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Step 6 - Licence Agreement
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The essential requirement in any technology transfer is that of a licence agreement entered into between the parties. A licence is a permission to do something that would otherwise under law be prohibited. The provisions of a licence agreement will depend on the nature of the technology being licensed. However, there are certain key provisions, some of these are of greater importance to the Licensee and some to the Licensor. It is important though to both parties that the agreement is clear and unambiguous and outlines all issues relevant to the commercial arrangement between the parties. It is a matter between the parties as to who prepares the first draft of the licence agreement. However, usually the Licensor will assume that task. Thereafter, it is a matter for the parties to negotiate and agree the terms of the agreement. Accordingly, flexibility on both sides is important. It is advisable for all discussions and documents to be "subject to contract" which means that no legally binding agreement exists until the formal contract has been completed by the parties. The keys provisions of a Licence Agreement are:

  1. Identity of the parties;
  2. Definitions;
  3. Description of the Licensed Technology;
  4. The Grant;
  5. Consideration/payment;
  6. Term and Renewal of the Licence;
  7. Obligations of the Licensor;
  8. Obligations of the Licensee;
  9. Ownership of improvements;
  10. Warranties;
  11. Indemnities;
  12. Infringement claims against third parties;
  13. Termination;
  14. Confidentiality;
  15. Assignability;
  16. Boilerplate Clauses e.g. governing law, jurisdiction, and dispute resolution.

Each of the above are discussed below (in brief).

  1. Identity of the parties - the Agreement should identify the legal entities which are party to the Agreement, with corporate names and addresses of both being correct.
  2. Definitions - the Agreement should contain definitions of all important terms. These would typically include 'Intellectual Property Rights', 'Licensed Product', 'Net Sales Price' and 'Confidential Information'.
  3. Description of the Licensed Technology - the Agreement should clearly and comprehensively identify the licensed technology which is the subject matter of the Agreement. Where the licensed technology comprises registered intellectual property or applications for registered intellectual property, full details of these registrations and applications should be detailed in a schedule to the Agreement. Ownership of the licensed technology will already have been established by the Due Diligence process. [See sample clause here]
  4. The Grant - the Agreement should state clearly the technology to be licensed and the Licensee's proposed uses of these rights, for example use for the purposes of research and development, for the manufacture and sale of any product or only specified products. From the Licensee's perspective, the grant should be defined as widely as possible.
    Exclusivity - the Agreement should also indicate whether the Licence is to be exclusive, non-exclusive or sole. There are important distinctions between these different licences which companies should be aware of. An exclusive licence means that a Licensee has the right to use the licensed technology for the permitted purpose, in the licensed territory, to the exclusion of all other parties, including the Licensor. A non-exclusive licence means that a Licensee can use the licensed technology but other licenses may be granted by the Licensor (who may also exploit the technology themselves). A sole licence means that a Licensee can use the licensed technology and while the Licensor cannot grant other licences, they are not excluded from exploiting the technology themselves.
    Territorial scope - the geographical area within which the licence extends should be stated clearly. The Licensee may also wish to secure an option or right of first refusal in respect of additional fields of use or territories as the company broadens its business focus.
    Right to sub-contract and/or sub-licence - the Agreement should specify whether the Licensee is granted a 'have made' right, i.e. whether it can permit third parties to use the licensed technology for the manufacture of certain products on its behalf and if so, on what basis. The Agreement should also specify whether the Licensee is permitted to grant sub-licences of the licensed technology. Where a Licensee is granted the right to sub-licence and/or a 'have made' right this is often subject to certain conditions. For example, the Agreement may provide that the Licensee is at all times responsible for the activities of its sub-licensees. [See sample clause here]
  5. Consideration/Payment - the method of payment will entirely depend on the circumstances in each case. For example, the Licensee may pay a lump sum on execution of the Agreement and/or milestone payments and/or royalties during the term of the Agreement. Royalties are usually calculated as a percentage of the annual aggregate net sales price achieved by the Licensee in selling quantities of products which incorporate any of the licensed technology. The term 'Net Sales Price' must be defined very clearly in order to remove any ambiguity as to how the royalties are calculated. Royalty obligations warrant particular attention in situations where the Licensee has the right to, and proposes to, sub-licence to another party some or all of its rights under the Agreement. [See sample clause here] Where a foreign Licensor is involved, it is common for the Agreement to permit the Licensee to make payments of withholding tax to the tax authorities, from royalties otherwise due to the Licensor, subject to providing the Licensor with evidence of such withholding to enable the Licensor (where applicable) to make submissions to its own tax authority for appropriate tax relief. Refer to the Tax Guide for more information here www.techsearch.ie/guides Again where a foreign Licensor is involved, the Agreement should specify the currency in which payments are to be made and the means of ascertaining the applicable rate of exchange, and commonly the Licensor will require the Licensee to bear any attendant costs of conversion.
  6. Term and Renewal of the Licence - the Agreement should indicate the initial time frame of the licence as well as the Renewal Period. Patent licences (including 'mixed' licences i.e. licences of both patents and know-how) are normally expressed to run for the life of the patents being licensed. They may however be shorter. [See sample clause here]
  7. Obligations of the Licensor - the obligations placed on the Licensor will depend on the circumstances in each case. The following are some obligations which a Licensee will often seek from a Licensor:
    • to pay all fees in respect of patent, trademark and industrial design registrations and applications during the term of the licence, and not to do, or fail to do, anything which would allow them to lapse;
    • to provide technical assistance to the Licensee.
  8. Obligations of the Licensee - the following are some obligations which will usually be placed on the Licensee:-
    • at all times to make it clear to third parties that it is using the licensed technology under licence from the Licensor and to affix such patent, trade mark and/or copyright notices (as applicable) to its products as the Licensor may request;
    • to notify the Licensor as soon as it becomes aware of any suspected or threatened infringements by any third party;
    • to maintain detailed records relating to its sale of licensed products and to make same available for inspection upon the reasonable request of the Licensor;
    • to use either its "reasonable" or "best" endeavours to properly exploit the licensed technology;
    • specify certain minimum sales targets.
  9. Ownership of Improvements - where a Licensee creates improvements to the licensed technology the Licensor will naturally wish to have access to these improvements. However, for competition reasons, a Licensee cannot be obliged to assign any improvements it makes to the Licensor but the Licensor can, however, seek a licence of such improvements. This obligation can only be placed on the Licensee if the Licensor itself is also obliged to grant the Licensee a licence for any improvement it makes.
  10. Warranties - the Agreement will often contain warranties from the Licensor. These are designed to give the Licensee comfort with respect to key facts underlying the transaction and/or to allocate risk. The following are some examples:-
    • that the Licensor is the owner of the licensed technology, or if not the owner, that it has a valid right to sub-licence the technology;
    • where any of the licensed technology comprises registered rights, or applications for registration, that they are valid (so far as the Licensor is aware) and in force and that all relevant fees have been paid;
    • that there is no current or threatened litigation connected with the licensed technology;
    • that the use of the licensed technology by the Licensee in the manner envisaged in the Agreement will not infringe the intellectual property rights of any third party. [See sample clause here]
  11. Indemnities - it is common for the Agreement to contain two forms of indemnities:-
    • Indemnity from the Licensor in respect of any costs, claims or damages incurred by the Licensee, by reason of any claim that the use by the Licensee of the licensed technology, infringes the intellectual property rights of a third party.
    • Indemnity from the Licensee in respect of any costs, claims or damages incurred by the Licensor as a result of any defects in products made under the Agreement or as a result of any of the activities of the Licensee. [See sample clause here]
  12. Infringement Claims against Third Parties - the Agreement should deal with the rights and obligations of each of the parties in the event that a third party is suspected of infringing the licensed technology. [See sample clause here]
  13. Termination - the Agreement should provide that either party may terminate the Agreement when certain events happen such as the other party being in material breach of the Agreement and fails to remedy that breach within, for example, 30 days of receipt of written notice of the breach; the other party goes into liquidation; or there is a change of the corporate control of that party. The termination clause should also detail other circumstances that can lead to the Agreement being terminated such as failure of the Licensee to pay sums due within the specified time lines. [See sample clause here] There should be a provision in the Agreement dealing with post termination. The Agreement should list those provisions which are to continue after termination of the licence e.g. confidentiality obligations. The Agreement should also provide that on termination for whatever reason, the Licensee will forthwith return to the Licensor all materials comprising any of the licensed technology and will cease all use of the licensed technology for whatever reason.
  14. Confidentiality - the Agreement should contain a provision which provides that each party will keep all confidential information of the other party strictly confidential at all times and to only use same for the purposes permitted under the Agreement. [See sample clause here]
  15. Assignability - it would be usual for the Licensor to insist that the Licensee is prohibited from assigning any of its rights or obligations under the Agreement to a third party.
  16. Boilerplate Clauses e.g. governing law, jurisdiction, and dispute resolution - Boilerplate provisions should be considered very carefully. The Licensor will generally want the Agreement to be governed by the law of where they are based. For example, if the company is Irish, the Agreement will generally be governed by Irish law, with the Irish Courts having jurisdiction (exclusive or non-exclusive) over any dispute. As an alternative to or a preliminary step to litigation, the parties may agree to include a 'dispute resolution' clause which obliges them to go to mediation and/or arbitration in the event of a dispute. [See sample clause here]

Application of Competition Law Rules

When preparing a Licence Agreement, it is important to ensure that none of its provisions contravene competition law. Guidance in this regard is given by the Technology Transfer Block Exemption ("TTBE") which details the provisions that are permitted and those that are not. If there are breaches of competition law, financial penalties will apply. Accordingly, it is advisable to seek legal advice when negotiating and drafting the licence agreement.

Other Types of Agreements

There are several other types of agreements which may be relevant at different stages of a transaction and are detailed below for a matter of completeness. The key provisions listed above are equally relevant to these agreements which include: - Collaborative Research & Development Agreement - over the last number of years, universities and other publicly-funded research organisations have been forging closer links with business. In the collaboration with industry, universities obtain sponsorship to assist their research activities and earn revenue by the commercial development and marketing of their innovations. The collaboration also increases their research profile. The industry's perspective is slightly different. It gains access to external expertise, accelerates research, gains an advantage over its competitors and generates valuable intellectual property rights. The form of a Collaboration Agreement varies depending on each case. For example, under the Agreement, one party may do the work for another, with the latter taking all the intellectual property rights. Another situation is where both parties co-operate in research and each, to some extent, secures the benefits (and exploitation) of it and of any intellectual property rights arising from it. Such arrangements may be structured through the medium of a joint venture company. Whatever the arrangement, it is important when preparing the Agreement to ensure that intellectual property rights are suitably protected; decide at the offset as to ownership of intellectual property rights created during the project; define the scope of the project with clarity; have regular meetings and reports; and consider the circumstances in which the parties wish to terminate the project.

Sample Case Study Company B

In the semiconductor industry, substantial R&D investment is required. Company A (an international computer manufacturer and distributor) outsources part of its R&D by joint research with universities, thereby securing a high return on its investment and securing a quick means by which it can enter the market.

Materials Transfer Agreement ('MTA') - the Agreement is between the owner of (patented or unpatented) material and a party seeking the material and the right to use the material for research and/or commercial purposes. An MTA is not a licence agreement. The purpose of an MTA is to document the transfer and outline the terms of use. MTAs provide legal protection for the provider of the materials. In addition to addressing liability issues, MTAs help maintain the property rights associated with the materials. MTAs are frequently used in the pharmaceutical industry.

Evaluation and Option Agreement - under the Agreement, the person undertaking the evaluation may wish to take an interest in the invention and is given an exclusive right to do so for a period of time, together with an option to be exercised during that period to take a licence. For example, it will often be the case that an inventor requires funding to enable him to file his patent applications more widely and in exchange for this, a company may be prepared, in exchange for such period of exclusivity and option, to give the necessary funding. For an option to be legally binding all the terms upon which it is made and how the option is be to exercised must be set out in the option document. If significant points remain to be negotiated, the benefit of the option may be worthless because the party granting the option may refuse to conclude an agreement on the outstanding points. In practice, pressure of time may make this unrealistic and it may appropriate in some cases to provide for binding dispute resolution procedures which will settle any outstanding provisions. If it is impractical to even try and specify licence terms in advance, an alternative would be to incorporate a right of pre-emption or a right of first refusal. This would prohibit the grantor from granting the right to another without giving the grantee the opportunity to take up the right.

Clinical Trials Agreement - this is a sector-specific evaluation agreement in which it is not envisaged that the person undertaking the evaluation takes any exclusive rights in the subject matter of the evaluation - instead the benefit they receive is financial. A Clinical Trials Agreement is, structurally, a subcontracting agreement. It might be regarded as a pure research and development agreement in that intellectual property, namely data intended for regulatory submission purposes, is expected to emerge from it. It is unlikely to give rise to potentially patentable subject matter. Ownership of the data should be addressed under the Agreement and adequate provision should be made for the commissioning company to secure physical possession of or access to the data as this will often be necessary to respond to questions from regulatory authorities. As the conduct of clinical trials has particular potential liability consequences, the responsibility for this needs to be addressed in the Agreement and the insurance position appreciated.

Conclusion

Bringing together knowledge and experience to develop and exploit a technology can have substantial benefits for the parties involved. As with any relationship though, problems can arise. However, this can be avoided or at least minimised with a little planning and thought at the start of the process. This guide will help companies to ensure that they address the important issues. There is everything to be gained in licensing technology and the only thing to lose is progress!

Step 5 - Term Sheets |Heads of Agreement Content Outline


Last updated 13/9/2006