently flexible to absorb unexpected costs that may arise during negotiations

US Laws – Boycotts, Embargoes and Economic Sanctions

• Be aware of anti-boycott and economic sanction laws – • Anti-Boycott laws: The Arab League boycott of Israel is principal

foreign economic boycott that U.S. entities must be concerned about.

• Embargoes: Small percentage of all U.S. exports/reexports require an export license, but nearly all exports and many reexports to embargoed destinations and countries designated as supporting terrorist activities require a license. These countries are Cuba, Iran, North Korea, Sudan, and Syria.

• Economic Sanctions: OFAC administers a number of different sanctions programs (6 and counting!). The sanctions can be either comprehensive or selective, using the blocking of assets and trade restrictions to accomplish foreign policy and national security goals.

• As part of due diligence, check BIS, State Department and OFAC lists of countries subject to embargoes or economic sanctions

Payments• Currency Conversions can reduce funding unpredictably• Refer to US Dollars only in research agreement to insulate project

from currency conversion. • If contract refers to foreign currency, wait for each payment to

be converted before authorizing spending!!

• Payment timing • Advance payments less common practice some countries, but can

be critical to mitigate University risk!

Foreign Tax Laws• Some countries tax money that leaves the country – sponsors

will sometimes try to pass this loss to the University• Often, the tax rate fluctuates so often the sponsor cannot predict

amount of the tax for any given payment • Explain non-profit nature of university – we have no profit line to

absorb this tax!

• Value Added Tax or “VAT”• Definition: a tax that is levied any time value is added to a

product along the manufacturing/distribution chain.• Ultimately, the cost of this tax is passed to consumers.• The United States does not assess VAT taxes, but references in

foreign contracts are common

IP Terms• Ownership• In many countries it is routine for universities to grant ownership

to companies (and they have been doing so for decades) • In some key countries, government laws aid in providing company

ownership to intellectual property, adding fuel to fire• Joint ownership often assumed if they fund

• Licensing Expectations • Concept of licensing-in from universities unfamiliar to many

foreign company• Reluctance to pay fair consideration for license

Export Control• Assure open academic environment is maintained• Foreign companies often ask for long publication delays, which

can move research out of “fundamental research exclusion”• In some countries, it is common to agree to publication

restrictions when corporates fund projects

• Identify whether export-controlled materials or data will go back and forth between university and company during collaboration• Scope of Work is often silent on exchange of materials/data, even

when it will occur.

• Avoid agreeing to follow foreign export control laws!

Foreign Laws• Avoid direct application of specific foreign laws – offer to state

that the university will follow the U.S. counterpart

• The practices and procedures of U.S. universities are designed to assure compliance with U.S. laws, not the laws of random foreign countries, but many that appear in contracts are similar in subject matter (workplace safety, discrimination, etc.)

• More than likely, the research performed by the University will be in the United States, not the foreign country, thus, the foreign laws do not apply.

• Sometimes, U.S. laws will restrict the data we can give the sponsor (HIPPA, etc.) and the sponsor is unaware of these restrictions

• Be prepared to educate!

Dispute Resolution• Governing law:• Be very cautious about allowing foreign laws to apply to disputes. Your

legal team does not know the laws and cannot assess risks!

• Jurisdiction:• It is common for foreign contracts to have clauses requiring that

contract disputes are resolved in the foreign country – making dispute resolution very expensive and unpredictable for the university.

Options:• Remain silent on choice of law and jurisdiction.• For jurisdiction, state that, in the event of a dispute, the dispute will be

resolved where the party defending the dispute resides. • Provides a disincentive to file a lawsuit and minimizes risk to the university.

Contract “Language”

• What is the official language of the contract?

• Ensure “English” is the official language• Even native speakers who translate the language may not be aware

of the legal meaning/ramifications of the words unless they are a trained attorney in that country!

• What about both the English and French versions being considered official?• Strange, but better than nothing

Challenge: Visitors• Foreign companies often send visitors to participate in, and

monitor, research.

• WHEN YOU KNOW A VISITOR IS COMING:• IP ownership expectations • Institutional liability issues• Visa issues

• Universities have an easier time obtaining visas (no quota on H1B)• Foreign companies are sometimes tempted to take advantage of that

• Institutional liability issues• When the company expects university to take on formal employer

responsibilities for visitor

Challenge: Visitors• WHEN YOU DON’T KNOW A VISITOR IS COMING

• Deals are often negotiated with no reference to visitors, only to find the visitor arriving right after the contract is signed, AND refusing to sign the IP agreement

• Particularly awkward because the funding is committed (exciting PI) and the agreement already deals with IP ownership – often in conflict

• Companies from some countries will send completely unannounced visitors (even to the PI)• If the visitor stays, it is not uncommon for patent filing to occur back

in the home country that covers EXACTLY what your faculty is researching.

• And…. Of course… it is not cited as a joint invention

Challenge: “Sabbatical” Visitors• Companies will send visitors as a “sabbatical” to visit university lab• Unconnected to any research agreement

• PIs request a gift to cover cost of supplies, etc. used by the visitor

• “Gift” can’t be provided… but they can provide funds under a contract

• Research agreement becomes a mechanism for an arrangement it was not intended to cover…

• All the same arguments and challenges, but without precise scopes of work, etc.

A final word – unfunded MOUs

Unfunded “MOUs”• Purpose - signifies the intent of the parties to undertake joint

activities that may lead to a later binding agreement (or may not). Activities often include:• Student and faculty exchanges• Joint grant writing projects• International cooperation

Purpose is often ritual, a formal acknowledgment of a relationship. Often, high value is placed on these agreements by foreign

organizationU.S. views them as “feel good” documents that are not

necessarily essential

MOUs

• Pitfalls:• MOUs are getting increasingly detailed and “legal”. Harder

and harder to place nonbinding language in them.• The more detailed the language and understanding, the more likely

the agreement is to be viewed as a fully binding, legal agreement.

• Intellectual property clauses often conflict with the U.S. university’s visitor policies and have other significant problems

• Difficult to assess risk of terms without scope of work or concrete activities.

• Difficult to enforce in case of problems.

MOUs

• Tips to stay out of trouble:• Subject any discussed activities to “university policies and practices”

and contingent upon securing “adequate and appropriate funding”

• Assure the MOU has a clear end date (three years or less)

• Assure the MOU has a clear “termination for convenience” provision

• Consider campus policy that certain high risk subjects, like intellectual property, will not be discussed in unfunded MOUs • If the university is not receiving anything of value, why should it take a

legal risk?

• When possible, state expressly in the MOU that there is no intent to create enforceable rights or obligations

• Ensure University officials are aware of collective “commitments” of signed MOU’s.

Questions???

(and thank you!)