Malaysia – Understanding Research And Development (R&D) And R&D Related Agreements.

Introduction 

In this era, research and development (“R&D”) is crucial in maintaining competitiveness in the global marketplace. Companies that conduct/invest in R&D are better positioned to adapt to changing market demands and to develop innovative solutions. 

This article is written to provide readers with some understanding on R&D as well as the common agreements related to it. 

What is R&D? 

R&D refers to “a set of innovative activities undertaken by companies to introduce new services, processes or products, or to improve existing ones”. 

R&D is the first (1^st) stage of a product’s lifecycle, before it comes into existence and proceeds to pre-commercialisation and commercialisation stages. 

When Do the Companies Conduct R&D? 

R&D is normally conducted by companies in the following circumstances: 

1. Initial R&D – Before the development of new services, processes or products 

R&D is fundamental to the creation of new products and innovative offerings. The development of smartphones such as the Samsung Galaxy Z series illustrates the extensive R&D that goes into the initial design, engineering, and functionality before the smartphones were released. This initial R&D lays the groundwork for the entire product. 

This initial R&D is not merely brainstorming or sketching ideas. It is a rigorous and systematic process, involving significant personnel, sufficient equipment, and resources. Researchers and engineers are required to conduct extensive market research, explore emerging technologies, develop prototypes and test different designs to optimize performance and user experience. 

This initial R&D is crucial for mitigating risks and ensuring that the final product is innovative, viable, and marketable. In essence, this initial R&D phase is where the seeds of innovation are sown, setting the stage for the entire product development. 

2. Ongoing R&D – From time to time after the successful development of the services, processes or products 

A company may decide to engage with continuous R&D effort after the product’s initial release to improve the product and ensure that such product is relevant at the current time and trends. For example, smartphones receive regular software updates such as security enhancements to protect users’ data and new features to improve functionality, illustrating this continuous development. 

This ongoing R&D is crucial for a company to remain competitive in rapidly evolving markets. Consumer expectations and technological landscapes shift constantly, demanding that products adapt to stay relevant. By continuously conducting R&D, a company demonstrates commitment to its customers, ensuring the best product experience. This proactive approach strengthens customer loyalty and positions the company as an innovator and visionary. 

Why Is R&D Necessary? 

R&D is necessary for companies to stay relevant and competitive in an ever-evolving marketplace. Research shows that companies with consistent investment in R&D outperform the companies that invest irregularly or neglect it completely.¹ 

By maintaining a steady focus on R&D, companies can stay ahead of competitors by developing innovative offerings that address the evolving needs of consumers. This persistent investment drives financial growth and ensures companies remain key players in their industries. 

Investing in R&D enables companies to produce and offer the latest, sought-after products which are both innovative and valuable in the marketplace. In addition, R&D also helps companies to optimize their production processes, making operations more efficient and cost-effective over time. 

The industries that heavily spend on R&D range from engineering, pharmaceutical, semiconductor, and technology, to software. In 2023, the United States of America, China and the European Union secured the top three spots for the most expenditure in R&D, spending billions of dollars investing in R&D.² 

Conversely, companies that neglect R&D or invest in R&D inconsistently face substantial challenges in achieving sustained growth and remaining competitive over the long term. The downfall of Nokia and Blackberry serve as examples of the critical importance of continuous innovation through R&D for any company aiming for long-term success. 

Nokia, which dominated the mobile phone industry in the late 1990s, failed to adapt to the rapid advancements of iOS and Android in the early 2010s. This resulted in a loss of market leadership and client base.³ Similarly, Blackberry, once the leading smartphone provider, saw its popularity decline as iOS and Android advanced, and the company struggled to catch up with evolving trends.⁴ 

How Do Companies Conduct R&D? 

Conducting effective R&D requires sufficient funds, specialized expertise, and appropriate facilities. These elements are essential for driving innovation and testing new concepts for the success of R&D efforts. Generally, R&D may be conducted by companies in two ways i.e. internally or through third-party. 

1. Internal R&D 

Large companies, with substantial resources, often conduct R&D internally. Such organisations usually have dedicated R&D departments with skilled personnel and well-equipped facilities to support innovation. Internal R&D allows companies to maintain greater control over the research process and intellectual property. 

2. R&D involving third-party  

R&D with the involvement of a third party is often opted by small and medium-sized companies, which may lack the necessary resources to support in-house R&D. These companies may engage in contracts for services or form collaborative partnerships with universities, research institutions, or specialized firms. These forms of R&D not only allow smaller organisations to tap into external expertise and technologies of a third party but also reduce their financial burden in conducting the R&D as well as minimize their risk/loss, as conducting R&D may not yield immediate profit and there is uncertainty of R&D success. 

Common Agreements Involved In R&D 

There are several agreements involved in respect of R&D. These agreements may be divided into preliminary agreements and definitive agreements. 

Some of the preliminary agreements include the following: 

1. Non-Disclosure Agreement (“NDA”) 

NDA (also known as Confidentiality Agreement) is a written agreement between the parties that prohibits the disclosure of confidential information which came into the parties’ possession pursuant to the execution of the NDA. 

An NDA is usually executed prior to the commencement of discussions/negotiations on the R&D and disclosure of confidential information relating to the R&D. 

The execution of the NDA is important to protect the confidential information owned by a party that has been disclosed to the other party whether verbally or in writing during the discussions/negotiations. 

In most cases, the confidentiality obligations of a party will survive the termination of the NDA whether or not the parties will later on proceed with the execution of the definitive agreement. 

2. Memorandum of Understanding 

Memorandum of Understanding (“MoU”) is a written document which sets out the general framework, key terms and intentions of the parties for a subject matter and the facilitation of further definitive agreement(s). 

An MoU is typically used at the early stage of negotiations for an intended R&D arrangement between the parties.  At this stage, parties usually have yet to agree on all the important terms of the R&D arrangement but still wish to set out its broad framework. 

Generally, the parties execute MoU to demonstrate their commitment to the proposed R&D, to confirm their mutual understanding of certain essential terms, to publicly announce their intentions to conduct R&D, and to provide documentary evidence with regard to the R&D arrangement to the prospective investors or sponsors. 

In most cases, MoU is not binding, and the conduct of the R&D will be subject to the execution of a definitive agreement between the parties, which will contain the finalized terms and conditions relating to the R&D. 

Once the parties have completed the relevant discussions/negotiations relating to the intended R&D, the Parties will proceed with the execution of any of the following definitive agreements, depending on the R&D arrangement/structure agreed by the parties: 

1. R&D Appointment Agreement 

R&D Appointment Agreement is a legally binding document that governs the relationship, rights and obligations of the parties to the agreement in respect of the appointment of the appointed party to provide R&D services to the appointing party. This agreement is based on a contract for services where the relationship between the parties is not that of employer and employee. 

Normally, the parties will agree to the following key terms and conditions in R&D Appointment Agreement: 

1. In respect of R&D service fee 

The appointing party shall pay a fee (known as R&D service fee) to the appointed party in consideration of the R&D services to be provided by the appointed party to the appointing party; 

2. In respect of R&D services 

The appointed party shall: 

27. perform and complete the R&D services in accordance with the agreed scope of work based on the timelines agreed in the R&D Appointment Agreement; and 

28. provide the agreed deliverables to the appointing party based on the timelines agreed in the R&D Appointment Agreement; and 

3. In respect of intellectual property ownership 

The appointed party agrees that: 

27. the ownership of the foreground intellectual properties (i.e. the intellectual properties created pursuant to the R&D) shall be owned by the appointing party and in the case where the appointed party uses its background intellectual properties (i.e. the intellectual properties which are in existence prior to the conduct of the R&D) in providing the R&D services and creating the foreground intellectual properties, the appointed party shall grant perpetual and royalty free license to the appointing party to use such background intellectual properties in relation to the foreground intellectual properties; 

28. the appointed party shall have no right to further deal with the foreground intellectual properties; and 

29. the appointing party as the owner of the foreground intellectual properties shall have the right to protect (including to register) the foreground intellectual properties with the relevant intellectual property offices under its own name and to commercialize such foreground intellectual properties. 

2. R&D Collaboration Agreement 

R&D Collaboration Agreement is a legally binding agreement which will be executed between two or more parties known as collaborators (each having special skills and assets) that want to cooperate together or work collaboratively to conduct R&D to develop, improve and possibly commercialize a new product. 

Normally, the parties will agree to the following key terms and conditions in R&D Collaboration Agreement: 

1. In respect of R&D cost 

The parties will agree to either any of the following with regard to the cost of the R&D: 

(aa) each party is responsible for its own cost incurred in the performance of its obligations in respect of the R&D; 

(bb) only one party is responsible for all the costs incurred in respect of the R&D conducted by the parties; or 

(cc) all parties are equally responsible for the cost of the R&D; 

2. In respect of the conduct of the R&D  

The parties shall: 

27. perform and complete their agreed scope of work based on the timelines agreed in the R&D Collaboration Agreement; and 

28. produce the agreed deliverables based on the timelines agreed in the R&D Collaboration Agreement; and 

as the performance of a party’s obligation might be dependent on the completion of the other party’s performance of its obligation, the R&D Collaboration Agreement will provide the relevant clause to address such dependency issues. 

3. In respect of intellectual property ownership 

The parties agree that: 

27. the ownership of the foreground intellectual properties shall be jointly owned by the parties and in case where a party uses its background intellectual properties in conducting the R&D and creating the foreground intellectual properties, such party will grant perpetual and royalty-free license to the other party to use such background intellectual properties in relation to the foreground intellectual properties; 

28. the foreground intellectual properties shall be registered (where applicable) with the relevant intellectual property offices under the name of all the parties; and 

29. a party is restricted from modifying, amending or enhancing the foreground intellectual properties, or selling/assigning its right over the foreground intellectual properties to another party without the prior written approval of the other party; and 

4. In respect of the commercialisation of the foreground intellectual properties 

The parties will agree on the terms and conditions with regard to the commercialisation of the foreground intellectual properties including the following: 

(aa) the party who will undertake the commercialisation of the foreground intellectual properties; 

28. the process to be adhered to prior to the commercialisation; 

29. the commercialisation modes (such as via internal product manufacturing or licensing); and 

30. the profit-sharing arrangement between the parties. 

Conclusion 

In conclusion, R&D is crucial for a company’s long-term success. By investing in R&D, businesses can produce cutting-edge products, enhance existing processes, and be at the forefront of the industry. R&D not only drives growth and efficiency but also positions companies to adapt to future challenges. It is pertinent for a company to choose the right structure of R&D and to enter into appropriate R&D related agreement(s) with comprehensive terms and conditions to ensure that the company’s rights in respect of the R&D are sufficiently protected. 

For further information, please contact:

Khairul Fazli Abdul Kadir, Partner, Azmi & Associates

khairul.fazli@azmilaw.com

1. Rađenović T, Krstić B, Janjić I & Vujatović MJ, ‘The Effects Of R&D Performance On The Profitability Of Highly Innovative Companies’ (2023) 28 Strategic Management 34 <https://www.smjournal.rs/index.php/home/article/view/338>. 

2. World Intellectual Property Organisation, ‘End of Year Edition – Against All Odds, Global R&D Has Grown Close to USD 3 Trillion in 2023’ (2024) <https://www.wipo.int/web/global-innovation-index/w/blogs/2024/end-of-year-edition>. 

3. Firstpost, ‘Timeline: The fall of Nokia’ (2012) <https://www.firstpost.com/tech/news-analysis/timeline-the-fall-of-nokia-3608581.html>. 

4. Investopedia, ‘BlackBerry: A Story of Constant Success and Failure’ (2024) <https://www.investopedia.com/articles/investing/062315/blackberry-story-constant-success-failure.asp>.