Structure of a Technology Transfer Agreement (check-list)
Partially adapted from the "Training Manual on Technology Transfer", by United Nations Industrial Development Organization (UNIDO)
Identification of the parties
The opening paragraph should identify the parties to the agreement with their official names, addresses and, when applicable, the location of their governing law of incorporation. Corporations should be identified as patent and subsidiary, patent, or subsidiary alone, and their legal capacity or authority should be given.
Care in specifying the parties to an agreement ensures precise identification of licensing and licensed parties. For the licensor, this precludes the possibility of extending the licence beyond the intended entity or of not including all of the include entity. For the licensing party extend to the entire intended entity.
The purpose of an agreement should be stated in a brief paragraph that captures the essence of why the licence agreement is being executed. It can be as simple as “ This agreement is to permit company A to make, use and sell product X in the territory, as defined in the agreement, with the help of the technical assistance and the know-how licensed under this agreement, by company B and under the licensed patents as defined in this agreement. ‘ A statement can also be made, either in this section or in the whereas clauses, on the economic aim of the contract, i.e. to produce the licensed goods economically and competitively.
Effective date of the agreement
The data when the agreement comes into full force and effect is often stated in a separate paragraphs. It can come before or after the date the agreement is signed. The effective date is sometimes defined in the definitions section of the agreement when conditions prevent showing just the date itself.
Some countries require government approval after the parties to an agreement have agreed to all of its provisions and have executed ( signed ) the document. In those cases the date of the government approval usually becomes effective date.
Whereas clauses (recitals, preamble)
The whereas clauses give the background and rationale for the agreement . They should be worded carefully to clarify the terms and conditions for people from either party who were not involved in making the agreement but who are asked later to settle conflicts between the parties. Clarity is also important in the event legal action is taken by one party against the other. In a court of law the judge may look to the whereas clauses to improve his understanding of clauses that may be difficult to interpret. Whereas clauses contain such things as licensor and licensee representation and background of the agreement.
This clause states that the licensor owns the subject technology of the licence ( patents, patent applications, know-how trade secrets, trade marks and / or copyrights ), that it has the right to grant the licence and that it has not granted a previous conflicting licence.
This clause indicates why the licensee wishes to obtain rights to the subject technology. When applicable, it also indicates the patent, patent applications, know-how, trade marks and / or copyrights the licensee owns in the field of the licensed technology. It is also appropriate to include any other pertinent information relating to or affecting the licence is being taken to resolve an infringement or some other dispute, mention of such situations helps to preclude future misunderstandings.
Background of the agreement
When warranted, other clauses should include statements about any prior agreements that may relate, dominate or affect in any way the present agreement. Cancelled or suspended agreements should be mentioned as well.
Definition of terms
To preclude misunderstandings between the parties, the subject matter and key words that will have broad impact in the agreement require definition. Most important are the following :
Licenced patents. : This generally includes the patents, patent applications, continuation, continuations-in-part, and divisions that relate to the licenced technology. If the licence includes foreign countries, the definition would then include the foreign counterparts of the patents and applications in each country. If there are several patents, patents applications etc., they are usually listed in an attached schedule, which shows the necessary specific details of each. Typical scheduled headings are licensor identification or docket number, patent title, country(ies) where the patent is issued or filed, filing date, patent number for those that have been issued and the issue date.
Licensed know-how/trade secrets. : This is licensor’s information to be transferred to the licensee. The technology included in the know-how should be described in broad terms but with enough specificity to avoid misunderstandings.
Usually, the licensor agrees to communicate to the licensee information in his possession that it has a right to divulge, as of the effective date of the agreement. The licensee is advised to assure that the information, such as pertinent drawings, manuals, specifications and formulas, will enable it to produce the licensed product or use the licensed process successfully. Sometimes know-how will include the sale and supply of manufacturing equipment or apparatus used to manufacture the licensed products, assuming the licensor has such equipment and proprietary rights on it . In some patent and know-how agreements, the definition is put into the licence grant section. When there is a great deal of material, a listing and description are often made and attached to the agreement.
Licensed improvements. : If the licensor’s improvements are part of the licence, it is the best to clearly define them in this section. Improvements usually include inventions, technical developments and know-how, including trade secrets, as defined in the agreement that : (a) the licensor has or has obtained the rights to license, the (b) are patentable or not, (c) are developed or acquired during the term of the agreement, (d) pertain to the licensed process and licensed apparatus and (e) have been put into commercial use by the licensor. Their inclusion is a major consideration that should be thought out carefully by all the parties to the agreement.
Major improvements. : Defining major improvements in an agreement is difficult. The licensed improvements described above generally relate closely to the technology transferred in the licence agreement , This section usually does not include improvements resulting in a recognizable process or product shift. For example, if a product, such as metal tube for the packaging of household products, is the subject of licence agreement, an improvement developed by the licensor in the product or in the process for making metal tubes should be transferred to the licensee under the rights granted in the licensed improvements. However, if the licensor develops a plastic tube for the packaging of household products, it most likely would be considered a major improvements.
Grant-back. : This is the term used to denote giving the licensor rights to the improvements made by the licensee on the licensed technology. If the licensee grants improvements back to the licensor, the scope of such improvements requires clear definition in this section. It usually parallel the “ licensed improvements “ and “ major improvements “ definition.
Licensed product/licensed process/Licensed apparatus. The definitions of these terms should be tied into the patent rights and know-how to be exchanged under the licence. They represent the basis for collecting royalty payments. The licensed product may be covered by patents only, while the licensed process used to manufacture the product may be covered by patents and/or know-how. Equipment in the licensed apparatus can also be covered by either patents, know-how or both.
Net sales. When royalties are based on a percentage of net sales, the parties must decide and stipulate what the term means. Often it is gross sales less discounts, commissions, returns, taxes or other credits as intended by the parties to the agreement. This definition is obviously very important as it is used in calculating royalties to be paid.
Territory. The geographical areas where the licence will be in effect should be clearly specified. Each country covered must be named. If the rights vary by country as to exclusivity, or in any other manner such as sales rights vs. manufacturing rights, providing a table usually enhances clarity. Patents rights can only be granted for countries in which the licensed patents are filed or issued, but know-how does not have a territorial barrier.
Subsidiary. A subsidiary is a company either wholly or partially owned by another company. The owning company is called the parent company. If the rights granted in the licence apply to a parent company, as licensee, including its subsidiary or subsidiaries, the ownership (whole, partial, with voting rights) must be defined. Good practice requires that the subsidiary be controlled by the licensed party. For the purposes of the agreement, “control” means the power to direct the management and policies of a subsidiary through the ownership of voting securities, by contract or otherwise. This definition applies to the licensor with respect to his obligations under the agreement. It should be clear whether the rights granted are from a parent, a subsidiary or both.
Other definitions. As a licence is negotiated and drafted, additional terms requiring definition will become apparent. It is best they be added to the definitions section if they are key and apply broadly to the agreement. Otherwise, they should be defined in the first paragraph or clause in which they are mentioned.
Subject Matter of the Licence
The licence grant
The grant is probably the most important part of the licence. Its provisions, outlined below, require careful thought as to their content. To protect all parties, they should be drafted unambiguously, leaving no doubt or open questions regarding the rights being granted.
The term “licensed patents” should be defined in the agreement in order to identify the patents, applications etc. included in the licence. These items should be shown clearly in a schedule attached to the licence agreement. This applies for each country in the licensed territory.
The grant specifies exclusivity, territory, rights conferred, limitations, maintenance and protection of patents, and patent making.
The grant can be exclusive, sole ( exclusive except for the licensor) or non-exclusive. Typically, a licensee seeks an exclusive licence at least for the country concerned, and possibly for the neighbouring region, as a means of securing the market. Exclusivity is even more important if the production capacity being set up is intended to fully cover growing demand for the licensed products over a period of time. The licensee seeking an exclusive licence must be prepared to make a strong case for its ability to market the technology in the licensed territory aggressively.
The governing factor for the licensor, on the other hand, is to determine its goals for optimizing the returns from its own use and/or the sale of technology rights, and then to determine if these goals can be meshed with those of the licensee. Sometimes exclusive or sole licences are given for a limited time period, perhaps three or five years, and then become non-exclusive in case the market targets are not achieved. The exclusivity decision for licensor can be very complicated, especially if the patents extend to foreign countries. It requires careful assessment of which approach will yield the greatest return. The following questions should be considered:
Will the licensor use the technology itself ?
If so, will it be only in its own country or in several countries ?
Will the patent protection have a long life ?
Will the licensed product have a broad or narrow market ?
Are there many or few prospects for a licence ?
What is allowed or restricted by the applicable laws ?
As territory is normally defined in the “definitions” section of the licence, as shown earlier, it needs only be denoted by a capital T in the licence grant. This is the preferred technique, as otherwise the licensee grant paragraph will be needlessly encumbered.
It is proper for the grant to set forth exactly what a licensee is free to do under the patent rights. Depending on the claims in the patents, the licensee can be given the right to manufacture, have manufactured, use and/or sell the subject matter of the licence.
Depending on the coverage within the claims of the patents, the licensor may wish to impose limitations beyond the geographical territory on the quantity or volume of products sold and on field-of-use. Field-of-use restrictions are sometimes applied to licences of technologies that have many or several uses. In that event, the licensee may be given the right to practise the technology for one or more, but not all, of the applications. It may be noted that under the United States antitrust laws, field-of-use restrictions and territorial restrictions may have antitrust consequences if their effect is to unreasonably restrain competition among otherwise competing parties (see module 10, on the legal environment in developed countries. The licensee and the licensor as well should assess the effect of such restrictions on both the market and its growth potentials.
Maintenance and prosecution of the patents
The licensor, except as noted below, usually bears responsibility for the cost of filing, prosecuting and maintaining licensed patents. This includes future patent applications if improvements are included in the agreement.
The future patents, when offered to and accepted by the licensee, become part of the licensed patents and are subject to royalty payments. Therefore, future patents can add to the term of agreements written for the life of the patents. The licensee should understand this consequence before requesting or accepting such responsibility. On the other hand, often the licensee is not given the right to apply for any patent, anywhere in the world, covering any invention disclosed to it under the agreement, without the licensor`s permission.
In some agreements, mainly exclusive licences or when the licensed territory consists partially or totally of foreign countries, the licensor may propose that costs associated with prosecuting and maintaining licensed patents are made the responsibility of the licensee. The licensee is advised to avoid this responsibility.
Licensor and licensee rights concerning infringement suits may vary from country to country owing to differences in the applicable laws. The provisions below apply in many developed areas of the world. Developing countries often have legislation limiting the choice of applicable law and the jurisdiction of foreign courts. The parties to a patent licence agreement should check the infringement clauses carefully against what is allowable for the countries covered by the agreement.
The licensor will want the licensee to advise it promptly, in writing, of any infringement the licensee discovers. The licensor will also want the right to sue the infringing party to recover damages after assessing the facts of the alleged infringement. The licensor usually claims the right to choose and control the counsel selected to prosecute the suit and will insist on full cooperation by the licensee. The licensor will also want to control legal action by the licensee against an alleged infringer.
Damages collected in such a suit usually pay for the cost of litigation. The parties then divide the remainder evenly between them if the infringement caused significant damages to the licensee.
After looking into the facts carefully, the licensor may decide not to file suit. Then the licensee is often given the right to pursue a suit on its own. The least that the licensor can do in such event is extend legal and technical assistance to the licensee. The licensee should attempt to have royalty payment relief written into the agreement for situations in which the licensor will not allow the licensee to take legal action against an alleged infringer. Sample clauses intended to protect the licensee in case of infringements are included in module 17, on guarantees and warranties in technology transfer.
The agreement should stipulate how patent suits against the licensee by third parties will be handled. The licensor may not agree to warrant the validity of the licensed patents and may not assume an obligation to defend or indemnify the licensee against a third party suing the licensee for patent infringement. For the licensee, however, it is important to adequately consider possible infringement. A first negotiating position would be to seek full indemnification from the licensor. If the licensor does not agree to this, it should at least: (a) affirm that to the best of its knowledge, the technology to be transferred is not covered by any other patents and (b) commit itself to joining the licensee in any action to be taken in the event of third-party claims for infringement, including legal action (see the subsection on warranty and indemnification for additional comments).
In some cases the licensor assumes a degree of responsibility and obligation to defend a licensee. The parties may split the actual litigation expenses evenly, or the licensor may agree to pay up to a certain percentage of royalties collected from the licensee at the time of the suit.
An award favouring the licensee usually pays the litigation expenses of the parties on a pro-rated basis first. The surplus, if there is one, is then split evenly between the parties. If the licensor does not participate in the litigation, the licensee should insist that no portion of the award be shared.
The licensor often insists on requiring the licensee to mark patented products with the patent number. In the event of an infringement this identification may help the licensor and/or the licensee to collect damages for the period prior to giving notice of the infringement to the infringer.
Know-how/trade secrets/confidential information
Know-how alone can be the basis for a technology transfer licence agreement. In that event, the licence will have no references to patents. However, when know-how exists along with patents, both are often included in one licence agreement. Including know-how can be specially important to a licensee receiving a new product or process.
If, for some reason, one or both parties wishes to separate the know-how licence from the patent licence, the know-how paragraphs can be pulled out and embodied in a separate agreement. In such cases the know-how agreement should stipulate the pertinent terms and conditions from the patent licence that will also apply to know-how.
Hereafter the term know-how will include both confidential information (trade secrets) and non confidential information. It refers to the technical and specialized knowledge that has particular value in making, using and selling the licensed process or product.
If know-how is defined term in the agreement, then the grant can be a statement such as the following: “Licensee is granted the right to use the licensed know-how to make, use and/or sell the licensed products, licensed process and licensed apparatus in the territory”.
Licences often include improvements made subsequent to the effective date of the agreement. These improvements are usually the subject of a separate section of the agreement (discussed later).
To the extent possible, and for accurate documentation, know-how disclosures should be made in writing. Very often the agreement will allow conferences, plant visits and the like. In such cases, the substance of oral disclosures should be confirmed in writing within a stipulated time period and made a part of the record of transferred know-how.
In drafting the know-how section, the licensee should assure more than just the transfer of information. Show-how provisions, wherein the licensor agrees to demonstrate how to use the technology correctly, are also vital.
It is proper and to the advantage of the parties that the licensed know-how be held in confidence. Suitable wording for this portion of the agreement is common and readily available, but attention is needed for exceptions to the confidentiality provisions. A secrecy obligations that permits the usual exceptions should be acceptable, i.e. confidential information that:
The licensee can prove, with written records, is already known to a licensee or is already in the possession of the licensee.
Was in the public domain prior to disclosure by the licensor.
Becomes a part of the public domain by publication or by any other means except an unauthorized act or mission by the licensee.
Is received from third parties who are under no obligation to maintain such information in confidence.
The licensee can prove, with written records, was developed by licensee independent of disclosures from licensor.
In practice, a prospective know-how licensee will need sufficient information to evaluate the advantages of the technology to be transferred before a licence is taken. Therefore, a secrecy agreement usually is entered into also before a licence is taken (see module 13, on types of agreements, for a deeper discussion of secrecy agreements). Obligations of secrecy usually continue beyond the term of the agreement (see discussion on survival, in the section dealing with boilerplate provisions).
Licensee’s use of the know-how
The agreement should provide conditions giving the licensee the right to disclose any portion of the know-how. Any restrictions the licensor requires on disclosures within the licensee’s organization, to suppliers or to customers would be included here. The agreement may spell out the basis on which disclosures can be made to include a requirement that the licensee execute agreements with the pertinent employees and third parties.
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 fulfil this responsibility.
Common elements of the technical assistance include the following:
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. Because training is so important in the technology transfer process, this topic is dealt with at length in module 15 on training.
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.
Consultation. This is the right of the licensee to contact the licensor by mail, telefax, telex or telephone through representatives appointed by each party.
If the party decides to include improvements made after the effective date of the agreement, this section must be drafted carefully. Many variations are possible depending on the strength and size of both parties, their future intentions and the nature of the improvements. For example, when the licensor is a known leader and technology developer, it would be to the licensee’s interest to secure access to the licensor`s improvements in order to remain competitive and secure or strengthen its market position.
It is necessary to stipulate the rights to licensor improvements in the grant and to allow for their use as well. A specific provision providing for access to all improvements effected by the licensor during the period of the agreement and the right to their use is desirable from the licensee’s viewpoint. Improvements are usually subject to the same secrecy obligations imposed for the know-how and confidential information disclosed during the agreement. Improvements made by the licensee to be granted back to the licensor require a separate clause to specify how they are to be handled (see discussion on grant-back of improvements below).
As described for know-how, if the improvements are a defined term, the grant usually has the same wording, using “licensed improvements” in place of “licensed know-how”: Licensee is granted the right to use the licensed improvements to make, use and/or sell the licensed products, licensed process and licensed apparatus in the territory.” The rights to improvements are usually for the term of the main agreement.
Timing of the disclosure
To avoid premature disclosure, it may be advisable to provide that disclosure be made after filing a patent application or after first commercial use in the case of unpatented improvements. A delay in disclosure serves at least two purposes. One is to avoid loss of patent protection; another is to allow time to determine that an improvement is one that will be truly useful rather than one that will be abandoned after closer study of its value.
Grant-back of improvements made by licensee
Subject to antitrust laws in the applicable countries, the licensor generally wants this provision whereby the licensee is obligated to give the licensor non-exclusive rights to improvements, patentable or otherwise, made by the licensee during the term of the agreement. The licensor also often tries to obtain those rights without time limit. Some licensors also may try to obtain a grant-back provision without offering their own improvements. The licensee, in such cases, should negotiate for reciprocal access to improvements on the basis of terms to be negotiated at the time of grant-back, particularly where major improvements are concerned, as earlier defined. When the licensor requires the right to use the improvements in all its plants, the licensee should likewise require access to improvements from other plants of the licensor.
Usually, the licensor wants sub-licensing rights for the improvements if it has licensed the subject technology to the other licensees. However, the requested sub-licensing rights usually do not provide for the use of the improvements by other parties (except, perhaps, the licensor) in the licensee’s territory. In a situation where there are several licensees of the same technology in different countries of the world, it can benefit a licensee to give such sub-licensing rights, provided the licensee also receives the improvements from the other licensees.
The provisions with respect to definition and timing of disclosure for improvements are commonly reciprocal between the licensor and licensee.
Subject to individual country laws, a licensee does not have sublicensing rights unless the agreement authorizes them. Should the parties agree to allow sublicensing, the main agreement should specify the rights and obligations of the licensor and licensee with respect to the sublicensee(s). it is usually obvious that granting sublicensing rights is good business for the licensor and licensee. When the benefits are unclear for the licensor, but the licensee wants sublicensing rights, the licensee should prepare and present a market plan to persuade the licensor.
It is general practise for the licensor to have the licensee responsible for assuring that the sublicensee fulfils all the requirements of the principal licence and also for collecting royalties. Determining which party provides the technical assistance to the sublicensee is another major decision for sublicenses. This responsibility usually falls to the primary licensee.
The best way to ensure that the sublicensee has obligations comparable to the licensee’s is for the licensor to draft the sublicence. By so doing, it can be certain to include all the pertinent requirements from the primary agreement. This procedure should be acceptable to the primary licensee.
The payments in technology agreements usually take the form of a lumpsum, a royalty or a combination of both. The valuation and methods of payments in technology agreements are discussed at length in module 16 on valuation and methods of payment.
Technology agreements frequently involve the transfer of valuable know-how. For this reason, the licensor usually requires an initial lump-sum payment when the licensee is executed. This payment should reflect the value of information transferred early in the life of agreement. It is usually justified, from the licensor`s point of view, by the transfer of important knowledge. It also precludes receiving no payment should problems develop with implementing the licence. For the same reason, the licensee should avoid, as much as possible, accepting a lumpsum payment provision that could amount to a write-off in the event of non-continuance of the agreement.
Although an up-front payment is usually found in agreements including know-how, it is not unusual for patent licences without know-how to include an upfront payment. From the licensor`s viewpoint, it encourages a licensee to pursue the technology diligently. It is most common when the licensor has a strong position, in which case it will probably also require minimum royalty payments. If the licensee has a good negotiating position, deletion of up-front and minimum royalties should be pursued vigorously.
The amount of up-front payments depends on several factors:
An assessment of the value of the technology.
Whether the licence is exclusive or non-exclusive and whether it allows sublicensing or not.
Whether advance payment of royalties is included.
The rate of running royalties to be paid
The amount of minimum royalties.
The length of the period for which royalties are payable.
Most licences require payment of royalties based on a percentage of the net sales of the licensed product, as defined in the definitions section. Advance payments are sometimes required to be made initially or over a period of time; they are applied against running royalties. More often, royalties are collected at set periods (three months, six months or yearly) based on the net sales for the period immediately preceding.
Exclusive licences commonly contain a yearly minimum royalty provision representing the yearly guaranteed earnings for the licensor. Such provisions are, however, not uncommon in nonexclusive agreements. The parties generally set the minimum’s based on a conservative estimate of projected net sales over the life of the agreement. The licensee should be careful when accepting a minimum royalty provision as this could represent a relatively heavy financial burden if there are of delays in start-up of production. Otherwise, the licensee should negotiate for minimum’s to start after an initial commercialization period and then increase gradually (for five or so years) up to an agreed-on amount that generally remains in effect for the life of the agreement.
From the licensor`s viewpoint, minimums in a licence agreement attempt to ensure vigorous effort on the part of the licensee to commercialize the technology. Agreements may provide for termination of the licence if the minimums are not being met or, less stringently, to convert the licence from exclusive to non-exclusive status. For this reason, if minimums cannot be avoided in the licence, the licensee must do its utmost to have fair, realistic minimums set.
Delineating absolutes rules on setting minimum royalties is quite difficult, because so many factors are involved. A reasonable procedure is for the licensor and licensee to try to develop theoretical sales projections, or to use market projections based on the project feasibility study and then to reduce those projections by 20 to 40 percent to arrive at a fair, conservative amount to be used in the agreement.
Separate payments for patents and know-how
A trend exists to separate patent and know-how royalty payments in licence agreements. There are several reasons for this:
Patent royalties are subject to risk since there is always a chance they can be declared invalid.
Patent royalties can remain in effect only for the life of the patent, but know-how royalties may continue well after the licensed patents expire (see discussion on know-how licences below).
The subject matter of the licence with respect to patents is limited to the scope of the claims, whereas the subject matter can be defined more broadly under the scope of the know-how.
From the above if it follows that the licensor may try to obtain higher royalties for the transfer of know-how than can be obtained from patent rights. Naturally, the licensee should guard against this as best as it can during the negotiations.
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 equipment 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.
Acquisition of machinery
When a licensor sells proprietary machinery to a licensee, the terms for such a transaction can be shown in separate paragraph of the agreement, in a schedule attached to the agreement or in a separate sales agreement. On occasion, a licensee is permitted to buy machinery from a third party based on the licensed patents and/or know-how.
In addition to the above payments, the licensee may have to pay separately for specific technical services the licensor may provide in connection with the licence. These may be considered under three main headings (a) training programmes for licensees personnel, (b) specific technical services performed in the licensor`s works and facilities, such as special drawings, and (c) technical experts supplied by the licensor to the licensee’s plant.
The licensor normally agrees to provide training services free of charge, but the licensee is required to cover the travel costs and living expenses of trainees. Fees for (b) and (c) normally show the hourly and daily rate for personnel plus all travel and living expenses incurred in the case of direct assistance to licensee’s plant.
Payment method and currency
This is not a concern for host countries where cheques or bank transfers are easily arranged. Where it presents a difficulty, the type of currency, exchange control, governmental taxes and other factors have to be considered. The agreement must provide for how payments are to be handled.
Interest on overdue payments
If the licensee fails to make a payment when due, the licence agreement generally provides for interest payments, at a specified rate and in the agreed-on currency. In domestic agreements, a rate of 3-5 percent above a recognized banking rate in that country is customary. For international agreements, the parties negotiate to select the international bank to be used for the base rate, subject to the applicable government rules in the licensee’s country.
It is customary for the licensee to furnish a statement, certified by the licensee’s appropriate officer or an independent certified public accountant acceptable to both parties (preferred when the parties have not had previous experience with each other), showing royalty calculations in sufficient detail for the licensor to ascertain their correctness.
A further provision is usually included requiring the licensee to maintain records that permit a licensor or his representatives to determine that all payments made and due are accurate. These records should be open to inspection by the licensor or to a third party accounting firm acceptable to both parties on reasonable notice. If an audit becomes necessary, the agreement should provide for the handling of the cost.
Whenever possible, the licensor will want to avoid the use of an accounting firm for conducting audits as their fees can be high. Depending on the relationship between the licensor and licensee, the licensee may want to insist that any inspection of its records be done by a third party.
Term of the licence agreement
In a patent licence, the term is usually from the effective date of the licence until the expiration of the last of the licensed patents, or until none of the licensed patents remain in effect for any other reason (lapsed or declared invalid).
In case where there are no existing patents, but only patent applications, it is common to provide that the licence terminate after an agreed-on period, such as three to five years, unless a patent or patents issue during that period. The licensee should negotiate for this provision in such cases.
Typically in know-how (or patent and know-how) licences, the know-how royalty period is established by negotiation. Some developing countries limit the term by law, e.g. five to ten years. Still, in many countries the term does not have to be limited, as it does for a patent licence. At the end of the term of a know-how licence, a licensee may be given the right to continue to use the know-how on a royalty-free basis or may be denied the right to continued use unless the know-how licence is renewed. Renewal is then open to negotiation of the royalty rate, but most often the renewal rate is lower. Some developing countries consider the know-how to be paid up when the term of the licence expires.
In view of the above, the parties have to consider local laws, their plans for the licensed technology and their bargaining options carefully. Then they negotiate to obtain the best position possible.
Termination of the agreement
Termination provisions vary widely. They can be limited to expiration or invalidity of the patents, to a definite time period for know-how and/or to breach of the agreement by either party. With respect to breach or default, it is common to provide that the licence can be terminated if the breach or default is not cured within a 60-day period following notice of the offence. Breach or default is usually determined in arbitration.
Often the agreement will include specifically the following conditions as cause for termination: overdue payments; bankruptcy, receivership or insolvency; change of control.
If a payment remains overdue for a set period, such as 60 or 90 days, the licensor will usually have the right to terminate the agreement without resort to arbitration. In some countries, this does not apply if the overdue payment is caused by a temporary banking or government problem.
Bankruptcy, receivership or insolvency
Bankruptcy or receivership may also be cause for termination. Should proceedings take place, by or with the consent of the licensee, that prevent the licensee from paying royalties or implementing the licensed technology, and should these proceedings remain in effect for a specified length of time, such as 60 days or more, the licensor may wish to have the right to terminate at the end of the specified time period. The licensee, at the same time, should push for a longer period of at least 6 months and also try to make this provision reciprocal.
Change of control
With the great rise in merger and acquisitions activity around the world, the change of control provision has become very important to licensors. They have become wary that their technology might inadvertently fall into competitor’s hands by that route. Although this concern is certainly valid, the licensee must be careful to avoid losing the technology too easily in case of acquisition. The following provisions will demand skilful negotiation and review by the licensee’s legal advisor.
A licensor in a strong position may want to have a change of control provisions such as the following :
If during the term of the agreement the licensee sells that part of his operations that is significant to the licensed technology, a third party acquires that part of the licensee’s operations, or if a competition of the licensor takes an equity position of sufficient percentage in the licensee or is able to obtain access to the licensed technology in any other way, the licensor will have the right to terminate the licence within a period of 90-120 days.
The licensee, however, should negotiate to have the provision apply only if acquiring firm is a competitor of the licensor. Then, what constitutes a competitor has to be a defined in the licence agreement.
Effect of termination
Following a termination, the licensor will usually want to provide for the remedies listed below:
Payments due. Prompt payment for all money due or accrued.
Technical information. Immediate return of all technical manuals, etc.
Non-use of the licensed technology. The licensee is no longer permitted to use any of the licensed patents, know-how or improvements.
Machinery. The return of purchased machinery that embodies any of the licensed technology. In this event, the licensee may be given compensation. The amount of compensation should be stipulated in the agreement, e.g. it may be based on the depreciated value of the equipment.
Liquidated damages. Because of termination the licensor may have to forgo income that cannot be regained easily by licensing to another party or parties following such termination. This might be the case if, for example, the opportune licensing moment had passed or the incident had generated bad publicity. A liquidated damages provision allows the licensor to recover income lost in such circumstances. In a liquidated damages provision for the future royalty income of the licence, had it not been terminated, is estimated and discounted for payment in a lumpsum to the licensor within 30-90 days after the termination date. The procedure to be followed is shown in the agreement, and it usually provides for discounting at an agreed-on rate. In practice, the licensee should carefully assess the implications of a liquidated damages provision and negotiate it for a lower settlement or for its possible deletion.
Survival. In this paragraph the provisions of the effect of termination, secrecy, non-use of the technical information and non-use of the patent sections of the agreement are specifically noted to survive the expiration or termination of the agreement, to the extent permitted by the applicable governmental laws.
A paragraph stating that the licensee will use its best efforts to exploit the licensed technology is common in both exclusive and non-exclusive licences. 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.
Most favoured licensee
Non-exclusive licensee should insist on this clause. It provides that should the licensor grant another licence to a third party on more favourable terms, the more favourable terms will then apply to the first licensee. Normally, the licensor is reluctant to incorporate such a clause, especially if the technology is likely to be licensed to several parties, but the licensee should insist on it. In granting such a provision, the licensor will probably want a definition of “more favourable terms”.
More favourable terms
Frequently the licensee expects to have this right apply to a reduced royalty rate, but the licensor will want it to apply to all the terms and conditions of the additional licence. This safeguards against a situation in which a new licensee may negotiate a reduced royalty in return for requirements more favourably to the licensor elsewhere in the agreement.
The licensee will want a reduced royalty to come into force automatically. But the more favourable terms provision precludes this, as the licensor has to agree to all terms and conditions of the new licence. The licensee should insist that the licensor advise the licensee of an additional licence on more favourable terms, but should also allow at least three months following execution of the additional licence for such a disclosure. At the same time, the licensor should insist that failure to notify not be treated as a breach. Instead acceptance of the new terms by the licensee can be made retroactive, with interest applied to any reduced royalties that would have come into effect.
Warranty and identification
Many times a licensor, especially one in a strong position, will make no warranty or representation of any kind, express or implied concerning any matter in the agreement. In effect, no warranty is extended. Courts do not always recognize this practice, however. At the same time, if the agreement is silent with respect to a warranty, the licensee should not consider a warranty as implied. The understanding of the parties must be expressed in the agreement. Therefore, the licensee should negotiate as best he can to obtain a meaningful warranty.
The discussion of infringement in the subsection on patent rights covered the responsibilities of the parties in case of infringement suits brought by third parties against the licensee. In spite of any warranty disclaimers, the licensee should at least negotiate for some indemnification against any damages he may have to pay to a third party. An offset equal to a percentage of the royalties paid to the licensor up to the time of settlement of the third party suit is one such solution; a temporary reduction in future royalties until all or an agreed-upon portion of the damages is paid is another. The licensor should not reject such a position summarily. Addressing the matter in this manner will most likely preclude a less favourable court or arbitration judgement should an incident be litigated or arbitrated.
If the licensee cannot obtain a warranty of substance in the agreement, it should insist that the warranty section be used to confirm that the licensor:
Owns or has the rights to the licensed patents.
Owns or has the rights to disclose the licensed know-how and other technical information.
Has no ongoing, pending or threatened suit regarding the licensed patents and technology ( assuming there is one ).
Has used the know-how to enable him to produce the licensed product. If there is no licensed product, then some statement that attests to the worth of the know-how should be given.
Unless the agreement calls for the licensor to establish a turnkey operation, it is not easy for a licensee to obtain production guaranties based on the use of the know-how. Production guaranties may, however, be feasible with stipulation from the licensor that if specified raw materials, equipments, technical skills etc. are utilized and proper instructions are observed, it guarantees the quantities, quality and consumption figures stipulated in the agreement.
For an extensive presentation of this subject, see module 17 on guarantees and warranties in technology transfer.
If the technology or products made under a licence are considered sensitive or if they might be utilized in countries to which the licensing country restricts exports, the licensor will require a clause to assure that such restrictions are not violated. The provision should specifically prohibit the licensee from exporting or re-exporting any of the licensed know-how, improvements, other technical information or products to any such countries, without prior authorization from relevant authority of the licensing country’s.
Arbitration and applicable law
Arbitration is being used more and more frequently as a means to resolve licence agreement disputes because it is usually faster, much less costly and more amicable than lawsuits.
The arbitration clause of engagement is usually very broad. It frequently provides for any dispute arising from or relating to the licence to be settled by arbitration. A more limited clause, however may be acceptable. Often, unless prohibited by the applicable law the parties will specifically exclude disputes concerning antitrust laws, export control laws, the validity or alleged infringement of patents and royalty rates or other payments stipulated in the agreement.
The parties generally specify that the arbitration procedure be in accordance with the rules of an arbitration association appropriate to the geographic areas of the agreement. Although there appears to be a trend toward selecting one impartial arbitrator, in most agreements it is still common to have three arbitrators, one from each party’s country and the third from a different country. Naming the language to be used in the proceedings is also advisable.
There are many subtle points to consider in writing arbitration and applicable law clauses. Patent laws differ around the world. The use of discovery in arbitration can be limited and the generally accepted procedures for arbitration are changing. The licensee and licensor are advised to have legal counsel study the circumstances for each licence carefully before deciding on the most appropriate provisions for such clauses.
It is important for the licence agreement to provide for assignment or preclude it. Assignment is commonly precluded for the licensee, although there are exceptions. usually the licensor will provide that the agreement be binding and be of financial benefit to any successor to the licensor`s entire business (or that part of the business that relates to the licensed subject matter) by merger, consolidation or another means. The same provision would generally apply to the licensee except that it would be subject to the change of control provisions discussed in the subsection on termination of agreement.
The assignment clause may state, in specific language, that the agreement is not otherwise assignable by either party except by the licensor to an affiliated company of the licensor. Such assignment by the licensor should not relieve the licensor or a successor of his obligations under the agreement. The licensee should also be careful about accepting any clause that unduly restricts assignments of the licence agreement to new owners of the enterprise.
A clause will usually provide that if a significant provision of the agreement is declared void or unenforceable by arbitration or court proceeding, the remaining provision of the agreement will remain in full effect. However, the licensor may wish to add that any provision of such importance (in the licensor`s sole judgement) that the licensor does not want to continue the agreement without it, gives the licensor right to terminate the licence within a period of 30-90 days. Naturally, the licensee should strongly oppose such an added clause or have it modified so that the licensor`s right to terminate is subject to arbitration. Instead of termination the parties may agree to change the remaining conditions in order to re-establish the initial expectations and balance of the agreement.
In general, almost all licence agreements contain an entire agreement clause. It is especially important when there are existing agreements or have been prior agreements between the parties related to the current or another subject matter. Such earlier dealings could be licence agreements, secrecy agreements, letters of intent or other matters. The clause should state that the licence agreement currently being consummated represents the entire agreement between the parties on the subject matter and supersedes all previous agreements or understandings concerning that subject matter. Parties are advised to add that the agreement may only be modified in writing, signed by both parties.
Force Majeure, contingencies
This clause provides that neither party to the agreement will be responsible for failure or delay in performing their obligations due to circumstances beyond their reasonable control. The circumstances referred to by this clause usually include, but are not restricted to, acts of God (such as fire, floods, storm and earthquake), explosion, major accident, war, terrorism, labour disputes, fuel shortages and transportation embargoes or failures. Payments due by the licensee are usually exempt from this clause and remain due and payable unless the licensor waives such payment.
The parties will designate the principal contacts for the handling of correspondence, fax messages, telephone calls, notices, royalty payments, technical assistance, training, patent administration etc. Generally, each party appoints a technical and/or a licence administrator is appointed to handle the day-to-day business of the licence. The licence administrator may also be the recipient of all contacts and be responsible for referring them to appropriate individual or department within the organization. Most corporations prefer that all patent and legal matters be sent directly to their general counsel.
Whatever the preference, the desired contact representative should be named in this section of the agreement. This to precludes uncontrolled communication between the parties. If the agreement is between parties who speaks different languages, they will need to state in the agreement the language to be used for communication.
Tuesday, May 01, 2007
Structure of a Technology Transfer Agreement (check-list)
Posted by Anthony Cerminaro at Tuesday, May 01, 2007