Across Industries Matthew Jennejohn Associate Professor of Law BYU UNCITRAL Version 12 25 March 2019 Key Points Contractual networks are critical for growth Multiparty agreements are important legal tools in those networks ID: 1028484
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1. 1Collaborative Contracting Across IndustriesMatthew Jennejohn, Associate Professor of Law, BYU@ UNCITRAL Version: 1.2 (25 March 2019)
2. Key PointsContractual networks are critical for growthMulti-party agreements are important legal tools in those networksUnderstanding the role of contracts in these networks requires a careful study of transactional contextIntellectual property rights are crucialMarkets are dynamic, and industries evolvePublic institutions are necessary to maintain and diffuse this governance structure2These are some of the important points this presentation will make
3. 3The Central Economic PuzzleHow can companies de-verticalize innovation processes without exposing themselves to the costs of contractual incompleteness?
4. 4The Conventional Wisdom on the Cost of IncompletenessMost of the contract economics literature focuses upon the hold-up problem as the key issue in incomplete contracting
5. How Parties Cope With Hold Up5Since Macauley (1963) and Macneil (1974, 1978), theory has included both formal and informal institutionsFormal EnforcementInformal EnforcementContractual obligations are enforced through recourse to a third party tribunalBreach determined by reference to agreement and precedentThird party tribunal is a public court or a private arbitratorWhat we focus on in the 1L Contracts courseContractual obligations are enforced through social constraintsRepeated dealingsReputational effectsBreach determined by reference to social norms or commercial practiceAn autarkic model of community enforcement
6. 6A key question is how formal and informal contracts interact
7. The Formal/Informal Interface7Two theories of the relationship between formal and informal contracting have emergedSubstitutionary TheoriesComplementarity Theories“Crowding out” thesis: formal enforcement undercuts informal governance institutions, built upon notions of repeated dealings or reciprocityBrief pedigree:Theory originates in Macauley (1963) and refined in subsequent work (e.g. Macneil 1974, 1978, Klein 1996)Developed into part of the argument for minimalist intervention (e.g. Schwartz & Scott 2003)Formal contracting supports informal governanceBrief pedigree:Poppo & Zenger (2002) provide initial empirical evidenceGilson, Sabel & Scott (2009, 2010) outline “braiding” theoryBozovic & Hadfield (2016) outline “scaffolding” theory
8. Common Terms In Alliance Contracts8An equity stake could be a complementary governance toolProject PlanBackground IP LicensingAdministrative MechanismsForeground IP OwnershipMilestonesTerminationIndemnificationDispute ResolutionProvides a roadmap for the collaborationMay not be complete by the start of the collaborationUpdated regularlyCentral tasks: Articulating the project planUpdating the planDeciding whether milestones achievedParties license their relevant background IP to one anotherExclusive or non-exclusive basesDetermines who will own the foreground IP resulting from the collaborationSole ownership v. jointSome compensation may be provided upfrontRemaining compensation is structured as an earnoutE.g., indemnities relating to intellectual property claimsCan be particularly important in industries where product liability claims are potentFor cause v. at willOptions on IP ownership depending on who terminates and whenIn US, typically DE or NY law chosenArbitration frequently used in biopharmaDispute resolution bifurcated depending upon claim type
9. The Core of the Braiding Mechanism9A governance committee has decision authority, has equal numbers of representatives, and operates by a unanimity ruleSource: Jennejohn 2016
10. 10Evidence from AutomotivePreliminary research suggests that new collaborative contractual mechanisms are being introduced in North American supply chain relationships
11. The “Conventional” Supply Chain11Three basic governance layers (the top layer is where new developments are occurring)Advanced Procurement/ Joint DevelopmentAll Supply Chain ActivitiesFoundationJoint Development AgreementsISO 9001StandardTerms & ConditionsIATF 16949OEM Supplier ManualStrategic Supplier Engagement
12. Transforming Conventional Relations12The North American Working Relations Index grades the major OEMs on how they collaborate with their supply chainSource: PPI
13. The Role of Disruptive Technologies13New technologies (autonomous/electric/mobility) are also driving greater collaboration
14. The Role of Disruptive Technologies14Multi-party alliances are pursued to build platforms for emerging technologies
15. 15What explains variation in the use of governance mechanisms?
16. 16Networks as a Source of VariationCertain contractual mechanisms are used more when networks exacerbate intellectual property spillovers and coordination problems
17. Bernstein’s ThesisBeyond Relational Contracts (2015)Qualitative study of equipment supply chains in Upper MidwestArgues that network position facilitates reputational sanctionsContract Governance in Small World Networks (2019)Qualitative study of 11th century Maghribi trading networkArgues that small world network structure supports reputational sanctions across large, dispersed marketsIn short, the small world network structure allows reputation to operate in automotive, aerospace and biotech, just like it does in commodity markets, like wholesale diamonds, grain & feed, cotton, etc.17Bernstein’s recent work argues that collaboration networks are self-governing
18. What Is a Small World Network Structure?18Watts & Strogatz 1998LatticeSmall WorldRandomHigh Local EfficiencyLow Global EfficiencyHigh Global EfficiencyLow Local Efficiency
19. 19An Implicit Theory of Contractual VariationDifferent network structures may necessitate different contractual responses
20. 20Evidence from BiotechnologyOne of my projects explores the braiding and network governance theses in the context of biotechnology innovation, because detailed data on the collaboration network is publicly available
21. Biotechnology Is Not a Small World2120 years of contract data reveals a highly diverse and dynamic collaboration network, and little evidence of a small worldNetwork of alliance relationships in SIC 2834Vertices = 8,515Edges = 33,279Clustering Coeff = 0.149 Assortativity = -0.182
22. When Are These Committees Used?22A governance committee has decision authority, has equal numbers of representatives, and operates by a unanimity ruleSource: Jennejohn 2016
23. 23Select ResultsResults of Logistic Regression Analysis of Main Effects of Prior Deals and Network Centrality on Formal Contracting
24. 24A New View of NetworksIn the biotechnology network, formal contracts are designed to respond to network-based risks—i.e., the network is a source of exchange hazards (such as spillover risk), not necessarily a response to them
25. Take-AwaysUnderstanding collaborative contracting requires acknowledging that there are more exchange hazards than hold-upGovernance choices are contingent upon complex combinations of exchange hazardsIndustry-by-industry approach is a good way to reduce conceptual complexity, but industries are not staticPath dependency matters but it does not dominate25There is an important role for public institutions to play in a very complicated new form of economic organization