Israeli companies that hold in
their possession knowledge and technology developed with the funding of the
Israeli Chief Scientist often encounter difficulties manufacturing in Israel a
product developed by them and often turn to foreign companies to transfer the
manufacturing or the manufacturing rights to a foreign company. Sometimes, this
cooperation also includes distribution and marketing services for the products.
Pursuant to the Encouragement of
the Industrial Development and Research Law (The "R&D Law"),
the transfer of the rights of a company to another country that is funded by the
Israeli Chief Scientist is subject to the Chief Scientist's approval. This
approval is necessary to protect two fundamental interests of the R&D Law:
To ensure that all knowledge developed with the funding of the Chief Scientist and
that the manufacturing will both remain in Israel, and in order to encourage
the local employment market.
Nevertheless, the Chief Scientist
acknowledges the need for these types of collaborations and therefore subject
to certain conditions, allows them. Some of these conditions are financial
(such as the increased rate of royalties that companies must pay the Chief
Scientist for the sales of their product) and others are instructions intended
to verify that the contractual communication between the companies shall not
harm any protected interests of the Chief Scientist.
This article will be focusing on
a contractual tool that is customarily used in this type of cooperation
agreements and that the Chief Scientist views it as a means to protect, among
other things, his own interests. This tool is the trust agreement.
Naturally, in cooperation
agreements for manufacturing and maintenance, each party must protect several
important interests. An Israeli company must verify that all Intellectual
Property rights in its products and the development thereof remain in its
exclusive possession and it must avoid a situation in which a foreign company can
make forbidden use of any exposed information. Furthermore, according to the R&D
Law, an Israeli Company must avoid a situation in which the cooperation between
the parties shall be an illegal transfer of information – which can be
considered a legal felony according to the R&D Law.
A Foreign company that undertakes
to manufacture a product and to also, in many cases, distribute it, is
interested in avoiding a situation where it would not be able to change or restore
the product as the result of an Israeli company being unable to meet its
contractual obligations. For example, in a case where an Israeli Company
becomes Insolvent - Since the Intellectual Property rights relating to a
product belong exclusively to the Israeli company, while the foreign company
only owns manufacturing rights, the latter can easily find itself facing an
impossible situation where it is unable to continue manufacturing the product
and is unable to meet its obligation to supply the product to third parties.
As the result of the need to
protect the aforementioned interests, a mechanism of trust agreement, which is
attached to the primary agreement between the companies, was developed over the
past few years. The trust agreement establishes the responsibilities of a third
party who is appointed as trustee of all the knowledge and information that ensures
the rights to continue the manufacture and support of the product (the "Materials").
The trustee's role is to put the parties' agreements into practice and to
release the Materials to the foreign company, if necessary, in accordance with the
specific and predefined conditions of the trust agreement.
In 2007, and in order to suit itself
to this foregoing practice, the Chief Scientist published a list of principals
needed for his approval of such trust agreements. These principals were
intended to protect the owners of the knowledge that is funded by the Chief
Scientist. It is important to emphasize that although these principals are not considered
to be an Israeli Law or regulation, the parties are obligated to obtain the
Chief Scientist's approval on their agreements. Without this approval, the
cooperation between the Israeli company and the foreign one can be considered a
breach of the R&D Law.
The following principals must be
met in order to obtain the Chief Scientist's approval:
The trust agreement must establish that the
release of the Materials to the foreign company does not include the transfer
of any Intellectual Property rights and that all Intellectual Property rights
belong exclusively to the Israeli company.
The foreign company's right to use the
Materials, if released by the trustee, is limited to fulfilling the predefined
needs written in the trust agreement. Pursuant to the Chief Scientist's principles,
these needs must be limited to manufacturing (where a transaction for the
manufacture and supply of products is involved) or for the support and
maintenance services of the product. If the foreign company is interested in
receiving the Materials in other scenarios, then the parties must include these
scenarios in the trust agreement and obtain a written specific approval from
the Chief Scientist thereto, in advance.
The trust agreement must include a clause
stating that in the event of releasing the Materials to the foreign company by the
trustee, such a release shall be made only for a temporary and predefined
trustee must be an Israeli civilian; the trust agreement must be governed by the
Laws of the State of Israel and set that the competent courts of Israel shall
have sole and exclusive jurisdiction over any disputes arising from it. Since a
Governing Law and Jurisdiction clause stating otherwise can be included in the
primary agreement, i.e. the cooperation agreement, it must be clarified in the
trust agreement that the Governing Law and Jurisdiction clause written in the
trust agreement supersedes any contradictory instructions written in the
cooperation agreement, in that matter.
The trust agreement must define a reasonable
timeframe that only upon its lapse the trustee will be entitled to release the
The trust agreement must establish that the
trustee and the Israeli company shall report to the Chief Scientist upon its
activation. In addition, any material change in the agreement after the signing
thereof, such as the replacement of a trustee or a change of substantial
conditions in the agreement, is subject to the prior approval of the Chief
The Chief Scientist aims to protect the Israeli
company's rights in cases of a request for its dissolution or for the
appointment of a receiver thereto. As long as there is no interruption in the
supply of the products or in the support and maintenance services, the filing
of a request for the company's dissolution or for the appointment of a receiver
thereto does not constitute a sufficient cause for the activation of the trust
agreement and the release of the materials. This applies also in cases where an
Israeli third party purchased the company or took the Israeli company's
obligations upon itself.
the approval procedure, the Chief Scientist is usually satisfied with a legal
opinion from the company's attorney stating that the trust agreement meets the
principles stated above.
Chief Scientist acknowledges the Israeli companies' need to integrate into the
global world. This is especially true for Israeli companies that are actually a
part of global corporations. The need for cooperation is particularly
recognizable in such companies and the Israeli Chief Scientist has identified that
negative incentives might be created when foreign companies try to cooperate
with R&D centers in Israel that are partially funded by the Chief
Scientist. Therefore, disregarding a few exceptions, the Chief Scientist
enables the transfer of manufacturing from Israel to other countries.
the above, it should be noted that the Chief Scientist's approval is subject
not only to the limitations specified above but also, in the majority of cases,
to the increased rate of royalties that an Israeli company must pay the Chief
Scientist for the purchase of its products (usually between 3.5% to 4.5%) and to
the increase of the total sum that the company must pay the Chief Scientist
(increase between 120% - 300%).