June 10, 2009June 10, 2009

©2009, Thomas A Briggs. The contents of this document are proprietary and should not be duplicated or shared without express permission from the author.

Fundamentals of Licensing Transactions – for Business Executives and Startups

Thomas A. BriggsPartner & Practice Leader: Licensing and Technology Transactions

“Hey, who is this guy?” Worldwide co-chair of Licensing and Technology Transactions portion of Jones

Day’s IP Practice AreaRecent “big” disclosed deals:

• Micron’s JV with Intel to make flash memory

• Bayer strategic alliance with Schering-Plough

• IBM’s sale of its printer business to Ricoh

• Micron’s JV with Nanya to make DRAM

• Eolas Technologies patent license to Microsoft for IE Led the IP aspects of over 70 mergers, acquisitions, venture capital and

private equity deals in each of the last 5 yearsClients include Athersys, Bunge, Celgene, GeoBiotics/GeoSynFuels, Gennum,

IBM, MedImmune, Micron, Nielsen Company, Resilience Capital, Riverside Partners, Thales

Former chemical engineer and manager for Union Carbide and Praxair Former in-house counsel and chief IP officer for MA Hanna Company and

Polyone Corporation Current biography @ www.jonesday.com/tabriggs

Licensing Transactions

Collaborative• Joint Development

• Cross Licenses

• Strategic Alliances

• Joint Ventures

• Patent Pools

• Ancillary to purchase of business

• Entry into new technology/business

Coerced• Litigation settlement

• Response to a “letter”

Primary Business Goals of a License Agreement

Define the fundamental economic and technical relationship between the parties

Establish the procedures to be taken to protect and exploit the licensed IP

Describe how the relationship between the parties will be monitored, regulated and terminated

Product Life Cycle

Licensor Range Scope of Activities

Licensee Range

R&D Scale Mfg Market Dist Service Reg

Example: Contract Manufacturer

Licensor

Licensee

Licensor

R&D Scale Mfg Market Dist Service Reg

Ex: Licensor = Research Institution

R&D Scale Mfg Market Dist Service

Licensor

Licensee

Sublicensee(s)

Reg

Ex: Licensor = Startup Company

Licensor

Licensee

Sublicensee(s)

Distributor(s)

R&D Scale Mfg Market Dist Service Reg

Elements of Typical License Agreements

Parties Background/Recitals DefinitionsDefinitions

• Licensed IP

• Licensed Products License GrantLicense Grant

• Exclusivity

• Fields (Products/Territory/Qty)

• Sublicensing Improvements Compensation/RoyaltiesCompensation/Royalties Records and Reports Termination

• Causes

• Post termination

Certain Obligations/Covenants

• Technology TransferTechnology Transfer

• Control of materials - EscrowControl of materials - Escrow

• Confidentiality

• Efforts to commercialize

• Marking/Quality Control

• No Contest Prosecution Litigation

• Defensive

• Offensive Warranties/Indemnity Miscellaneous

• TransferabilityTransferability

• Governing Law

• Dispute Resolution

3

1

2

5

4

Organization of What Follows…

Topics 1 (Common Definitions) and 2 (License Grant) for Life Sciences

Topics 1 (Common Definitions) and 2 (License Grant) for Software

Topic 3 (Compensation) for Life Sciences then Software and other industries

Topic 4 (Transfer/Control of Materials)

Topic 5 (Transferability)

Topic 6 (Due Diligence)

Topic 1: Common Definitions – Life Sciences

“Licensed Patents”

• Identify invention disclosure(s) or patent application(s) that describe the patented or patent pending invention(s)

• Identify all patents that are licensed

“Licensed Patents” means U.S. Patent Application Serial No. 06/000,000, all divisionals, continuations, continuations-in-part, and other applications claiming priority thereto or the invention described therein anywhere in the world, and all patents or equivalents thereto recognized by any governmental authority issuing from any of the foregoing, including all extensions, reissues and reexaminations of any of the foregoing.

Common Definitions – Life Sciences

“Licensed Technology”

• Identify all unpatented technology that is licensed, if any, including documents and other materials (e.g., biological or pharmaceutical materials or software code)

• Subject to trade secret (until published) and copyright protection

“Licensed Technology” means all technology, information, data and materials relating to the research, development, manufacture, use, regulatory approval, marketing or sale of [the products] owned by Licensor or licensed to Licensor with the right to sublicense and all trade secrets and copyrights therein.

Common Definitions – Life Sciences

“Licensed Product”• Scientific description• Related to the licensed IP – somehow

Covered by any claim of a Licensed PatentMade using or incorporating any of the Licensed Technology

• Often used as basis for calculating the compensation due to the Licensor

“Licensed Product” means any diagnostic, prophylactic or therapeutic (a) the manufacture, use, sale, offer for sale or importation thereof would infringe upon a claim of any of the Licensed Patents (but for the license granted hereunder) or (b) that is made using, contains or otherwise incorporates any of the Licensed Technology.

Common Definitions – Life Sciences

“Territory” – Geographic (usually by country)

“Field” / “Field of Use” – Limitations on applications of the rights licensed:

• Prevention, diagnosis and/or treatment of disease in humans (and/or animals)

• Specific diseases/conditions

• Research and non-commercial purposes

Financial definitions – Topic 3

Topic 2: License Grant – Life Sciences

Rights: depend upon type of IP licensed Rights: depend upon type of IP licensed

Degree of exclusivity

Type of products or processes; quantity

Territory; reserved accounts

Compensation

Grant-back to improvements

Extend to affiliates (current or future?)

Sublicensing

Patent Rights

MakeMake UseUse SellSell Offer to SellOffer to Sell ImportImport “ “Have made”Have made” Patent pending? Published? Market? Advertise/promote but not sell? Distribute? Transport? Sell at wholesale? Violation = Infringement

Trade Secret Rights

Use/access Use/access information

Disclose Disclose it to others

Violation = Misappropriation

Copyright Rights

Copy/reproduceCopy/reproduce

Distribute/publishDistribute/publish

Create derivative worksCreate derivative works

Public displayPublic display

Public performancePublic performance

Market? Sell?

Violation = Infringement

Trademark Rights

UseUse

Market? Distribute?

Violation = Infringement

Topic 2 (cont.): License Grant – Life Sciences

Rights: depend upon type of IP licensed

Degree of exclusivityDegree of exclusivity

Type of products or processes; quantity

Territory; reserved accounts

Compensation

Grant-back to improvements

Extend to affiliates (current or future?)

Sublicensing

Degree of Exclusivity

Exclusive: Exclusive of the Licensor? Sole or Semi-exclusive: Licensor + 1 Non-exclusive: multiple Licensees “Co-exclusive”: 2 (but not Licensor) Restrictive covenant(s): “Licensor shall not…” Exclusivity usually leads to minimum performance requirements by Licensee

Exclusivity can vary among rights granted (e.g. sole right to make and non-exclusive right to sell)

Topic 2 (cont.): License Grant – Life Sciences

Rights: depends upon type of IP licensed

Degree of exclusivity

Type of products or processes; quantity

Territory; reserved accounts

Compensation (Topic 3)

Grant-back to improvements

Extend to affiliates (current or future?)

SublicensingSublicensing

Sublicensing – Life Sciences

General Rule: No right to sublicense without consent of Licensor

Can distinguish among the rights licensed “Have made” ~ sublicense to right to “make” Conditions on sublicensing (w/ or w/o consent) is prudent:

• Form of sublicense; certain obligations passed through

• Notice to Licensor – before or after sublicense grant

• Effect of termination of prime license

• Sharing of revenues from sublicensee(s) Distinguished from assignment or transfer of the entire

agreement

Ex: License Grant Clause – Life Sciences

“Subject to the terms and conditions of this Agreement, Licensor grants to Licensee a license under all rights in the Licensed IP throughout the Territory solely within the Field.

The foregoing license is exclusive to Licensee, including exclusive of Licensor.

The foregoing license includes the right to sublicense to Affiliates of Licensee.”

“Subject to…” = term/termination, royalties, field, territory

Ex. License Grant Clause – Life Sciences

“Licensor grants to Licensee a worldwide, royalty-bearing, non-transferable, exclusive license, including the right to sublicense, under the Licensed Patents solely to make, use, sell, offer for sale and import the Licensed Products in the Field in the Territory.

Licensor further grants to Licensee a non-exclusive license to use and copy the Licensed Technology for its internal purposes as reasonably required to exploit the foregoing rights granted under the Licensed Patents.”

Topic 1: Common Definitions - Software “Licensed Product” = Software

• Usually specified by the trademark of the software as it is marketed generally, and a particular version, which is usually the most recent generally released version

• Not usually the basis for calculating the compensation due to the Licensor

Specific technology and patents are NOT usually specifically identified, but rather all IP rights of Licensor are included

“Software” means the software marketed as of the Effective Date under the trademark SOFTWARE in the version generally released as of such date.

Common Definitions – Software “Territory” – Geographic or locations of licensee “Field” / “Field of Use” – Limitations on the rights licensed:

• Use of the object (executable) code only for internal operations, not others

• Copying the code for backup purposes only

• Limited copy and/or modification of the documentation for internal use only

“User” – who within Licensee can use the software

• Enterprise (everyone in the Licensee)

• Named Users (certain identified people)

• Concurrent Users (quantity of users at the same time)

• Seats (total number of users that can use at any time)

• Usually serves as the measure on which royalties are calculatedUsually serves as the measure on which royalties are calculated Financial definitions – Topic 3

Topic 2: License Grant – Software

Rights: Rights: generally not specifically identified, but instead are granted to all IP rights of the licensor

Usually non-exclusive, unless custom-developed To use the Software within limitations (or to access and

use in cloud computing) To copy the Software for backup (non-cloud) To modify and copy documentation for internal

distribution only Usually no sublicensing The rights EXCLUDED are often lengthy (see example) “Shrink-wrap” and “click-wrap” licenses “Open Source” – free use, but with conditions

Let’s take a break!

Topic 3: Compensation – Life Sciences

Upfront fees – technology transfer Milestones

• Development

• Sales Royalties:

• Fixed per unit made or per volume processed

• Fixed per unit sales

• Fixed portion of profits (25% rule)

• Variable (volume, time, exclusivity) Manner of payment: $, “in-kind” Timing of payment

“Net Sales” and “Net Profits”

“Net Sales” = gross revenues from ($ invoiced or collected) sale of Licensed Products LESS:

• duties, tariffs, sales tax, VAT

• discounts, rebates, returns actually given

• transportation and insurance

• installation charges?

• distribution or sales agent fees?

• maintenance fees for statutory rights?

• service and parts revenues? “Net Profits” = Net Sales LESS:

• cost of goods sold (labor and materials and allocation of indirects) There are no “standard” definitionsThere are no “standard” definitions

Risk Shifting with Royalties

–$/unit made

–$/unit sold

–Gross sales ($ invoiced)

–Gross sales ($ collected)

–Net Sales ($ invoiced)Net Sales ($ invoiced)

–Net Sales ($ collected)

–Net Profits (Net Sales less cost of goods sold)

Pro-Licensor

Pro-LicenseeF

inancial Risk

to Licensee

Royalty-Related Provisions Favorable to LicenseeLicensee (recipient of license)

No upfront or fixed fees Maximum/cap: time/paid up Combination products: % of sales Stacking/offset: deduction for royalties paid to others “Most Favored Licensee” Sales between affiliates included “Sale” occurs when money is collected, not invoiced or

shipped No minimums Failure to achieve minimum: convert to non-exclusive rather

than termination Pass through of same royalty rate for sublicensees

Royalty-Related Provisions Favorable to LicensorLicensor (grants the license)

Upfront or fixed fees No maximum/cap or term for payments No reduction for combination products No deduction for royalties paid to others No “Most Favored Licensee” Sales between affiliates excluded “Sale” occurs when product is invoiced or shipped Minimum payments (for exclusivity) Failure to achieve minimum leads to termination High % of whatever Licensee receives from

sublicensees, subject to minimum

Example Financial Terms – Life Sciences Upfront fee: amount is highly dependent upon current state of

development and sunk costs of Licensor to date; $ or % equity Common development milestones: amount is dependent upon sunk costs

of Licensor and market potential as risk of development ↓

• Filing of NDA: $ (within x days after achievement)

• Initiation of Phase I: $

• Initiation of Phase II: $

• Initiation of Phase III: $

• Filing of BLA: $

• Regulatory Approval: $

• First Commercial Sale: $ Royalties: increasing rates common (0-250k/yr; 250–500k/yr, etc.) Sales $ Milestones: total annual sales > X; total accumulated sales > Y Sublicense fees: X% of whatever compensation licensee receives from

sublicensees, but not less than the royalty

Life Science Industry Examples

Form 8-k SEC filings and foreign equivalents disclose material amounts – publicly available

Sometimes companies to an agreement disclose certain types of payments

Industry publications report public information, e.g. BioWorld, IMS Drug News, Contract Pharma

IP valuation firms and accountants aggregate public and non-public information

Some recent examples… So, what is right for your deal?

Topic 3: Compensation – Software

Users

• Enterprise flat fee

• Flat fee per location

• Named, Concurrent, or number of Users Cloud Computing (SaaS f/k/a ASP)

• Number of transactions processed

• Amount of time used or accessed Occasionally, royalties Same/similar rates for like users Maintenance and Support – separate fee Manner of payment: $, “in-kind” Timing of payment

Topic 3: Compensation – Other Industries?

Common:

• Technology transfer fee

• Upfront license fee

• Royalties Compensation varies due to:

• Degree of exclusivity

• Breadth of Field

• Availability of competitive technologies

• Strength of IP protection

• Bargaining power

• Other parts of the license agreement (termination, warranties, indemnities, transferability, etc.)

Topic 4: Transfer/Control of Materials

Rights to tangible materials separate from IP rights licensed Transfer of the physical materials required to exploit the

rights licensed

• Licensed Patents – anything?

• Licensed Technology Development records Manufacturing and QC records Biological and chemical materials Software code – object or source

Licensee restrictions on access, use, etc. Mechanics of transfer

• To the licensee: when, where, how,

• To an independent third party = escrow

Escrow

“Deposit”: Licensor deposits physical forms of Licensed Technology to an independent third party, rather than the Licensee

• Life Sciences = biological materials and documentation

• Software = source code and documentation “Updates”: Obligations of Licensor to update the deposit

to reflect current state of the Licensed Technology “Verification”: Degree to which the escrow agent verifies

the contents of the Deposit “Release”: Distribution of the Deposit to the Licensee upon

certain trigger points Enables licensee to maintain benefit in Licensor

bankruptcy or breach of transfer obligations Fees charged by escrow agent are a function of Deposit,

Updates and Verification and other obligations

Topic 5: Transferability

General Contracts Rule: Contracts are assignable unless they state they are not – silence permits assignment

Licensee Exception: Licenses are NOTNOT assignable by the Licensee (without consent of Licensor) unless the license agreement states that the license is assignable

Under some state laws, like California, a change of control by merger (or other mechanism defined as an assignment) can be an “assignment”

Young companies (and some mature companies), especially those backed by VC-funding, need the ability to transfer the agreement in connection with a sale of the company

Bankruptcy: Assumption by debtor-in-possession prohibited without consent? Assumption followed by assignment?

What is reasonable? Licensor vs. Licensee perspectives

“Assignment Clause” Variations

Silent – no assignment clause at all (prohibits licensee) “This agreement is not assignable by either party without

the consent of the other party” “This agreement is not assignable by either party without

the consent of the other party, such consent not to be unreasonably withheld or delayed”

“This agreement is not assignable by either party except in connection with the sale of substantially all of the assets of the party seeking to assign”

“This agreement is not assignable or otherwise transferable by either party except in connection with the sale of substantially all of the assets, a merger or sale of controlling interest of stock of the party seeking to assign or otherwise transfer its interest hereunder”

Topic 6: Due Diligence By Licensee (recipient)

Technical diligence• Does the technology work as advertised?

• Do development records support conclusions?

• Do development records support data filed with governmental authorities or standard-setting bodies?

• What tangibles are required for an effective technology transfer?

Legal diligence• Ownership of the subject matter licensed (and the ability to license it)

Assignment records publicly recordedNews re: prior licensing activitiesInternal licensor development records

• Degree to which patent claims and trademarks prevent competition

• Countries of registrations and patent filings

Topic 6: Due Diligence By Licensor (owner)

Financial condition of the licenseeAbility to exploit the license

• Complete development

• Obtain and sustain regulatory approvals

• Market

• Distribute/sell products

• Support/service customers and productsMotive for obtaining the license – reputation as a licensee

Ability of licensee to maintain confidentiality

Questions? Parties Background/Recitals Definitions

• Licensed IP

• Licensed Products License Grant

• Exclusivity

• Fields (Products/Territory/Qty)

• Sublicensing Improvements Compensation/Royalties Records and Reports Termination

• Causes

• Post termination

Certain Obligations/Covenants

• Technology Transfer

• Control of materials - escrow

• Confidentiality

• Efforts to commercialize

• Marking/Quality Control

• No Contest Prosecution Litigation

• Defensive

• Offensive Warranties/Indemnity Miscellaneous

• Transferability

• Governing Law

• Dispute Resolution

Contact Information

Thomas A. Briggs (Tom)

Jones Day

12265 El Camino Real, Suite 200

San Diego, CA 92130

(858) 314 – 1164

tabriggs@jonesday.com