NEGOTIATIONS AND LICENSING

NEGOTIATIONS AND LICENSING

1. THE TEAM

   • 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.

2. NEGOTIATING

   • The process of negotiation is frequently informal and, typically, is not completed in a single meeting of the parties around the table
   • licence agreement
     • Terms of exchange specified for the bargain; Something of value exchanged; and Mutual exchange.
   • What do you want to achieve and what have you got to offer?
     • If you are the licensee, you have identified the new technology as being appropriate to your company’s business strategy and you should have clearly identified the specific applications of the technology you want to commercialise, in terms of the types of products or manufacturing processes you want access to and the market sectors they are relevant to.

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
       • The basis for the payment can be any, or a combination, of the following
         • A once-off non-refundable fee;
           • A number of fees paid on reaching agreed milestones
             • A fee paid on signing of the licence agreement
               • Cost of patents to date or cost of research to date
                 • A lump sum to cover the costs of negotiating and drafting the agreement
                   • Ingrith Osorio, Group 101
       • 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
             • Recognition on the part of the licensee that a significant investment has gone into developing the technology
               • 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.

4. Royalties

   • 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’
     • Setting the Royalty Rate
       • For stand-alone products or processes, base the royalty on the sales price of the product, a unit weight, or a unit volume
         • For compound products or processes, base the royalty on the percentage contribution of the licensed technology to the total manufacturing cost of the final product
           • For compound products or processes, base the royalty on a percentage of the premium achieved by the manufacturer
             • Set the royalty as a precise cash amount per unit/volume/ weight sold
               • If the royalty is not based on a unit which itself tracks inflation then ensure that the royalty is index-linked
                 • Set the royalty as a percentage of the profit
                   • If the licensee is making an investment, then a lower royalty might be fair
                     • A sliding scale with a high initial royalty falling to a lower rate on increased sales provides an incentive to the licensee to improve market share
     • Minimum Royalty
       • Minimum royalties may not be achieved for several reasons:
         • The product or technology is completely new and both the licensor and licensee had unrealistic market expectations
           • The licensee is too small or specialised and cannot service the targeted markets
             • Competing products or technologies appear on the market in the interim
               • The product or technology shows problems
                 • The licensee does not use his best efforts to promote the product or technology.
     • 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.

5. HEADS OF AGREEMENT

   • 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
             • Work schedule: Where work needs to be done
               • Costs: Who will incur the costs of a) the technology transfer and b) the development work? Who will pay the patent costs if any new patents are to be filed?
                 • Lump sum/royalties: Negotiate the licence fee and royalty rate as discussed in the section above.
                   • Payment schedule: Depending on the payments that have been agreed
                     • Licence option: If the agreement includes a licence option, specify whether exclusive or non-exclusive
                       • Option term on licence: 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: o Exclusive licence o Sole licence o Non-exclusive licence o Option (exclusive or non-exclusive
                             • 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: o Application o Territory o Duration
                               • 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, the licensor might consider negotiating a provision for a non-exclusive royalty-free licence to the improvement
                                       • Infringemen: The licensor might wish to have control over all infringements
                                         • Termination: Other than for any specific duration of the licence that may be agreed, the usual terms should be inserted into the agreement
                                           • 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.

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