Bernstein
& Associates
Attorneys
At Law, P.C.
Embassy Row 400,
Intelligent Innovation
Managementsm
Patent, Trademark, Telephone
(770) 671-1755
and Copyright Law Facsimile
(770) 671-1161
Related Business Matters www.globaliplaw.com
SOME
TOPICS OF DISCUSSION
FOR
LICENSING NEGOTIATIONS
The following are some of the points that
are usually considered important areas for discussion as the parties are
negotiating to form a relationship. This list is not exclusive. There are other
deal points and legal considerations which you should consult with us on before
concluding discussions. Some points may or may not be applicable to you. This
outline is provided as general information and is not intended to be legal advise about your particular situation.
1.
Basic
Terms:
A.
Licensor:
The party who has the technology, e.g., trade secret, invention, patent
application, patent, etc.
B.
Licensee:
The party who wants to acquire the right to make, use or sell the technology.
C.
Technology:
The ideas, inventions, prototypes, products, etc., which Licensor provides to
Licensee.
D.
Product:
That which is made using the Technology.
E.
Royalty:
The money paid based on sales of Product.
2.
Goals: The most important item to discuss are the goals of the parties with respect to the
relationship and the product.
A.
Is a
relatively short or long product life anticipated?
B.
Does
Licensee plan on building a product line around the Technology?
C.
How
does the Technology fit within Licensee’s current product mix?
D.
What
is Licensee’s history and experience with this type of product? If Licensee
does not already have sales in this area, how do they intend to penetrate the
market?
E.
What
are the realistic anticipated sales, costs and strategy of manufacturing,
marketing, advertising, shipping, distribution, fulfillment, etc?
F.
Is
Licensor expected to bring other ideas to Licensee for an option to license?
G.
Contributions:
What are the parties bringing to the table. Licensor
may contribute the technology, accepted status as an expert (useful in
marketing), new R&D, etc. Licensee may contribute development,
manufacturing, marketing, distribution (e.g., already have products in the
market) and/or sales expertise. What if Licensee brings in its own proprietary technology?
3.
Defining
the License:
A.
Exclusive
or nonexclusive license? Exclusivity usually commands a higher royalty rate
because licensor cannot have anyone else make or sell the product.
B.
Licensor
may grant a license to manufacture, market, distribute and/or sell Product based
on the Technology in a defined territory.
C.
Need
to define territory: the
D.
License
can also be “co-exclusive” where Licensor and Licensee can both make
and/or sell in the same or noncompetitive markets.
E.
Need
to define the market channel: Each market might be licensed to a different
company that has expertise or distribution effectiveness in that market. For
example, a medical diagnostic test kit can be marketed to retail stores, physicians offices, hospitals, etc. Other channels can
include membership warehouses, department stores or specialty retailers, etc.
Sometimes it is better to carve up the market to maximize the experience of
different companies in different markets.
4.
Defining
the Technology:
A.
The
Technology may defined as the invention(s) described
in any patent applications or patents. If only certain embodiments of the
patent application are to be licensed, this needs to be described in detail so
that only the desired technology is licensed. The licensed technology should be
described in detail so that the parties are clear of what is being licensed. If
there are no patents or applications, the Technology needs to be described in a
way specific enough so that one looking at the agreement can understand clearly
what is being licensed.
B.
The
Technology may be defined in terms of the patents as well as the underlying
technology. If the patent(s) is/are ever declared invalid or unenforceable, but
Licensee is still selling product, Licensor may not want the license to be
terminated for failure of the patent, but rather to continue based on
the license of the underlying technology.
5.
Defining
the Product: The
products licensed to be made and sold using the Technology should be defined. Will
Licensee support the product post-sale? What warranties will be offered to the
customer? Long warranty period can increase effective cost to Licensee. Who
will develop the user manual, if any?
6.
Improvements
or Modifications:
A.
What
if Licensor develops new improvements? Does Licensee get the right to have them
automatically included in the license, or are they to be separately negotiated?
Licensee often gets the right of first refusal to negotiate for a license on
improvements or new products.
B.
What
if Licensee develops an improvement to the technology; who will own the
improvements? Licensee may want to own all improvements developed by either
party or jointly so that it keeps control. If created by Licensee or jointly,
Licensee gets the right to use the improvements under the terms of the existing
license. If Licensor alone develops the improvement, there may be additional
compensation negotiated. Licensee may take the position that the improvement
will help sales and therefore no increase in rate is warranted. Licensor may
say that Licensor expended money and effort developing the improvement and
which makes for a more valuable and desirable product and thus a higher royalty
rate should apply.
7.
Product
Development:
A.
How
will the product be developed from the information Licensor provides to
Licensee? Will Licensee pay for prototype development? There should be a
schedule of development activities and an agreed upon time frame. Failure to
meet the time schedule should give Licensor the right to terminate.
B.
Will
Licensor be required to assist in development, marketing, sales, attending
trade shows? Often Licensor must commit to some reasonable amount of assistance
to help get the product into the market and accepted. Will Licensor help train
Licensee’s sales people on using the product?
8.
Compensation:
A.
Up
front payment: To reimburse Licensor for development and legal costs. This may
or may not be considered creditable against future royalties.
B.
Royalty
rate: Best to be based on a percentage of Net Sales, not gross sales or net
profit. Can also be a defined dollar value per unit sold.
i.
Rate
can be fixed for the entire term of the license.
ii.
Rate
can vary. Rate can be sliding scale to either increase or decrease with
increased sales.
iii.
First
year sales may be low as product is introduced into the market. The parties may
want to anticipate this and let Licensee spend more of the first year royalties
in sales enhancements.
iv.
Royalties
are usually paid and reported quarterly, within 30 days of the close of the
quarter. Payment and a report on sales are sent to Licensor. Interest can be
required on late payments.
C.
Consulting:
Licensor may be hired as a consultant with an hourly, daily, monthly or other
basis of a fee for consulting services, e.g., product design, development,
marketing, trade show attendance and speaking engagements, and other product
marketing services. Often, the need for consulting services diminishes as the
product is launched, so, an anticipated end date should be considered.
D.
Equity:
Licensor may get a percentage of ownership in Licensee.
9.
Pricing: Who gets to set product pricing?
10.
Minimum
royalties:
A.
Licensor
wants minimum royalties to make sure that Licensee is actively selling product.
Options: Failure to make two quarters of minimum royalty payments can either
terminate the agreement or convert the agreement to be nonexclusive. Licensee
may respond that they have significant investment costs in product launch; that
first year sales will be low and the money should be spent on building market
share. Option: waive first year minimums, especially if the anticipated sales
levels are rather sketchy and hopelessly optimistic. Better to encourage
Licensee to succeed right out of the gate rather than fail.
11.
Term: Several options.
A.
For
the life of the last to expire patent.
B.
An
initial period of years, e.g., commonly three or five years.
C.
Term
can be renewed
i.
Automatic:
no one has to do anything, the license renews automatically unless someone
terminates.
ii.
Upon
notice: the license terminates unless the parties agree to continue.
iii.
The type
of renewal usually depends on which party wants to stay in the agreement
longer. Often the Licensor wants a shorter license term and a non-automatic
renewal so that the license can be terminated if sales are not good. Or, if
sales exceed expectations, Licensor may want to increase compensation. Licensee
usually has significant investment in tooling, marketing, etc., and wants a
long initial term to be secure and automatic renewal so that if someone forgets
to renew the license (few executives maintain a calendar with contract renewal
dates) there is no major upset. Inadvertent termination can sometimes cause one
party to want to renegotiate the deal.
12.
Termination:
A.
Failure
to make payments.
B.
Quality
of products poor.
C.
Failure
to make minimums.
D.
Failure
to introduce product to market according to the time schedule agreed upon.
E.
Bankruptcy
(bankruptcy law may trump contract law and prevent Licensor from terminating
the agreement. Need to draft provisions anticipating this possibility).
F.
Breach
of any term of the agreement and failure to cure the breach within 30 days.
G.
Can
Licensor terminate for no cause? If so, Licensee will want at least six months
advance notice.
13.
Right
to sublicense manufacturing and/or marketing/sales:
A.
Can
Licensee hire another manufacturer to manufacture product for it? This might
arise if Licensee does not have the capacity to fill orders and needs to
outsource part or all of manufacturing or assembly. Licensor is concerned with
maintaining quality of the product. Also, if sublicensee produces at a lower
cost than Licensee can, which thus raises Licensee’s profit, should the royalty
be recalculated to reflect a different cost structure?
B.
Can
Licensee sublicense marketing/sales? This should be discussed initially to
determine whether Licensee is or should be the marketing and sales organization
or whether another company should be in charge of these activities.
14.
Trademarks: Will Licensor be granting Licensee the
right to use Licensor’s trademarks on the products? If so, there must be a
quality control provision (see below) in the agreement. If Licensee develops
its own trademarks, need to discuss who owns them. If Licensee develops a
trademark for the product, and the product is very successful, if the agreement
is terminated, Licensor cannot find another licensee and use the successful
trademark because Licensee owns it.
15.
Patents: Licensor usually controls the patent
work and the pays the costs. Licensee usually should not be given this control.
On occasion, universities will allow the Licensee to control the patent work.
16.
Quality
Control: Licensor must
have the right to inspect facilities, the financial records relating to the
product sales, and have control and approval of product quality. Failure of
Licensee to maintain product quality is a common reason for Licensor
terminating the agreement. This is also true of any sublicensees.
17.
Patent
Marking: Licensee must
mark all products with the appropriate patent markings indicating the present
patent number and any that are subsequently obtained for the Technology or any
improvements or modifications to the Technology. Licensee must also mark all Products
with appropriate trademark notices. These will also be material terms of the
agreement.
18.
Indemnification
and Insurance: Licensee
will indemnify Licensor and hold it harmless from any product liability and
personal injury claims relating to the Technology, and will maintain adequate
insurance coverage for same in amount to be agreed upon, naming Licensor as
co-beneficiary. Licensee must provide Licensor with proof of compliance with
this requirement, which will be a material term of the agreement.
19.
Books
and Records: Licensee
will maintain adequate books and records for the purpose of calculating the
royalties in accordance with Generally Accepted Accounting Principals
standards, and Licensor will have a reasonable right to audit and inspect those
records to verify the calculation of royalties. If reported royalties are
determined, upon audit, to be underreported more than 10%, Licensee pays
underreported royalties plus a 10% penalty, plus the costs of the audit. Along
with each royalty payment, Licensee must also provide a statement setting forth
the basis upon which the royalty payment was calculated. These provisions will
also be material terms of the agreement.
20.
Assignments: The agreement will be assignable by Licensor,
but may not be assigned or sublicensed by Licensee without the prior written
consent of Licensor, except in connection with the sale of substantially all of
Licensee’s assets.
21.
Arbitration: Should there be an arbitration or
mediation provision? Resolution of conflicts is an issue too complex to be
commented on in this document, but should be discussed by the parties.
22.
Buyout: the possibility of either party being
bought out, either by the other party or by a third party,
may be discussed.
23.
Choice
of Laws: Which state’s
laws will apply?