NEGOTIATIONS AND LICENSING

NEGOTIATIONS AND LICENSING

1. The purpose of any licensing negotiations is for both sides to identify clearly what each wants from the commercial arrangement they intend entering into. The objective is to achieve an outcome, where each side is clear on what it is giving and receiving from the agreement and, importantly, that each party is content with the final deal reached and has gained a sense of trust and fairness from the other.

   • HEADS OF AGREEMENT
     • The Heads of Agreement typically are a set of bullet point headings, under which the parties are expected to discuss and complete in their own words (or brief bullet points) the decisions they have reached on each item.
       • Heads of Agreement – Licence
         • Parties: The registered legal name and location of the parties.
         • Start date: Commencement of licence.
         • Duration: Agree the appropriate term for the licence
         • Nature of licensed IP (patent, copyright, know-how, etc.): Provide only those patents that cover the specific product which the licensee wants access to
         • Work schedule: Where work needs to be done, in transferring the technology from the licensor to the licensee, or where it is expected that one or both of the parties needs to do some specific development work to prepare the product for the market, it is essential that a well-defined work schedule is drafted and agreed by both parties before the licence agreement is drafted.
         • Costs: Who will incur the costs of a) the technology transfer and b) the development work (if any)? Who will pay the patent costs if any new patents are to be filed? (for example, joint patent applications).
         • Lump sum/royalties (minimum royalties): Negotiate the licence fee and royalty rate as discussed in the section above.
         • Payment schedule: Depending on the payments that have been agreed, also agree when the appropriate payments should be made.
         • Licence option: If the agreement includes a licence option, specify whether exclusive or non-exclusive
         • Option term on licence: In the case of a licence option, agree the term to allow time for the licensee to do due diligence on the patent applications and the technology and specify the event that triggers an exercise of the option
         • Right of first refusal: The licensee is interested, but may not be ready to take a licence, so the licensor may decide to offer a right of first refusal
         • Scope of licence: The licence should be made as specific as possible by using several parameters to define its restricted scope
         • Exclusivity: Exclusivity can be granted without giving away exclusive rights to the whole IP.
         • Liability: The licensee provides product liability for any products it manufactures under the licence and indemnifies the licensor against any damages.
         • Warranty on licensed patents: The licensor is expected to provide certain warranties on the patents to which the licensee has certain rights.
         • Ownership of IP: For any agreements where there will be an element of development work involved, ensure that the work schedule is written and that it contains a well-defined description of the work each party is responsible for.
         • Ownership of improvements: Where a licensee independently makes an improvement (an invention that cannot be separated from the licensed IP), the licensor might consider negotiating a provision for a non-exclusive royalty-free licence to the improvement, including the right to sub-license.
         • Infringement (who takes action to sue): The licensor might wish to have control over all infringements, but this depends on whether the licensee might be considered to be in a stronger position to win an action in the territory than the licensor.
         • Termination: Other than for any specific duration of the licence that may be agreed, the usual terms should be inserted into the agreement to cover material breach, receivership, change of control, etc.
         • Choice of law: This depends on the country of residence of the partners. If it is the same for both, choose the laws and jurisdiction of that country.
         • Dispute resolution: The parties may wish to choose arbitration or mediation as an alternative means to resolving disputes and include appropriate terms for this.

2. THE TEAM

   • It is unwise to negotiate on your own, as points and issues may arise that you are either unsure of or misinterpret. It is best to appoint a small team, which can be as few as two people, to address points on technology, manufacturing, legal, IP and finance, as required.

3. NEGOTIATING

   • The process of negotiation is frequently informal and, typically, is not completed in a single meeting of the parties around the table. More usually, the parties meet several times to discuss the technology. When they decide to enter into a formal licence arrangement, specific individuals from the team with a combination of technical and legal expertise are introduced on both sides to complete the deal and to sign a formal agreement.
     • The process begins with discussion on the main points that must be agreed and usually extends over a period of time, taking the form of conference calls and e-mail exchange of documents. It concludes with the introduction of a draft agreement, when the main points have been agreed.
       • The main point to be aware of is that the agreement needs to provide for the exchange of a bargain in order to create an enforceable contract – that is, a ‘consideration’ is exchanged in return for ‘something of value’. The contract must fulfil three essential elements. There must be:
         • Terms of exchange specified for the bargain; Something of value exchanged; and Mutual exchange.
           • In the licence agreement, the licensor agrees to provide the licensee with the use of his property (more specifically, he makes a promise not to sue for infringement of his IP). In return for exchange of the valuable IP, the licensee agrees to pay the licensor a fee and/or royalties as consideration and the agreement specifies the terms and conditions for exchange of the bargain.

4. THE TERMS

   • Licence Fee
     • The licence fee (also referred to as ‘lump sum’, ‘down payment’ or ‘upfront fee’) is a payment that, typically, is separate to royalty payments. For a proven technology or product, which is already in commercial operation and is being transferred as a turn-key technology package to the licensee, the licence fee is usually a set fee which all licensees pay. However, for an unproven product or technology that is not yet commercially proven and which requires some further development by the licensee, the licence fee is often a result of negotiation and can be agreed in a number of alternative ways.
       • The basis for the payment can be any, or a combination, of the following, but in any event it must be realistically supported by the scale of the new business opportunity being offered to the licensee:
         • A once-off non-refundable fee; A number of fees paid on reaching agreed milestones – for example, signing of the contract, completed transfer of the technology, production of a successful prototype, manufacturability of the product achieved, sale of the first product, etc. (fees are paid upon achievement of incremental success);
         • A fee paid on signing of the licence agreement, but deductible against the first royalty payments (an advanced royalty payment, which might be a fee equal to the first year’s estimated minimum royalty payment); Cost of patents to date (or a percentage of these) or cost of research to date (or a percentage of this);
         • A lump sum to cover the costs of negotiating and drafting the agreement, the transfer of the technology and the required training and consulting support after the transfer.
       • The licence fee is intended to reflect a number of considerations:
         • Payment as a security or sign of intention that the licensee is committed to commercialising the technology
         • Recognition of access to strong IP that provides the licensee with a monopoly for a unique commercial opportunity, which has a tangible value for the licensee in the defined territory
         • Recognition on the part of the licensee that a significant investment has gone into developing the technology, in which it has not had to risk investment itself
         • A payment towards a portion of the expenditures already committed by the licensor
         • Milestone fees to reward the licensor for the successful development of the technology, but only as the risk to the licensee diminishes as the technology moves closer to market
   • Royalties
     • Normally, royalties are paid in addition to the licence fee. They are based usually on a unit, a volume or a weight of sale – the ‘royalty base’.
       • This necessitates an appreciation of the operating costs, the likely sales price and the net margin for the product from the technology being licensed.
   • Setting the Royalty
     • Rate In setting the royalty, consideration must be given to the end-use or application of the product or technology. A stand-alone product or process based completely on the licensed technology is more straightforward than a case where the technology is only part of a whole.
   • Minimum Royalty
     • The licensor should have an expectation of achievable annual sales. A minimum royalty can be based on this market forecast. The minimum royalty also ensures that the licensee actively exploits the licence and does not use it as a blocking manoeuvre towards competitors.
   • Resetting Minimum Royalties
     • In the event that the minimum royalty is not achieved, partners usually build some scope into the licence agreement for renegotiation of the minimum royalty on reasonable terms, but cancellation of the licence is an option, or reverting to a non-exclusive licence where an exclusive licence exists

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