BEST PRACTICES

BEST PRACTICES

1. PREPARING TO NEGOTIATE

   • A key to any deal is for each party to have an understanding of what they want from the deal. Thus, Effective negotiation begins with effective preparation. Effective preparation includes assembling the right team, Preparing a heads of agreement, defining guidelines for the process, negotiating honestly, and drafting the contract
   • THE TEAM
     • In many negotiations both parties will have a deal team. The deal team will conduct due diligence and negotiate the license. 
     • A deal team will generally include a Business Development Executive; a Scientific/Technical Expert; a Decision Maker; and a Licensing Attorney. The scientific and legal roles may be filled by multiple team members; for example, if the licensing attorney is not a patent attorney, a patent attorney will be needed on the deal team to understand the scope and nature of the patent rights and/or potential patent rights.
     • INITIAL TEAM MEETING
       • (e.g., spokesperson, technology review, business evaluation, record keeping).
       • It is important that the deal team meet and reach an understanding of the business motivation for the deal and the responsibilities and role of each team member during the process . In preparing for the negotiation, the deal team should identify, assess and prioritize the interests of their client. The “client” may be, for example, a business unit in the case of a large corporation, the company in the case of an emerging biotechnology company, or the University in the case of a Technology Transfer Office.
       • THE TERM SHEET
         • It is often helpful for parties to exchange a term sheet prior to the initial negotiation meeting. The term sheet typically covers the major issues in a potential deal in outline form, including: the licensed product or process; licensed territory; license fee and royalty; technical information and training required to develop and manufacture, sell and service the licensed product, and who will be responsible for same; sales and service support; degree of exclusivity, and duration of the license. The process of creating this document will help team members understand and focus on the overall objectives of the agreement and avoid unfavorable terms. Additionally, the document enables each party to understand their team’s basic position from the start, avoiding potential misunderstandings as the negotiation proceeds.
         • DEADLINES
           • Establishing preset deadlines for each of the major steps in the negotiation process is important because it forces the other party to reveal its true intentions and interests in the licensing agreement. Parties not committed to reaching an agreement will not meet deadline requirements, enabling the other party to cut its losses and look elsewhere for a potential licensing partner.
           • THE GROUNDWORK FOR OPEN DIALOG
             • In any negotiation, a nondisclosure agreement can provide security for both parties to maximize information transfer. Some key terms include license and scope, enforcement rights, the financial arrangement, additional patent prosecution and maintenance costs, ownership of improvements, liability, indemnification, and warranties and representations
             • DRAFTING THE CONTRACT
               • Commentators have suggested that the party drafting the contract is always in the more favorable position because that party will be in a position to ensure inclusion of desirable provisions and places the other party in the position of defending every request to modify the drafted agreement

2. NEGOTIATION

   • The terms of a licensing contract reflect the allocation of risk between the parties of the potential future development and marketability of the patented technology. A licensor that has taken a molecule through one or more phases of a clinical trial, or has the financial resources to do so, will likely be in position to negotiate narrow licensing agreements that incentivize development and marketing of the technology and that enable additional licensing agreements with other licensees of different strengths that can compete in other markets.
   • VALUATION APPROACHES
     • A business school/MBA approach to valuation often uses one of three methods: the cost method, the market method, and the income method. The value of the technology using the cost method is the cost of developing or purchasing the technology, though this does not reflect changes in the market or new information about the technology.
     • PROPRIETARY POSITION
       • A weak proprietary interest may exist where a patent is questionable in nature; one that covers only a very narrow technology, is very similar to other patented technology or was granted despite potentially not meeting the requirements for patentability.
       • EXCLUSIVITY AND FIELD OF USE
         • License exclusivity refers to whether the licensor has licensed the invention/technology to multiple licensees, whereas the field of use is the circumstances for which the licensor has granted the licensee permission to make, use and sell the patented technology. It is more advantageous for licensors to grant multiple non-exclusive licenses to further the goal of fully developing the patented technology.
         • DEVELOPMENTAL STAGE OF INVENTION
           • Patented inventions that are in the early stage of development often require substantial investment and development before a commercially viable product is produced. But high fees and royalties can compromise the future market success of the licensed technology by siphoning licensee funds away from development and marketing, particularly for an emerging biotechnology company licensee
           • PAYMENT TERMS
             • There are several forms of payment that licensing parties can negotiate to compensate the licensor for the patented technology. For example, when a University is the licensor, a typical license will include a signing fee, reimbursement and ongoing payment of patent prosecution costs, milestone payments, minimum annual royalties and a percentage royalty on sales.

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