negotiating issues_negotiating licenses [compatibility mode]

Negotiating Licenses

David Wanetick

Managing Director

IncreMental Advantage

Cost Method

� Value of an asset is the cost to replace the

asset with an identical or equivalent asset

• Can take into account historical costs or current

costs to replace

� Original R&D costs

� Re-creation costs

� Replacement costs

� Design around costs

� Issues

• When do you begin counting time dedicated to

project?

• How much research is funded by grants?

• Learning from mistakes

• Inflation and deflation in costs

Cost MethodSeemingly Easy to Calculate

� Legal fees

� Application / registration

and other fees

� Personnel costs

Seemingly Easy to Calculate

� Preparation and

prosecution costs /

patents

� R&D Cost / patents� Personnel costs

� Development costs

� Production costs

� Marketing and advertising

costs

� R&D Cost / patents

� Preparation, prosecution

and R&D costs / patents

Cost Method

Cost Method

� However, accounting standards are not well-

suited to determining costs of developing IP

� Buying / developing research

� No other intangible costs are broken out on the income statement

� R&D expenses are acceptable by investors and there � R&D expenses are acceptable by investors and there are tax credits associated with R&D expenditures

� According to Booz Hamilton, only 15% of R&D expenses go to research

� The bottom line……cost does not equal value

� Nuclear powered aircraft

� Motorola Iridium satellite project

� Cellophane wrappers for lettuce

� Small percentage of patents have any value whatsoever

Cost Method – Negotiating Considerations

� Good for anchoring negotiations

� Useful for make/buy decisions

�Design around, the existence of a patent

increases design around costs

� More information about patent reduces costs

�Time to market

�Assurance of reaching the market

�Enhanced market position

Market Method

Build a Schedule of Similar Licensing Deals

License No. Revelancy Licensee Licensor Date of Royalty Royalty

No. Weighting License Rate (Low) Rate (High)

1 5 Corvero Networks Xbridge Software May, 2003 1% 5%

2 5 Marnetics Infotier.com October, 2002 5% 5%

3 5 Tech Laboratories Bernard Ciongoli et al. July, 2005 5% 5%

4 5 Link Plus Axiometric July, 2005 3% 2%

5 2 IXIA Netiq July, 2003 25% 50%

6 1 SWL Robert E. Pfister et al. October, 1993 16.5% 16.5%

7 1 Pegasus Solutions Global Enterprise Technology Ocober, 2000 20% 20%

8 1 Vicrev Technologies TA Technologies June, 2004 18% 18%

9 0 Falconstor Network-1 October, 2001 15% 20%

10 0 Acacia Patent Acquisition Telemate.net March, 2007 50% 50%

Market Method – Application Issues� Specific rights conveyed in transaction

� Arms-length transaction

� If no royalty is changed on intra-company transactions, the IRS may deem a market rate; often, a low royalty rate is applied to avoid this

� Competitor vs. new market

� Special financing terms available

� Economic conditions at the time of the transaction� Economic conditions at the time of the transaction

� Date of the transaction

� Inclusion of non-IP assets in transaction

� Functional characteristics of the guideline IP

� Stage of development of the IP

� Economic characteristics of the guideline IP

� Legal characteristics of the guideline IP

� Large vs. small sale; prosecution history; inclusion of know-how; distressed sale; lawsuit at baseline comparables

Income Method

� Discount rate

� Valuing the technology as part of a going concern -

lower discount rate

� Valuing the technology as a discrete economic unit –� Valuing the technology as a discrete economic unit –

higher discount rate

� DCF estimates are usually much higher than the results

from market comparables

� Should use sensitivity analysis, scenarios and

probabilities

Strategic Value� Determine the strategic value your technology / patents

represent for the licensor / licensee

• Patents are most valuable when they cause consumers to buy more of the product – PCs (replacement of a perfectly good product); increased utility for existing or new user (features on cell phones); when the patented feature is a primary factor in the demand for the product, i.e. the patent is the product (velcro, stickey notes)stickey notes)

• Impact on product portfolio

• Impact on manufacturing costs

• Royalty rate will vary depending on whether the licensee is a competitor or is opening up a new market

• Ramifications of a license agreement with a major player on the valuation or ability to receive funding by a smaller company

� Depends on number of license

• Tool to use to obtain lower costs of supplies

• How renowned the inventor is – aka provenance

Strategic Value� Determine the strategic value your technology / patents

represent for the licensor / licensee

• Blocking power

• Next best alternative

• What are you selling into?� Standards setting bodies vs. Business methods

� Battle – Broadcom vs. Qualcom� Battle – Broadcom vs. Qualcom

• Show licensee they can make more by paying a license

• A strong patent program indicates a successful R&D program which is an indicator of corporate earnings power

• It is during the reduction to practice that many obstacles to practical implementation are encountered, and the resulting solutions are the source of many inventions. Honeywell maintains a large engineering staff to help licensees implement its patent technology.

• Patent value is a function of what the portfolio already has in it

The Initial Negotiations

� Negotiating away from the table

� Strengthening leverage before negotiations begin

� Developing technology� PrototypingPrototyping

� Proof of principle experimentation

� Data acquisition

� Third-party validation

The Initial Negotiations

� Strengthening leverage before negotiations begin

� Securing a customer or financing

� Learning about the decision making of the other side

� Motivations of other sides – business and personal

� Accounting considerations� Accounting considerations� Royalties – paid out of cost of goods sold vs. upfront fees

can be amortized over the life of the IP

� Are decisions made at the business level vs. centralized

� Locating an internal champion

Opening the Negotiations

� Using intermediaries � Leverage their relationships

� A form of validation

� More familiar with preparing documents

� Who speaks first� Who speaks first

� Can poke holes in the other side’s opening

� If you disagree, don’t let them continue uninterrupted

� Risks of baiting impulsive behavior� Pie-in-the-sky technology

Opening the Negotiations

� When negotiating against a machine, lubricate the machine� Get your story straight – strong patent (opinion letter), financial

models, independent validation

� Understand timelines and roles of players

� Know how the other side works � Know how the other side works

� Always be hard on the problem but soft on the people

Early Stages of Negotiations

� NDA� Difficult to obtain

� May already pursue technology, idea might be in the public domain, someone else may approach them with the idea

� Classify invention as a trade secret, to get two causes of actions if there is a violation

Breach of contract and misappropriation of a trade secret� Breach of contract and misappropriation of a trade secret

� Bringing a Lawyer� Form of legal validation

� Threats

� Modulating of expectations

Early Stages of Negotiations

� Memorandum of Understanding / Letter of Intent� Binding is questionable

� Gating mechanism

� Reduced impact of changes in players on the other side, puts negotiations on a track

� Jeopardize agreementJeopardize agreement

� Could handicap your own negotiating strategy

� Potential licensees can pay for an option to have a first look at the technology� Pay filing fees

Licensing Check List

� Do you own the intellectual assets?

� Do you have the rights to license or sublicense?

� Do you have the right to practice?

� Do you suspect infringement? [if so, licensing strategy will be very different]

� What prior obligations/encumbrances exist that stand in � What prior obligations/encumbrances exist that stand in the way of licensing?

� What is the status of the patents and pending cases in all jurisdictions?


� Identify and inventory all the supporting intellectual property

� Know-how, trade secrets, trademarks, research reports, etc.

� What other technologies do you own that are related or linked to this technologylinked to this technology

� What rights are you licensing?

� What rights and/or assets do you want to keep out of the offering?

� Is technology cleared by regulatory authorities?

� What samples are available?

� Compare against the next best alternative?


� What are the potential market segments (fields-of-use)

� What are the value drivers in the market?

� What are the benefits (quantify)?

� What is the value chain in the industry

� Who are the high value licensee prospects?

What other assets can be included to add more value to � What other assets can be included to add more value to the offering

� What are the strengths, weaknesses, opportunities, threats from licensing to others

� What is the value of the technology

� Value created in the market (licensee)

� Value share for your company (licensor)

Licensing Specific Issues� Research Development

� Licensee pays licensor to develop

� Cost vs. cost-plus

� Penalties for non-performance

� No more milestones

� Lose window of opportunity for product

� Licensor pays licensee to develop

� Penalties for non-performance

� Late payment penalties

� Reclaim product and their data

� Step-Up Royalty Rates� Good for licensees who have high initial capital costs

� Can be matched with requirements that certain expenditures will be made by licensee

Licensing Specific Issues

� Step-Down Royalty Rates� Suitable when licensee has manageable initial capital costs

� Incentivize licensee to scale operations

� Minimum RoyaltiesLicensee is incentivized to commercialize� Licensee is incentivized to commercialize

� Licensee is disincentivized to design around

� Royalty Stacking� Licensee can reduce its royalty payments to licensor by a

percentage of its future royalty obligations

� There are usually floors

� Can be applied to other stipulations in the license agreement such as milestone payments


� Sublicenses� Veto rights

� More opportunities to collect royalties

� Sometimes primary licensee does not pay a royalty itself but rather contracts with derivative licensees

� These third generation licensees should be covered by royalty auditsThese third generation licensees should be covered by royalty audits

� Selling to distributors – lower prices than end customer will pay

� Most favored nation license� Licensee only pays lowest current royalties or no future

licensees will be granted lower royalty rates

� Risk of anti-trust challenge


� Fields of use� In early stages

� Harder to split fields of use because licensee’s investment is too big

� Licensee wants sufficient room to experiment

� Licensee will want full fields of use, not want full disclosure because there could be less lucrative solutions that will destroy the pricing power of a lucrative market

� Licensors must be careful that they don’t do quick deals too early because they need the money; they might license to a company that will introduce a product at an inexpensive price; could destroy the pricing power of a large market segment (in medicine – same dosings, same formulation, same administration is a problem) and therefore lose a lucrative licensing opportunity


� Fields of use� Licensor could diversify its risks by having many fields of use

licenses

� Licensor could negotiate for higher royalties on subsequent licenses if initial licensees prove technology

� Broad, then retractable� Broad, then retractable

� Narrow, then right of first refusal

� Litigation� Non-exclusive licensees

� Have no standing to sue

� Exclusive licensee insists on right to defend

� Usually have more resources

� Licensor insists on right to defend


� Cross-licensing

� Benefits

� Less risk of litigation

� Less R&D costs since there is less work-around� Less R&D costs since there is less work-around

� Barriers to entry for new competitors

� Concerns

� Give competitors access to your IP

� Harder to assert later – not standing on right to exclude –harder to receive an injunction


� Grant-backs� Only granted to big companies

� Difficult to use in Europe

� Insurance

� Basic definitions� Sales

� Annual


� Have-made rights� Right to sub-contract for the manufacture of the product

� Product liability issues

� Right to inspect vs. requiring licensee to adhere to standards

� Change of control

� Tight control of volume of production� Tight control of volume of production

� Handling of disposability of defective products, excess materials

� Trade secrets

� Improvements are made after patent filings, licensees want this information


� Combining licenses with consulting agreements� Assignee can become more active in commercializing the

technology

� Can include confidentiality

� Know-how can’t be found to be invalid – possible anti-trust issues when the know-how becomes widely knownissues when the know-how becomes widely known

� Issue – one licensing rate or two

� New technology – Development Agreement, new entity

� Defense against MedImmune

� Duration of licensing agreement� Extending – perpetual license based on pending patents, foreign

patents or weak patents with lots of time remaining

� Terminating – notification; 8 years from filing or 5 years from first sale


� Consider the Possibility that the Licensee will file for Bankruptcy Protection

� Write in “license will terminate if the licensee files for bankruptcy protection”

� This may not be enforceable due to the IPSO FACTO rule� This may not be enforceable due to the IPSO FACTO rule

� However, licensors want to be the squeaky wheel

� Licensor should receive consideration in return for granting consent for the assignment of its license if the licensee goes into bankruptcy

� Licensor should be aware of res judicata – must object when bankruptcy court is moving in an director adverse to the licensor’s interests

Compliance� Compliance issues should be considered during the

negotiating, not as an afterthought

� Royalty audits� Audits should be conducted early in the relationship

� Disputes should be addressed within the framework of regular meetingsmeetings

� Calculation of royalties should conform to licensees accounting practices

� Surveys and self audits are intermediate steps

� Usually work on commissions

� Letters should be sent out immediately after audit comes back – shows you believe in audit, deprives licensee of excuse to delay payment

Compliance

� Royalty Audits

� Some companies are sloppy in their payouts� You might owe the other side money

� Local laws may inhibit discovery

� Royalty audit included with accounting audit� Royalty audit included with accounting audit� Less aggressive, maybe management wants it that way

Contact Information

David Wanetick

Managing DirectorManaging Director

IncreMental Advantage

[email protected]

negotiating issues_negotiating licenses [compatibility mode]

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