NEGOTIATIONS AND LICENSING

The purpose of any licensing negotiations is for both sides to identify clearly what each wants from the commercial arrangement they intend entering into.
1. THE TEAM
  1. It is unwise to negotiate on your own, as points and issues may arise that you are either unsure of or misinterpret.
  2. Decide on who will lead the negotiations and outline the process the team should follow in accepting or rejecting proposals during the negotiation.
  3. It is best to appoint a small team
2. NEGOTIATING
  1. The process begins with discussion on the main points that must be agreed and usually extends over a period of time
  2. May need to meet in person at some point in between, if discussions become too complex toresolve certain issues on the phone.
    1. It is important to avoid beginning negotiations with the exchange of a template licence agreement as the initial draft document.
  3. The Agreement reflect all the essentials of the business transaction that both parties seek agreement on
    1. The negotiations shouldfocus on one item at a time until agreement is reached
      1. The contract must fulfil three essential elements. There must be: Terms of exchange specified for the bargain; Something of value exchanged; and Mutual exchange.
1. Licence Fee (also referred to as ‘lump sum’, ‘down payment’ or ‘upfront fee’)
  1. Is a payment that,typically, is separate to royalty payments.
  2. licence fee is usually a set fee which all licensees pay
  3. An be agreed in a number of alternative ways
    1. *Cost of patents to date (or a percentage of these) or cost of research to date (or a percentage of this);A once-off non-refundable fee;among others.
2. The licence fee is intended to reflect a number of considerations: Payment as a security or sign of intention that the licensee is committed to commercialising the technology;A payment towards a portion of the expenditures already committed by the licensor.
Royalties
1. They are based usually on a unit, a volume or a weight of sale – the ‘royalty base’. As seen in , the ‘25% rule’ Chapter 16 approach is used frequently for the negotiation of a royalty.
2. This necessitates an appreciation of the operating costs, the likely sales price and the net margin for the product from the technology being licensed
3. Setting the Royalty Rate
  1. In setting the royalty, consideration must be given to the end-use or application of the product or technology.
4. Minimum Royalty
  1. A minimum royalty can be based on this market forecast.
  2. A minimum royalty may be appropriate in a situation where the technology is at the pre-market
  3. It also ensures that the licensee will do what is necessary to take it to market as early as he can, so that the minimum royalty is covered by sales revenues as soon as possible.
  4. Resetting Minimum Royalties
    1. In the event that the minimum royalty is not achieved, partners usually build some scope into the licence agreement for renegotiation of the minimum royalty on reasonable terms,
HEADS OF AGREEMENT
1. Before any exchange of agreement templates begins, it is essential that a ‘Heads of Agreement’
2. The key elements that should be discussed between the parties to establish the main points of the agreement
  1. It is important to be brief and specific on the points and to avoid the temptation to express them in legal formulations.

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