Negotiation and Licensing

Negotiation 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.It is essential that the licensor understands the licensee’s requirements and he should identify and clarify how the technology will meet the licensee’s needs. The licensee should have an appreciation of the commercial potential of the technology and be able to convince the licensor he has the capability to fully exploit it.

2. It is not wise to negotiate on your own, as points and problems may arise that you are not sure or misunderstand. It is better to designate a small team. Decide who will lead the negotiations and describe the process that the team must follow to accept or reject proposals during the negotiation. You may need to seek clarification from your board of directors to solve difficult problems in which the terms may not be acceptable for your own organization

3. The negotiation process is often informal and, in general, is not completed in a single meeting of the parties around the table. Usually, the parties meet several times to discuss the technology. The process begins with a discussion on the main points to be agreed upon and generally extends over a period of time, taking the form of conference calls and document exchange by email.

   • It is important to avoid beginning negotiations with the exchange of a template licence agreement as the initial draft document. Unfortunately, for most complex technology licensing deals, this is a premature step in the proceedings and, most often, it very quickly spirals into a long drawn-out process of serial amendments on both sides, leading to misunderstandings and disputes over the legal interpretation of words and clauses, without really addressing the specific elements of the deal and the commercial terms that each party thought it was signing up to.
     • The contract must fulfil three essential elements.
       • Terms of exchange specified for the bargain
       • Something of value exchanged
       • 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.
     • You should prepare financial projections for the business opportunity and calculate the net margin you expect to achieve on the sale price of technology-based products. Taking into account the "25% rule", you can estimate the royalty you can pay to the licensor and you can use this in the negotiations to make an attractive commercial proposal for both parties.
       • n your introduction to the negotiations, it is important that you provide the licensor with sufficient information and solid arguments to convince him that he is the right partner to exploit his technology.
       • On the other hand you are the licensor, so you should look for these specific capabilities in your licensee and be convinced that you have demonstrated a viable business strategy to exploit the IP. You should also look for assurances (directly from the license holder and also of the credit checks) that the company is financially stable.

4. 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.
   • Where negotiations on licence fees get into difficulty, one can introduce a trade-off between the fee and the royalty, where the fee may be reduced for an increase in the royalty.
     • Royalties
       • Normally, royalties are paid in addition to the license fee. They are generally based on a unit, volume or sales weight: the "royalty base". The "25% rule" approach is often used to negotiate a royalty.
         • The following are some approaches worth considering
           • 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 (requires trust or auditing of the manufacturer’s costs)
           • For compound products or processes, base the royalty on a percentage of the premium achieved by the manufacturer, as compared to the equivalent product without the licensed technology (the unimproved product)
           • Set the royalty as a precise cash amount per unit/volume/ weight sold (involves a risk to licensor from inflation and a risk to licensee if he needs to reduce the price to compete)
           • 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 and a better overall return for both licensor and licensee.

5. HEADS OF AGREEMENT

   • Licence Parties: The registered legal name and location of the parties.
   • Start date: Commencement of licence.
     • 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)
   • Duration: Agree the appropriate term for the licence (see ‘Duration’ under ‘Scope’ below).
     • Nature of licensed IP (patent, copyright, know-how, etc.): Provide only those patents that cover the specific product which the licensee wants access to (see ‘Application’ under ‘Scope’ below)

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