day 5 afternoon - ford and prowse

Lead to Win

Lead to Win

Key Contracts that enable development,

sales and “partnership” success

June 24, 2009

Robert Ford

Thomas Prowse

Gowlings Kanata Technology Law Office

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Agenda

Theme: Key Contracts that enable success

• Start-ups and the role of contracts

• NDAs and the anatomy of an agreement

• License Agreements

• Sales & Channel Agreements

• Strategic Alliance & “Partnership” Agreements

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Start-ups and the role of contracts

What is role of contracts for a start-up?

• While a start-up naturally focuses on matters within its

operational control, the reality is that many internal matters and

most external matters will be governed by contracts

• These agreements will include the “internal” agreements already

touched on, including shareholder agreements and employment

agreements

• The focus of this session is on agreements with external third

parties including NDAs, License Agreements, Supply Chain

Agreements, Sales & Channel Agreements, and Strategic

Alliance & “Partnership” Agreements

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Start-ups and the role of contracts (cont’d)

What is role of contracts for a start-up?

• Since these classes of agreements will provide much of the

business structure for the start-up, they should be seen as a key

foundation for, and an integral part of, the start-up operation

• As such, these agreements are best seen as a key enabler of

business success

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NDAs and the anatomy of an agreement

What is an NDA?• An NDA (or Non Disclosure Agreement) is an agreement under

which a party agrees to maintain the confidential nature of information received from another party

• The NDA sets out the limited purpose for which the confidential information may be used

• The NDA may be one-way or mutual and typically has a short time duration

• The NDA normally states that the confidential information is being provided on an “as is” basis

• Protect from loss of patent rights

• Protect from loss of trade secret and confidential information

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NDAs and the anatomy of an agreement (cont’d)

What isn’t an NDA?

• An NDA (or Non Disclosure Agreement) is not an

agreement for the ownership or licensing of intellectual

property rights

• An NDA is not an agreement for the development of a

product or the provision of a service

• An NDA is not an agreement for the license or sale of a

product

• An NDA is not an agreement for the delivery of a service

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The anatomy of an Non Disclosure Agreement

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First element: The Parties

• The agreement needs to set out the legal name of the

contracting entities as well as other entity particulars such as

address and province or state of incorporation

This Agreement is between [insert Company full legal name],

with an office at [insert business address], and [insert

Company full legal name], with an office at [insert business

address].

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Second element: The activity or purpose

• The agreement needs to set out the purpose of the

agreement and/or the activity being pursued by the

contracting entities

The parties are engaged in business discussions related to

_______________________________ (“Activity”), which may

result in the disclosure of Confidential Information as defined

below.

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Third element: Subject matter (& definitions)

• The agreement needs to set out the subject matter of the

agreement as well as any definitions needed to give

meaning to terms used in the agreement

“Discloser” shall mean a party hereto which discloses

information to the other party.

“Recipient” shall mean a party hereto which receives

information from the other party.

“Confidential Information” means ….

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Fourth element: Rights & obligations

• The agreement needs to set out the rights and obligations

of the contracting entities under the agreement (and may

specify certain remedies in the event of a breach of these

obligations)

The Recipient shall use the Confidential Information only in

connection with the Activity ….

Except with the express prior written authorization from

Discloser, Recipient shall not copy or transmit ….

Upon written request from the Discloser, the Recipient will

promptly deliver to the Discloser, or destroy ….

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Fifth element: Limitation of Liability etc.

• The agreement needs to set out the ground rules for the

contracting entities with respect to Limitation of Liability,

Caps on Damages, Indemnities etc.

All Confidential Information is provided „as is‟ without warranty

assurance, guarantee or representations of any kind and shall

remain the sole property of the Discloser. No license is either

granted or implied by the conveying of Confidential Information

to the Recipient.

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Sixth element: Term (& Termination)

• The agreement needs to set out the Term for the agreement

(including its start date) as well as the ground rules for the

contracting entities with respect to its renewal or termination

(and any continuing rights & obligations)

Confidential information may be exchanged between the

parties under this Agreement for a period of one (1) year from

the Effective Date. The parties shall retain in confidence all

Confidential Information of the other party for a period of five

(5) years from the date of each disclosure.

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Seventh element: Governing Law etc.

• The agreement should set out the body of law to be used

for the interpretation of the agreement and will sometimes

specify the place where the contracting entities would like

legal actions (or mediation) to take place as well as other

general terms and conditions

This Agreement is governed by, and is to be construed and

interpreted in accordance with, the laws of the Province of

Ontario and the laws of Canada applicable in that Province,

excluding any conflict of law provisions.

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License Agreements (cont’d)

License Grant – Heart of the Agreement

• exclusive, sole or non-exclusive?

• territory? i.e. geographical limitations?

• field of use?

• specific rights? eg. make/have made

• transferable?

• sub-licensable?

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Royalties

• What is a “Reasonable Royalty”? Factors include:

• Prevailing royalty rates in the industry

• R & D costs of developing technology

• Nature of the technology

• State of the technology (does it need to be commercialized?)

• Strength of protection

• Nature of competing technologies

• Expected market penetration

• Technology transfer

• Many other variables

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Royalties

• Many theories to quantify royalty rates. Can consult an expert if

client has not already determined this issue. Three primary

methods:

(1) Cost Method - how much costs are saved

(2) Comparables Method - compare similar deals in the

industry for rates

(3) Income Method - project future incomes by accounting

methods with discount rates (i.e., anticipated profits)

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Royalties

• Up front/ lump sum/ per milestone

• Fixed amounts:

• Advance lump sum (fully paid up)

• Lump sum payable in instalments

• Fixed but dependent on future events or milestones

Used where Licensor wants to recoup development or other

costs, mitigate risk that Licensee will not perform

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Royalties

• Running royalties (per unit/ net revenues)

• Variable and dependent on extent of exploitation (sales

volume, quantity of material used, articles sold).

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Royalties

Various examples:

• $50,000 upon execution of Agreement

• running royalties equal to 10% of the Net Sales of Licensed

Product sold during the Term

• a royalty of $20 per Licensed Product manufactured by

Licensee

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Royalties

• Minimum payments

• important with exclusive licenses to guarantee revenues

• mandatory (must achieve or agreement or territory

terminates)

• permissive (allows for top-ups)

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Royalties

• Failure of Licensee to meet minimums may result in mandatory

or permissive actions

• Termination of Agreement

• Revocation of exclusivity, territorial scope, etc.

• Licensee must “top up” royalty payments to meet minimums

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Representations and Warranties• Performance

• Link to Technical Specifications

• Time Limited

• Intellectual Property Infringement

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Indemnities• Intellectual Property Infringement

• Personal Injury

• Property Damage

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Infringement and Indemnity

• Licensee will want full IP warranty and indemnity

• Licensor will want to limit scope of indemnity

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Warranties

• Scope of warranties depends on nature of the license

arrangement

• Consumer products usually “as is, where is”

• High end or custom products have broader warranties

• Scope of warranties is always a point of contention between

the parties

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Warranties

• Minimum warranties may include:

• Licensor is the owner of all IP in the licensed materials

• Use will not infringe IP or other rights of a third party

• Licensed materials (e.g. software) will perform in accordance

with specifications or documentation – should be objective

and measurable – not mere promo materials

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Warranties

• Warranties may have time limitations – ties in with acceptance

testing

• May be limited remedies for breach of warranty – ties in with

maintenance and support

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Disclaimers

• Parties will want to disclaim all other reps, warranties express or

implied, and conditions not expressly set out in Agreement

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Term and Termination

• Life of the IP

• Specified Term

• Need enough time to commercialize the technology

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Term and Termination

• Must give careful consideration to what rights and obligations

should survive termination:

• Payment of royalties for existing inventory

• Audit rights

• Indemnity obligations

• Obligations of confidentiality and non-disclosure

• Limitations of liability

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General Terms/ Boilerplate

• Choice of Law

• Alternate Dispute Resolution

• Entire Contract

• Severability

• Compliance with Laws

• Force Majeure

• Assignment/ Change of Control

• Surviving Provisions

• Notices

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Some License Agreement Traps

• Joint Ownership of IP

• Contractor or employee ownership of the licensed technology

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Keys to Licensing Success

• Aligning the objectives of the agreement with the party’s

strategic objectives

• Proper resource allocation after deal signed

• Regular and full communication between the parties

• Addressing issues as they arise with flexibility and consensus

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Sales & Channel Agreements

Types of Distribution Arrangements

• Direct Sales

• Sales Reps/Sales Agents

• Resellers and Dealers

• Mass-Market Sellers

• Value-Added Resellers (VAR)

• Original Equipment Manufacturer (OEM)

• System Integrators

• Vendor Programs

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Sales & Channel Agreements (cont’d)

Key Terms

• Product Definition

• License Terms

• IP Infringement Indemnification

• Exclusivity

• Marketing Efforts

• Payments

• Limitation of Liability (dealing with the outrageous and asking for it yourself with a straight face)

• Exclusion of Warranties

• Termination

• Non-Solicit/Non-Competition

• Confidentiality

• Trade-Marks

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Product Definition

• What’s included and what’s not included

• Rights to receive Updates/Upgrades/Modifications

• Ownership of improvements, particular in OEM or VAR

arrangements where Distributor may make modifications to

Vendor’s Product

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Rights of Distributor with respect to your Product

• Right to reproduce/copy

• Right to modify

• Retain ownership of “improvements”

• Right to sublicense

• Specify terms of sublicense

• Survival of sublicenses on termination of Distribution

Agreement

• Third-party technology

• Who’s responsible for obtaining licenses from third parties

for third party material in the Product

• Pass on restrictions imposed by third parties to Distributor

and End Users

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Exclusivity• Dimensions of exclusivity:

• Geographic

• Product

• Field of Use

• Industry

• Cascades of refusal

• Requiring upfront prepayments and/or other “skin-in-the-game”

• The price of exclusivity is typically a minimum sales obligation

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IP Infringement Indemnification

• Protects the Distributor from liability if the Product infringes a

third party’s rights, typically patent rights

• Manufacturer may want an indemnity from an OEM or VAR if

they will modify the Product

• Scope of indemnity: If giving the indemnity, try to limit the

jurisdiction to U.S./Canadian IP Rights

• Indemnitor’s right or obligation to Repair/Replace/Modify if

commercially reasonable, if not commercially reasonable, then

Vendor may refund the purchase price

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Payments

• How is the Distributor compensated?

• Sales Agents typically earn commissions

• How are commissions earned?

• What sales are commissionable, and what are not, must

be clearly set-out

• Commissions paid only on revenue received by the

Manufacturer

• Is commission payable for some period following

termination?

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Payments

• Resellers are typically compensated based on their margin

• VAR’s and OEM’s may pay “Royalties”

• Typically a percentage of license fees received by the

Distributor

• Net Revenue versus Gross Revenue

• Minimum Royalties

• Requirement to keep records and audit right in favour of

Manufacturer

• Records and audit right to confirm compliance

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Termination

• Terminating distributors can be difficult, particularly where no

written agreement is in place

• Common law requirement to give notice

• Duration of notice dependent on certain factors which

include:

• exclusivity;

• duration of relationship;

• value of the product line relative to other lines carried

by distributor;

• effort; and

• expenditures incurred to build market

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Termination

• Optics are important – is the Manufacturer a “pirate” stealing

the fruits of the Distributor’s effort by terminating the

relationship

• Importance of documenting poor performance and

communication of expectations

• Termination for Convenience

• Termination for Breach

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Non-Solicit/Non-Competition

• Limiting Distributors ability to leverage its experience to assist a

competitor

• Needs to be reasonable in its duration and scope to be

enforceable

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Strategic Alliance & “Partnership” Agreements

What is a “Joint Venture”?

• Describes a wide variety of legal relationships

• Any relationship where two corporations agree to work together

to address a market, product, technology or resource

• Shared Risk, Shared Management, Shared Reward

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Why Form a Joint Venture?

• Frequently, developing and commercializing new products or

accessing a new market is too complex and expensive for a

company to do it alone

• Leveraging Resources, each party brings certain things to the

table:

• Money

• Intellectual Property Rights

• Personnel

• Access to Sales Channels

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Partnering for the start-up

• Obtain Funding

• Leverage Technology

• Access to Development Resources

• Take Advantage of Installed Base

• Credibility

• Access to Markets

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Concerns

• Loss of Control/Vision/Flexibility

• Loss of Upside

• Risk of Creating Competition

• Free Rider Concerns

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Structuring the Joint Venture

• Contractual Alliance vs. True Joint Venture

• True Joint Venture

• Separate Legal Entity (Corporation, Limited Partnership)

• Jointly Owned and Managed

• Contractual Joint Venture

• Relationship between one or more corporations defined

by contract (typically a “Joint-Venture Agreement”)

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Choice of Structure

• Tax Issues

• Flow through to JV v. Corporate Taxation

• Assignment/Divestiture of Assets to Corp. or retention

• Liability Issues

• Corporate vs. Individual/Joint & Several

• Structural/Control Issues

• Corporate Structure & Rules; Formalities

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Choice of Structure• Strategic Variables

• Fields of Use

• Geographic Territory

• Control of Development

• Many other

• Financial Variables

• Royalty/Profit Sharing

• Equity

• “Pre-Market Payments”

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Key Issues – Due Diligence

• Includes review of:

• Parties entering into the alliance and contributions

• Corporate/contracting documents

• Public searches

• Subsidiary(ies) and involvement

• Proprietary Rights of the parties

• Validity, Ownership

• Employee Confidentiality Agreements and Assignments

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Key Issues – IP Ownership

• Can be a difficult issue to deal with and should be carefully

considered in each case

• Avoid tendency to “jointly own” or to ignore the issue

• Consider “Pre”, “During”, and “Post” Rights

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Key Issues - Background IP

• Background IP of the parties needs to be protected and licensed subject to the terms of an appropriate license agreement

• What rights will be granted and how will the scope of such rights be limited?

• Exclusivity Issues

• Geographic

• Field of Use

• Sublicenses

• Restrictions

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Key Issues – Foreground IP

• Different IP Ownership Models

• One Party Owns, with license to the other Party

• Development and License Agreement set out each

Party’s rights

• Joint Ownership

• Complex

• Need to define the Parties rights in a “Joint-Ownership”

Agreement

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Key Issues – Foreground IP

• Joint Ownership Agreement (or terms to be included in the JV

Agreement)• Rights to exploit the IP

• The right to grant non-exclusive licenses to third parties

• Protection of the Intellectual Property

• Registration

• Enforcement

• Associated Costs

• Termination

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Other Key Issues

• Governance and Control

• Dispute Resolution

• Exit Strategies

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Q & A

• ?

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Thank you!

Thomas Prowse

613.783.8988

[email protected]

Robert Ford

613.786.0142

[email protected]

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