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Craft a contract that yields maximum value for your technology

January 5th, 2011 · No Comments · eNews Platinum

It may seem like an over-simplification, but thorough preparation remains the most important step you can take to assure that your TTO extracts maximum value from its license agreements.

“You’ve got to prepare, prepare, prepare,” says Kevin M. Levy, an attorney with Miami-based Gunster Yoakley, where he co-chairs both the Technology Practice Group and the Emerging Growth Companies Practice Group. Levy and Gail Taylor Russell, JD, MBA, founder and partner of Austin, TX-based Taylor Russell & Russell, P.C., shared their expertise as part of an audioconference, “Secrets of Win-Win Contracts: Negotiating and Contracting Tips from the Tech Transfer Experts,” sponsored by Technology Transfer Tactics.

Due diligence in preparing for any contract negotiation, Levy says, should always include a thorough knowledge of your IP, its potential market, key “must-haves,” other issues you might be willing to negotiate, and a specific game plan and financial goal or target from the outset. But doing homework on the licensee may be the most important part of your preparation, he stresses. “The management team is the most important aspect to exploit your technology. Knowing them puts you in a better position,” Levy says.

NDAs not always boilerplate

Levy also cautioned against being too quick to print out and use a boilerplate NDA in the early stages of negotiation. “Not only do you want it to be an NDA, but you want it to be a ‘non-use’ agreement too.”

He recommends:

  • Narrowly defining the purpose of disclosure and use of the confidential information.
  • Avoiding provisions requiring that all confidential documents be marked “Confidential,” but adopting an internal policy for handling licensor and third-party disclosures and receipt of confidential information.
  • Excluding all warranties and liability with respect to the confidential information.
  • Insisting on an unlimited period of confidentiality for trade secrets.
  • Obtaining the licensee’s specific agreement as to your ownership of specific trade secrets.

What licensees want

Taylor Russell shared some of the licensee’s perspective so TTOs can understand their common requirements and head off potential negotiating snags. She highlights four basic factors that are often at the center of negotiating and contracting difficulties: time to market, freedom to operate, valuation, and potential ownership of improvements.

“I tell clients to write down the most important things [they want] to get out of the agreement,” Taylor Russell says. “What are the things I can give on? What don’t I want to give on? When you have that hierarchy, it makes it easier to get through the negotiations.”

Time to market is a key consideration for licensees that impacts valuation, because proven technology that has already been turned into a product or an advanced prototype is by definition more valuable and should garner higher licensing fees. The more development that must be done translates into more time, risk and, ultimately, lower licensing fees.

“If there’s a particular market where it’s important to get in quickly and get your money, in those areas time to market is the most important consideration,” Taylor Russell says.

Freedom to operate critical

Freedom to operate — the ability to practice the technology and sell the product or service that embodies the technology — is a must for licensees. “IP clauses must protect, not inhibit, the licensee’s freedom to operate. Most licensees will get a freedom-to-operate opinion, and the risk associated with licensing after the opinion must be factored into license price,” she comments.

Grant and scope of rights clauses are also often problematic, and TTOs must leave no room for interpretation, Levy adds. “The grant clause and scope of rights are very important because they talk about what’s going to happen to your IP,” he says. “Narrowly define the granted rights by being specific and unambiguous. You want to make it very clear what the scope of use is and include specific restrictions.”

Additional contracting tips he offered include:

  • Do not allow any transfer of rights unless you also include restrictions, such as the licensor’s absolute right, at his or her sole discretion, to pre-approve in writing any assignee or sublicensee.
  • Counter the licensee’s merger, acquisitions and loan argument with your need to know your potential “partner.”
  • Recognize that an overbearing non-transfer provision will affect the market for the licensee, which may also ultimately affect the university’s ability to reap rewards down the road.

Taylor Russell points out that for the license to have strong economic value — especially for a small company — the licensee wants the ability to freely transfer the license if their company is acquired. Your contract wording could read like this: “The licensee may transfer right to a third party that acquires substantially all the assets” of the licensee. She says that a licensee doesn’t want to have to get consent during acquisition negotiations because it introduces uncertainty and risk into those negotiations.

IP ownership presents sticky questions

Levy tells TTO negotiators to specifically state that all derivatives and improvements will be owned by the licensor regardless of who develops it and that the licensee will assign all rights to those improvements to the licensor. But from the licensee’s perspective, insisting on ownership of improvements can be a major sticking point, Taylor Russell says.

“What gets sticky is, what is an improvement?” she says. “For example, in the software world is an update or upgrade defined as an improvement? Be sure to have a clause that clearly defines this.” She adds that, to clear this hurdle, one option is to agree to negotiate these terms later on. While that can move a deal forward, you’re really just deferring the problem until later. One way to compromise is to limit the time period in which improvements are owned by the licensor, Taylor Russell says.

Indemnification guidelines

It’s a mistake, Levy says, to pass quickly over indemnification clauses — they are not all the same. Be sure this clause is very specific, Levy says, particularly in answering these questions:

  • Who controls the defense and settlement of a claim?
  • Who pays for the costs of defense and settlement of claim?
  • Can an indemnified party choose counsel (at its own cost) to assist the indemnifying party’s counsel?

It all comes down to royalties

When you get to the issue of royalties, “make sure you understand the royalty base if you’re doing running royalties,” Taylor Russell warns. She offers these specific observations and recommendations:

  • For technology that requires productizing, licensees will often request reduced or limited royalties for a reasonable period of time.
  • Risk allocation should be based on one up-front payment, a smaller up-front payment with a running royalty, or no up-front payment and larger running royalty rate. She prefers to focus primarily on running royalties, which allow both parties to avoid assessing a fixed value up front for the licensed technology. It also allows the market to determine the innovation’s true value.

Finally, Levy says strong contracts should always address the issue of dispute resolution. Spell out whether it will be handled via mediation, arbitration, or court action and include details regarding the governing law, venue, and jurisdiction. And, compensation for prevailing party attorneys’ fees should be well defined, leaving nothing to chance.

Contact Levy at 305-376-6094 or klevy@gunster.com; contact Taylor Russell at 512-338-4601 or gail@russell-law.com.

Editor’s note: CD and audiostream recordings of “Secrets of Win-Win Contracts: Negotiating and Contracting Tips from the Tech Transfer Experts,” complete with all handout materials, are available here.

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