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negotiating issues_Negotiating licenses [compatibility mode]

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  • 1. Negotiating Licenses David Wanetick Managing Director IncreMental Advantage
  • 2. Cost Method Value of an asset is the cost to replace the asset with an identical or equivalent asset • Can take into account historical costs or current costs to replace Original R&D costs Re-creation costs Replacement costs Design around costs Issues • When do you begin counting time dedicated to project? • How much research is funded by grants? • Learning from mistakes • Inflation and deflation in costs
  • 3. Cost Method Seemingly Easy to Seemingly Easy to Calculate Calculate Legal fees Preparation and Application / registration prosecution costs / and other fees patents Personnel costs R&D Cost / patents Development costs Preparation, prosecution Production costs and R&D costs / patents Marketing and advertising costs
  • 4. Cost Method
  • 5. Cost Method However, accounting standards are not well- suited to determining costs of developing IP Buying / developing research No other intangible costs are broken out on the income statement R&D expenses are acceptable by investors and there are tax credits associated with R&D expenditures According to Booz Hamilton, only 15% of R&D expenses go to research The bottom line……cost does not equal value Nuclear powered aircraft Motorola Iridium satellite project Cellophane wrappers for lettuce Small percentage of patents have any value whatsoever
  • 6. Cost Method – Negotiating Considerations Good for anchoring negotiations Useful for make/buy decisions Design around, the existence of a patent increases design around costs More information about patent reduces costs Time to market Assurance of reaching the market Enhanced market position
  • 7. Market Method Build a Schedule of Similar Licensing Deals License No. Revelancy Licensee Licensor Date of Royalty Royalty No. Weighting License Rate (Low) Rate (High) 1 5 Corvero Networks Xbridge Software May, 2003 1% 5% 2 5 Marnetics Infotier.com October, 2002 5% 5% 3 5 Tech Laboratories Bernard Ciongoli et al. July, 2005 5% 5% 4 5 Link Plus Axiometric July, 2005 3% 2% 5 2 IXIA Netiq July, 2003 25% 50% 6 1 SWL Robert E. Pfister et al. October, 1993 16.5% 16.5% 7 1 Pegasus Solutions Global Enterprise Technology Ocober, 2000 20% 20% 8 1 Vicrev Technologies TA Technologies June, 2004 18% 18% 9 0 Falconstor Network-1 October, 2001 15% 20% 10 0 Acacia Patent Acquisition Telemate.net March, 2007 50% 50%
  • 8. Market Method – Application Issues Specific rights conveyed in transaction Arms-length transaction If no royalty is changed on intra-company transactions, the IRS may deem a market rate; often, a low royalty rate is applied to avoid this Competitor vs. new market Special financing terms available Economic conditions at the time of the transaction Date of the transaction Inclusion of non-IP assets in transaction Functional characteristics of the guideline IP Stage of development of the IP Economic characteristics of the guideline IP Legal characteristics of the guideline IP Large vs. small sale; prosecution history; inclusion of know- how; distressed sale; lawsuit at baseline comparables
  • 9. Income Method Discount rate Valuing the technology as part of a going concern - lower discount rate Valuing the technology as a discrete economic unit – higher discount rate DCF estimates are usually much higher than the results from market comparables Should use sensitivity analysis, scenarios and probabilities
  • 10. Strategic Value Determine the strategic value your technology / patents represent for the licensor / licensee • Patents are most valuable when they cause consumers to buy more of the product – PCs (replacement of a perfectly good product); increased utility for existing or new user (features on cell phones); when the patented feature is a primary factor in the demand for the product, i.e. the patent is the product (velcro, stickey notes) • Impact on product portfolio • Impact on manufacturing costs • Royalty rate will vary depending on whether the licensee is a competitor or is opening up a new market • Ramifications of a license agreement with a major player on the valuation or ability to receive funding by a smaller company Depends on number of license • Tool to use to obtain lower costs of supplies • How renowned the inventor is – aka provenance
  • 11. Strategic Value Determine the strategic value your technology / patents represent for the licensor / licensee • Blocking power • Next best alternative • What are you selling into? Standards setting bodies vs. Business methods Battle – Broadcom vs. Qualcom • Show licensee they can make more by paying a license • A strong patent program indicates a successful R&D program which is an indicator of corporate earnings power • It is during the reduction to practice that many obstacles to practical implementation are encountered, and the resulting solutions are the source of many inventions. Honeywell maintains a large engineering staff to help licensees implement its patent technology. • Patent value is a function of what the portfolio already has in it
  • 12. The Initial Negotiations Negotiating away from the table Strengthening leverage before negotiations begin Developing technology Prototyping Proof of principle experimentation Data acquisition Third-party validation
  • 13. The Initial Negotiations Strengthening leverage before negotiations begin Securing a customer or financing Learning about the decision making of the other side Motivations of other sides – business and personal Accounting considerations Royalties – paid out of cost of goods sold vs. upfront fees can be amortized over the life of the IP Are decisions made at the business level vs. centralized Locating an internal champion
  • 14. Opening the Negotiations Using intermediaries Leverage their relationships A form of validation More familiar with preparing documents Who speaks first Can poke holes in the other side’s opening If you disagree, don’t let them continue uninterrupted Risks of baiting impulsive behavior Pie-in-the-sky technology
  • 15. Opening the Negotiations When negotiating against a machine, lubricate the machine Get your story straight – strong patent (opinion letter), financial models, independent validation Understand timelines and roles of players Know how the other side works Always be hard on the problem but soft on the people
  • 16. Early Stages of Negotiations NDA Difficult to obtain May already pursue technology, idea might be in the public domain, someone else may approach them with the idea Classify invention as a trade secret, to get two causes of actions if there is a violation Breach of contract and misappropriation of a trade secret Bringing a Lawyer Form of legal validation Threats Modulating of expectations
  • 17. Early Stages of Negotiations Memorandum of Understanding / Letter of Intent Binding is questionable Gating mechanism Reduced impact of changes in players on the other side, puts negotiations on a track Jeopardize agreement Could handicap your own negotiating strategy Potential licensees can pay for an option to have a first look at the technology Pay filing fees
  • 18. Licensing Check List Do you own the intellectual assets? Do you have the rights to license or sublicense? Do you have the right to practice? Do you suspect infringement? [if so, licensing strategy will be very different] What prior obligations/encumbrances exist that stand in the way of licensing? What is the status of the patents and pending cases in all jurisdictions?
  • 19. Licensing Check List Identify and inventory all the supporting intellectual property Know-how, trade secrets, trademarks, research reports, etc. What other technologies do you own that are related or linked to this technology What rights are you licensing? What rights and/or assets do you want to keep out of the offering? Is technology cleared by regulatory authorities? What samples are available? Compare against the next best alternative?
  • 20. Licensing Check List What are the potential market segments (fields-of-use) What are the value drivers in the market? What are the benefits (quantify)? What is the value chain in the industry Who are the high value licensee prospects? What other assets can be included to add more value to the offering What are the strengths, weaknesses, opportunities, threats from licensing to others What is the value of the technology Value created in the market (licensee) Value share for your company (licensor)
  • 21. Licensing Specific Issues Research Development Licensee pays licensor to develop Cost vs. cost-plus Penalties for non-performance No more milestones Lose window of opportunity for product Licensor pays licensee to develop Penalties for non-performance Late payment penalties Reclaim product and their data Step-Up Royalty Rates Good for licensees who have high initial capital costs Can be matched with requirements that certain expenditures will be made by licensee
  • 22. Licensing Specific Issues Step-Down Royalty Rates Suitable when licensee has manageable initial capital costs Incentivize licensee to scale operations Minimum Royalties Licensee is incentivized to commercialize Licensee is disincentivized to design around Royalty Stacking Licensee can reduce its royalty payments to licensor by a percentage of its future royalty obligations There are usually floors Can be applied to other stipulations in the license agreement such as milestone payments
  • 23. Licensing Specific Issues Sublicenses Veto rights More opportunities to collect royalties Sometimes primary licensee does not pay a royalty itself but rather contracts with derivative licensees These third generation licensees should be covered by royalty audits Selling to distributors – lower prices than end customer will pay Most favored nation license Licensee only pays lowest current royalties or no future licensees will be granted lower royalty rates Risk of anti-trust challenge
  • 24. Licensing Specific Issues Fields of use In early stages Harder to split fields of use because licensee’s investment is too big Licensee wants sufficient room to experiment Licensee will want full fields of use, not want full disclosure because there could be less lucrative solutions that will destroy the pricing power of a lucrative market Licensors must be careful that they don’t do quick deals too early because they need the money; they might license to a company that will introduce a product at an inexpensive price; could destroy the pricing power of a large market segment (in medicine – same dosings, same formulation, same administration is a problem) and therefore lose a lucrative licensing opportunity
  • 25. Licensing Specific Issues Fields of use Licensor could diversify its risks by having many fields of use licenses Licensor could negotiate for higher royalties on subsequent licenses if initial licensees prove technology Broad, then retractable Narrow, then right of first refusal Litigation Non-exclusive licensees Have no standing to sue Exclusive licensee insists on right to defend Usually have more resources Licensor insists on right to defend
  • 26. Licensing Specific Issues Cross-licensing Benefits Less risk of litigation Less R&D costs since there is less work-around Barriers to entry for new competitors Concerns Give competitors access to your IP Harder to assert later – not standing on right to exclude – harder to receive an injunction
  • 27. Licensing Specific Issues Grant-backs Only granted to big companies Difficult to use in Europe Insurance Basic definitions Sales Annual
  • 28. Licensing Specific Issues Have-made rights Right to sub-contract for the manufacture of the product Product liability issues Right to inspect vs. requiring licensee to adhere to standards Change of control Tight control of volume of production Handling of disposability of defective products, excess materials Trade secrets Improvements are made after patent filings, licensees want this information
  • 29. Licensing Specific Issues Combining licenses with consulting agreements Assignee can become more active in commercializing the technology Can include confidentiality Know-how can’t be found to be invalid – possible anti-trust issues when the know-how becomes widely known Issue – one licensing rate or two New technology – Development Agreement, new entity Defense against MedImmune Duration of licensing agreement Extending – perpetual license based on pending patents, foreign patents or weak patents with lots of time remaining Terminating – notification; 8 years from filing or 5 years from first sale
  • 30. Licensing Specific Issues Consider the Possibility that the Licensee will file for Bankruptcy Protection Write in “license will terminate if the licensee files for bankruptcy protection” This may not be enforceable due to the IPSO FACTO rule However, licensors want to be the squeaky wheel Licensor should receive consideration in return for granting consent for the assignment of its license if the licensee goes into bankruptcy Licensor should be aware of res judicata – must object when bankruptcy court is moving in an director adverse to the licensor’s interests
  • 31. Compliance Compliance issues should be considered during the negotiating, not as an afterthought Royalty audits Audits should be conducted early in the relationship Disputes should be addressed within the framework of regular meetings Calculation of royalties should conform to licensees accounting practices Surveys and self audits are intermediate steps Usually work on commissions Letters should be sent out immediately after audit comes back – shows you believe in audit, deprives licensee of excuse to delay payment
  • 32. Compliance Royalty Audits Some companies are sloppy in their payouts You might owe the other side money Local laws may inhibit discovery Royalty audit included with accounting audit Less aggressive, maybe management wants it that way
  • 33. Contact Information David Wanetick Managing Director IncreMental Advantage dwanetick@incrementaladvantage.com