The Challenge of Closing Open Innovation
The Intellectual Property Disassembly Problem
Ove Granstrand and Marcus Holgersson*
Final manuscript version, 2014. Published in Research-Technology Management, please use
the following reference:
Granstrand, Ove, and Marcus Holgersson. 2014. "The Challenge of Closing Open Innovation:
The Intellectual Property Disassembly Problem.” Research-Technology Management 57 (5):
Overview: This article addresses one of the many unexplored challenges associated with
closing open innovation—the intellectual property (IP) disassembly problem. This is the
problem of disentangling and allocating IP rights at the closing or termination of an open
innovation project or at the exit of one or more of the vital participants. IP disassembly
problems may be mitigated (but not eliminated) through contingent contractual provisions
at the IP assembly stage. Moreover, provisions can be made at both the assembly and
disassembly stages to prepare for and benefit from subsequent IP reassembly in a sequence
of project generations over time. An overriding implication is that IP management
addressing both IP assembly and disassembly problems is necessary (although not
sufficient) for effective governance of open innovation.
Keywords: Intellectual property; Open innovation; Strategy; IP management; Licensing; IP
Open innovation is an old phenomenon, but the use of it has grown during the last decade.
This growth has given rise to a need for improved competence in managing open innovation,
and numerous research studies and publications have sought to fulfill this need
(Chesbrough 2004; Henkel, Baldwin, and Shih 2013; Kirschbaum 2005). The literature has
stressed the opportunities for increased innovativeness and competitiveness offered by
both inbound modes of open innovation—acquiring knowledge and ideas from external
sources—and outbound modes of open innovation—relying on external paths to markets
for exploitation (Dahlander and Gann 2010; Enkel, Gassmann, and Chesbrough 2009). In
addition, various scholars have recognized coupled or combined modes of open innovation
(Enkel, Gassmann, and Chesbrough 2009; Granstrand 2004), in which knowledge is
acquired, developed, and commercialized with involvement of external partners, for
instance through technology and innovation collaborations, alliances, and networks (e.g.,
Mowery, Oxley, and Silverman 1996).
In both practical and academic discussions of open innovation, much attention has been
given to the opening of closed innovation, and the related opportunities and challenges. On
the other hand, little or no attention has been given to the closing of open innovation, and
the potential problems that may then arise. The closing of open innovation in general refers
to the change process by which organizations decrease their overall openness in innovation,
for example by increasingly relying on internal R&D or in-house commercialization. It may
also refer to the more specific process of leaving, terminating, or cancelling an individual
open innovation project. In either connotation closing open innovation involves a range of
challenges that ripple throughout the organization, including challenges related to human
resource management, production and supply, information technology, and marketing. Such
challenges may be particularly problematic in the context of coupled open innovation, in
which the interdependence and exchange is highly reciprocal.
When closing open innovation projects intellectual property–related challenges, specifically
those related to disassembling jointly generated intellectual property (IP), may be
particularly thorny. Research and technology managers are familiar with the endgame of
terminating in-house R&D projects, but IP problems seldom arise at this late stage for in-
house projects. As a result, managers may not be prepared to deal with the issues associated
with the end stage of open innovation projects that involve both internal and external
players. This article offers an analysis of the IP disassembly problem in this context, and
some managerial approaches to deal with it.
IP Assembly and Disassembly
Flows of ideas and knowledge across firm boundaries are central to open innovation
(Chesbrough 2003, 2006; Chesbrough and Bogers, forthcoming). The knowledge that flows
is commonly associated with and influenced by a set of registered or unregistered IP
ownership and usage rights, which control the commercial use of the shared knowledge,
part of which may be disclosed and disseminated in return for the rights. These rights,
which may include patents, copyrights, trade secret rights, license rights, among others, are
allocated through managerial and legal decisions. A common objective in managing these
rights in an open innovation system is to ensure sufficient freedom to operate for each actor
within specified fields of use, a goal which may invoke conflicts of interest. Each actor must
ensure that all the technologies and the associated intellectual property rights (IPRs)
required to support its business are collected from various owners; the problem of
collecting all the required rights is the IP assembly problem. As innovations become
increasingly dependent on multiple technologies, and hence multiple IPRs, likely with
multiple IPR holders, the IP assembly problem becomes more complex, creating a pressing
need for well-functioning technology markets and careful technology management
The process of separating or disentangling a set of related IPRs at the disintegration or
termination of businesses or projects—the IP disassembly problem—is also challenging. The
IP disassembly problem has been defined as the problem of “finding an explicit or implicit
contractual arrangement for allocation of IPRs and licenses that allows for separating and
disintegrating a company, business unit, project entity, resource set, or IP unit in order to
enable a transaction, organizational transfer or dissolution of it” (Granstrand and
Holgersson 2013, 186).
In the context of open innovation, the IP disassembly problem is the problem of
disentangling and allocating IPRs at the closure of an open innovation project or at the exit
of one or more of the vital participants. During an open innovation project, knowledge flows
across organizational boundaries, and IP is shared or transferred across these boundaries,
whether implicitly or explicitly. When the project is closed or terminated, the involved
actors must deal with an IP disassembly problem. Some of the challenges associated with IP
disassembly derive from the inherently unavoidable incompleteness in contracting where
omissions might be expected, especially as new types of contingencies appear as the surge
of open innovation brings into the field many new entrants with limited experience with
An Unsuccessful Closing of an Open Innovation Project
To illustrate the IP challenges in the process of closing an open innovation project, we
present an actual case of a collaboration for joint technology development and
commercialization between a large European multinational corporation and a small US R&D
firm. The case, which is presented anonymously here, involves coupled open innovation,
and therefore a higher degree of resource integration across firm boundaries than pure
inbound or outbound projects are likely to. As a result, it involves more problematic
disassembly issues. The case, which ended up in court, was followed closely by one of the
authors, who was involved as an economic expert. Case data were collected mainly from
confidential company documents and court case material, as well as through the author’s
participation in discussions connected with court proceedings, complemented by
interviews with engineers, lawyers, and business managers in the large firm and its law
These interviews were mainly structured around two elements. Firstly, key events in the
innovation process were assessed together with alternative scenarios without the allegedly
damaging event. Secondly, factors in the claimant’s IP damage calculation model were
assessed (for instance, the expected rate of technological substitution in the industry,
market growth rate, technical and commercial risks, and the expected risk-adjusted cost of
capital as assessed by the interviewees).
Technical, commercial and legal interview data was then checked against open and closed
industry reports plus documentation provided by the claimant and finally integrated into an
economic analysis in order to address the claimed damages on an evidential basis in
Although a single case chosen explicitly for its value in exploring the existence of various
challenges cannot be used to support generalized conclusions about the size or frequency of
IP disassembly problems, it can help identify potential problems and remedies. The single-
case approach is deemed useful for exploring new areas and for providing evidence for the
existence of certain features of a phenomenon (Bryman and Bell 2007). This single-case
study can lead to future research that explores the IP disassembly problem and other
problems related to the closure of different types of open innovation.
The two companies involved were engaged in R&D and commercialization collaboration in
the heavy inorganic chemical industry. This industry is typically characterized by raw
material extraction, standardized bulk products, and cost-cutting process technologies. It is
dominated by globalized, capital-intensive oligopolies and there are significant entry
barriers, retaliation capacity, and imitation risks. The two firms involved in this case were
LF, a large, multinational European technology firm with over 60,000 employees working in
more than 100 countries, and SF, a small US innovation firm with just a few employees
working mainly in R&D. SF was a non-producing entity (NPE), but not a typical patent troll.
In the 1990s, LF needed a new cost-saving purification and separation process technology,
which was provided by SF. At that time, this process technology was at a small pilot-plant
stage, not yet developed to the commercial demonstrator stage, and the collaboration was
intended to develop the technology and scale it up. In pursuit of this goal, the two firms
entered into an exclusive two-year technology collaboration agreement (TCA), which was
both extendable and terminable.
The TCA included a set of terms governing IP assembly at the inbound acquisition phase
and IP disassembly at the outbound exploitation and termination phases of the
collaboration, offered here in summary (without exact legal wording):
• SF specified and provided all its know-how (including patents and trade secrets)
and LF provided some (but not all) of its know-how as cleared background
• Each party owned its background technology and was obliged to obtain, maintain,
and defend its background patents at its own cost.
• SF granted LF an exclusive, worldwide license on its background technology. In
return, LF paid SF a background-technology user fee based on a specific license-
• All foreground technology was owned, managed, and paid for by LF, which
compensated SF for engineering work (with fixed fees, hourly rates, and caps).
Outbound exploitation and termination
• If both parties agreed that the joint development work had been successful, the
companies would enter into an agreement for joint commercialization. Otherwise,
LF should grant SF a non-exclusive, irrevocable, royalty-free license to the
foreground technology with unrestricted sublicensing after 5 years, and SF should
grant LF a non-exclusive, irrevocable, and restricted license of such background
technology as was necessary for LF to exploit the foreground technology and then
pay SF the background-technology user fee. These licenses should also include a
non-exclusive right to any written reports relating to background or foreground
• The TCA could be terminated in case of collaboration performance default, financial
default, third-party acquisition, or key persons leaving SF. In this case, mutual
licensing would become noncompulsory.
• Both parties should treat as confidential all material received from each other and
reasonably prevent its disclosure for 10 years after the termination of the TCA
unless it had become common knowledge.
Change of control
• If SF received an acquisition offer, LF had the right of first refusal to purchase all or
part of the shares in SF or all or parts of the background technology. LF retained the
purchase option for five years after termination of the TCA.
When a few years of collaborative work failed to scale the process technology sufficiently
for a commercial demonstration plant, technological and economic disagreements between
the two companies ensued. LF chose to terminate the TCA and continue with in-house R&D
under the premise that enough knowledge had been developed and gathered, either within
or in parallel with the collaboration, to enable it to continue the project on its own. SF, then
scouting for new partners, asked LF for access to the demonstration plant (run by LF) for a
new customer partner from Asia. LF bluntly denied access, whereupon SF sued for damages
of roughly $150 million for breach of post-contractual loyalty, patent infringement, and
misappropriation of trade secrets in the form of breach of a confidential relationship and
unrightful use of IP.
Key issues in the case were uncertainties and disagreements with regard to rights to
technology relevant to the collaboration project. These uncertainties and disagreements
related not only to the technology developed within the project (foreground knowledge),
but also to technology developed either outside or after the collaboration. A general caution,
especially for small or less experienced firms collaborating with larger or more experienced
firms, is that collaborating partners have an incentive to perform R&D on complementary or
substitute technologies on their own, outside the collaboration. Collaborators can then use
any results from such R&D to increase their bargaining power within the collaboration,
sometimes leading to premature termination of or exit from the collaboration without
meeting the expectations of the partners. An early analysis of this case, noting this
phenomenon, introduced the concepts of sideground and postground knowledge
(Granstrand 2001) as a complement to the standard concepts of background and
foreground knowledge (see “Relevant Knowledge Types in Open Innovation,” p. XX).
In dealing with side- and postground technologies, an important issue in the case was the
valuation of and determination of damages for SF’s lost profits due to LF’s termination of
the collaboration project. In this case, SF invoked the “25 percent rule,” which stipulates a
license royalty amounting to 25 percent of a profit-related royalty base, such as the
licensee’s EBITDA. However, this determination was opposed by LF, which challenged the
fairness of the 25 percent rule on grounds presented in Granstrand (2006), claiming that
the 25 percent rule in IP damage calculations was applicable only in a very special case and
did not reflect the large difference in R&D and commercialization investments between the
two companies in this case.1 Questions such as which royalty determination method to use,
what discount rate to use, and what the expected market life time for the technologies might
be entered into the case; in each instance, the answers chosen made significant differences
in how the project and potential agreements could have financially impacted both firms,
creating barriers for ex post negotiation. The court finally decided that LF had indeed
engaged in breach of post-contractual duty of loyalty and IP infringement. LF appealed, and
the case ended with SF being awarded about $1 million in damages for some minor
misappropriation of its trade secret rights.
This case illustrates the difficulties in reaching agreements on IP disassembly after an open
innovation project ends or fails, even in the context of a fairly simple bilateral collaboration
with contractual measures taken at the IP assembly stage to avoid disassembly problems
down the road.
text box 1
Relevant Knowledge Types in Open Innovation
Managing IP assembly and disassembly problems can be facilitated by understanding what
knowledge assets the partners hold and provide before, during, and after the project.
Contracts and deals can then be structured accordingly. Defining knowledge categories
helps to clarify such understandings. Background and foreground knowledge are here
complemented by sideground and postground knowledge.
Background knowledge is knowledge that is relevant to a collaborative venture or open
innovation project that is supplied by the partners at the start of the project.
Foreground knowledge is all the knowledge produced within the collaborative venture or
open innovation project during the project’s tenure.
Sideground knowledge is knowledge that is relevant to a collaborative venture or open
innovation project, but produced outside the project by any of the partners during the
Postground knowledge is knowledge that is relevant to a collaborative venture or open
innovation project that is produced by any of the partners after the project ends.
Project starts Project ends
Note: The figure does not illustrate that parts of one firm’s background, sideground, and postground
knowledge may overlap with another firm’s knowledge.
Old knowledge New knowledge
Source of knowledge
IP Management in the Closure of Open Innovation
By the very nature of contingencies, contingency contracting before the launch of an open
innovation project is always incomplete (Williamson 1985), potentially leading to ex post
disagreements and disputes. However, such contracting can be made less incomplete by
learning from previous cases.
An important lesson from the case presented here is the need to explicitly consider
sideground and postground knowledge in contracting. This side- and postground
knowledge can either substitute for or complement the foreground knowledge developed
within the project; in either case, it can unbalance the relationship within the collaboration.
In this case, a small firm (SF), which was contributing to the joint technology development,
was completely dependent upon complementary assets held by its collaboration partner for
commercialization of the technology. A first important issue in contracting, then, is for a
collaborating partner to safeguard itself against the risk that its partners undertake R&D in
parallel with the collaboration and (accidentally or intentionally) develop substitute side-
or postground technologies, since these could diminish the commercial value of the
foreground technologies. This could be handled, for example, through exclusivity
agreements or by stipulating a minimum royalty amount.
Similarly, both actors might have interests in acquiring rights to any complementary side-
or postground technologies in order to safeguard the competitiveness of the foreground
technologies. Hence, a second important issue is for collaboration partners to secure usage
rights, at least for certain fields of use, not only to background technologies but also to any
potential side- or postground technologies, to ensure freedom to operate. This need can be
addressed through change-of-technology clauses, such as grant-forward clauses (see
“Common Causes in Licensing Contracts,” p. XX). There is an information problem related to
such clauses, however, in that side- and postground knowledge is difficult to monitor across
organizational boundaries. Information disclosure clauses could mitigate that risk, although
their effectiveness is limited by enforcement problems.
A third important issue is that the producer of side- and postground technologies might be
entitled to license royalties if a collaboration partner makes use of them in subsequent
businesses. Royalty determination in such cases becomes difficult. Negotiation and
bargaining in these cases can be eased, and disputes related to royalty determination be
mitigated to some extent by establishing principles for valuation and pricing of IP in ex ante
agreements, for example by agreeing on a set of fair, reasonable, and (possibly)
nondiscriminatory (FRAND) licensing terms in advance (see Granstrand and Holgersson
Foreground knowledge, and the uncertain nature of its relevance to the participating
organizations going forward, presents another significant issue. The foreground knowledge
produced in an open innovation project is typically of relevance to the joint project.
However, the knowledge needed to solve one problem may also unexpectedly contain the
seeds of a solution for other problems. Thus, serendipities emerging from the partners’
work in pursuit of the joint project can potentially reposition the partners, restructure the
knowledge flows, and lead to the development of additional indications or applications (for
example, for a new chemical compound or a new material). These discoveries might be of
limited relevance to the joint project but of major importance to one or more of the
collaboration partners, or even to some third party outside the collaboration.
Again a combination of licensing and pricing of technologies is called for to address this
possibility. Foreground knowledge relevant only to third parties could be handled by the
usual open innovation contracts for technology exploitation and acquisition (Granstrand et
al. 1992). A more difficult (disputable) type of situation arises when foreground knowledge
turns out to be relevant both to the joint project and to one partner’s business outside the
project, and perhaps to third parties as well. Licensing tools exist for resolving this situation
in principle, but technology control and pricing become thorny and shorthand
recommendations are hard to give, other than to point out the need to recognize the
Clearly there are many possible complexities and contingencies connected to different types
of cross-boundary knowledge flows in open innovation. Contingency contracting, valuation,
and pricing are key tools for managing IP disassembly in this context (Holgersson 2012).2
License contracts can be tailored to fit many if not most IP disassembly (and assembly)
situations. Limitations such as restrictions in time and commercial space (for instance,
geographic markets, applications, or market segments) can be imposed to preserve
competitive advantage. Grant-back and grant-forward clauses can help collaborators to
avoid losing their technological leads. Sublicense clauses can allow parties to retain control
of new entries and exits. Change-of-control clauses can allow the technology owner to retain
control of licensed technology in case of ownership changes among the partners.
text box 2
Common Clauses in Licensing Contracts
A number of standard clauses may be used in project initiation agreements to anticipate
and mitigate IP disassembly issues. We offer here a brief list of some of the most common
clauses used in license agreements. However, there are no exact or commonly accepted
definitions and clauses may vary a great deal from contract to contract.
- An assign-back clause stipulates that the licensee must transfer ownership of any
improvements it makes to the licensed technology back to the licensor.
- A grant-back clause stipulates that the licensee must license any improvements it makes to
the licensed technology back to the licensor.
- A grant-forward clause stipulates that the licensor must offer the licensee a license on any
improvements of the licensed technology made by the licensor.
Assign-back, grant-back, and grant-forward clauses are examples of change-of-technology
clauses, which stipulate what the parties will do in case a particular technology change
occurs, just as a change-of-control clause does in case a certain change in ownership occurs.
- A change-of-control clause stipulates that the licensor has the right to terminate the license
agreement in case of a change of ownership of the licensee.
- A no-challenge clause stipulates that the licensee is not allowed to challenge the validity of
the licensed patents.
- A termination clause stipulates that the licensor and/or licensee has the right to terminate
the license agreement under certain conditions, for instance if the licensee challenges the
validity of the licensed patents.
The IP Reassembly Process
As illustrated by the case reported here, even an apparently simple process of IP
disassembly can present managerial challenges. However, the IP disassembly problem may
also be turned into an opportunity. The concepts outlined in the discussion form the basis
for what we call the IP reassembly process, a way of managing recurrent IP assembly and
disassembly processes strategically in order to build and expand an organization’s IP base
Fore-, side-, and postground knowledge generated by an open innovation collaboration may
become background knowledge for a subsequent project. Through skillful management of
the IP disassembly process, an organization can capture excess knowledge resources by
securing partial or full ownership or license rights, first, to foreground knowledge relevant
to the first project, second, to side- and postground knowledge, and third, to any foreground
knowledge of limited relevance to the other collaboration partners. In that way, the
organization accumulates knowledge and skills that can be leveraged in subsequent
projects through licensing and collaboration agreements. In this way, the assembly and
disassembly of IP is utilized repetitively in recurrent contracting.
The IP base is thus built by reassembling IP over several generations of projects through
strategic management of IP and knowledge flows from various sources (Figure 1). Such a
process is characteristic of some research institutes, such as Belgium’s Imec (see Leten et al.
2013). The leverage of this reassembly business model increases with the number of
collaborating partners and recurring partnerships, especially if the focal entity can position
itself as a hub, maintaining bilateral or multilateral agreements with partners in different
industries or for technologies with complementarities that supersede competitive concerns.
Figure 1 A recurrent IP reassembly process
BK of 1
BK of 1
BK of 2
BK of 2
BK of 3
BK = Background knowledge (of research institute if nothing else stated)
FK = Foreground knowledge produced within collaboration
SK = Sideground knowledge produced and controlled by research institute
PK = Postground knowledge produced and controlled by research institute
Old knowledge New knowledge
The project described in our case was of a simple and common type, but the IP disassembly
process failed due to disputes related to sideground and postground knowledge. The
complexities and risks in the endgame of an open innovation project can lead to a variety of
IP disputes; many of these can be mitigated with foresight and attention to the likely
sources of such disputes.
In order to reduce the risks of failure in open innovation, technology and IP managers must
pay more attention to IP disassembly in general, and to sideground and postground
knowledge more specifically. Contractual provisions for these knowledge types should be
included in license agreements, making the inherently incomplete contingency contracting
less incomplete and thereby mitigating IP disassembly problems.
IP disassembly may also present opportunities. The necessity of IP disassembly may be
remade as a virtue in the form of a business model that leverages assembly and disassembly
to build and capture knowledge resources. In this model, strong management and
contracting skills related to IP assembly and disassembly allow for subsequent IP
reassembly, so that back-, fore-, side-, and postground knowledge can be redeployed and
expanded in multiple project generations.
It is important, then, that management, economic, legal, and technology experts are
involved in drafting contracts and structuring deals for open innovation. A diverse set of
knowledge, experiences, skills, and mindsets is conducive to creative contingency
contracting. Some technology managers despise legalities, which they are neither trained
for nor prepared to deal with. However, the design of a contract platform with contract
modules built on combinations of clauses is not unlike the development of an engineering
system based on various components and subsystems. Contingency contracting also runs
the risk of becoming overengineered, however, just as engineering systems do. Managers
must attempt to take a balanced approach.
Addressing assembly and disassembly problems through contracting is necessary, but not
sufficient, for effective governance of open innovation projects. Noncontractual social
relationships are important complements to contractual relationships, not least when a
project is about to end (Granstrand and Holgersson 2013). It is difficult to contract away
such failure factors in a collaboration as arrogance (“Steal with pride”), NIH (“not-invented-
here”) syndrome, and hubris (“We don’t need them anymore; we can do it ourselves now”).
Good contractual relations are valuable. Good social relations may be invaluable.
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1. The 25 percent rule was later found to be a fundamentally flawed tool for determining a
baseline royalty rate in a hypothetical negotiation by the United States Court of Appeals
for the Federal Circuit (CAFC) in Uniloc USA, Inc. vs. Microsoft Corp. An alternative to
the 25 percent rule is the model provided in Granstrand and Holgersson (2012). This
model generalizes the principle of equalizing the rates of return on investments in the
bilateral case of a buyer and a seller of an exclusive license presented in Granstrand
(2006) to apply to multilateral cases with multiple buyers and sellers of nonexclusive
2. On the other hand, joint ownership of IP is generally to be avoided, as the risks and
uncertainties of such an arrangement are significant. One often-cited risk is that in many
jurisdictions any owner can sell licenses to jointly owned IP without the consent of the
other owners (Granstrand and Holgersson 2013).