IP licensing: gaining advantage through innovation20 April 2010

Presentation by:

Alexander Carter-Silk, Partner, IPTC Group

Nicholas Tall, Solicitor, IPTC Group

What do all these products have in common?

Anatomy of a licence

• What can you license?

• Why license your IP?

• Elements of a licence?

• Potential pitfalls?

• Sharing risk and reward

• Questions

What IP can you license?

Licensing facilitates:

Monopoly rights patents, designs and know-how create barriers to entry for competitors, providing market advantage for the licensee

Reputation goodwill and reputation is a valuable commodity - it increases the propensity for purchase by a consumer and reduces the barriers to market entry

The licensor to develop a revenue or capital stream from rights which provide either a monopoly or some degree of exclusivity

The licensee to maximise the return on its manufacturing design, distribution or other production skills whilst minimising risk from utilising rights which have been developed

Key aspects of a licence

Scope Purpose; IP licensed; software Territory Is the licensee capable of exploiting a territory?Approvals Protecting licensor’s goodwill and reputationNon-derogation Reputation of licensor and licensee interlinkedCompliance Termination; Penalties; Removing exclusivity;

Ratchets on minimums; Rewards Discretionary rewards for performanceGuarantees Minimum payments v Capital payments;

Cross-collateralisation?Warranties Who bears the risk of infringement?Indemnities Difference between indemnity and guaranteeExclusivity Is this necessary? Does the market work better

with multiple licensees? Change of control Common to provide for termination in the event

of a change of control

Pitfalls and case studies

• Over-negotiated or one-sided agreements• Licensing is often about the subtleties of relationships - that is

not one size fits all; use precedents with caution• Managing the licence and having sanctions which are

appropriate to the magnitude of the breach• Auditing clauses are very often unworkable because the key

records are not accessible and reporting structures are vague• Widely drafted indemnity provisions • Ill considered choice of law exclusive jurisdiction and

enforcement - beware conflict of laws• Over complicated agreements• Future proofing; accommodating price and economic changes• Is the document clear? Is terminology understood in an industry?

How is this to be interpreted?

Case Study 1: Oxonica Energy Limited v Neuftec Limited [2009] EWCA Civ 668

• Oxonica had an exclusive licence to patent rights and know-how (catalyst to be added to diesel fuel)

• “Licensed Products” defined by reference to a PCT application. National patents granted were narrower in scope

• Oxonica began selling a second catalyst which fell within the PCT application but outside the narrower claims in some of the granted national patents

• Oxonica refused to pay royalties on sales in countries where narrower patents granted

• Oxonica sought a declaration that its catalyst was not a Licensed Product in countries where patents with narrower claims granted

• Neuftec counterclaimed for royalties

Business commonsense drives interpretationDecision (upheld by Court of Appeal):

• The agreement had clearly been drafted by someone unfamiliar with patent law “little weight should be put on detailed analysis of the words used if the result flouted business commonsense”

• Judge looked at context in which “Licensed Products” used in agreement to find on the agreement’s proper construction that the claims in the PCT application not the national patents actually granted governed whether royalties payable or not

• The alternative interpretation would have meant that Neuftec’s chances of being paid would have reduced the more patent claims were filed and would have given no weight to the know-how element of the licence

• “Precedent is a good servant and a poor master”. There is no template, the devil is in the detail and knowledge of the rights which are being licensed is crucial

Case Study 2: Hudson Bay Apparel Brands LLC v Umbro International Ltd [2009] EWHC B28 (Ch)

In 2006, Umbro granted two separate exclusive licences for selling soccer-based clothes in the US:

A Major retail company called Dick's Sporting Goods (Dick's) on-field wear/players (no pockets)

B Hudson Bay Apparel Brands LLC (Hudson) for off-field wear (fan’s apparel with pockets)

Umbro retained the right for "teamwear" (soccer kit provided to competitive teams)

• Hudson’s agreement contained a detailed approvals clause requiring written approvals to be sought at various stages of production

• Miss Jackson (an employee of Umbro US) approved shorts without pockets to be made by Hudson

Follow the terms of the agreement

Relations deteriorated; Hudson could not get approvals processed.

Umbro concerned that Hudson acting outside the scope of its licence.

Hudson sued, claiming

(i) Umbro breached the Hudson licence by permitting had Dick's to market off-field wear

(ii) Umbro was in breach of an implied duty of co-operation in the operation of the licence

Umbro counterclaimed that

(i) Hudson was in breach of contract by marketing on-field wear, in particular, "pocketless soccer basics”

Effect of conduct on licence interpretation

• Umbro permitted Dick’s to sell products that fell within Hudson’s exclusive licence, thereby being in breach of warranty to Hudson

• An implied term did exist that Umbro had to consider articles submitted for approval – Hudson could not satisfy its obligation to get approval if Umbro failed to follow the approvals process

• Hudson was in breach of contract by selling shorts without pockets. Held: the products in question were not within the licence - a modification to the agreement would have been required that Miss Jackson (an employee) did not have authority to make

• Lessons: make sure definitions correct in exclusive licences (blurring); know who you are dealing with – do they have relevant authorities; change of personnel can cause issues if processes not properly followed; jurisdiction issues for licensee

• There is no rule

• A good starting point is to calculate a royalty on the basis that the IPR is worth 20% of the profit of licensee

• Adjusted royalty rate

• Adjust up: Strong goodwill and high degree of recognition

• Adjust up: High investment in creation of IPR (barrier to entry). Eg Pharma and Patent

• Adjust up: If there is low capital cost of exploiting the IPR and large premium over cost

• Adjust down: If there is substantial capital risk to licensees or slow time to market

• Adjust down: If there is no proof of concept

Royalty rates

Equity participationWhat is it? Licensor participates in the equity of the licensee

company and agrees to sale by licensee of its interest in licensee company

Advantages Structure can assist funding opportunities – eg bank finance, other investors, Licensee strongly incentivised

Disadvantages Loss of control by the licensor, this is not appropriate for mature brand or businesses

Conflict over the levels of control, eg market positioning, speed of exploitation, quality

When to use television producers; projects needing investment; merchandising arrangements strongly reliant on licensee input into products and brand establishment; returns sufficiently uncertain that royalties are excessive burden on the licensee

Examples TV production deal with equity participation for distributor

Grow back

What is it? The licensee participates in the value of any sale of the IPR by the licensor up to the value of the royalties paid under the licence (grows back the royalties paid)

Advantages Leaves control with the licensor but gives the licensee the opportunity to participate in the goodwill which is accrued to the licensor (capital value)

When Strong competition of retail space, brand or rights owners require revenue now but the capital value is dependent upon the access to market provided by the licensee

Examples Numerous licensing and brand management companies are now considering this as “variant” to paying high royalty rates

Consider Sliding scale of participation depending on how quickly the IPR is sold after the license/agreement terminates.

Reciprocal ownershipWhat is it? The Licensor is given a shareholding in the

licensee/franchisee and the franchisee/licensee takes a stake in the licensor’s business

Why? There is a natural tension between the licensee and the licensor as to the appropriate share of value created by the relationship, this leads to royalties and minimums being a blunt and often divisive method of allocating value. Especially if the licensed business is a high percentage of the licensor’s business and vice versa

Advantages Encourages both parties to invest in the relationship where the reward may extend beyond the term of the license. If this extends beyond the license buy out provisions may be required

When A single exclusive licensee in a a specific territory where the local goodwill attaches to the in-country trader. A technology licensee (eg software) where some development will be undertaken by licensee

Examples Franchise agreements

Joint ventures

What is it? New company is established for a particular product or sector with a license to that company. Can also be purely contractual

Advantages Allows for co-venturing where the outcome is uncertain and royalties alone would represent an unfair share of risk passing to the licensee. Licensor gets opportunity to speculate where it would not otherwise have opportunity to exploit its rights

Disadvantages Licensor forgoes minimums and guarantees and accepts a higher risk. Exiting such arrangements can be complex, neither party can simply terminate without significant loss. Loss of control by Licensor. Business failure usually means a loss of rights

When High levels of risk sharing needed; third party’s skills and access to market required

Examples Partwork publishers use this structure on very regular basis – enables entry into market where not otherwise present

Questions?

•Construction & Engineering•1 November 2006

Further Information

For more information on our services,

please contact:

Alexander Carter-Silk020 7427 6507Alexander.Carter-Silk@speechlys.com

Nicholas Tall

020 7427 6697

Nicholas.Tall@speechlys.com

www.speechlys.com