In the second part of the series on commercialising an idea, Geethalakshmi R., CEO and Managing Partner, Associated Business Attorneys, discusses the processes involved with negotiating licensing contracts.
Any technical licensing contract may be analysed in respect of the following basic elements:
- The subject of the contract
- The licensor’s obligations
- The obligations common to both parties
One of the first points of concern to the negotiators of the license contract will be the identification of the entities, or persons, who will become the parties or, in other words, will sign the license contract and become legally bound to carry out its provisions.
The objective in describing the parties to a license contract is to identify each of them with sufficient certainty so that their identity will not later become a subject of controversy.
When the parties are negotiating a license contract, they usually proceed on the basis that certain technology is necessary for the manufacture of a particular product, or the application of a particular process, from which a product or other result is to be obtained.
In other words, the ultimate objective of the parties in concluding a license contract is the transfer by the licensor, and the acquisition by the licensee, of a given technology and of the right to exploit that technology. This will include the use or sale of a given product, or in the application of a given process, through which a product or other result will be obtained.
These provisions describe the product to be made, used or sold, or the process to be applied and from which a product will be obtained and in turn used or sold. They will also identify the invention or inventions included in that product or process, describe the knowhow, if any, which is to be supplied, and identify the technological advances of one party or the other and the conditions under which those advances will be made available by that party to the other.
Identification of product or processes
Since the ultimate objective of the licensee concerns a product or process, one of the provisions in the license contract will identify in concise terms that product or process. In the typical case, that provision is set forth in the part of the license contract dealing with definitions.
Identification of the invention
The provision that identifies the invention or inventions included in the product or process usually refers to:
- The number of the patent for invention, or the application for the grant of a patent for invention.
- The country where the patent was granted or registered or where the application was filed.
- The date of the patent grant, or the filing date of the application.
- The title of the invention and the status of the application.
Where the product or the process in question includes a number of inventions, the relevant information in respect of each invention is usually grouped together and set forth in a schedule attached to the license contract.
Description of the know-how
As regards the description of such know-how, technical information can be identified in terms of the relevant documentation, as for example, diagrams of the layout of the plant, drawings or blueprints of machines, lists of spare parts, manuals or instructions for the operation of machines or the assembly of components, specifications of raw materials, labour and machine time calculations, packaging and storing instructions and information on stability and environmental aspects.
The know-how may often be the reason for the current competitive position, if not superiority, of the licensor in the field of the technology concerned. As such, it is a valuable asset of the licensor to be preserved. At the same time, it is a resource which the licensor is willing to part with in exchange for an agreed price from the licensee, or others who wish to use it.
Its supply to the licensee is consequently the result of a bargain in which the price is not just the payment of a monetary remuneration fixed by the license contract, but also the commitment by the licensee not to disclose that know-how to third persons, except under certain conditions or with the consent of the licensor.
Access to technological advances
The technological advance of immediate concern to the parties to the license contract will normally be one which has a significant or substantial affect. Also, the parties might decide that the mutual exchange of information on technological advances is in their best interests and that each shall be free to exploit, free-of-charge, the technological advance of the other.
This is called cross licensing. They might also decide that if either party makes available the technological advance of the other to a third person for remuneration, then the other shall be entitled to share in that remuneration in some agreed manner and amount.
Limitations of the license and anti-competitive practices
The license can have several contractual limitations regarding permissible activities
(to make, to sell, the fields of use and so on). There may also be restrictions to part of the claims on them as well as territorial or quantity restrictions, or limitations on the sale prices. However, any provision conflicting with the prohibition of antitrust or anti-competitive practices is usually to be considered null and void.
The main requirement is that, as a rule, exclusive intellectual property rights represent a pro-competitive monopoly for a limited duration only so that their owners should not exercise their right by abusing this monopoly, for example, by imposing anti-competitive obligations on the licensee. The most important forms of such abuse can include export bans, minimum royalty clauses, exclusive grant-back and conditions preventing challenges to validity and coercive package licensing.
Which of the parties to the license contract will be able, by virtue of its provisions, to perform the act or acts of exploitation? In what territory or territories, and with what effects on arrangements with third persons, in relationship with the licensor or the licensee, who are also interested in exploiting the technology, are distinct but related questions? A decision on each of these questions must be clearly reflected in the license contract.
Permitted field of use
A provision on the field or fields of use, or activity, specifies the purpose, or purposes, for which the invention, or the know-how, may be applied. It serves to define the scope of that application by the licensee.
The licensor expects that the licensee will not only exploit the invention and apply the know-how, but will do so to the fullest extent permitted by the terms and conditions of the license contract. The parties might wish to specify that the licensee will make, use or sell the product that includes the patented invention, or will apply the know-how in a certain manner with a view to obtaining a certain result and to exploiting the technology at a certain level.
The parties might wish also to set forth the commitments of the licensor, the performance of which will assist the licensee in achieving the expected manner and extent of working or other exploitation.
Settlement of disputes
When non-performance is likely, or does occur and there is no provision in the license contract which fixes the agreed consequences in respect of that failure of performance, one party might propose a solution that is satisfactory to the other. That solution might be the allowance of additional time to render the performance or the substantial correction of the flaw, or flaws, in question. It might mean that some other performance in lieu of the defective performance would be acceptable.
In these ways, an amicable way of settling the dispute between the parties could be arrived at without recourse to legal remedies in the courts, or other tribunals. Normally, the law of the country where a given act or performance is to take place governs the disputes arising out of that act. In the case of a license contract involving a foreign licensor and a domestic licensee, the law of the licensee’s country would be applicable and the courts of that country would be competent since most, if not all, acts or performances take place in that country.
Duration of the license contract
The time-scale of a licensing contract, that is its commencement, duration and termination, must be stipulated in the contract. An intellectual property right can be licensed for the maximum period of time during which it is in force (for example for patents, the maximum is generally 20 years). Shorter licensing periods may also be agreed upon and the parties may reserve the right to terminate the contract with future effect in case of specified circumstances.
The “price” or the “cost” of the acquisition of industrial property is dependent upon a number of factors, including the nature and duration of the industrial property rights, and the technology and the relative bargaining power of the parties. The prospective transferor usually makes a careful assessment in terms of value or the need for the particular technology, the alternative technologies available, the prospect of technological advances and the likely production and profitability of the potential transferee.
The prospective transferor also makes detailed projections of production and consequent income flow from other potential licensees or technology recipients.
Direct monetary compensation
(A) Lump sum payment: A pre-calculated amount to be paid once, or in instalments
(B) Royalties: Post-calculated recurring payments
(C) Fees: compensation for services and assistance rendered per period of service
Indirect and non-monetary compensation
Income from related operations
The licensor, or technology supplier, may receive income from various operations. These may be:
- Commissions on the sales of the product made on behalf of the licensee, or technology recipient through the distribution channels of the licensor, or technology supplier.
- Profits from the sale of the product supplied to the latter under exclusive purchase arrangements.
- Profits from the sale to the licensee or technology recipient of related products which complete its marketing programme.
- Profits from the sale to the licensee or technology recipient of raw materials.
- Intermediate goods, parts or other components and rentals from machinery, equipment or other capital goods released by the licensor, or technology supplier, to the licensee or technology recipient.
Advocate Geethalakshmi is held in great esteem and high regard amongst her profession. She is the CEO and Managing Partner for Associated Business Attorneys FZC, UAE, ABA Management Consultants, Dubai UAE, ABA Investments LLC, Dubai UAE and Associated Business Attorneys, Bangalore India – a position which is not common for an expatriate woman in the profession. Geetha can be reached at email@example.com.