Top Five Overlooked Pitfalls in Inwardly Licensing IP
By: Steven J. Henry
There are many reasons to consider licensing “in” technology from an institution, company or even an individual. These include: expanding your own technology, increasing market coverage, saving the time and money to develop the technology yourself, eliminating a possible patent infringement threat, and—in the case of an exclusive license—adding an offensive weapon to your arsenal.
Numerous factors need to be considered when inwardly licensing technology, and there are scores of puzzle pieces to assemble to get the right agreement negotiated and signed. Some of those puzzle pieces, however, may appear relatively unimportant, but not addressing them fully may come back to bite you down the road.
Here, then, is a list of issues many licensees often overlook (or don’t look at thoroughly enough) when entering into a licensing agreement:
#1 – Believing a term sheet or memorandum of understanding will protect your interests
While a term sheet is a good starting point for negotiating the core terms of a deal, a formal, written licensing agreement is the best (and perhaps only) way to remove any ambiguity as to deliverables, ownership, and the permitted use of the IP. In fact, most term sheets expressly state they are not binding contracts.
A term sheet is usually just an expression of what the parties are working toward. A term sheet that claims to be binding may not have sufficient detail of core terms for a court to say there was an understanding sufficient for an enforceable contract to have been formed. Even if it is enforceable, it likely does not lay out all the provisions you will want to have the deal you envision.
A related problem is agreeing to a term sheet before consulting your lawyer, who may raise questions and point out issues that would lead you to desire different terms. Once the other party thinks agreement has been reached on some terms, it can be very difficult to alter those terms without having to make unwanted concessions or damaging the goodwill you have with the other party. Involving your lawyer as a guide before agreeing to a term sheet can help you avoid such complications.
#2 – Not doing sufficient due diligence beforehand
"Due diligence" refers to the process of conducting a prudent investigation of your prospective deal partner (the would-be licensor) and, if you are buying or taking a license to the IP, the “quality” of the IP itself (distinct from the technology it purportedly protects). Although assessing the IP’s value may need to be done by your IP lawyer, you can (and should) investigate the other party and the history of the IP assets.
Some of the most critical issues to investigate relate to ownership and strength of IP protection, but many licensees overlook the need to ensure (1) the licensor actually owns all the rights in the IP being licensed and (2) the licensee can practice the technology after it obtains a license. Sometimes, for example, a third party may have dominant rights which will necessitate obtaining a license.
Another issue is whether the technology being licensed is easy to design around. If so, your competitors may begin using similar technology that achieves the same goal in a different way, and, without having to pay royalties, you may find yourself undercut in price. In other words, is the technology really worth what you are going to pay for it, and can you stop paying once circumstances change and the value is no longer present?
#3 – Dealing with the wrong party
Although this sounds simple, often your intended licensor may have U.S. or foreign subsidiaries. The IP may be held by another member of the corporate family. Or the rights may actually be owned or encumbered by a third party that has to approve the deal, such as an investor or lender that holds a security interest. If the technology was developed elsewhere and acquired by your collaborator, the legal title might not have been transferred and properly recorded.
Be sure the proper entity having the rights and authority to enter into the agreement is a party to the agreement, and that any required approvals have been obtained in writing. A title search of the government records is also a vital part of the due diligence process for buyers.
#4 – Believing all licensors are the same
Over the last decade, big companies such as IBM and others have adopted a policy of only licensing technology to those who grant them freedom from suit for patent infringement. A middle manager who enters into a license that does not contain a cross-license or covenant not to sue would not like the consequences if his/her company is sued by its licensee.
As a result, convincing a large company to grant a license without insisting on reciprocity is most difficult and rarely succeeds. Granting such freedom to the large company could significantly impact the value of your own company’s intellectual property, not to mention its potential for success and a high valuation. By contrast, similar technology might be available from a university or smaller company that will not insist on such a cross-license or covenant.
#5 – Not obtaining non-compete agreements from licensor’s key employees/consultants
Finally, a commonly overlooked issue involves the key employees and/or consultants of the company from which you may be considering licensing technology. Although they may not be party to the licensing deal, you need to consider the consequences should they leave. You don’t want them to become competitors in the field for which you’ve just paid! Requiring the licensor to obtain non-competes from all its key employees and consultants—enforceable by you—may save you considerable angst down the road.
This list is not meant to be exhaustive, of course. Licensing can be a complex process and transaction even when the end result looks fairly straightforward. There are a lot of landmines to avoid, with only a few discussed here. Consulting your lawyer before making any IP licensing commitments is always the wisest first step.
