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Fundamentals of Licensing Transactions – for Business Executives and Startups June 10, 2009 Thomas A. Briggs Partner & Practice Leader: Licensing and Technology Transactions © 2009, Thomas A Briggs. The contents of this document are proprietary and should not be duplicated or shared without express permission from the author.
“Hey, who is this guy? ” n Worldwide co-chair of Licensing and Technology Transactions portion of Jones Day’s IP Practice Area n Recent “big” disclosed deals: • Micron’s JV with Intel to make flash memory • Bayer strategic alliance with Schering-Plough • IBM’s sale of its printer business to Ricoh • Micron’s JV with Nanya to make DRAM • Eolas Technologies patent license to Microsoft for IE n Led the IP aspects of over 70 mergers, acquisitions, venture capital and private equity deals in each of the last 5 years n Clients include Athersys, Bunge, Celgene, Geo. Biotics/Geo. Syn. Fuels, Gennum, IBM, Med. Immune, Micron, Nielsen Company, Resilience Capital, Riverside Partners, Thales n Former chemical engineer and manager for Union Carbide and Praxair n Former in-house counsel and chief IP officer for MA Hanna Company and Polyone Corporation n Current biography @ www. jonesday. com/tabriggs
Licensing Transactions n Collaborative • Joint Development • Cross Licenses • Strategic Alliances • Joint Ventures • Patent Pools • Ancillary to purchase of business • Entry into new technology/business n Coerced • Litigation settlement • Response to a “letter”
Primary Business Goals of a License Agreement n Define the fundamental economic and technical relationship between the parties n Establish the procedures to be taken to protect and exploit the licensed IP n Describe how the relationship between the parties will be monitored, regulated and terminated
Product Life Cycle Licensor Range Scope of Activities R&D Scale Mfg Reg Market Dist Service Licensee Range
Example: Contract Manufacturer Licensor R&D Scale Mfg Licensee Licensor Reg Market Dist Service
Ex: Licensor = Research Institution Licensor R&D Scale Mfg Reg Market Dist Service Licensee Sublicensee(s)
Ex: Licensor = Startup Company Licensor R&D Scale Mfg Reg Market Dist Service Licensee Sublicensee(s) Distributor(s)
Elements of Typical License Agreements n Certain Obligations/Covenants n Parties 4 n Background/Recitals • Technology Transfer n Definitions • Control of materials - Escrow • Licensed IP 1 • Confidentiality • Efforts to commercialize • Licensed Products n License Grant • Exclusivity • Marking/Quality Control 2 • No Contest • Fields (Products/Territory/Qty) n Prosecution • Sublicensing n Litigation • Defensive n Improvements n Compensation/Royalties 3 • Offensive n Records and Reports n Warranties/Indemnity n Termination n Miscellaneous • Causes • Transferability • Post termination • Governing Law • Dispute Resolution 5
Organization of What Follows… n Topics 1 (Common Definitions) and 2 (License Grant) for Life Sciences n Topics 1 (Common Definitions) and 2 (License Grant) for Software n Topic 3 (Compensation) for Life Sciences then Software and other industries n Topic 4 (Transfer/Control of Materials) n Topic 5 (Transferability) n Topic 6 (Due Diligence)
Topic 1: Common Definitions – Life Sciences n “Licensed Patents” • Identify invention disclosure(s) or patent application(s) that describe the patented or patent pending invention(s) • Identify all patents that are licensed “Licensed Patents” means U. S. Patent Application Serial No. 06/000, all divisionals, continuations-in-part, and other applications claiming priority thereto or the invention described therein anywhere in the world, and all patents or equivalents thereto recognized by any governmental authority issuing from any of the foregoing, including all extensions, reissues and reexaminations of any of the foregoing.
Common Definitions – Life Sciences n “Licensed Technology” • Identify all unpatented technology that is licensed, if any, including documents and other materials (e. g. , biological or pharmaceutical materials or software code) • Subject to trade secret (until published) and copyright protection “Licensed Technology” means all technology, information, data and materials relating to the research, development, manufacture, use, regulatory approval, marketing or sale of [the products] owned by Licensor or licensed to Licensor with the right to sublicense and all trade secrets and copyrights therein.
Common Definitions – Life Sciences n “Licensed Product” • Scientific description • Related to the licensed IP – somehow n. Covered by any claim of a Licensed Patent n. Made using or incorporating any of the Licensed Technology • Often used as basis for calculating the compensation due to the Licensor “Licensed Product” means any diagnostic, prophylactic or therapeutic (a) the manufacture, use, sale, offer for sale or importation thereof would infringe upon a claim of any of the Licensed Patents (but for the license granted hereunder) or (b) that is made using, contains or otherwise incorporates any of the Licensed Technology.
Common Definitions – Life Sciences n “Territory” – Geographic (usually by country) n “Field” / “Field of Use” – Limitations on applications of the rights licensed: • Prevention, diagnosis and/or treatment of disease in humans (and/or animals) • Specific diseases/conditions • Research and non-commercial purposes n Financial definitions – Topic 3
Topic 2: License Grant – Life Sciences n Rights: depend upon type of IP licensed n Degree of exclusivity n Type of products or processes; quantity n Territory; reserved accounts n Compensation n Grant-back to improvements n Extend to affiliates (current or future? ) n Sublicensing
Patent Rights n Make n Use n Sell n Offer to Sell n Import n “Have made” n Patent pending? Published? n Market? Advertise/promote but not sell? n Distribute? Transport? Sell at wholesale? n Violation = Infringement
Trade Secret Rights n Use/access information n Disclose it to others n Violation = Misappropriation
Copyright Rights n Copy/reproduce n Distribute/publish n Create derivative works n Public display n Public performance n Market? Sell? n Violation = Infringement
Trademark Rights n Use n Market? Distribute? n Violation = Infringement
Topic 2 (cont. ): License Grant – Life Sciences n Rights: depend upon type of IP licensed n Degree of exclusivity n Type of products or processes; quantity n Territory; reserved accounts n Compensation n Grant-back to improvements n Extend to affiliates (current or future? ) n Sublicensing
Degree of Exclusivity n Exclusive: Exclusive of the Licensor? n Sole or Semi-exclusive: Licensor + 1 n Non-exclusive: multiple Licensees n “Co-exclusive”: 2 (but not Licensor) n Restrictive covenant(s): “Licensor shall not…” n Exclusivity usually leads to minimum performance requirements by Licensee n Exclusivity can vary among rights granted (e. g. sole right to make and non-exclusive right to sell)
Topic 2 (cont. ): License Grant – Life Sciences n Rights: depends upon type of IP licensed n Degree of exclusivity n Type of products or processes; quantity n Territory; reserved accounts n Compensation (Topic 3) n Grant-back to improvements n Extend to affiliates (current or future? ) n Sublicensing
Sublicensing – Life Sciences n General Rule: No right to sublicense without consent of Licensor n Can distinguish among the rights licensed n “Have made” ~ sublicense to right to “make” n Conditions on sublicensing (w/ or w/o consent) is prudent: • Form of sublicense; certain obligations passed through • Notice to Licensor – before or after sublicense grant • Effect of termination of prime license • Sharing of revenues from sublicensee(s) n Distinguished from assignment or transfer of the entire agreement
Ex: License Grant Clause – Life Sciences n “Subject to the terms and conditions of this Agreement, Licensor grants to Licensee a license under all rights in the Licensed IP throughout the Territory solely within the Field. n The foregoing license is exclusive to Licensee, including exclusive of Licensor. n The foregoing license includes the right to sublicense to Affiliates of Licensee. ” n “Subject to…” = term/termination, royalties, field, territory
Ex. License Grant Clause – Life Sciences “Licensor grants to Licensee a worldwide, royaltybearing, non-transferable, exclusive license, including the right to sublicense, under the Licensed Patents solely to make, use, sell, offer for sale and import the Licensed Products in the Field in the Territory. Licensor further grants to Licensee a non-exclusive license to use and copy the Licensed Technology for its internal purposes as reasonably required to exploit the foregoing rights granted under the Licensed Patents. ”
Topic 1: Common Definitions - Software n “Licensed Product” = Software • Usually specified by the trademark of the software as it is marketed generally, and a particular version, which is usually the most recent generally released version • Not usually the basis for calculating the compensation due to the Licensor n Specific technology and patents are NOT usually specifically identified, but rather all IP rights of Licensor are included “Software” means the software marketed as of the Effective Date under the trademark SOFTWARE in the version generally released as of such date.
Common Definitions – Software n “Territory” – Geographic or locations of licensee n “Field” / “Field of Use” – Limitations on the rights licensed: • Use of the object (executable) code only for internal operations, not others • Copying the code for backup purposes only • Limited copy and/or modification of the documentation for internal use only n “User” – who within Licensee can use the software • Enterprise (everyone in the Licensee) • Named Users (certain identified people) • Concurrent Users (quantity of users at the same time) • Seats (total number of users that can use at any time) • Usually serves as the measure on which royalties are calculated n Financial definitions – Topic 3
Topic 2: License Grant – Software n Rights: generally not specifically identified, but instead are granted to all IP rights of the licensor n Usually non-exclusive, unless custom-developed n To use the Software within limitations (or to access and use in cloud computing) n To copy the Software for backup (non-cloud) n To modify and copy documentation for internal distribution only n Usually no sublicensing n The rights EXCLUDED are often lengthy (see example) n “Shrink-wrap” and “click-wrap” licenses n “Open Source” – free use, but with conditions
Let’s take a break!
Topic 3: Compensation – Life Sciences n Upfront fees – technology transfer n Milestones • Development • Sales n Royalties: • Fixed per unit made or per volume processed • Fixed per unit sales • Fixed portion of profits (25% rule) • Variable (volume, time, exclusivity) n Manner of payment: $, “in-kind” n Timing of payment
“Net Sales” and “Net Profits” n “Net Sales” = gross revenues from ($ invoiced or collected) sale of Licensed Products LESS: • duties, tariffs, sales tax, VAT • discounts, rebates, returns actually given • transportation and insurance • installation charges? • distribution or sales agent fees? • maintenance fees for statutory rights? • service and parts revenues? n “Net Profits” = Net Sales LESS: • cost of goods sold (labor and materials and allocation of indirects) n There are no “standard” definitions
Risk Shifting with Royalties Pro-Licensor Financial Risk to Licensee Pro-Licensee –$/unit made –$/unit sold –Gross sales ($ invoiced) –Gross sales ($ collected) –Net Sales ($ invoiced) –Net Sales ($ collected) –Net Profits (Net Sales less cost of goods sold)
Royalty-Related Provisions Favorable to Licensee (recipient of license) n No upfront or fixed fees n Maximum/cap: time/paid up n Combination products: % of sales n Stacking/offset: deduction for royalties paid to others n “Most Favored Licensee” n Sales between affiliates included n “Sale” occurs when money is collected, not invoiced or shipped n No minimums n Failure to achieve minimum: convert to non-exclusive rather than termination n Pass through of same royalty rate for sublicensees
Royalty-Related Provisions Favorable to Licensor (grants the license) n Upfront or fixed fees n No maximum/cap or term for payments n No reduction for combination products n No deduction for royalties paid to others n No “Most Favored Licensee” n Sales between affiliates excluded n “Sale” occurs when product is invoiced or shipped n Minimum payments (for exclusivity) n Failure to achieve minimum leads to termination n High % of whatever Licensee receives from sublicensees, subject to minimum
Example Financial Terms – Life Sciences n Upfront fee: amount is highly dependent upon current state of development and sunk costs of Licensor to date; $ or % equity n Common development milestones: amount is dependent upon sunk costs of Licensor and market potential as risk of development ↓ • Filing of NDA: $ (within x days after achievement) • Initiation of Phase I: $ • Initiation of Phase III: $ • Filing of BLA: $ • Regulatory Approval: $ • First Commercial Sale: $ n Royalties: increasing rates common (0 -250 k/yr; 250– 500 k/yr, etc. ) n Sales $ Milestones: total annual sales > X; total accumulated sales > Y n Sublicense fees: X% of whatever compensation licensee receives from sublicensees, but not less than the royalty
Life Science Industry Examples n Form 8 -k SEC filings and foreign equivalents disclose material amounts – publicly available n Sometimes companies to an agreement disclose certain types of payments n Industry publications report public information, e. g. Bio. World, IMS Drug News, Contract Pharma n IP valuation firms and accountants aggregate public and non-public information n Some recent examples… n So, what is right for your deal?
Topic 3: Compensation – Software n Users • Enterprise flat fee • Flat fee per location • Named, Concurrent, or number of Users n Cloud Computing (Saa. S f/k/a ASP) • Number of transactions processed • Amount of time used or accessed n Occasionally, royalties n Same/similar rates for like users n Maintenance and Support – separate fee n Manner of payment: $, “in-kind” n Timing of payment
Topic 3: Compensation – Other Industries? n. Common: • Technology transfer fee • Upfront license fee • Royalties n Compensation varies due to: • Degree of exclusivity • Breadth of Field • Availability of competitive technologies • Strength of IP protection • Bargaining power • Other parts of the license agreement (termination, warranties, indemnities, transferability, etc. )
Topic 4: Transfer/Control of Materials n Rights to tangible materials separate from IP rights licensed n Transfer of the physical materials required to exploit the rights licensed • Licensed Patents – anything? • Licensed Technology n Development records n Manufacturing and QC records n Biological and chemical materials n Software code – object or source n Licensee restrictions on access, use, etc. n Mechanics of transfer • To the licensee: when, where, how, • To an independent third party = escrow
Escrow n “Deposit”: Licensor deposits physical forms of Licensed Technology to an independent third party, rather than the Licensee • Life Sciences = biological materials and documentation • Software = source code and documentation n “Updates”: Obligations of Licensor to update the deposit to reflect current state of the Licensed Technology n “Verification”: Degree to which the escrow agent verifies the contents of the Deposit n “Release”: Distribution of the Deposit to the Licensee upon certain trigger points n Enables licensee to maintain benefit in Licensor bankruptcy or breach of transfer obligations n Fees charged by escrow agent are a function of Deposit, Updates and Verification and other obligations
Topic 5: Transferability n General Contracts Rule: Contracts are assignable unless they state they are not – silence permits assignment n Licensee Exception: Licenses are NOT assignable by the Licensee (without consent of Licensor) unless the license agreement states that the license is assignable n Under some state laws, like California, a change of control by merger (or other mechanism defined as an assignment) can be an “assignment” n Young companies (and some mature companies), especially those backed by VC-funding, need the ability to transfer the agreement in connection with a sale of the company n Bankruptcy: Assumption by debtor-in-possession prohibited without consent? Assumption followed by assignment? n What is reasonable? Licensor vs. Licensee perspectives
“Assignment Clause” Variations n Silent – no assignment clause at all (prohibits licensee) n “This agreement is not assignable by either party without the consent of the other party” n “This agreement is not assignable by either party without the consent of the other party, such consent not to be unreasonably withheld or delayed” n “This agreement is not assignable by either party except in connection with the sale of substantially all of the assets of the party seeking to assign” n “This agreement is not assignable or otherwise transferable by either party except in connection with the sale of substantially all of the assets, a merger or sale of controlling interest of stock of the party seeking to assign or otherwise transfer its interest hereunder”
Topic 6: Due Diligence By Licensee (recipient) n. Technical diligence • Does the technology work as advertised? • Do development records support conclusions? • Do development records support data filed with governmental authorities or standard-setting bodies? • What tangibles are required for an effective technology transfer? n. Legal diligence • Ownership of the subject matter licensed (and the ability to license it) n. Assignment records publicly recorded n. News re: prior licensing activities n. Internal licensor development records • Degree to which patent claims and trademarks prevent competition • Countries of registrations and patent filings
Topic 6: Due Diligence By Licensor (owner) n. Financial condition of the licensee n. Ability to exploit the license • Complete development • Obtain and sustain regulatory approvals • Market • Distribute/sell products • Support/service customers and products n. Motive for obtaining the license – reputation as a licensee n. Ability of licensee to maintain confidentiality
Questions? n Parties n Certain Obligations/Covenants n Background/Recitals • Technology Transfer n Definitions • Control of materials - escrow • Licensed IP • Confidentiality • Licensed Products • Efforts to commercialize n License Grant • Exclusivity • Marking/Quality Control • No Contest • Fields (Products/Territory/Qty) n Prosecution • Sublicensing n Litigation n Improvements • Defensive n Compensation/Royalties • Offensive n Records and Reports n Warranties/Indemnity n Termination n Miscellaneous • Causes • Transferability • Post termination • Governing Law • Dispute Resolution
Contact Information Thomas A. Briggs (Tom) Jones Day 12265 El Camino Real, Suite 200 San Diego, CA 92130 (858) 314 – 1164 [email protected] com