Negotiating License Agreements

First Publication Date: 9th December 2010This is in furtherance of my post on drafting patent licenses. The final deal in a license transaction depends on how well a person can negotiate and not on what is fair. “You get what you bargain for and not necessarily what is fair.” Therefore, preparation for a license negotiation and negotiation skills play an important role in the final outcome.

The first step towards preparing for a license negotiation is patent strength evaluation. A Licensor or Licensee must be well aware of the strength of his patent or portfolio in the light of other patents. A landscape or a map with respect to the strength of the patent would be very helpful in defining the direction of negotiation. Any strengthening of the patent through modification of claims must be done by the Licensor before the negotiation begins. The same applies to the Licensee as well.

Assessment of the monetary value of the patent or portfolio is another important step for negotiation. It must be borne in mind that the value of a patent depends on its utility for a party and factors such as market size, invention’s value and so on are external factors. A licensee would be willing to pay based on what he can pay and the capability of the licensee will determine the nature of license terms. For example, a patent may be worth ten crores but if the licensee’s access to business is only 1 crore, his licensing fee capability will be less than that. In such a situation, the licensor would want to give only a non-exclusive license with use limitations.

Understanding the other party’s background and reach is very important for a successful negotiation. Participants in a license must include patent licensing experts in addition to other business personnel. A deal that is not legally enforceable would not add value to either party and a patent licensing expert will ensure that the deal is within accceptable legal limits.
A licensing term sheet that helps in license negotiations is provided hereunder for your reference.

Basic Term Sheet for negotiation

1. Grant

a. Type of License
b. Rights granted
c. Territory
d. Period
e. Sub-licensing

2. Royalty

a. Type of royalty
b. Mode of payment
c. Audit
d. Report
e. Late payment and interest and
f. Patent prosecution and maintenance.

3. Term and Termination

a. Term – start and end dates
b. Mutual termination
c. Termination by default
d. Termination by convenience
e. Conditions of termination
f. Post termination duties

4. Confidentiality

a. Conditions
b. Permitted purpose
c. Transfer
d. Return
e. Survival
f. Authorization

5. Intellectual Property

a. Background IP and Transfer
b. Foreground IP and Transfer
c. Jointly created IP IF ANY AND CONDITIONS
d. Grant back

6. Indemnity

a. Type of indemnity
b. Conditions
c. Limitations

7. Liability

a. Type of liability
b. Limitations
c. Extent

8. Warranty

a. Tye of warranty
b. Conditions
c. Limitations

9. Notice

a. Address
b. Change of communication

10. Dispute resolution

a. Litigation
b. Arbitration

11. Law and Jurisdiction

a. Applicable law
b. Court jurisdiction
As a preparatory step for negotiation, every party may prepare an ideal provision with respect to each of the said entries and decide on the extend of permitted flexibility. It must be borne in mind that the scope of negotiation with respect to a specific term or condition in a license typically depends on the stature of teach party and the circumstances of the negotiation.

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