Technology Transfer Agreements
The basics
2017
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This publication used material and/or info from WIPO. COPYRIGHT: IP CYPRUS, 2017 This document is not intended as a substitute for legal advice. It is essential in any technology transfer agreement to appoint a legal representative.
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Intellectual Property is an intangible asset which can be exploited in many ways. Technology licensing involves reaching an agreement on a complex set of terms, each of which has several possible solutions. Therefore advance preparation is essential. Four fundamental principles to be bear in mind when dealing with licensing:
Technology licensing is not necessarily synonymous with technology transfer. Technology licensing only occurs when one of the parties owns valuable intangible assets otherwise known as intellectual property There are different types of technology licenses. Technology licensing occurs in the context of a business relationship in which other agreements are often important.
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The parties The parties to a license agreement are the LICENSOR (the party who owns the intellectual property and gives the license) and the LICENSEE (the one who wants to use the intellectual property and wishes to receive the license).
What to clarify before negotiating Before beginning the technology licensing negotiations, it is important for each party to understand the expectations and the position of the other. Therefore, the following issues should be addressed: -
What is the reason for this license? How will this license agreement make money for each party? What outcome does each party want to avoid?
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What leverage does each party have?
What is the time frame for signing the license agreement? Is there any deadline due to a product launch? Must it be completed in time for an investment? -
What data/documents does each party need? What specifications/protocols/product sheets are relevant to the technology? What information related to the other party do I need? Are there any other similar agreements which may be relevant to the transaction?
Key Issues A) Subject Matter of the license. This may sound obvious but it is an underestimated issue that can give rise to disputes after the agreement has been signed. The licensor’s interest is to narrow the definition of what is being licensed. The licensee’s interest is in having a broad definition of the technology.
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The second question that must be addressed is whether the subject matterthat is licensed is in a completed format or whether there is more work to be done. Can the parties proceed with the technology in an incomplete form? (such as a partially written software?) In this case, it is advisable to have a separate or attached development agreement with clear deliverables/assignment of responsibilities and timetables. Further, who owns the IP that underlies the Subject matter. Does the licensor own what is being licensed to you? Do they have the right to license it to you? Do they have the right to license all other technologies that are needed to make the licensed technology work? Moreover, in case the licensor and licensee will be working together on a technology project or product creation (for example, a joint venture to develop a product together), it is recommended to specify in the agreement who owns what intellectual property and/or technology as of the time of the execution of the agreement. One of the relevant matters is whether the licensee will be able to receive rights to the future releases or versions of the technological product. Another important issue regarding the subject matter is how much information will need to be disclosed to the licensee regarding the technology.. Such information might be designs, technical specifications, scripts and other technical information. In this case, a Confidentiality Agreement might be required before the negotiation of the License Agreement. 6
Where the technology or product alone is not as valuable as the product distributed with a well-known trademark, then it is important to clarify whether a a license for the use of such protected trademark will be required as well. In this case, the negotiations must cover this license as well, and the trademark numbers and registrations must be included in the agreement.
B) What kind of rights does the license give. Once the parties have a clear idea about WHAT will be licensed, the next step is to clarify what they wish to DO with this technology. A license agreement includes several different rights, depending on the needs of the parties. These rights might include the right:
To reproduce the technology To display it To modify it To make derivative works from it To use it To Distribute or sell it To import and To sub-license it to another who can do any or all of the above.
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As intellectual property rights are mainly territorial, the parties should be clear about the territories of the use of the subject of the Agreement. The License Agreement must specify whether the rights of the Licensee are worldwide or limited to a designated country/jurisdiction. An essential term to decide is whether the rights given will be exclusive rights (as this might be important for the profitable plans of his business). If the Licensee wishes to have exclusive rights, the following options might work for the limitation of the negative aspects of an exclusive license:
The exclusivity can be depended on the licensee achieving certain minimum royalty payments or product sales The exclusivity need not last for the same term as the agreement and can be limited to a shorter time period during which the licensee can establish its business The exclusivity can be for only some of the grants of the agreement or only with respect to certain technologies.
C) Financial terms of license.
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The financial aspect is mainly dependant on the previously addressed subject and the scope of the license. In practical terms, it is usual for the parties to have different approaches on the valuation issue of a technology license. The value must be considered in the context of all other related transactions such as: if there is only an IP license or also a manufacturing and purchasing agreement, a marketing agreement, a distribution agreement, a joint venture etc. There are two main methods for the valuation of technology: the cost method and the income method. The Cost Method: This is calculating how much the licensor has invested in developing the technology and the intellectual property. The Income Method: This method involves calculating how much the parties expect will be earned by the technology that is to be licensed and then dividing this into percentages based on some notion of how much each party deserves based on its contribution to the technology, the stage of development of the technology, market risk, marketing, inherent value, strength of the patent against litigation attack, competing technologies and other such factors.
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Payment methods in a technology license agreement generally follow the route of royalties and/ or lump sum payments. Royalties can be based on per unit sales or on a percentage of revenues basis from products sold or sublicensed that incorporate the licensed technology. The licensee might want a provision “capping” the royalties that must be paid to the licensor. This means that the licensee will pay X percent of his product sales up to a fixed amount. This “cap” may be renewed annually. The licensee might prefer this option as it gives him the prospect of using the technology “free” after a certain period of time. Also it creates a more certain business model. On the other hand, it is common for the licensor not to prefer the cap fee option.
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The day after the execution of the License Agreement The Agreement is only the beginning of a complex, technology based business relationship. There are many key terms that require on-going attention after the signing of the agreement. Terms such as payment of recurring royalties, renewal date provisions, any post signing deliverables due, termination and expiry dates are all terms which need to be followed up and checked.
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