Savery M. Gradoville, Esq. 2 Context for licensing opportunities for IP rights Licensor – what IP rights are competitive in the commercial marketplace? Assess whether and to what extent their IP rights infringe or may be infringed by the rights of others Assess whether competing rights have advantages or disadvantages over their IP rights Competing licensors strengths and weaknesses Assess whether IP rights may be expanded to fill in any gaps revealed from due diligence investigations Assess the extent of IP rights protection in potential Licensees jurisdiction(s)
Savery M. Gradoville, Esq. 3 Context for licensing opportunities for IP rights Licensee – what are the available opportunities for licensing IP rights? –Assess the extent to which various IP rights infringe other IP rights –Assess if competing IP rights have advantages or disadvantages over a Licensors proposed application –Identify possible licensors and their strengths and weaknesses –Circumvention of IP rights to avoid having to license them Are, and if they are, to what extent are IP rights protected in the licensed territory?
Savery M. Gradoville, Esq. 4 Primary Negotiation Advantage from this Due Diligence Inquiry Ability in negotiation to raise or speak to the advantages of competing IP rights and/or disadvantages of IP rights being offered for licensing to weaken the other partys bargaining position Sources – patent searches, literature searches, technology space searches Appropriate experts – patent attorneys, lawyers and scientists/engineers expert in pertinent technology
Savery M. Gradoville, Esq. 5 Due Diligence re Licensed IP Rights Scope of IP rights Validity of IP rights Right to license IP rights Right to exercise licensed IP rights
Savery M. Gradoville, Esq. 6 Reason for IP Rights Due Diligence To identify issues re IP Rights which impact licensing terms –Limitations –Impediments –Unknowns Position re representations and warranties –Major Licensor Pitfall – not having an understanding of what reps and warranties it is willing to give and why – before negotiations begin –Failure to Identify – negotiation on this point is reactive to Licensees requests – may make concessions or delaying the negotiations to undertake proactive due diligence re IP Rights
Savery M. Gradoville, Esq. 7 Licensors Control of Scope of Licensees Due Diligence Preliminarily, Licensor decides it does not or cannot exploit the IP Rights effectively itself Usually Licensor will approach the potential Licensees with a licensing opportunity
Savery M. Gradoville, Esq. 8 Licensors Control of Scope of Licensees Due Diligence Initial interaction and dialogue with potential Licensee re IP rights and responses to Licensees due diligence inquiries Need to establish a regulated regime – Nondisclosure Agreement with disclosure and use restrictions –Is Licensees investigation itself confidential? Must control this process Failure to do so – inadvertent disclosures, jeopardize IP rights (patent applications/trade secrets), and loss of legal professional privileges –Premise – relevant documents should not be disclosed –Disclosure may be important to going forward with a licensing transaction
Savery M. Gradoville, Esq. 9 Minimal Controls / Regime Consolidate documents at one location or on a web site where Licensor controls all access Document all questions raised by Licensees investigations and all Licensors responses Set time limits for Licensees investigations Identify any off limits questions/areas Have a single point of contact who is an information gate-keeper If negotiations breakdown, recover hard copies and monitor Licensees activities to determine any misuse of Licensor information
Savery M. Gradoville, Esq. 10 More Information Rather than Less is Recommended Reason behind Due Diligence Knowledge obtained by Licensor of Licensee and by Licensee of Licensor Greater advantage in negotiation Assessment of the proposed allocation of IP rights and risks –Exclusive v. non-exclusive –Territorial limitations/spread of IP rights
Savery M. Gradoville, Esq. 11 Key Due Diligence Questions/Issues Financial standing of the parties and how shown/verified Resources available to implement licensing deal Whether dispute resolution proceedings (i.e., legal, arbitration, conciliation, mediation) are pending or threatened – any history of such proceedings Priority of this licensing deal within Licensor/Licensee – standing and tenure of champion Position and experience of the parties relative to the market and IP rights being licensed Simple exit strategy if deal does not work
Savery M. Gradoville, Esq. 12 How to Structure the Deal Determine what the preferred structure of the deal for Licensor/Licensee Options should preferred structure not be available or not be accepted by the other party Must always develop a Plan B; if not, either party may end up with a less than optimal deal / risk allocation
Savery M. Gradoville, Esq. 13 Who should be the Licensor? Should the title holder of the IP rights transfer or license their rights to a more appropriate Licensor? –A limited asset special purpose vehicle –Licensor might avoid using an entity owning valuable assets, especially those UNRELATED to the IP rights Have all assignments of IP rights licensed been identified, obtained and recorded as required? Is entitlement to IP rights shared by more than one entity?
Savery M. Gradoville, Esq. 14 Who should be the Licensee? For the Licensor, the identity of the Licensee is generally always significant –Licensor always interested in licensing to a party having the most resources necessary to carry out Licensees obligations to Licensor Reduces the risk of Licensees failure and maximizes the Licensors return A limited asset special purpose vehicle - Licensee might avoid using an entity owning valuable assets, especially those UNRELATED to the IP rights –Where the Licensee does not have sufficient resources, Licensor may mitigate the risk by seeking a third partys or affiliated partys guarantee
Savery M. Gradoville, Esq. 15 Who should be the Licensee? For the Licensee, usually interested in an unfettered right to sublicense –Where there is an unfettered right to sublicense, identity of the Licensee is less significant to the Licensor (network of sublicensees) unless Licensor retains approval right over sublicensee selection –Where there is no unfettered right to sublicense, specific identity of the Licensee is always significant to the Licensor who wishes to mitigate against the risk that the Licensee may fail
Savery M. Gradoville, Esq. 16 Taxation Drivers Does either the Licensor and/or Licensee have tax exempt status? If so, the taxation drivers are not important for the tax exempt party. Licensor wants to minimize tax payable on royalties/fees (consideration) from the Licensee. Licensee wants to maximize tax benefits available from paying royalties/fees (consideration) to the Licensor.
Savery M. Gradoville, Esq. 17 Tax Issues raised by the chosen deal structure Tax status of Licensor and Licensee Any significant taxation advantage re jurisdiction/situs of the license Capital gains tax implications re transferring or licensing IP rights Any withholding tax considerations Any applicable jurisdiction specific taxes Are otherwise applicable tax avoidance provisions vitiated?
Savery M. Gradoville, Esq. 18 Other Issues raised by the chosen deal structure Are licensing costs (to initiate and maintain) greater than Licensors return? What are the unwinding costs/adverse effects, if any? How difficult does the chosen deal structure make it to enforce or protect licensed IP rights? Does the chosen deal structure track the parties respective customary operations?
Savery M. Gradoville, Esq. 19 Asset Protection Issues raised by the chosen deal structure Are IP rights from claims made by third parties Does Licensor protect IP rights from claims made by Licensor Does Licensee protect IP rights from claims made by Licensee
Savery M. Gradoville, Esq. 20 Asset Protection Issues raised by the chosen deal structure If a limited asset special purpose vehicle is used by either or both of the Licensor and Licensee, richer guarantors of such partys performance are recommended –Key: must have procedures/process to monitor financial health of any guarantor
Savery M. Gradoville, Esq. 21 Asset Protection Issues raised by the chosen deal structure Where either Licensor or Licensee proposed to transfer assets (including IP) to minimize bankruptcy consequences, such transfer(s) need to be reviewed under pertinent bankruptcy laws to determine whether any such transfer(s) qualifies as a voidable preference.
Savery M. Gradoville, Esq. 22 Asset Protection Issues raised by the chosen deal structure Is the cost of setting up and maintaining a limited asset special purpose vehicle to protect assets unrelated to the licensing agreement worth whatever benefits are created by using such vehicle? What is the structures effect on protecting IP rights should infringement or other legal proceedings be necessary? Any impeding of legal enforcement mechanisms requires another deal structure.
Savery M. Gradoville, Esq. 23 Asset Protection Issues raised by the chosen deal structure Does the deal structure complement the parties current operational activities? If not, the inertia of current operational activities probably will adversely impact or undermine the deal structure.
Savery M. Gradoville, Esq. 24 Payment Issues Licensor –Solvency of the Licensee Guarantors for limited asset special purpose vehicle – Where is Licensee or Licensees bank located? Will pertinent government controls prevent Licensor from obtaining the full amount of Licensees consideration?
Savery M. Gradoville, Esq. 25 Payment Issues Licensee –Failure to make full payments to Licensor, for whatever reason, risks Licensors termination of the licensing agreement for Licensees breach. Management of risk – Licensor may not be willing to license its most valuable IP rights to Licensee
Savery M. Gradoville, Esq. 26 Operational Issues Licensing agreements success is measured by the operation of the license. Operational success results from the appropriate deal structure. –Must complement each partys respective current operational activities. –Designate an internal administrator in charge of implementing the license. –Dispute resolution process – escalation procedures.
Savery M. Gradoville, Esq. 27 Negotiation Issues Knowledge –Due diligence investigations –Structural options –Operational aspects of structural options –Understand and anticipate the other partys likely positions and commercial imperatives –Develop favorable responsive solutions –IP rights pricing options Objectives – obtain preferred pricing positions of the Licensor and of the Licensee
Savery M. Gradoville, Esq. 28 Negotiation Issues Skills –Necessary to do the deal –Team approach Scientific, legal, patent, financial, operational, tax, governance, regulatory, valuation, accounting, cultural and marketing skills needed. No one person has all of these skills to negotiate a licensing agreement – assemble a team with members having negotiation skill itself, legal, patent, scientific and financial expertise and experience.
Savery M. Gradoville, Esq. 29 Negotiation Issues Team Approach –Select Team leader –Select Spokesperson –Designate roles and circumstances under which each member can and cannot speak –Dont mix messages – all speak the same party line –Designate which members participate in the negotiations If delays in decision-making are disadvantageous, have decision- makers participate face-to-face –Identify issues the team cannot decide – refer to technical, management or legal or finance, as appropriate –Communicate and brief all members of Team on all issues
Savery M. Gradoville, Esq. 30 Negotiation Issues Be prepared with a Plan B – a serious alternative and at least as attractive to a partys preferred and/or original position –Use proactively or defensively –Use dictated by the flow of negotiation If used too early – may waste a significant bargaining chip/advantage If used too late – may have minimal effect –Hopefully, never used
Savery M. Gradoville, Esq. 31 Negotiation Issues Be prepared to ask why –know the reason behind your and the other partys positions/demand – strategic advantages Substantive answer – basis for attacking the position or suggesting an alternative to address the substantive concern expressed as reason for the why Non-substantive answer – e.g., always done it this way or a matter of company policy –Argue the logic of that response –Gain negotiating advantages, especially if occurs repeatedly
Savery M. Gradoville, Esq. 32 Negotiation Issues Control –Drafting Not as important as once was – with use of electronic copies and redlining programs Usually guaranties legal involvement –Venue and Pace Not as important as once was – Internet Still important for face-to-face negotiations –Access to Team members and other subject matter experts –Saves time
Savery M. Gradoville, Esq. 33 Negotiation Issues Key risk apportionment terms as important as any commercial terms –Indemnities –Warranties –Limitation of Liability –Exclusions of Liability –Choice of law Alternatives – Preferred – Fall-back Sovereign Immunity –Pertinent where either or both parties are governmental entities (e.g., federal or state entities; non-US authorities)
Savery M. Gradoville, Esq. 34 Other Considerations Governing regulatory competition legal framework Cultural considerations affect negotiations and administration of deal structure