MODULE
07
Technology Licensing
in a Strategic Partnership
172 MODULE 07. Technology Licensing in a Strategic Partnership
MODULE 07. Technology Licensing
in a Strategic Partnership
OUTLINE
LEARNING POINT 1: The basic concept of license
1. What is a license
2. Why license
LEARNING POINT 2: Preparing to license
1. Due diligence
(1) The basic concept of due diligence
(2) The information needed for due diligence
2. Valuation of technology
(1) Limitation in valuation of technology
(2) Methods to value technology
LEARNING POINT 3: Negotiating a license agreement
1. Negotiation process
2. Guidelines of negotiation
(1) The golden guidelines of negotiation
(2) What should be avoided and what should be encouraged
LEARNING POINT 4: Overview of license agreement
1. Characteristics of a license agreement
2. Issues in a license agreement
LEARNING POINT 5: Managing a license agreement
1. Implementing and managing the agreement
2. Termination and post termination issues
INTRODUCTION
Companies are always under pressure to keep improving their products; otherwise,
they run the risk of losing out to competitors. A company has to keep investing in
and making efforts to develop new and better products. However, it is quite
possible that someone else has already developed the new or improved technology
that it needs.
Without putting in all that effort to develop that same technology, why not use the
technology developed by someone else, if that were possible? The context of this
module is "Technology Licensing in a Strategic Partnership. “
LEARNING OBJECTIVES
1. You understand the basic of licensing.
2. You learn about the importance of preparing and negotiating a license
agreement.
3. You understand the basics of a license agreement.
4. You learn to manage a licensing relationship as well as termination and post
termination issues.
LEARNING POINT 1: The basic concept of license
A technology protected by intellectual property (IP) right(s) may be commercially
exploited either by the owner directly for making a new or improved product, by
transferring it by sale or gift or by licensing it to another.
1. What is a license?
(1) Definition of a license
To license is where an owner of an IP right (licensor) simply gives another
(licensee) permission to use that right, while the owner continues to retain
the ownership of that right.
(2) License agreement
The permission is usually granted through a written contract where the
purpose, territory and the period of time is defined and agreed to by the
parties. This written contract is called a “license agreement.”
(3) Types of license
a. Licensing‐in
An enterprise obtains technology from an external source. One may
license‐in as when an enterprise obtains technology from an external
source, such as a university, a research laboratory, another company or an
individual.
b. Licensing‐out
An enterprise transfers its technology to another for the manufacturing of
products, for the further development of the technology or to expand its
current operations.
c. Cross‐licensing
More References 1‐1: The distinction between a license and an assignment
1. In a license agreement, a licensor continues to own the IP rights but
only gives the licensee the permission to use a defined right over one or
more IP rights.
2. In an assignment (sale) the ownership of the rights in the IP is
transferred from the assignor (seller) to the assignee (buyer). This is a
one‐time transaction for an agreed price.
3. The distinction between a license and an assignment is also important
for determining who has the rights to sue for infringement of a licensed
patent and for taxation.
(1) Infringement: Who can sue for infringement?
As a general rule, only an assignee of a patent can sue for
infringement and not a patent licensee. But, in many cases, an
exclusive licensee is given the right to sue.
(2) Taxation
a. License
A. Licensee: Royalties paid under a license are deductible
business expenses of the licensee.
B. Licensor: Royalties paid under a license comprise ordinary
income for the licensor.
b. Assignment
- Assignee: Payments made for an assignment are capitalized
by the assignee.
- Assignor: Payments received for an assignment may be
taxed as capital gains to the assignor.
A cross‐licensing occurs when two parties licenses their technologies to
each other.
2. Why license?
A business would consider licensing under these situations:
(1) Essential component of certain business relationships
Many business relationships involve or crucially depend on licensing of IP
rights such as when it hires a consultant or collaborates with one or more
enterprises which may be vendors or subcontractors for manufacturing a
part or component, or when it collaborates on research & development or
when it forms a strategic alliance or a joint venture.
(2) Non‐core IP for adding a revenue stream
A business may consider allowing another to exploit its IP rights (license)
for a fee where it does not or no longer uses a particular IP right in its
core business.
(3) Core IP for adding a revenue stream
Even when an IP right is integral to the core business of an enterprise, the
enterprise may choose to concentrate on one geographic market (e.g.,
Germany or Russia) or one field of use (e.g., the market for two‐stroke
engines) and license to others with greater capacity or interest in other
markets or fields of use.
(4) Core business is licensing
Some companies enter into business with the sole objective of creating and
licensing IP rights, without ever manufacturing a product; for them the IP is
the product.
(5) Forcing an infringer to become a licensee (stick license)
In a situation where the IP rights are being infringed, the owner of those
rights may choose to litigate, which could be expensive, with an uncertain
outcome and be protracted. A more realistic option may be to put pressure
on such infringers to take a license, for example, by threatening to litigate.
(6) Licensing to each other (cross licensing)
In closely‐related industries where rivals employ very similar technologies
they often infringe upon each other’s IP rights. In such situations
cross‐licensing is relied upon to avoid expensive tit‐for‐tat litigation.
(7) Patent pools
Where manufacturers don’t themselves hold any patents relevant to the
products they manufacture and they are held by several patent holders they
may license the patents in a group. That is, the patents are put in a
patent pool by the patent holders and they are licensed in a package
directly by the owners or by an entity established for that purpose. Such
arrangements are particularly relevant in the context of patent thickets
where a single product may involve a maze of patents making its
manufacture impossible without dealing with an array of patent holders.
(8) Complying with standards
Sometimes, it is necessary to obtain licenses for protected technologies,
which are essential for meeting the requirements of a de facto industry
standard, or a de jure national or international technical standard that has
been set by a standard‐setting organization. When a license is needed for
meeting the requirements of an industry standard, it is generally available
on either a royalty‐free basis or is negotiated on the basis of what are
called fair, reasonable and non‐discriminatory (RAND or FRAND) terms.
LEARNING POINT 2: Preparing to license
1. Due diligence
Due diligence is a necessary first step before entering into any kind of
business transaction and is particularly important when considering a long‐term
business relationship, such as an IP license agreement. It must be done both
by the licensor as well as the licensee.
(1) The basic concept of due diligence
a. Due diligence is a term used for a number of concepts involving the
performance of an investigation of a business or person.
b. Due diligence is a necessary first step before entering into any kind of
business transaction and is particularly important when considering a
long‐term business relationship, such as an IP license agreement. It
must be done both by the licensor as well as the licensee.
c. Given the constraints of time and resources, a due diligence exercise
should seek to gather and analyze as much information as possible on
the potential licensor or licensee, the market, the technology and other
similar technologies available in the market or being developed, the
legal and business environment (local or international, as required) and
any other information that would enable the potential licensor or
licensee to be better informed.
d. The purpose of due diligence exercise is to assess potential risks and
benefits, identify risks that may undermine the value of technology, and
develop strategies for overcoming any such risks. This exercise
should naturally be conducted in a legitimate manner, within the bounds
of relevant laws.
(2) Information needed for due diligence
In a due diligence exercise, the exact information to be verified would vary,
depending on the facts and circumstances of a given situation. However,
in relation to patents, the basic information to be sought is as follows:
a. The ownership of the patents; checks whether all the inventors have
duly signed an assignment document assigning their rights in the
patents to the assignee.
b. The validity and adequacy of the scope of the rights offered; a patent
attorney has to analyze the claims of the patents or patent applications
being licensed to determine the scope of the claims.
c. Have all proper procedures been followed to ensure effective patent
protection in all the relevant markets?
d. The right to use the subject matter; are there any third parties claiming
rights over the patents in question.
e. Before licensing patents or patent applications from universities, a
potential licensee should carefully consider the impact of government
rights in the patented inventions.
f. Can the patented technology perform as per expectations; for example,
will it serve to reduce costs, improve performance or deliver other
identifiable benefits?
g. What is the economic or strategic value, in that, to what extent do the
patents in question fit into and further the business objectives of the
two parties to the proposed license agreement?
h. Will other IP rights have to be acquired (for example, a blocking patent
of a third party) to fully implement the patented technology in question;
is there freedom to operate (FTO) or would one or more licenses to
other patents be required too?
i. It is important to develop alternatives to a negotiated deal. Consider
strengths of the technology sought to be licensed versus competing
technologies available in the market. Most parties, if they are aware that
the other party “must” do the deal or the other party has limited
alternatives, will seek to extract far more favorable terms.
More References 2‐1: The sources of information for licensing
For obtaining information for licensing a range of sources can be usefully
consulted. These will include the following:
1. Publicly available information of publicly‐traded companies
2. Online and subscription database services for the relevant market or
products
3. Trade publications
4. Trade and technology exhibitions, fairs and shows
5. Technology licensing offices of research‐based universities and
publicly‐funded research and development institutions
6. Relevant government ministries, departments and agencies
7. Professional and business magazines, journals and publications
concerning the relevant products and markets
8. Professional and business associations
9. Technology exchange
10. Innovation centers
11. Patent information services
Depending on the particular field of interest and circumstances, a company
will consult one or more of the above sources of information.
2. Valuation of technology
(1) Limitation in valuation of technology
a. Traditionally, the valuation of assets reflected their historical cost, as
adjusted by depreciation, and their value was directly related to their
expected profitability.
b. In recent years, however, this link is no longer automatically applicable
as “new economy” companies generate earning seemingly unrelated to
their fixed assets. This is happening, primarily, because of their use of
intangible assets.
c. An owner of an asset, a potential purchaser, a financier and an insurer,
will each value a fixed asset differently, even though it is an identifiable
asset which is measured in a common currency. It thus follows that
valuing intangible assets is even more difficult, and even more
subjective.
(2) Methods to value technology
a. Cost Approach
The licensor’s investment in the technology is represented by the costs
associated with developing, protecting and commercializing the
technology. These expenditures are known to the licensor and can
reasonably be estimated by the potential licensee. They represent the
base, or minimum that the licensor will want to recover, with interest.
b. Income Approach
The income approach to valuation involves making educated guesses
(or more precise measures, if possible) as to the amount of income that
the new technology will generate. The issue then is to determine the
respective shares the parties should each have of the benefits and find
a royalty formula that matches that calculation.
c. Market Approach
Sellers and purchasers of real estate and used cars know, or can
readily ascertain, what other parties have agreed for similar houses and
cars in the same area. It follows that comparable market transactions
are a convenient and useful way of determining the value of an asset
in anticipation of negotiating a purchase or sale. The same approach is
beneficial in licensing, though perhaps not as useful as desired because
there will seldom be identical technology and intellectual property packages.
LEARNING POINT 3: Negotiating a license agreement
1. Negotiation process
Negotiating a technology licensing agreement is the art of reaching an
agreement where the licensor grants and the licensee acquires the right to use
the licensor’s technology on specified terms and conditions. The objective is to
set the basis for a mutually satisfactory and ultimately rewarding future
relationship. That is, a “win‐win” outcome as opposed to a “win‐lose” outcome
(which, in effect, is a “lose‐lose” outcome). The negotiation process involves
four distinct phases: preparing, discussing, proposing and bargaining.
(1) The Preparation Phase
This is probably the most important, in that it is almost impossible to
recover from, or overcome, inadequate preparation. Preparation includes all
that has been discussed thus far.
a. Having gone through a preliminary analysis of its business objectives
and decided that a licensing agreement would further that objective.
b. Establishing a team consisting of experts from the financial, legal and
technical areas. Their respective roles and responsibilities must be
clarified and each team member must understand the overall objective.
c. Preparing a summary of the key commercial issues to be covered in
the license agreement and the position of the party on each such issue.
More References 3‐1: NDA & LOI
1. NDA (Non‐disclosure Agreements)
(1) It is important to keep in mind that it is not sufficient to enter a
licensing negotiation based on pure trust as on many occasions the
negotiations do not necessarily result in a final license agreement.
(2) To safeguard confidential information disclosed during negotiations it
is standard practice to enter into a mutual non‐disclosure agreement,
also referred to as a confidentiality or secrecy agreement.
2. LOI (Letter of Intent)
(1) A Letter of Intent(LOI) or Memorandum of Understanding(MOU) is an
interim agreement spelling out the understanding of the parties before
a formal license agreement is signed.
(2) The Discussion Phase
This is usually characterized by the licensor promoting the merits and the
opportunities offered by its technology, and the potential licensee reviewing
documentation and information under a confidentiality agreement.
(3) The Proposing Phase
In the proposing phase, the parties are exploring the possible relationship
and the principal commercial terms. Key questions are being asked,
assumptions tested, strategic objectives established and boundaries
identified.
(4) The Bargaining Phase
In the bargaining phase, the question might become, “If we grant you an
exclusive worldwide license, then you have to double the sum payable on
signing the agreement”, to which the licensee might respond “If we double
the down‐payment, then one half is to be credited against the future
royalties payable to you on our sales of Licensed Products.”
(2) Such an agreement generally states that the parties have embarked
on and intend to continue negotiations with the intention of concluding
a license agreement.
In the absence of clear intention to that effect it would be for the courts of a
particular country to determine, subject to the laws of that country, whether
such an agreement is legally binding on the parties or not.
2. The Guidelines of Negotiation
Guidelines are the principles that aim to provide the negotiator with a practical
framework for the conduct of a negotiation. They are not rules, which if
transgressed must mean the negotiation is at an end. Rather, the failure to
follow or achieve a guideline is intended to alert the negotiator to the need to
have an understanding of the current position and perhaps the need for
additional or different actions.
(1) The golden guidelines of negotiation
a. Aim for a “win‐win” outcome
License agreements invariably involve long‐term technical, commercial
and personal relationships and, it follows, that for the agreement to be
successful all parties need to be satisfied with the agreement reached.
A dissatisfied party will often go to extreme lengths to redress a
perceived injustice and, when this happens, the grief, for one if not both
parties, is likely to well exceed all the previous benefits. After all, all
agreement is not inevitable and, in such a case, the “win‐win” outcome
would have been for the parties not to reach an agreement.
b. Generate variables
Generating variables or creating different options is another guideline for
successful negotiation. A variety of different solutions are possible in
solving a problem or in arriving at a mutually acceptable agreement. All
of the key terms of the agreement are variables, and a little imagination
can create additional variables, all of which can be creatively managed
so as to arrive at an outcome that makes the parties feel that they
have achieved an agreement that meets their respective business
objectives.
c. If … Then guideline
If …. Then guideline is otherwise known as the Never Give Unless You
Get guideline. It is too easy for the inexperienced negotiator to agree to
a proposal, and to then make a separate proposal – and be surprised
when it is rejected. The negotiator has the power and the chance to
explore and to link the issues and so achieve a better outcome. For
example, “If we grant you an exclusive worldwide license, then you
have to double the sum payable on signing the agreement.”
d. Establish the maximum (or best) position, and the minimum (or worst)
position in respect of each issue.
This is part of preparing for the negotiation and identifying and ranking
the issues of importance to oneself, as well as anticipating those likely
to be important to the other. This does not automatically mean that, if
in the negotiation a minimum position is not being achieved, the
negotiator should discontinue negotiations. Rather, being a guideline and
not a rule, it requires the negotiator to be satisfied that, in agreeing to
a position that is less than the minimum, there are good reasons.
Perhaps new information has changed the minimum position which was
established prior to the meeting. Or, on another issue the negotiator has
achieved an outcome better than the maximum, and so overall and on
balance the negotiator can accept a less than optimal outcome on this
issue. Or this issue is not that important to the negotiator, and/or it can
be justified because it is the last issue and overall agreement can now
be reached.
e. Aim high, but protect your credibility
This is relevant to the previous guideline, and reflects that it is possible
to accept a lesser position whereas the converse (to increase an offer)
is usually impossible. If the official price for a new Mercedes Benz is
$50,000 and a customer offers $35,000, it would be only a moment
before the sales person was talking to the next customer. It is all very
well to aim high, but not so high that the offer is not realistic and, in
fact, jeopardizes, if not destroys, the customer’s credibility. Rather, the
customer might agree to pay $45,000, and then proceed to negotiate for
the first year’s services to be free, for the warranty to be extended by
a year, for the radio/CD system to be upgraded, for a tow bar to be
installed, and so on.
f. Trade variables that are cheap for you but valuable to the other party
This is the best outcome. The independent engineer’s report on the
second hand‐Mercedes being purchased shows that repairs of up to
$10,000 may be necessary. The customer might offer to proceed with
the purchase if the repairs are carried out, and the garage might agree
to do this because the mechanics have little work on hand and spare
parts are few and are at wholesale prices. This is the best variable of
all – it is valuable to one party but is cheap for the other party.
g. Everything is negotiable and you don’t get the deal you deserve; that
you get the deal you negotiate. Nothing is cast in stone.
(2) What should be avoided and what should be encouraged
a. The followings are to be avoided:
- Loss of credibility
- Surprises
- Arguing or threatening
- Underestimating the opponent
- Haggling
- Negotiating against yourself
- Lack of preparation
b. The followings are encouraged:
- Rationality: Even if they are acting emotionally, balance emotions
with reason
- Understanding: Even if they misunderstand us, try to understand them
- Communication: Even if they are not listening, consult them before
deciding on matters that affect them
- Reliability: Even if they are trying to deceive us, neither trust them
nor deceive them but be reliable
- Non‐coercive modes of influence: Even if they are trying to coerce
us, neither yield to that coercion nor try to coerce them but be
open to persuasion and try to persuade them
- Acceptance: Even if they reject us and our concerns as unworthy of
their consideration, accept them as worthy of our consideration, care
about them and be open to learning from them.
LEARNING POINT 4: Overview of a license agreement
1. Characteristics of a license agreement
(1) A license agreement is the outcome of a business strategy and the start of
a business relationship
The parties clearly understand each other’s business objectives, and
appreciate that there is a mutual need to ensure that the licensing
agreement is successful.
(2) A license agreement is a contract.
More References 4‐1: The factors that influence the royalty rate
The following factors influence the royalty rate that may be established:
1. Market Size
2. Competition
3. Product Development Stage
4. Patent Strength
5. Unique vs. Common Technology
6. Manufacturing Rights
7. Exclusive vs. Non‐Exclusive
8. Worldwide vs. Regional Licenses
9. Deal Structure
Meeting the legal requirements for a binding and enforceable contract is
essential.
(3) Absence of any prohibition in a license agreement cannot be interpreted as
a permission to do the omitted act.
Don’t assume that a license is transferable or assignable, sub‐licensable or
encompasses a specific right/scope, simply because it does not expressly
restrict the same.
(4) While licensing depends on the existence of proprietary rights there may be
other important related issues.
Those related issues may be covered by other kinds of agreements such
as agreements dealing with research and development, consulting and
training, investment, manufacturing, distribution, sales, and so on.
10. Prevailing royalty rates in that particular industry technology (ballpark
range)
2. Issues in a license agreement
(1) Main issues in a license agreement
a. Identification of the Parties
The Agreement should be made between the party who has the right to
grant the license and the party who will be exercising that license. It
must be clear as to who the licensor and who the licensee is.
Additional details, including the addresses for each of the parties, the
jurisdiction of incorporation (for corporate entities) and the effective date
of the Agreement, may also be included in the identification section of
the Agreement.
b. Definitions
The definition clause is the dictionary for the Agreement. As far as
possible, each definition should be self‐contained. There are three
minimum terms that must be defined in a patent license.
- Licensed patents, any confidential information and know how,
meaning “those that are subject of a license”
- Licensed products, meaning “those that may be produced, used, offered
for sale, sold or imported by the licensee under the terms of the license”
- Territory, meaning the geographical territory “where the product may
be used”
c. Subject Matter
It is crucial to be clear about the scope of a license, as the license
grant forms the heart of the deal. It must be clear as to what is being
licensed. For example, “the licensed subject matter” shall mean:
- Intellectual property rights: The “Intellectual Property Rights” shall
mean all rights owned or otherwise held by Company X in, to or
under patents or patent applications, whether domestic or foreign,
and all divisions, continuations and continuation‐in‐part of any patent
applications, and all patents which may issue from any patent
applications, and all reissues, reexaminations, and extensions of
patents, relating to Company X’s technology.
- Technology rights: The “Technology Rights” shall mean all rights
owned or otherwise controlled by Company X in, to or under
technical information, know how, process, procedure, composition,
device, method, formula, protocol, technique, software, design,
drawing or data relating to the technology of Company X, which are
not covered by Intellectual Property Rights, but which are necessary
for the practice and full utilization of inventions at any time
disclosed or claimed under the Intellectual Property Rights.
d. Extent and scope of the licensed rights
A license could be exclusive, sole or non‐exclusive. A non‐exclusive
license, where the licensee is one of several licensees with whom the
licensor has entered into agreements for the use and exploitation of the
technology, is the preferred option of most licensors. By spreading the
risks and rewards to several licensees, the licensor does not depend on
the success of one licensee. He can maintain a better control over the
technology and, by virtue of the fact that several licensees are using
and exploiting the technology in several markets and perhaps in a
variety of products, the technology is given a chance to further evolve
and develop.
e. Field of use
The Licensee may be limited to distributing and selling the technology
to a particular class of customers (such as airlines), commercializing the
technology within a specific industry or industry segment (such as
computer software), or using it for a particular purpose (such as
research or incorporation into some other product or process).
f. Territory
The license may be limited to a particular geographic territory. For
example, worldwide rights could be granted, or the rights could be for
specific countries or even specific parts of countries (such as a state or
region of a country). What is appropriate will be influenced by what
the licensor is able to offer in terms of rights and what the licensee is
able to take advantage of in a particular territory or region.
g. Technical assistance
Depending on the kind of technology being transferred, there is often an
agreement to provide the licensee with technical assistance in the form
of documentation, data and expertise.
h. License fees
Payments to the licensor for the acquisition and use of technology are
usually classified as lump sums and royalties, and many agreements
contain both types of payment.
- Lump sums: Lump sums are payable on the happening of a
particular event. There may be one sum only, payable on signing
the agreement. If there were no further payments, this would be
considered a fully‐paid‐up license.
- Royalties: Royalties are regular payments to the licensor, which
reflect the use of the technology by the licensee. As they link use
with a monetary amount they can be a good reflection of the value
of the technology to the licensee and, accordingly, royalties are the
most usual type of payment in license agreements.
(2) The other issues in a license agreement
a. Effective date
Where foreign government approvals are required for a license
agreement, the licensor’s position will be protected by a condition
precedent providing that the license will not come into effect until the
license is approved in the form agreed between the parties. In this case,
the licensor will not have lost his bargaining position in the event that
changes are required in the license agreement, which favor the licensee.
b. Recitals
Properly drafted recitals are very useful for explaining the context and
background of the license, and may assist in the interpretation of the
Agreement.
c. Sub‐license
The licensee, particularly an exclusive licensee, may wish to have the
right to grant sub‐licenses in its territory. If so, this needs to be
specifically negotiated and stated in the agreement. The sub‐license
issues may include:
- To whom Licensee may sub‐license
- What rights are sub‐licensable and where
- What level of control Licensor wants over sub‐licensees
- Whether prior written approval of the Licensor is required for
granting of any sub‐licenses, the choice of a sub‐license, and the
conditions upon which such sub‐licenses may be granted; for
example, the extent to which the terms of the sub‐license should
accord with those of the head license agreement.
- Whether or not the sub‐license comes to an end when the head
license is terminated or expires for any reason.
d. Improvements
When dealing with improvements, also known as versions,
enhancements, and new models, it is important to define what is an
improvement and, therefore, covered by the license, and what is a new
technology or new intellectual property.
e. Most favored licensee
Where the license is non exclusive, the licensee may wish to include in
the agreement a most favored licensee clause which in effect ensures
that in the event that the licensor grants another licensee terms that are
more favorable, then, by virtue of this clause, the present licensee
would be entitled to terms as favorable as had been granted to the
other licensee. In granting such a provision there should be clarity as
to what is meant by “more favorable terms.”
f. Best efforts
A paragraph stating that the licensee will use its best efforts to exploit
the licensed technology is common in both exclusive and non‐exclusive
licenses. It would be desirable for the parties to agree on the meaning
of best efforts, and what may constitute best efforts in terms of specific
steps to be taken by the licensee.
g. Transferability of rights
A provision typically used in a license agreement states that the license
shall ensure to the benefit of and be binding on the successors,
assigns or other legal representatives of the parties. It is to be noted,
however, that use of language of this type is uncertain in terms of its
effect and could perhaps be in conflict with other provisions of the
agreement that attempt to specify the assignability or lack of
assignability of the license granted and the rights pertaining thereto.
h. Royalty stacking
The concept of royalty stacking arises from the risk that multiple patents
may affect a single product. Royalty stacking arises when, in order to
take a product to market, the developer of the product takes licenses
from all of the owners of the patents which affect the final product.
When the royalty payments are added together, the licensee may find
itself with a non‐profitable product. Hence it has become quite usual for
licensees to insist on including anti‐stacking provisions in license
agreements. A typical anti‐stacking provision states that the royalty rate
payable to the licensor will be reduced if the licensee is obliged to
enter into licenses with third parties in relation to the product. Such a
provision can lead to a disparity between the expectations of the
licensor as to the royalty it will receive from the licensee and the actual
royalty the licensee is contractually obliged to pay.
i. Restrictions on payments under local law
The issue of exchange control restrictions and other local regulations
that may affect the transfer of funds and therefore the remittance of
royalties should be addressed by the parties and suitable solution be
found at the time of the negotiation.
j. Inflation
The issue of inflation is effectively provided for where the royalty rate is
expressed as a percentage of sales. Where, however, the royalty is a
specific amount in a specified currency, it is usually reviewed regularly,
say, annually or every two years, and adjusted, if the national law so
permits, in accordance with an agreed consumer, manufacturing or other
local index. Adjustments can also be made to lump sums payable on
the happening of an event where, in particular, the occurrence of the
event is distant and uncertain.
k. Financial administration
The financial administration provisions of the license agreement include
obligations on the licensee to keep accounts and records, to report the
results and pay the consequent royalties. The royalty reports, which
might be required once, twice, or four times a year, might need to be
certified by the licensee’s chief financial officer or auditor.
l. Infringement
When all or part of the technology has the benefit of patent or other
intellectual property protection, it is important to provide for what will
happen if there is any infringement. There are two situations where
infringement could occur.
- The first infringement situation
The first is where a third party is using the protected technology but
does not have a license. Here the licensee is facing competition
and is likely to be at a financial disadvantage as the infringing
competitor is not paying royalties.
- The second infringement situation
The second infringement situation is where a third party claims that
the licensee is using technology in respect of which the third party
has obtained protection. In this situation, the licensee may be
faced with the prospect of not being able to continue to use all or
some part of the licensed technology.
m. Product liability
Product liability can have important financial consequences. The risk is
that there might be injury or damage, to person or property, arising
from a licensed product that is defective. The need is to identify the
source of a potential defect and to assign responsibility accordingly.
n. Representations and warranties
Representations and warranties are statements or assurances about a
matter or position relevant to the license agreement. One important
distinction is that a representation is not usually a term of the
agreement, whereas a warranty is a contractual term, the breach of
which could entitle the injured party to terminate the agreement and sue
for damages. A warranty is an assurance or promise in a contract, the
breach of which may give rise to a claim for damages. It is essentially
a minor term of a contract. Typical examples of representations and
warranties include:
- The licensor owns the technology and has the right and authority to
grant the license.
- The licensed material (e.g. text, software, and/or documentation) is
original and has not been copied.
- To the best of the licensor’s knowledge and belief, the licensed
patents are valid and are not being infringed by any third party.
o. Licensor and Licensee obligations
The licensor is expected to take, for example, in a patent and know
how agreement, all necessary action to transfer the technology and
assist the licensee to commence commercial production. Similarly, the
licensee is expected to successfully manufacture and market the
licensed product in the territory.
p. Taxes
It should be made clear in the Agreement who is to absorb and pay
relevant taxes, including any applicable sales, customs and excise, or
withholding taxes. Withholding taxes are of particular concern in
international licensing arrangements. If one party is obligated to assume
responsibility for withholding taxes, the Agreement usually includes a
provision which requires the other party to provide reasonable
assistance in respect of any possible refunds.
q. Waiver
A waiver clause in a license agreement means that a party does not
lose its rights because it does not enforce those rights. Thus, if a
licensor was entitled to give notice of termination due to nonpayment of
royalties, but overlooked or ignored the breach, the licensor could still
give notice in respect of another breach of that obligation. The waiver
clause in effect prevents the application of the legal concept of
estoppels, i.e. the earlier tolerance or oversight does not prevent the
licensor from subsequently enforcing its rights.
r. Force Majeure
A force majeure clause in a license agreement addresses intervening
circumstances beyond the control of a party, which prevent that party
from carrying out its obligations. War, strikes and fire are the types of
occurrences envisaged, and the benefit of the clause is that the time to
carry out an obligation may be delayed until the force majeure
circumstance ceases or is removed.
s. Anti‐competitive practices
When entering into a licensing agreement it is important to keep in
mind that if certain business practices are incorporated, the agreement
may, depending on the national laws of the country or countries in
question, be considered illegal if tantamount to being anti‐competitive.
Some examples of practices that may be considered unlawful depending
on the particular circumstances of the agreement are obliging a licensee to
accept certain products or services in addition to the proprietary technology
(tie‐in, bundling), prohibiting the licensee from dealing with certain
enterprises, attempting to fix the prices of products incorporating the licensed
technology, territorial restrictions, cross licensing and patent pooling.
t. Government regulations
When considering entering into a licensing agreement with a foreign
partner it is important to verify the existence of various government
regulations that may affect it. For example, most countries would at
least require the registration of a licensing agreement with the relevant
authorities in that country but there may, in addition, be an approval
process that must be followed for engaging in that kind of activity in
that country. In the licensor’s own country there may be regulations
that restrict or make conditional the dealing with certain technologies for
security or other reasons.
u. Disputes
When negotiating the license agreement, parties should be aware that
disputes might arise and provide means for resolving them. Built in
flexibility for amendments should provide means for resolution at first
resort. Failing which, mechanisms for dispute resolution must be
provided for. When drafting dispute resolution clauses, parties can draw
from several options. Traditionally, parties have often agreed to resolve
disputes through litigation in a specified domestic court. Increasingly,
however, parties opt for alternative dispute resolution (ADR) procedures,
such as arbitration and mediation, or mediation followed by arbitration.
<Advantages of ADR procedures>
- A single procedure. Through ADR procedures, the parties can
agree to resolve in a single procedure a dispute involving intellectual
property rights that are protected in a number of different countries,
thereby avoiding the expense and complexity of multi‐jurisdictional
litigation, and the risk of inconsistent results.
- Party autonomy. Because of its private nature, ADR procedures
afford parties the opportunity to exercise greater control over the
way their dispute is resolved than would be the case in court
litigation.
- Neutrality. ADR procedures can be neutral to the law, language
and institutional culture of the parties, thereby avoiding any home
court advantage that one of the parties may enjoy in court‐based
litigation, where familiarity with the applicable law and local
processes can offer significant strategic advantages.
- Confidentiality. ADR proceedings are private. Accordingly, the
parties can agree to keep the proceedings and any results
confidential. This allows them to focus on the merits of the dispute
without concern about its public impact, and may be of special
importance where commercial reputations and trade secrets are
involved.
- Finality and enforceability of arbitral awards. Unlike court decisions,
which can generally be contested through one or more rounds of
litigation, arbitral awards are not normally subject to appeal.
v. Indemnities
Generally, an indemnity is an undertaking by one person to meet a
specific potential legal liability of another. An indemnity entitles the
person indemnified to a payment if the event giving rise to the
indemnity takes place. Unlike a claim for breach of warranty there is no
need for the indemnified party to establish that he has suffered loss.
w. Release
If a license is being entered into as part of a settlement to infringement
proceedings, it may be necessary to include in the grant section a
release against infringement that was alleged to occur prior to the date
of the Agreement. Although most properly drafted grant provisions will
make it clear that the rights granted to the licensee are conditional
upon the licensee’s compliance with its obligations under the Agreement,
this is particularly important in a release‐type grant if the licensor
intends to retain the right to recover damages for the past infringements
upon any future breach by the licensee of the Agreement. This would
likely only apply where specific consideration for the release has not
been provided.
More References 4‐2: Confidential Information
YeraCAM and Tolmnex each agree that all information contained in
documents marked “confidential” which are received by one party from
the other party, and all information indicated to be Confidential
Information in Sections X and Y(collectively, “Confidential Information”)
shall be received in strict confidence, used only for the express
purposes set for in this Agreement, and not disclosed by the recipient
party(except as required by law or court order), its agents or employees
without the prior written consent of the other party, unless such
Confidential Information.
1. was in the public domain at the time of disclosure;
2. later became part of the public domain through no act or omission of
the recipient party, its employees, agents, or permitted successors or
assigns;
3. was lawfully disclosed to the recipient party by a third party having no
obligation to the disclosing party;
4. was already known by the recipient party at the time of disclosure;
5. was independently developed by the recipient without use of or access
to such Confidential Information; or
6. is required to be disclosed to a government agency.
LEARNING POINT 5: Managing a license agreement
1. Implementing and managing the agreement
A license agreement is a continuous relationship over a fairly long period of
time between two parties working towards a mutually‐rewarding outcome. To
ensure that the relationship is rewarding to the parties, it is important that they
deliver on their respective obligations arising from the agreement.
It is important that all of these obligations and how they may be implemented
are clearly specified in sufficient detail in the agreement. They imply both for
the licensor and licensee costs in terms of time spent and additional human
resources deployed. Doing so is indispensable for the survival, smooth running
and sustainability of the agreement.
Here are several issues in managing the relationship in a license agreement:
(1) Technical assistance
Technical assistance can greatly reduce the time required by the licensee to
move the licensed technology into production. The obvious benefits are that
the licensee generates income more quickly and the licensor earns royalties
much sooner. While technical assistance benefits both parties, the licensor
will need to have the resources available to fulfill this responsibility.
Common elements of the technical assistance include the following:
a. Plant visits and training
The licensee obtains rights to on‐the‐spot training of its technical
engineers, in the licensor’s facilities, that are developing or using the
licensed process and/or making and selling the licensed product.
b. Direct assistance
The licensee may obtain the right to have site assistance (within the
licensed territory) from the licensor’s technical personnel to the solve
problems related to commercial use of the licensed process and/or the
making and selling of the licensed product.
c. Consultation
This is the right of the licensee to contact the licensor by mail, telefax,
telex or telephone through representatives appointed by each party.
(2) Tangible items
The agreement should specify how the licensor will bill and collect for any
machinery sold to the licensee, and for such items as operating manuals,
blueprints, drawings, manufacturing specifications, test equipments or devices
supplied by licensor to licensee. Such charges may apply for quantities that
exceed an agreed‐on level to be exchanged initially for no added payment.
(3) Reporting
Licensees are typically obligated to send a royalty statement or report with
each royalty payment, although if royalties are payable on a relatively
frequent basis, reports may only be required at less burdensome intervals,
such as quarterly or annually. A licensor may also request that the reports
be certified by the licensor’s auditors or chief financial officer.
The reporting clause usually requires the licensee to keep and maintain
complete and accurate financial and production records relating to all
products manufactured, sold, used, returned and invoiced (if such products
relate to the licensed intellectual property) in sufficient detail to allow the
licensee to verify such records. Ancillary to the reporting obligation is a right
of the licensor to inspect and audit these records, or allow an independent
third party to perform an inspection and audit.
(4) Auditing
Most audit clauses limit the licensor in the exercise of its rights to a
specified frequency (e.g. once per year) and only upon reasonable notice
and during regular working hours. The cost of any audits are normally
borne by the licensor, unless it finds a discrepancy between the royalty
amounts actually paid to it and the amounts it should have received, in
which case the licensee is required to pay for the audit. Licensors should
make it a policy to conduct periodic audits as is their right, as regular
audits keep a licensee honest by removing temptations.
2. Termination and post termination issues
(1) License agreements come to an end in the following two ways:
a. The period of the agreement expires or an event agreed to trigger
termination occurs. For example, the term may be fixed as ten years
from the effective date and on the completion of the ten years the
agreement ends. Or, it expires on the occurrence of an event such as
the expiration of the last of the licensed patents or, sooner, if it is
determined by a court or administrative agency of competent jurisdiction
that the last of the patents within the “Licensed Subject Matter” is
invalid or unenforceable.
b. The agreement is terminated by one party before the agreement has
expired. The right to terminate the agreement is usually set out in detail
and relate to a failure to perform in some way amounting to a breach
of a condition of the agreement, for example, failure to make payments,
bankruptcy or insolvency.
(2) After expiration or termination of the agreement
a. Know‐how or confidential information
When an agreement expires or is terminated by the licensor, will the
licensee return or continue to use the know‐how or confidential
information? For example, “Return of Confidential Information: Upon
termination of this Agreement by Company B pursuant to Section [*],
but not upon expiration or termination of this Agreement by Company A
pursuant to Section [*], Company A shall promptly return to Company B
any Confidential Information of Company B received from Company B
prior to such termination, and Company A shall no longer be entitled to
use any such Confidential Information for any purpose.”
b. Sub‐license
Are there any sub‐licenses or other rights that have been granted to
third parties and do they continue after termination?
c. Other clauses
For example, maintaining confidentiality, continuing rights to use the
other party’s improvements, access to records for a particular period.
For example, “Protection of Confidential Information: Each party’s
obligations of confidentiality, non‐use and non‐disclosure set forth in
Section[*] shall be fulfilled by using at least the same degree of care
with the other party’s Confidential Information as it uses to protect its
own Confidential Information. This obligation shall continue in full force
and effect during the term of this Agreement and thereafter for a period
of three (3) years.”
QUIZ
Q1. Identify the incorrect statement:
1) A license transfers the right to use IP rights but not its ownership.
2) For some businesses licensing of their IP is their only business.
3) A due diligence exercise should only be conducted by a licensor.
4) You don't get the deal you deserve, you get the deal you negotiate.
Answer : 3)
A due diligence exercise which is the performance of an investigation prior to
entering into a licensing relationship (and may well be useful to do from time to
time even during the relationship) should be done by both parties. It is important
that both parties are well informed of their partner, the business, the industry,
competing products and technologies etc. The better informed the parties are, the
better the agreement and finally the relationship would be.
Q2. Identify the incorrect statement:
1) If something has not been prohibited in the agreement it means it is allowed.
2) A licensee could be granted the right to use the IP rights of the licensor
worldwide.
3) A licensee could be obliged to make a report with every royalty payment.
4) Even after an agreement has terminated there may be certain clauses that
remain valid.
Answer : 1)
It cannot be assumed that simply because something is not prohibited in the
agreement that it is allowed.
Q3. Identify the incorrect statement:
1) A business should not license the intellectual property which is integral to its
business.
2) A business could grant a license to an infringer.
3) A business may enter into license agreements during its interactions with
contractors, consultants and in the context of a strategic alliance.
4) A business may usefully license its IP rights that it does not use.
Answer : 1)
A business may license its IP which is integral to its business by licensing its use
in another territory or field of use.
