BISNIS Bulletin, August/September 2003
by Sarah Carey and Vladimir Kouznetsov
Over the past 10 years, Russian technology has received increasingly wider recognition and, as a consequence, interest from Western investors. In the early years of Russia’s free market reforms, most Westerners recognized Russia’s highly publicized achievements in space and nuclear technologies. Since then, however, as contacts with Russian scientists and business people have strengthened, investors and other businesses in the West have come to recognize a seemingly untapped wealth of innovations developed by Russian scientists and engineers. Many Russian technologies offer completely different approaches to problems than those pursued in the West, often a result of Russia’s relative isolation from Western technologies during the Cold War, which forced the Soviet military-industrial complex to seek alternative solutions. U.S. companies interested in investing in the commercialization of Russian technology, however, must carefully consider the status of intellectual property rights and understand them in the context of Russian law.
When investing into the development or commercialization of Russian technology, there are several legal issues to consider. Most investments into technologies are accomplished through a newly formed company to which the inventor contributes his invention either under license or by sale. Some major issues to consider before buying or licensing a Russian invention or technology are how to assess the ownership of the technology, restrictions on technology transfer, and developing a patenting strategy.
A key initial issue is to determine whether the inventor has exclusive and transferable rights to the technology or whether he shares ownership with others. Russian patents list owners, as well as inventors, who need not be the same persons. For example, if an inventor developed the technology for his employer, the employer will most likely be listed as the owner (and will have the right to transfer the technology), while the individual who actually created the invention will be listed as the inventor. Under Russian law, inventors who are not owners do not have the right to transfer a patent, but they are entitled to reasonable compensation.
If the invention is not patented, it is much more difficult to determine who owns or has legitimate claims to the technology. This issue is particularly important in Russia. After cutbacks in funding for government-owned research institutes in the 1990s, institutes and individual scientists were encouraged by the Russian government to engage in commercial research and become financially self-sufficient. Many individual Russian scientists developed commercial applications of their technologies based on the government-sponsored research they performed for the institute where they were employed. In many cases, they used an institute’s facilities or materials, usually with the tacit acquiescence, and sometimes encouragement, of the institute itself. In some instances, the employing institutes encouraged such scientists to form spin-off corporations to develop new technologies.
As discussed above, under Russian law, the employer generally is the owner of the intellectual property developed by its employees in the course of employment, unless the employment contract explicitly provides otherwise, which is not a common practice. Thus, in many cases, the employer institute may have rights to the technology being transferred, even if it does not express interest in the technology at the time of its transfer. Therefore, it is important to prepare for the possibility that the institute may, once the technology has become commercially successful, attempt to assert rights to the technology. Russian law does not permit waivers of legal rights. If there is any doubt as to whether the institute has any rights to the technology, the purchaser needs to obtain an assignment or license of any rights that the institute has or may have.
Ownership assessment can also be complicated by the possibility of inadvertent disclosure of the technology to colleagues at home or abroad. Because many Russian scientists spent much of their careers before the adoption of free market-oriented intellectual property laws, they are often less practical than their Western counterparts in protecting their inventions. It is not uncommon for Russian scientists to share their ideas or inventions with colleagues at a scientific seminar or to show off a creation to potential business partners, without requiring a nondisclosure agreement. In other cases, the invention may have been incorporated into products prior to the patent application, which also constitutes disclosure. Such disclosure may be deemed a “publication” of the invention that can render the invention unpatentable. While it is impossible to determine with complete certainty whether such disclosure has taken place, the investor needs to conduct sufficient due diligence to have comfort that such unprivileged disclosures have not been made. Investors should consult an attorney to try to assess ownership rights accurately and, if necessary, negotiate an agreement with the institute for exchange of rights that is acceptable to all parties. In addition, investors will need assistance in dealing with the formalities of filing for patents, assigning patents or other rights, and dealing with other necessary documentation.
Russia adopted a Western-style patent law only in 1992. Because of the relative lack of experience with free market-oriented intellectual property rights, Russian inventors are generally not as savvy as their Western counterparts regarding patenting strategy. This is particularly true with respect to developing claims regarding the various potential applications of the technology. Russian scientists tend to claim relatively narrow applications. Therefore, the purchaser should review the technology with its patent counsel to develop an appropriate patenting strategy; this may require supplementing existing patents.
Both Russian and U.S. law impose restrictions on transfers of sensitive military or “dual-use” technologies. In the United States, the U.S. Commerce Department’s Bureau of Industry and Security (www.bis.doc.gov) is responsible for determining what constitutes “dual-use” technology. In Russia, the Department of Export Control within the Ministry of Economic Development and Trade determines whether exports of technologies or products from Russia comply with Russian export control laws. If you think that the technology in question may potentially be deemed to be dual-use or military technology, you should review export control issues with your counsel.
Generally, export control laws focus not on the issue of ownership, but on the transfer of know-how across borders. If a technology is subject to such restrictions, its transfer to another country may result in criminal and civil penalties. To transfer a controlled technology legally, the purchaser or the seller needs to obtain, prior to purchase, appropriate licenses and permits in all relevant jurisdictions.
For an overview of Russian intellectual property law
prepared by Squire, Sanders & Dempsey, visit http://bisnis.doc.gov/legal.
Sarah Carey, a partner in the Washington, D.C., office of
Squire, Sanders & Dempsey L.L.P. (www.ssd.com), chairs the
firm’s CIS practice group. Vladimir Kouznetsov, an associate in its D.C.
office, has worked in the area of U.S.-Russia technology transfer for 6 years.
Visit www.partnershipsforprosperity.net to learn about a Russian technology commercialization event in Philadelphia in November.