NEGOTIATIONS AND LICENSING

NEGOTIATIONS AND LICENSING

1. 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. Identify the colleagues, and any consultants, you think should be involved in the negotiations and work out a clear role for each in the discussions.
   • Decide on who will lead the negotiations and outline the process the team should follow in accepting or rejecting proposals during the negotiation. Include break-out time to review and discuss points in private and for the team to agree on specific terms.

2. 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 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.
       • Terms pf exchange specified for the bargain
       • something of value exchanged
       • Mutual exchange

3. 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.
       • 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);

4. HEADS OF AGREEMENT

   • Before any exchange of agreement templates begins, it is essential that a ‘Heads of Agreement’ is discussed and that agreement is reached on each of the important aspects of the planned interaction, be it a research collaboration, a licence agreement, a licence option agreement, patent exploitation agreement, or other.
     • 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: provide only those patents that cover the specific product which the licensee wants access to(see application under scope below)
       • 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. A licence fee may be paid as: A single payment made on signing; A single payment on signing, to be deducted from the first royalties due; X% on signing, the balance on achieving milestones A, B, C, etc.; and/or Quarterly, half-yearly or annually amounts (quarterly provides better control).
       • Scope of licence: The licence should be made as specific as possible by using several parameters to define its restricted scope
         • Exclusive licence: The licensee is the only permitted user of the licensed IP (see ‘Application’ below). Not even the owner of the patent can use it for the application defined under the licence agreement;
         • Sole licence: The licensee is the only legal entity granted a licence to use the IP, although the licensor is permitted to use the IP as well;
         • Non-exclusive licence: This allows the licensor rights to use the IP itself and also the right to grant licences to others for the same IP;
         • Option (exclusive or non-exclusive): If an option to licence the IP is granted, the licensor must consider whether he wishes to grant an exclusive option or a non-exclusive option (which gives him the freedom to grant others an option).
       • 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 – usually, the request of the licensee by a specific date, or on the submission of an evaluation report or some other action.
       • Licence option: If the agreement includes a licence option, specify whether exclusive or non-exclusive (see ‘Scope’ below). The option is granted on signing of the agreement. If the main agreement is a licence agreement, there may be an option in the licence agreement to licence some further aspects of the technology – for example improvements, next generation products, additional patents, additional applications of the patents, additional territories, etc.
       • 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 – that is, on receiving an offer from someone else, he has to offer the licence to the first party.
       • Exclusivity: Exclusivity can be granted without giving away exclusive rights to the whole IP. Different kinds of exclusive rights can be divided out by defining specific rights that fall within the following terms:
         • aplication
         • territory
         • duration

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