Planning and Preparation for Effective Negotiation

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Finally, licensors may seek supplemental remuneration or other types of income. Royalty payments may be reduced or obviated under a variety of circumstances where the licensee can compensate the licensor for the use of the technology in other ways

The size of the fee largely depends on the developmental stage of the invention or the exclusivity of the license as discussed above

A common method for calculating royalties is the 25 % rule. This rule starts with the premise that, under model circumstances, the licensor is owed 25 % of the licensee’s net invoiced sales

The purpose of annual or other periodic fees, which typically terminate when royalty payments begin, is to incentivize the licensee to aggressively develop and market the technology

Licensees, on the other hand, benefit more from low upfront payments, leaving the licensor to be compensated by royalties

it is always beneficial for the licensor “to seek substantial upfront payments rather than higher royalties, especially for untried products and/or markets

a typical license will include a signing fee, reimbursement and ongoing payment of patent prosecution costs, milestone payments, minimum annual royalties and a percentage royalty on sales

Payment terms. there are several forms of payment that licensing parties can negotiate to compensate the licensor for the patented technology.

the licensor can grant a broad field of use with the right to retract fields if the licensor presents a use to the licensee and the licensee elects not to pursue it

the licensor can grant a narrow field of use, with the licensee having the right of first refusal for other uses that the licensor would like to propose to third parties

Potential compromise positions include the following

Exclusivity and field of use. License exclusivity refers to whether the licensor has licensed the invention/technology to multiple, licensees, whereas the field of use is the circumstances for which the licensor has granted the licensee permission to make, use and sell the patented technology.

Developmental stage of invention:Patented inventions that are in the early stage of evelopment often require substantial investment and development before a commercially viable product is produced.

Rights to improvements. Parties should negotiate provisions to address the ownership of any current or future improvements of the technology

Proprietary position:A weak proprietary interest may exist where a patent is questionable in nature. Such a patent does not offer significant market strength because it is either incapable of keeping products or services using similar technology off the market or potentially could be invalidated

The income method values technology by the total estimated annual returns, which reflects the bottom line of what the licensee can pay

Using the market method, the value is determined by evaluating the value assigned to comparable technology licensed recently, which requires determining what transactions are comparable and obtaining current, reliable data

The value of the technology using the cost method is the cost of developing or purchasing the technology, though this does not reflect changes in the market or new information about the technology

Valuation approaches. A business school/MBA approach to valuation often uses one of three methods:

the negotiation brings together the terms of the license agreement which reflect the allocation of risk between the parties of possible future development and the marketeability of the patented technololy

The negotiation

The groundwork for open dialog: In any negotiation, a nondisclosure agreement can provide security for both parties to maximize information transfer.

Drafting the contract: Commentators have suggested that the party drafting the contract is always in the more favorable position because that party will be in a position to ensure inclusion of desirable provisions and places the other party in the position of defending every request to modify the drafted agreement

Deadlines:It is important because it forces the other party to reveal their true intentions and interests in the license agreement. The main steps in the negotiation process for which pre-established deadlines can be established include: the initial meeting, the drafting of the letter of understanding, the execution of the letter of understanding, the meeting to review the draft agreement, the revisions of the draft of the agreement, finalize the license agreement and execute the license agreement

Preparing to negotiate

The Term Sheet: exchange a sheet of terms before the initial negotiation meeting. cover the main problems in a possible agreement in the form of a summary, which includes: the licensed product or process; licensed territory; license rights and royalties; technical information and training required to develop and manufacture, sell and service the licensed product, and who will be responsible for it; sales and service support; degree of exclusivity and duration of the license

The agreement team must dentify, evaluate and prioritize the interests of their client. The interests of the clients will be tangible and intangible

Initial Team Meeting: reach an understanding of the commercial motivation of the agreement as well as responsibilities and the role of each team member during the process.

Business Development Executive; a Scientific/ Technical Expert; a Decision Maker; and a Licensing Attorney.

A key to any deal is for each party to have an understanding of what they want from the dea

Patent License Negotiation: Best Practices