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Five tips for a successful license agreement

Your company has invested valuable time and resources in developing new biotechnology - now it's time to think about whether you should license out all or part of your rights in your new inventions. Why would you license your intellectual property rights to another party?

Licensing can benefit your company in many ways: licensing is a means of bringing in revenue that can help fund further research and development; you may only be using your technology for one application or field, and licensing to another party would provide an additional revenue stream; you don't have the resources to bring your product to market by yourself; your company only wants to focus on one geographic region, and licensing will allow broader distribution and sales of your product; and so on.

Susan Foster

If you decide that licensing is the right choice for your company, five steps can help you enter into a successful licensing agreement.

Choose a good licensee

Selecting the right company to whom you want to license your IP -- the licensee -- is critical. A good licensee has a solid base of experience to take the IP and run with it: your licensee should demonstrate experience in the specific area of your technology. Request that your potential licensee present a formal strategic plan as to how it will develop and market your technology. Your potential licensee should have substantial expertise in the field in which your product competes and in the geographic market(s) in which the licensee wants to sell your invention. Your licensee must have sufficient financial resources.

Use a term sheet

Think of a term sheet as a template or executive summary for the detailed legal documents that will ultimately be drafted. The term sheet should be drafted early in your negotiations. A term sheet ensures that you and the licensee are "on the same page" regarding the terms and conditions of the licensing deal. The term sheet should include all of the basic business and financial terms that make up the deal.

Term sheets generally should state that the terms are non-binding, except for confidentiality provisions. You don't want to contract on the basis of an outline of an agreement - there will be many important points that need to get hammered out in the full agreement. Be aware, in particular, if your potential licensee is outside the United States, that some countries tend to interpret term sheets as creating an agreement, or at least an obligation to invest time and resources in moving forward with the deal. Be sure to consult with your legal counsel before signing any type of term sheet. Ideally, bring your legal advisor into the term sheet process in its early stages.

Get agreement on the "big picture"

Get the big picture in place first when you sit down with your licensee to negotiate the term sheet. Make sure you and your licensee agree upon the definition of your intellectual property - what patents, know-how, copyrights, and possibly trademarks are involved? Will you transfer any technology or materials, or only license your legal rights? Will the license be exclusive? How will the parties share the risk (if at all) of developing the product and getting through potential regulatory hurdles? How much will you be paid? Be sure all parties are clear on how you will be compensated for the licensing of your inventions.

Pin down the license terms

Once you have addressed 'the big picture' issues, pin down the specific terms of the license agreement. Discuss and come to an agreement regarding the scope of the license - what countries are covered? What field can the licensee enter with your intellectual property? How long will the license last? If the license is exclusive, will you reserve the right to use the intellectual property yourself? Will your licensee be allowed to sublicense? If so, will you get a share of revenue form any sublicensing arrangements? Will your licensee's affiliates be allowed to use the intellectual property?

Pin down the money

There are a number of ways to capture revenue under a license agreement. As the licensor, you will probably want to receive some money -- or possibly equity -- upfront as a licensing fee. It is also common to tie other lump-sum payments to the licensee's achievement of certain milestones, such as filing an investigational new drug application, or the occurrence of particular events, such as meeting certain sales thresholds.

Most license agreements also require royalties to be paid. It's critical to get agreement on the base of the royalty. If it's net sales, what is included and what can be excluded from the calculation? If your technology will be combined with other technologies, will royalties be charged on the sale price of the entire product, or just one part? Your licensee may request a royalty-stacking provision, which allows the licensee to offset certain third party royalties that the licensee may have to pay. You may want to negotiate an annual minimum royalty to ensure a minimum payment stream.

Many licensors pass royalty terms directly through to sublicensees by calculating royalties on net sales, whether by the licensee or its sublicensees. Alternatively, you can take a percentage of whatever revenue your licensee receives from its sublicensees.

A well-negotiated license agreement can be highly valuable to your company. To ensure your agreement will be successful, it is important to confer with experienced legal counsel and set up a detailed and practical licensing framework for a solid long-term relationship with your licensee.

Foster is a technology transactions lawyer with Fish & Richardson's San Diego office.

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