Is a Joint Venture Agreement Necessary in California?

Two small tech start-up companies collaborated on a new phone application they believe is poised to permanently change consumer habits. One company approached the other with the novel idea, and the larger company helped them implement the technology and work on the interface, in addition to obtaining funding. The two companies had a handshake agreement about the sharing of costs in addition to profits. Now that the second company obtained a patent for the app, they have shared with the first company that they do not have licensing rights, and that the first company will only get 30% of the profits. What could the first company have done to prevent an unfair deal? Should they have gotten the terms in writing?

California statute states that a joint venture is a business relationship between two or more companies. A joint venture exists if two or more parties have entered a business relationship for the purpose of combining property, knowledge or skill to “carry out a single business undertaking.” The parties must share an ownership interest in the joint business and retain joint control over the business dealings even if they have delegated authority to a representative. The businesses must also agree to share both profits and losses of the business. See Cochrum v. Costa Victoria Healthcare, LLC (2018) 25 Cal. App. 5th 1034, 1053. If all these criterions are established, the parties have created a joint venture, whether they have discussed it or not.

So, if the parties agree to create a joint venture, why is a formal joint venture agreement necessary? Because the parties are not formally merging all business together, and are not business partners in the sense, they are not required to complete any filings with the California Secretary of State. However, because their relationship may only be amicable for the purposes of the joint venture, they are advised to memorialize the terms of their agreement in writing. This is especially true when discussing who is responsible for what component, who will obtain funding, how profits will be shared, and what the protocol will be for winding up business or ending the venture.

Without a formal joint venture agreement, it is easy for one party to take advantage of the other, and a business dispute could end up in lengthy, time-consuming litigation. In our next blog post, we will discuss some of the liabilities associated with a joint venture and why forming a partnership is advised for businesses engaged in a long-term relationship with each other.

You put your heart and soul into the development of a new product, app, technology or method. You expect to reap the rewards. Collaboration is great, but do not let a good working relationship cloud your judgment. A joint venture agreement protects the interests of both parties and encourages future facilitation without bad blood. Our lawyers at SAC Attorneys specialize in business law including joint venture agreements. We want to help our clients reach an amicable solution but are not afraid of litigation if necessary. We help clients throughout Silicon Valley and remain open to serve you. Call today to discuss your options.