Kanzatec intro to ip licensing v4

UNLOCKING THE VALUE OF YOUR IP UNLOCKING THE VALUE OF YOUR

The Licensing of IP

A Brief Introduction for Technology Companies

Fas Mosleh IP M&A

+1650 468 0401 Los Altos, California

Source: Compiled and adapted from multiple publications and materials

Rights to trademarks referenced

herein, other than Kanzatec

trademarks, belong to their

respective owners. We disclaim

proprietary interest in the marks

and names of others.

UNLOCKING THE VALUE OF YOUR IP

What is IP?

• Intellectual property (IP) refers to creations of the mind, such as inventions; literary and artistic works; designs; and symbols, names and images used in commerce.

• IP is protected in law by, for example, patents, copyright and trademarks, which enable people to earn recognition or financial benefit from what they invent or create. By striking the right balance between the interests of innovators and the wider public interest, the IP system aims to foster an environment in which creativity and innovation can flourish. Source: WIPO

• IP is a broad concept and includes many different intangibles e.g. patents (inventions),

copyright (works of authorship including technical manuals, software, specifications, formulae, schematics, and documentation, among other things), know-how (e.g. expertise, skilled craftsmanship, training capability, understanding of how something works), trade secrets (a protected formula or method, undisclosed customer or technical information, algorithms, etc.), trademarks (logos, distinctive names for products and technologies), industrial designs (the unique way a product looks such as a computer’s molding), and semiconductor mask works (the physical design of semiconductor circuits).

http://www.wipo.int/patents/en/

http://www.wipo.int/copyright/en/

http://www.wipo.int/trademarks/en/


Technology Licensing

• Licensing implies an agreement between parties who receive and exchange approximately equal benefits and value. A voluntary license must be a win-win arrangement in order to be successful

• Technology licensing only occurs when a party owns valuable intangible assets (Intellectual Property), and because of that ownership has the legal right to prevent the other party from using it

• A license is a consent by the owner to the use of IP in exchange for money or something else of value

• Technology licensing doesn’t occur without IP!


Why License?

• Either we sell the patent/technology outright or license it • If licensed, the licensor retains ownership and title and the

power to reverse the license in case the licensee breaches its duties

• A license is less expensive for the licensee while more flexible in providing significant shared upside if the technology succeeds

• A recurring revenue stream could be established with multiple licensees, that provides predictable income

• Licensing could be a way to increase the chances of market success for a new or nascent technology (multiple go to market licensees buying access ‘affordably’)


Three Broad Categories of IP Licenses

• A License for certain IP rights only (e.g. a license to practice an identified patent or to copy and distribute a certain work of authorship).

Pure IP License

• The IP rights of any kind that are necessary to reproduce, make, use, market, and sell products based on a type of technology (e.g. a license to develop a new software product that is protected by patent, copyright, trademark and trade secret law).

Product or Technology License

• A license for all the IP rights necessary to create. market a product that complies with a technical standard or specification (e.g. a group of enterprises has agreed on a technical standard to ensure interoperability of devices—the group agrees to pool their IP rights and license to each other all rights each will need to manufacture and sell the product).

Standards License


Key Attributes of Licensing IP

What IP?

Rights Licensed

Degree of Exclusivity

Payment Formula

Contract

Limitations


Key Attributes of Licensing IP

What IP?

Rights Licensed

Degree of Exclusivity

Payment Formula

Contract

Limitations

Software, design, copyright, trade secret, patent, trademark, music, song etc.

Non-exclusive, perpetual, exclusive, sole, right to sublicense

Improvement rights; Rights to enforce patents; Assignment rights

Term, termination, releases, diligence (performance), records & reporting

Geographical, Field of use.

Annual Minimum Royalty, Rates


Some Components of a License

Defining what is being licensed

The terms of the grant

The consideration

Reps & warranties

Records & reporting

Release

Rights for pursuing any enforcement

Improvements Exclusivity


Grant Clause

• Sets forth what patent rights are being conveyed

• The grant can be exclusive (i.e., only the licensee has the right to exploit the patent rights) or

• non-exclusive (i.e., the licensor can grant similar rights to other parties)

• The grant can be limited by geography (such as U.S., Asia), and field of use (such as for tablets but not cameras)


Consideration

• The license agreement – typically requires a licensee to pay an upfront license fee as well as

ongoing royalties based on a percentage of sales or on a per-unit basis – can require annual minimum royalties (AMR) or minimum annual

product sales to be sure the licensee is diligently marketing the products or services covered in the patent

– can also require that the licensee provide reports to the licensor, e.g., of sales or revenue, to ensure accurate royalty payments

• Milestone payments are an excellent way to cope with the speculative nature of IP rights so that the licensor shares in the success of commercialization. E.g. milestone payments upon capitalization of the licensee, or product volume exceeding 100,000 units or say the FDA approval of a product that embodies the IP

• A licensor may propose the licensee take over the cost of IP maintenance in return for the rights of enforcement


Improvements

• A patent license defines each party’s rights to improvements of the patented technology

• Depending on the negotiation, improvements might be solely owned by the licensor, licensee, or jointly owned by both

• The party with more bargaining power often insists on controlling the rights to improvements


Transferability

• License agreements can provide the licensee a right to sublicense or assign the IP.

– The licensor can require approval of any such sublicense or assignment. E.g. the licensor avoids a competitor from obtaining license to the IP

• It is important for the licensee to have some ability to assign the license without restriction or else it may impact their business unduly


Due Diligence & Reporting

• License agreements can require due diligence by the licensee to develop and/or commercialize the IP – Such terms help ensure that the IP is used and not just put on the

shelf. E.g. the licensee can be required to use reasonable efforts to develop and commercialize products covered by the license

• License agreements can include milestones that must be met for the licensee to maintain the license

• They can also require submission of periodic reports of the licensee's activities related to the development and testing and the sales and marketing progress of the products covered by the licensed IP


Exclusivity Level

• Non-exclusive, exclusive, semi-exclusive or sole license

• if you license technology that still requires a lot of development from a university, you may want to negotiate for an exclusive license to justify the expense you’ll put into it.


Rights for Pursuing Enforcement

• A patent license can also control each party’s responsibilities for enforcing the patent rights along with apportioning liability if the licensee is sued for infringement – Generally, each party wants to have control of any infringement litigation but

also wants to avoid being required to defend or indemnify the other party

• Depending on the terms, an exclusive licensee can have the right to sue for infringement. The license agreement can determine how the costs of litigation are apportioned between licensor and licensee – E.g. the license may provide a licensee the right to withhold all or part of

royalties to offset costs of litigation. It may define how the proceeds of successful litigation are divided. Damages could first be allocated to cover litigation costs and then divided between the parties according to predetermined percentages


Termination

• License agreements can include negotiated provisions that establish how and for what reasons the agreement can be terminated. E.g. the agreement can specifically provide for termination upon breach of certain terms of the agreement

• Clauses that provide for automatic termination of the license agreement if one party seeks or is placed under bankruptcy protection may not be enforceable

• But clauses that provide for termination for failure to pay royalties may be enforceable regardless of bankruptcy


Dispute Resolution

• License agreements can require the parties to provide notice of any breach of the agreement and can specify periods during which any such breach can be cured

• The license agreement can provide in advance for arbitration or mediation of disputes. E.g. The agreement can require binding arbitration vs. litigation

• Binding arbitration weakens a powerful licensor’s ability to pursue critical breaches and hence will not be favored when they perceive the need to carry a big stick


Indemnities and Product Liability

• Licensors and licensees can provide various indemnifications to each other in a license agreement.

• The license can include representations and warranties concerning the IP and can require indemnification against any inaccuracy or loss arising from those representations and warranties – Licenses can include representations by the licensor that they own clear title

to the IP, that the IP is valid and enforceable, and/or that none of the products produced under the IP are known to infringe other IP held by third parties.

– Licensor can require the licensee’s compliance with applicable laws, such as export controls, tax codes, etc.

• The license agreement can also include indemnification terms ensuring that liability for defective products produced by the licensee does not extend to the licensor, who likely has limited if any control over the actions of the licensee. – Alternatively or in addition, the licensor can require that the licensee carry

sufficient liability insurance


CSFs

• Experienced product/technology/licensing team

• Skilled, proven licensing attorneys

• Preparation - In depth research of the prospective licensee, business, plan, market, competitors, needs

• Understanding your leverage (including licensee needs)

• Awareness and understanding of infringing products

• Weaving technology licensing into an overarching business partnership if any

• Win-win strong negotiation – with good will retained for long term success


Your Leverage Understanding what leverage you possess in

negotiations is critical • Why does the other party want this agreement? (i.e.

what leverage do you have that will make it more likely that the other side will agree to your terms?)

• Is your leverage based on the advantages of terms of the potential agreement or on something else? (e.g. the terms of another agreement, possible investment, threat of litigation, etc.)

• Are there other companies with whom you could reach agreement to meet your objectives (alternatives)? – Can you negotiate with both parties simultaneously?


Preparation is Key to Negotiation

• Technology licensing involves reaching agreement on a complex set of terms, each of which has several possible solutions

• Advance preparation is essential • Before approaching the licensee,

the licensor may spend months defining business objectives, assessing leverage, researching the other party, its culture, understanding the market, deciding positions on key terms, preparing documentation, and protecting IP + …

Negotiation

Preparation


Example Questions to Prepare 1

• How will this license agreement make money?

• What must you gain in order for this agreement to be worthwhile?

• What is the best result that can be obtained from this agreement?

• What outcome do you want to avoid?

• From a business perspective, is the best result a license to IP rights only (pure IP license) or a broader set of related agreements (business partnership)?

• Will this be a license from the other party to you (license in), or from you to the other party (license out), or a license from one side to the other (cross license)?

• Is payment of money the primary benefit/value that will be provided in exchange for the license or are there other benefits/values? Strategic value? E.g. overtake competition; jump start market for licensor’s products; learn from licensee go to market experience


Example Questions to Prepare 2

Ideally, do you want to obtain or provide:

• Assistance in using the IP (know-how)?

• Training?

• Development of technology or a product?

• Manufacturing?

• Purchase of products or equipment?

• Multiple products?

• Investment in R&D or other?

• Distribution of products or technologies?

• A license (consent) to use a patent or copyrighted material or trade secret (or other IP) that belongs by law to the other party?

• A license to use a trademark or logo?

• A license that enables you to comply with a technical standard or specification?


Think Long Term Relationship Not Transaction

• "You need to start to understand what are the negotiable points and what are the 'don't even try because it's our policy (points)'. You can waste a whole lot of time and a whole lot of good will. License agreements aren't like selling a used car. You don't get the best deal you possibly can and run. You're going to be living together for a long time. Circumstances change, you need modifications, you don't know what your company's going to look like in five years. You've got to leave good will and understanding on both sides because you're going to be living with each other. You're really to some extent partners: (the company) wants stuff to get developed, (the licensee) wants you to be successful but at the same time they want a fair deal. It's a different style of negotiation.“

-Lita Nelsen, director of the Technology Licensing Office at the Massachusetts Institute of Technology


Flexibility on Type and Timing of Payments

AMR

AMR

AMR=Annual Minimum Royalty Up-front lump sum

Milestone payments

Industry standards


Be Aware of Infringement

• The patenting of your invention is only the first step • Licensors must know who may actually be using their

invention • Parties who infringe patents don't have to do it on

purpose to be infringing. There's no intent requirement for patent infringement

• No one will just come to you and say, ‘Look we're using your patent and we want to get a license.'

• Look for the presence of your invention in other people's products or services

• Be aware of inventions perhaps in many different fields and stay abreast of where they're being used

Adapted from Inc. Manny Schecter, chief patent counsel for IBM


Understanding Both Perspectives

• Licensor proposes payments that contemplate an expansive market and optimistic profit potential

• Licensee views pricing through a lens of costs and risks including substantial costs to develop and commercialize a product, risks of lawsuit, and the uncertainty of changing markets

• Understanding the personal negotiation styles and how they are deployed to achieve the goals of the licensee


Understanding Competing Agendas

• Larger tech transfer offices are being perceived and being tasked with being revenue-generating

• Some institutions want lots of money up front: lots of licensing, fees, costs covered

• The tech transfer offices are perceived as greedy and obstructionist; companies or the industry is perceived as being stingy and obstructionist

Adapted from Inc. -Anthony P. Green, vice president of Technology Commercialization: Life Sciences for Ben Franklin Technology Partners of Southeastern Pennsylvania


Gotchas – Assignment or Bankruptcy

• Assignment provision if licensee is acquired, or termination conditions in the case of insolvency/bankruptcy

• If you enter into a paid-up license (when the licensee paid a one-time lump sum payment in lieu of future royalties) beware of assignment right: in the event a smaller licensee is acquired in the future by a larger company, if the license is assignable, the larger company may get a license without having to pay anything to the patent owner

• Ensure that In the event of licensee's insolvency or filing for bankruptcy, the license terminates automatically. If it doesn't, the license may be sold with other assets to a new buyer who will get the license without having to pay the IP owner


Gotchas – Being Exclusive too soon

• Exclusivity comes up as a regular bone of contention • Its hard to ignore unless you are a Microsoft or Apple with enough

power in the marketplace to get everybody to license and sell this technology

• When does a licensee typically ask for exclusivity…? – when the technology or product is new and some extensive resource

investment is needed to launch it (that’s not common is it?)

• If you are a start-up you may not know the full potential of your technology. Your excitement to get the deal done might result in you giving away the farm.

• If an exclusive license is a deal breaker, consider building milestones or performance-based metrics to see whether or not the licensee actually achieves the goals


Backup

Kanzatec intro to ip licensing v4

Law

Transcript of Kanzatec intro to ip licensing v4