top 10 legal challenges ttos face in licensing and commercializing ip rights october 8, 2009 savery...

Top 10 Legal Challenges Top 10 Legal Challenges TTOS Face In Licensing And TTOS Face In Licensing And Commercializing IP RightsCommercializing IP Rights

October 8, 2009October 8, 2009

Savery M. Gradoville, Esq.Steptoe & Johnson LLP

© 2009 Steptoe & Johnson LLP. All Rights Reserved.

Savery M. Gradoville, Esq.Savery M. Gradoville, Esq. 22

Context for licensing opportunities Context for licensing opportunities for IP rights for IP rights

Licensor – what IP rights are competitive in the Licensor – what IP rights are competitive in the commercial marketplace?commercial marketplace?

Assess whether and to what extent their IP rights infringe or Assess whether and to what extent their IP rights infringe or may be infringed by the rights of othersmay be infringed by the rights of others

Assess whether competing rights have advantages or Assess whether competing rights have advantages or disadvantages over their IP rightsdisadvantages over their IP rights

Competing licensors’ strengths and weaknessesCompeting licensors’ strengths and weaknesses

Assess whether IP rights may be expanded to fill in any gaps Assess whether IP rights may be expanded to fill in any gaps revealed from due diligence investigationsrevealed from due diligence investigations

Assess the extent of IP rights’ protection in potential Assess the extent of IP rights’ protection in potential Licensees’ jurisdiction(s)Licensees’ jurisdiction(s)


Context for licensing opportunities Context for licensing opportunities for IP rightsfor IP rights

Licensee – what are the available opportunities Licensee – what are the available opportunities for licensing IP rights?for licensing IP rights?– Assess the extent to which various IP rights infringe Assess the extent to which various IP rights infringe

other IP rightsother IP rights– Assess if competing IP rights have advantages or Assess if competing IP rights have advantages or

disadvantages over a Licensor’s proposed applicationdisadvantages over a Licensor’s proposed application– Identify possible licensors and their strengths and Identify possible licensors and their strengths and

weaknessesweaknesses– Circumvention of IP rights to avoid having to license Circumvention of IP rights to avoid having to license

themthemAre, and if they are, to what extent are IP rights protected in Are, and if they are, to what extent are IP rights protected in the licensed territory?the licensed territory?


Primary Negotiation Advantage Primary Negotiation Advantage from this Due Diligence Inquiryfrom this Due Diligence Inquiry

Ability in negotiation to raise or speak to the Ability in negotiation to raise or speak to the advantages of competing IP rights and/or advantages of competing IP rights and/or disadvantages of IP rights being offered for disadvantages of IP rights being offered for licensing to weaken the other party’s bargaining licensing to weaken the other party’s bargaining positionpositionSources – patent searches, literature searches, Sources – patent searches, literature searches, technology space searchestechnology space searchesAppropriate experts – patent attorneys, lawyers Appropriate experts – patent attorneys, lawyers and scientists/engineers expert in pertinent and scientists/engineers expert in pertinent technologytechnology


Due Diligence re Licensed IP Due Diligence re Licensed IP RightsRights

Scope of IP rightsScope of IP rights

Validity of IP rightsValidity of IP rights

Right to license IP rights Right to license IP rights

Right to exercise licensed IP rights Right to exercise licensed IP rights


Reason for IP Rights Due DiligenceReason for IP Rights Due Diligence

To identify issues re IP Rights which impact To identify issues re IP Rights which impact licensing termslicensing terms– LimitationsLimitations– ImpedimentsImpediments– UnknownsUnknowns

Position re representations and warrantiesPosition re representations and warranties– Major Licensor Pitfall – not having an understanding Major Licensor Pitfall – not having an understanding

of what reps and warranties it is willing to give and of what reps and warranties it is willing to give and why – before negotiations beginwhy – before negotiations begin

– Failure to Identify – negotiation on this point is Failure to Identify – negotiation on this point is reactive to Licensee’s requests – may make reactive to Licensee’s requests – may make concessions or delaying the negotiations to undertake concessions or delaying the negotiations to undertake proactive due diligence re IP Rightsproactive due diligence re IP Rights


Licensor’s Control of Scope of Licensor’s Control of Scope of Licensee’s Due DiligenceLicensee’s Due Diligence

Preliminarily, Licensor decides it does not Preliminarily, Licensor decides it does not or cannot exploit the IP Rights effectively or cannot exploit the IP Rights effectively itselfitself

Usually Licensor will approach the Usually Licensor will approach the potential Licensees with a licensing potential Licensees with a licensing opportunityopportunity


Licensor’s Control of Scope of Licensor’s Control of Scope of Licensee’s Due DiligenceLicensee’s Due Diligence

Initial interaction and dialogue with potential Licensee re Initial interaction and dialogue with potential Licensee re IP rights and responses to Licensee’s due diligence IP rights and responses to Licensee’s due diligence inquiriesinquiriesNeed to establish a regulated regime – Nondisclosure Need to establish a regulated regime – Nondisclosure Agreement with disclosure and use restrictionsAgreement with disclosure and use restrictions– Is Licensee’s investigation itself confidential?Is Licensee’s investigation itself confidential?

Must control this processMust control this processFailure to do so – inadvertent disclosures, jeopardize IP Failure to do so – inadvertent disclosures, jeopardize IP rights (patent applications/trade secrets), and loss of rights (patent applications/trade secrets), and loss of legal professional privilegeslegal professional privileges– Premise – relevant documents should not be disclosedPremise – relevant documents should not be disclosed– Disclosure may be important to going forward with a licensing Disclosure may be important to going forward with a licensing

transactiontransaction


Minimal Controls / RegimeMinimal Controls / Regime

Consolidate documents at one location or on a Consolidate documents at one location or on a web site where Licensor controls all accessweb site where Licensor controls all accessDocument all questions raised by Licensee’s Document all questions raised by Licensee’s investigations and all Licensor’s responsesinvestigations and all Licensor’s responsesSet time limits for Licensee’s investigationsSet time limits for Licensee’s investigationsIdentify any “off limits” questions/areasIdentify any “off limits” questions/areasHave a single point of contact who is an Have a single point of contact who is an information gate-keeperinformation gate-keeperIf negotiations breakdown, recover hard copies If negotiations breakdown, recover hard copies and monitor Licensee’s activities to determine and monitor Licensee’s activities to determine any misuse of Licensor informationany misuse of Licensor information


More Information Rather than Less More Information Rather than Less is Recommendedis Recommended

Reason behind Due DiligenceReason behind Due Diligence

Knowledge obtained by Licensor of Knowledge obtained by Licensor of Licensee and by Licensee of LicensorLicensee and by Licensee of Licensor

Greater advantage in negotiationGreater advantage in negotiation

Assessment of the proposed allocation of Assessment of the proposed allocation of IP rights and risksIP rights and risks– Exclusive v. non-exclusiveExclusive v. non-exclusive– Territorial limitations/spread of IP rightsTerritorial limitations/spread of IP rights


Key Due Diligence Key Due Diligence Questions/IssuesQuestions/Issues

Financial standing of the parties and how shown/verifiedFinancial standing of the parties and how shown/verifiedResources available to implement licensing dealResources available to implement licensing dealWhether dispute resolution proceedings (i.e., legal, Whether dispute resolution proceedings (i.e., legal, arbitration, conciliation, mediation) are pending or arbitration, conciliation, mediation) are pending or threatened – any history of such proceedingsthreatened – any history of such proceedingsPriority of this licensing deal within Licensor/Licensee – Priority of this licensing deal within Licensor/Licensee – standing and tenure of championstanding and tenure of championPosition and experience of the parties relative to the Position and experience of the parties relative to the market and IP rights being licensedmarket and IP rights being licensedSimple exit strategy if deal does not workSimple exit strategy if deal does not work


How to Structure the DealHow to Structure the Deal

Determine what the preferred structure of Determine what the preferred structure of the deal for Licensor/Licenseethe deal for Licensor/Licensee

Options should preferred structure not be Options should preferred structure not be available or not be accepted by the other available or not be accepted by the other partyparty

Must always develop a Plan B; if not, Must always develop a Plan B; if not, either party may end up with a less than either party may end up with a less than optimal deal / risk allocationoptimal deal / risk allocation


Who should be the Licensor?Who should be the Licensor?

Should the title holder of the IP rights transfer or Should the title holder of the IP rights transfer or license their rights to a more appropriate license their rights to a more appropriate Licensor?Licensor?– A “limited asset” special purpose vehicleA “limited asset” special purpose vehicle– Licensor might avoid using an entity owning valuable Licensor might avoid using an entity owning valuable

assets, especially those UNRELATED to the IP rightsassets, especially those UNRELATED to the IP rights

Have all assignments of IP rights licensed been Have all assignments of IP rights licensed been identified, obtained and recorded as required?identified, obtained and recorded as required?

Is entitlement to IP rights shared by more than Is entitlement to IP rights shared by more than one entity?one entity?


Who should be the Licensee?Who should be the Licensee?

For the Licensor, the identity of the Licensee is For the Licensor, the identity of the Licensee is generally always significant generally always significant – Licensor always interested in licensing to a party Licensor always interested in licensing to a party

having the most resources necessary to carry out having the most resources necessary to carry out Licensee’s obligations to LicensorLicensee’s obligations to Licensor

Reduces the risk of Licensee’s failure and maximizes the Reduces the risk of Licensee’s failure and maximizes the Licensor’s returnLicensor’s returnA “limited asset” special purpose vehicle - Licensee might A “limited asset” special purpose vehicle - Licensee might avoid using an entity owning valuable assets, especially avoid using an entity owning valuable assets, especially those UNRELATED to the IP rightsthose UNRELATED to the IP rights

– Where the Licensee does not have sufficient Where the Licensee does not have sufficient resources, Licensor may mitigate the risk by seeking resources, Licensor may mitigate the risk by seeking a third party’s or affiliated party’s guaranteea third party’s or affiliated party’s guarantee


Who should be the Licensee?Who should be the Licensee?

For the Licensee, usually interested in an For the Licensee, usually interested in an unfettered right to sublicenseunfettered right to sublicense– Where there is an unfettered right to sublicense, Where there is an unfettered right to sublicense,

identity of the Licensee is less significant to the identity of the Licensee is less significant to the Licensor (network of sublicensees) unless Licensor Licensor (network of sublicensees) unless Licensor retains approval right over sublicensee selectionretains approval right over sublicensee selection

– Where there is no unfettered right to sublicense, Where there is no unfettered right to sublicense, specific identity of the Licensee is always significant specific identity of the Licensee is always significant to the Licensor who wishes to mitigate against the risk to the Licensor who wishes to mitigate against the risk that the Licensee may failthat the Licensee may fail


Taxation Drivers Taxation Drivers

Does either the Licensor and/or Licensee have Does either the Licensor and/or Licensee have tax exempt status? If so, the taxation drivers are tax exempt status? If so, the taxation drivers are not important for the tax exempt party.not important for the tax exempt party.

Licensor wants to minimize tax payable on Licensor wants to minimize tax payable on royalties/fees (consideration) from the Licensee.royalties/fees (consideration) from the Licensee.

Licensee wants to maximize tax benefits Licensee wants to maximize tax benefits available from paying royalties/fees available from paying royalties/fees (consideration) to the Licensor.(consideration) to the Licensor.


Tax Issues raised by the chosen Tax Issues raised by the chosen deal structuredeal structure

Tax status of Licensor and LicenseeTax status of Licensor and LicenseeAny significant taxation advantage re Any significant taxation advantage re jurisdiction/situs of the licensejurisdiction/situs of the licenseCapital gains tax implications re Capital gains tax implications re transferring or licensing IP rightstransferring or licensing IP rightsAny withholding tax considerationsAny withholding tax considerationsAny applicable jurisdiction specific taxes Any applicable jurisdiction specific taxes Are otherwise applicable tax avoidance Are otherwise applicable tax avoidance provisions vitiated? provisions vitiated?


Other Issues raised by the chosen Other Issues raised by the chosen deal structuredeal structure

Are licensing costs (to initiate and Are licensing costs (to initiate and maintain) greater than Licensor’s return?maintain) greater than Licensor’s return?What are the unwinding costs/adverse What are the unwinding costs/adverse effects, if any?effects, if any?How difficult does the chosen deal How difficult does the chosen deal structure make it to enforce or protect structure make it to enforce or protect licensed IP rights?licensed IP rights?Does the chosen deal structure track the Does the chosen deal structure track the parties’ respective customary operations?parties’ respective customary operations?


Asset Protection Issues raised by Asset Protection Issues raised by the chosen deal structurethe chosen deal structure

Are IP rights from claims made by third Are IP rights from claims made by third partiesparties

Does Licensor protect IP rights from Does Licensor protect IP rights from claims made by Licensorclaims made by Licensor

Does Licensee protect IP rights from Does Licensee protect IP rights from claims made by Licenseeclaims made by Licensee



If a “limited asset” special purpose vehicle If a “limited asset” special purpose vehicle is used by either or both of the Licensor is used by either or both of the Licensor and Licensee, “richer” guarantors of such and Licensee, “richer” guarantors of such party’s performance are recommendedparty’s performance are recommended– Key: must have procedures/process to Key: must have procedures/process to

monitor financial “health” of any guarantor monitor financial “health” of any guarantor



Where either Licensor or Licensee Where either Licensor or Licensee proposed to transfer assets (including IP) proposed to transfer assets (including IP) to minimize bankruptcy consequences, to minimize bankruptcy consequences, such transfer(s) need to be reviewed such transfer(s) need to be reviewed under pertinent bankruptcy laws to under pertinent bankruptcy laws to determine whether any such transfer(s) determine whether any such transfer(s) qualifies as a voidable preference. qualifies as a voidable preference.



Is the cost of setting up and maintaining a Is the cost of setting up and maintaining a “limited asset” special purpose vehicle to protect “limited asset” special purpose vehicle to protect assets unrelated to the licensing agreement assets unrelated to the licensing agreement worth whatever benefits are created by using worth whatever benefits are created by using such vehicle?such vehicle?

What is the structure’s effect on protecting IP What is the structure’s effect on protecting IP rights should infringement or other legal rights should infringement or other legal proceedings be necessary? Any impeding of proceedings be necessary? Any impeding of legal enforcement mechanisms requires another legal enforcement mechanisms requires another deal structure.deal structure.



Does the deal structure complement the Does the deal structure complement the parties’ current operational activities? If parties’ current operational activities? If not, the inertia of current operational not, the inertia of current operational activities probably will adversely impact or activities probably will adversely impact or undermine the deal structure.undermine the deal structure.


Payment IssuesPayment Issues

LicensorLicensor– Solvency of the LicenseeSolvency of the Licensee

Guarantors for “limited asset” special purpose Guarantors for “limited asset” special purpose vehiclevehicle

– Where is Licensee or Licensee’s bank Where is Licensee or Licensee’s bank located?located?

Will pertinent government controls prevent Will pertinent government controls prevent Licensor from obtaining the full amount of Licensor from obtaining the full amount of Licensee’s consideration?Licensee’s consideration?


Payment IssuesPayment Issues

LicenseeLicensee– Failure to make full payments to Licensor, for Failure to make full payments to Licensor, for

whatever reason, risks Licensor’s termination whatever reason, risks Licensor’s termination of the licensing agreement for Licensee’s of the licensing agreement for Licensee’s breach.breach.

Management of risk – Licensor may not be Management of risk – Licensor may not be willing to license its most valuable IP rights willing to license its most valuable IP rights to Licenseeto Licensee


Operational IssuesOperational Issues

Licensing agreement’s success is Licensing agreement’s success is measured by the operation of the license.measured by the operation of the license.Operational success results from the Operational success results from the appropriate deal structure.appropriate deal structure.– Must complement each party’s respective Must complement each party’s respective

current operational activities.current operational activities.– Designate an internal administrator in charge Designate an internal administrator in charge

of implementing the license.of implementing the license.– Dispute resolution process – escalation Dispute resolution process – escalation

procedures.procedures.


Negotiation IssuesNegotiation Issues

KnowledgeKnowledge– Due diligence investigationsDue diligence investigations– Structural optionsStructural options– Operational aspects of structural optionsOperational aspects of structural options– Understand and anticipate the other party’s Understand and anticipate the other party’s

likely positions and commercial imperativeslikely positions and commercial imperatives– Develop favorable responsive solutionsDevelop favorable responsive solutions– IP rights pricing optionsIP rights pricing options

Objectives – obtain preferred pricing positions of Objectives – obtain preferred pricing positions of the Licensor and of the Licenseethe Licensor and of the Licensee



SkillsSkills– Necessary to do the dealNecessary to do the deal– Team approachTeam approach

Scientific, legal, patent, financial, operational, tax, Scientific, legal, patent, financial, operational, tax, governance, regulatory, valuation, accounting, governance, regulatory, valuation, accounting, cultural and marketing skills needed.cultural and marketing skills needed.No one person has all of these skills to negotiate a No one person has all of these skills to negotiate a licensing agreement – assemble a team with licensing agreement – assemble a team with members having negotiation skill itself, legal, members having negotiation skill itself, legal, patent, scientific and financial expertise and patent, scientific and financial expertise and experience.experience.



Team ApproachTeam Approach– Select Team leaderSelect Team leader– Select SpokespersonSelect Spokesperson– Designate roles and circumstances under which each member Designate roles and circumstances under which each member

can and cannot speakcan and cannot speak– Don’t mix messages – all speak the same “party line”Don’t mix messages – all speak the same “party line”– Designate which members participate in the negotiationsDesignate which members participate in the negotiations

If delays in decision-making are disadvantageous, have decision-If delays in decision-making are disadvantageous, have decision-makers participate face-to-facemakers participate face-to-face

– Identify issues the team cannot decide – refer to “technical,” Identify issues the team cannot decide – refer to “technical,” “management” or “legal” or “finance, “ as appropriate“management” or “legal” or “finance, “ as appropriate

– Communicate and brief all members of Team on Communicate and brief all members of Team on all issuesall issues



Be prepared with a Plan BBe prepared with a Plan B– a serious alternative and at least as attractive a serious alternative and at least as attractive

to a party’s preferred and/or original positionto a party’s preferred and/or original position– Use proactively or defensivelyUse proactively or defensively– Use dictated by the flow of negotiationUse dictated by the flow of negotiation

If used too early – may waste a significant If used too early – may waste a significant bargaining chip/advantagebargaining chip/advantage

If used too late – may have minimal effectIf used too late – may have minimal effect

– Hopefully, never usedHopefully, never used



Be prepared to ask “why”Be prepared to ask “why”– know the reason behind your and the other party’s know the reason behind your and the other party’s

positions/demandpositions/demand– strategic advantagesstrategic advantages

Substantive answer – basis for attacking the position or Substantive answer – basis for attacking the position or suggesting an alternative to address the substantive concern suggesting an alternative to address the substantive concern expressed as reason for the “why”expressed as reason for the “why”

Non-substantive answer – e.g., always done it this way or a Non-substantive answer – e.g., always done it this way or a matter of company policymatter of company policy

– Argue the logic of that responseArgue the logic of that response

– Gain negotiating advantages, especially if occurs repeatedlyGain negotiating advantages, especially if occurs repeatedly



ControlControl– DraftingDrafting

Not as important as once was – with use of Not as important as once was – with use of electronic copies and redlining programselectronic copies and redlining programsUsually guaranties legal involvementUsually guaranties legal involvement

– Venue and PaceVenue and PaceNot as important as once was – InternetNot as important as once was – InternetStill important for face-to-face negotiationsStill important for face-to-face negotiations

– Access to Team members and other subject matter Access to Team members and other subject matter expertsexperts

– Saves timeSaves time



Key risk apportionment terms as important as Key risk apportionment terms as important as any commercial termsany commercial terms– IndemnitiesIndemnities– WarrantiesWarranties– Limitation of LiabilityLimitation of Liability– Exclusions of LiabilityExclusions of Liability– Choice of lawChoice of law

Alternatives – Preferred – Fall-backAlternatives – Preferred – Fall-back

Sovereign ImmunitySovereign Immunity– Pertinent where either or both parties are Pertinent where either or both parties are

governmental entities (e.g., federal or state entities; governmental entities (e.g., federal or state entities; non-US authorities)non-US authorities)


Other ConsiderationsOther Considerations

Governing regulatory competition legal Governing regulatory competition legal frameworkframework

Cultural considerations affect negotiations Cultural considerations affect negotiations and administration of deal structureand administration of deal structure

top 10 legal challenges ttos face in licensing and commercializing ip rights october 8, 2009 savery...

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