On the Establishment of a National Authority for Technological Innovation – Amendments to the Law for the Promotion of Industrial Research and Development

The Law for the Promotion of Industrial Research and Development (“the R&D Law“) was passed in 1984 in order to fulfill several objectives:¹                  

1. To create hi-tech industry jobs and the absorption of scientific and technological manpower;
2. To create a surplus yield for the Israeli economy; that is, benefiting the economy by way of  research and development or the fruits thereof, above the yield intended for those directly involved in such research and development;
3. To develop the hi-tech industry while utilizing and expanding the 
   technological and scientific infrastructure as well as the human resources already present in the State;
4. To improve the balance of payments of the State through the manufacture and export of hi-tech products developed.

For the purpose of achieving these objectives, and pursuant to the R&D Law, an Industrial Research and Development Administration was founded and headed by the chief scientist of the former Ministry of Industry and Trade (today the Ministry of Economy) (“the Chief Scientist“). In accordance with the R&D Law and the residual power by the government in matters of research and development (by instruction of the Director of the Ministry of Economy), the Chief Scientist directed various incentive programs to provide support for industrial research and development needs (such provision of support examined and approved by the Research Committee in the Industrial Research and Development Administration).

Upon retrospect the lawmakers felt that the R&D Law had achieved its goals, and since its implementation Israel has indeed become a leader of technological innovation. That said, lawmakers have more recently felt a need to significantly improve the government’s ability in providing solutions for current market failures in technological innovation, and that therefore the role of the Chief Scientist as well as its goals should be adapted to meet present and future needs. Thus, while in the past, as mentioned above, the role involved encouraging creation and industrial growth, today there is a need for its modification such that it allows for maintaining competition of the Israeli hi-tech industry with the international market (developed countries and developing countries that have chosen innovation as their growth strategy) as well as connecting broader sectors of the Israeli economy to that industry regarded as a growth engine for the Israeli economy, and all this in the midst of an economic slowdown over the past few years.²

For this purpose, and in order to implement government policy for the field of technological innovation, was the R&D Law recently amended [Law for the Promotion of Industrial Research and Development (amendment No. 7), 5775-2015] (“the Amendment“). As part of the amendment, a supervised public body qualified for every right, obligation and legal act³ was established [i.e. a legal personality], namely, the National Authority for Technological Innovation⁴ (“the Authority“), which was equipped with “an improved tool box” and with broader freedom to act in relation to that which was available to the Chief Scientist pursuant to the R&D Law prior to the Amendment.⁵ For example:

1. Research Committees: Prior to the Amendment, one permanent Research Committee acted⁶ and was responsible for the examination and approval of all R&D plans, with respect to which the Chief Scientist’s support was requested, despite the variety of incentive programs for various industries. At present, in accordance with the Amendment, there will be several Research Committees, each of which authorized for one or more incentive program.⁷ 
2. Partner in a limited partnership: One of the new means at the Authority’s disposal not available prior to and now pursuant to the Amendment is allowing the Authority to become a partner in limited partnerships in the framework of handling incentive programs, whether as a limited partner or as a holder in a general partner.⁸ 
3. Transfer of know-how within Israel, transfer of production to outside of Israel and transfer of know-how to outside of Israel: Prior to the Amendment, the R&D Law dealt with issues of production in Israel and its transfer to outside of Israel as well as with the issue of the transfer of know-how to outside of Israel.⁹ The scope and breadth of the Chief Scientist’s discretion and activity were limited.

Pursuant to the Amendment, articles of the law dealing with the transfer of know-how within Israel, the transfer of production to outside of Israel and the transfer of know-how to outside of Israel were repealed,¹⁰ including, inter alia, provisions according to which:

3.1. Transfer of production or of production rights to outside of Israel are to be allowed only in unique cases recorded as justified.
3.2. In exchange for the transfer of production to outside of Israel, production or production rights of a product at a similar or higher technological level than the product subject of the transfer application is to be transferred to Israel.
3.3. Only where the research committee has been convinced, after having considered the kind of know-how being transferred and its degree of obsolescence and the length of time that has passed since the completion of its development and the amount of royalties paid until the submission of the application to transfer know-how to outside of Israel, and given that the exchanged know-how to be transferred to Israel is to supply a yield significantly larger than that which would have been achieved from the know-how being transferred to outside of Israel, is the research committee allowed, in unique cases recorded as justified, to approve said transfer of know-how, without requirement of payment of fees for the applicant of said transfer.
3.4. If the consideration for the transfer of know-how to outside of Israel is in stocks, under specific circumstances the stocks shall become a security of the State of Israel.

According to the Amendment, and in light of the establishment of the Authority, a different mechanism was set forth that allows for greater leeway in the approval of transfer of production to outside of Israel or transfer of know-how either within Israel or to outside of Israel. Thus, the modes of action for the transfer of know-how and production have not been preset, and are no longer anchored in legislation; instead of those specific law provisions outlining strict statutory arrangements, the Amendment only sets forth a framework that grants the Authority’s council or the Research Committees the authority to set forth arrangements for transfers of know-how within Israel, transfers of production to outside of Israel and transfers of know-how to outside of Israel, such that arrangements are set according to the specific incentive programs and according to the specific provisions concerning ownership of know-how that the Authority will be allowed to determine.^13,12,11 

4. Royalties: Prior to the Amendment, the R&D Law dealt with the issue of payment of royalties to the state treasury, and stipulated that any party that has been supported by the Chief Scientist shall pay royalties to the state treasury from any income derived from a product developed within the framework of said support or a product resulting therefrom.¹⁴ That is, the scope and breadth of the Chief Scientist’s discretion and activity on the issue of royalty payments were quite limited. According to the Amendment, a different mechanism that allows for greater flexibility on this issue as well has also been put in place. Accordingly, the payment of royalties will be laid out by the Authority’s council within the framework of the specific incentive programs.¹⁵

As stated, the Amendment instills wide-scale operational freedom in the National Authority of Technological Innovation as a result of both its designation as an independent entity and the authorities granted to it. In order to check the balance of power and in order to establish proper corporate governance¹⁶ in the new authority operating for the public good, lawmakers imposed on the functionaries¹⁷ of the new authority an obligation of caution and an obligation of loyalty to the Authority, similar to the obligations of caution and loyalty imposed upon officers and directors of companies in accordance with the Companies Law, 5759-1999.

The Amendment will take effect on January 1, 2016¹⁸ . Will the establishment of the new authority as well as the powers and relatively broad freedom granted to it achieve its goals, despite the slowdown experienced by industries over the past few years? Will it allow the Israeli hi-tech industry to continue to be relevant and competitive in the international market? Will it be attractive enough for foreign investors to invest in local industries supported by the Authority so that the total number of foreign investments in Israel increases? Will broader sectors of the Israeli economy connect to the hi-tech industry, a growth engine of the Israeli economy? One can expect to answer these questions only in the coming years.

1 See Article 1 of the Law for the Promotion of Industrial Research and Development, 5744-1984.

2 See page 628 of the proposal of a law for the promotion of industrial research and development (amendment 7) (The establishment of a National Authority for Technological Innovation), 5775-2015 (“the proposal to amend the R&D Law”).

3 See article 7 of the Amendment. 

4 The head of the new authority is the chief scientist of the Ministry of Economy, and its organs are the authority council, the general manager of the authority and the research committees – See article 8 of the Amendment.  

5 See the proposal to amend the R&D Law, page 629. 

6 See article 6 of the R&D Law. 

7 See article 9 of the Amendment and also the proposal to amend the R&D Law, page 641.

8 See article 14 of the Amendment and also the proposal to amend the R&D Law, pages 657-658. In addition, according to the Amendment, if a decision to direct an incentive program provides that the Authority become a limited partner or a holder in a general partner, it will be obligated to announce to the Manufacturers Association of Israel, in addition to central authorities in the relevant industry and to groups related to the specific industry also operating in the field of venture capital funds. The recipients will be able to provide the Authority with their position after 14 days from the day of receiving the announcement, and the position will be transferred to the council, to the Minister of Treasury and to the Minister of Economy before making a decision. 

9 See articles 19(c), 19A and 19B of the R&D Law. 

10 See articles 20 and 21 of the Amendment. 

11 See article 14 of the Amendment and the proposal to amend the R&D Law, page 666. 

12 According to the Amendment, a higher priority will be given to an arrangement according to which the one who receives the support will be requested to be the owner of the developed know-how and of the rights deriving from it, including the intellectual property rights in Israel, or to an arrangement according to which there will be a demand that the know-how and the rights deriving from it, including the intellectual property rights, be owned by a corporation incorporated in Israel, even if the one who receives the support is not a corporation incorporated in Israel; see the proposal to amend the R&D Law, page 659. 

13 It should be mentioned that the Authority will be allowed (and is likely) to apply in specific incentive programs the same arrangements used according to the R&D Law prior to the Amendment.

14 See article 21 of the R&D Law.

15 See article 23 of the Amendment and the proposal to amend the R&D Law, page 669.

16 See the proposal to amend the R&D Law, page 644. 

17 Functionary: a councilman, a member of a research committee, the general manager of the Authority, a deputy of the general manager of the Authority, and anyone who has an official job in the Authority, even if his title is different, and also a manager who reports directly to the general manager; see article 15B of the Amendment.  

18 See article 56 of the Amendment. Anyone who received aid from the Chief Scientist in the framework of the support prior to the Amendment will be considered as if he received the assistance from the authority to be established by the Amendment.