Commercial Terms of Technology License Agreements

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1 Commercial Terms of Technology License Agreements EPO Seminar on Licensing of IP Ljubljana, January 17/18, 2006 Dieter Reinhardt European Patent Attorney 1 Technology License Agreement Introduction Introduction We discuss a short general form of a patent and know-how license agreement which is taken from World Licensing Law Report ISSN BNA 03/02, p.17 and limited to commercial terms of the agreement. The form presupposes the existence of pending patent applications and of know-how developed by the licensor and made the subject matter of the license. 2 1

2 Technology License Agreement Table of Contents (1) 1 Definitions 2 Grant of License 3 Sub-license 4 Improvements 5 Representations 6 Licensor Disclaimers 7 Limitation of Liability 8 Licensee's Obligation to Act 9 Indemnification by Licensee 10 Acknowledgements 11 Secrecy 12 Manufacturing in Accordance with Specification 13 Start of Production and Best Efforts to Promote and Sell Commercial Terms 3 Technology License Agreement Table of Contents (2) 14 Identification of Products 15 Royalty 16 Minimum Royalty Payments 17 Manner of Royalty Payment 18 Maintenance of Records 19 Inspection 20 Obligation not to Compete 21 Duration of License 22 Termination 23 Prohibition of Assignment 24 Governing Law 25 Date Certain 26 Scope of License 27 Notice Commercial Terms 4 2

3 Commercial Terms Territorial Restrictions Grant of License Licensor herewith grants to Licensee the exclusive license to manufacture the Apparatus within the territory of (the Manufacturing Territory ), exploiting and utilizing the Application, the principles expressed therein and the know-how, as well as the exclusive right to sell the Apparatus, so manufactured, within the territory of (the Sales Territory ). In many agreements there are territorial limitations. Rights can be granted for all or for some jurisdictions. The territorial scope of the grant has to be defined. Often it is distinguished between manufacturing and sales countries to prohibit export and parallel import and grey market goods. 5 Commercial Terms Sub-License Sub-License The license granted herein does not include the right to sub-license unless the terms and conditions of the sub-license agreement are expressly approved by licensor. It is important to contemplate the right of licensee to sub-license the right to manufacture the licensed products or the fact that no such rights will be granted to licensee. 6 3

4 Commercial Terms Improvements by Licensor Improvements The license herein granted shall include all improvements of the invention, whether patented or unpatented, any improvement of the know-how.. directly related to the Apparatus. The scope of the agreement can automatically be broadened to improvements which the licensor may make on the licensed products. 7 Commercial Terms Manufacturing by Licensee Manufacturing in Accordance with Specifications Licensee shall manufacture the Apparatus in accordance with the specifications already supplied by Licensor and shall not make any material modifications thereof without Licensor s prior express written consent. lt is essential that the licensee manufactures the licensed products in strict accordance with the specifications set out by the licensor, thus assuring the quality of such products. 8 4

5 Commercial Terms Best Efforts Start of Production and Best Efforts to Promote and Sell Licensee shall expeditiously tool up, at its own expense, to initiate die manufacture of the Apparatus in the Manufacturing Territory no later than.... Licensee shall endeavour in every reasonable and proper way and to the best of its ability to sell the Apparatus in the Sales Territory and, for such purpose, Licensee shall advertise it in trade magazines and periodicals, newspapers, radio and television and in such other manner as it may deem necessary and proper. Start of the manufacture of the licensed products by a given date and the obligation to exert its best efforts to promote and sell the licensed products should be called for. 9 Commercial Terms Identification of Products Identification of Products Licensee shall affix to every Apparatus a plate indicating it to be manufactured by Licensee under license from Licensor. lt is important and generally useful for the licensor to see to it that the licensed products are identified as products manufactured under license. 10 5

6 Commercial Terms Royalty Royalty Licensee shall pay to Licensor as royalty percent of the net selling price of the Apparatus invoiced by Licensee to its customers in the Sales Territory. The term net selling price shall mean the price appearing in the invoices after deduction for freight, insurance, and sales taxes. Said royalty payment shall be due and payable to Licensor independently and irrespective of the fact that Licensee may not have collected the invoiced price from its customer for any reason whatsoever. This section calls for the calculation of the royalty to be made on the invoices issued by the licensee to its customers and not on the payment of the purchase price actually received by the licensee from such customers. The commercial risk involved in the sale of the licensed products would normally not be shared by the licensor in a licensing situation. 11 Commercial Terms Manner of Royalty Payment Manner of Royalty Payment Royalty payments shall be made by Licensee to Licensor on a quarterly basis in respect of royalties accrued and due for the preceding quarter. The first accounting period shall be. Simultaneously with each royalty payment made by Licensee to Licensor as herein provided, Licensee shall render and deliver to Licensor a written statement identifying all invoices relating to sales which gave rise to said royalty payment. This section sets out the timing of the royalty payments, the accounting period, and the licensee s obligation to render written statements to identify the invoices on which the royalty payments are to be made. 12 6

7 Commercial Terms Maintenance of Records Maintenance of Records Licensee shall, at all times, keep full and complete books and records regarding the sales which give rise to royalty payments hereunder and Licensor shall have the right, at its expense and no more than once in each quarterly period, to verify, or to designate an independent certified public accountant to verify, by examination of said books and records, the accuracy of the royalty statements rendered by Licensee. The right of verification shall include the right to make copies of said books and records or to obtain extracts there from. lt is important for the licensor to be able to verify the transactions which give rise to the royalty payments. lt follows that the licensee is to keep adequate records to allow such verification. This section thus establishes the obligation of the licensee to keep the relevant books and records. 13 Commercial Terms Inspection Inspection Licensor shall have the right to enter into Licensee s plant to inspect the manufacturing process of the Apparatus. Visual inspection of the premises in which the licensed products are manufactured may be important for the licensor. This section sets out the right to enter the Licensee's premises to make such inspections. 14 7

8 Commercial Terms Obligation not to Compete Obligation not to Compete Licensee shall not, during the term of this Agreement and for the period of years after its expiration or early termination, directly or indirectly manufacture, sell or in any way deal with, in the Manufacturing Territory or in the Sales Territory, any equipment which may be similar to, or which may be reasonably deemed competitive with, the Apparatus. The licensee s obligations not to compete during the term of the license, and for a given period of time after its termination, should be deemed an important element of the relationship. This section precludes to the licensee the possibility of improperly using the information and know-how of the licensor of which it will have acquired knowledge by reason of the license. 15 Commercial Terms Duration Duration of License This Agreement shall continue in force and effect for the period of.. years from the date of its execution. lt shall be automatically renewed for another. year period and so on for a like period or like periods, unless one party shall give to the other written notice of intent not to renew entrusted to the mail at least months prior to the then applicable expiration date. The duration of the license should, of course, be set out. The term of the license could be automatically renewed should the parties fail to indicate an intent not to extend the same by a given date, as is provided by this section. 16 8

9 Commercial Terms Early Termination (1) Termination (a) Licensor shall be entitled to terminate this Agreement before its expiration,... should the royalty payment due by Licensee fail to total in any one calendar year after the equivalent of upon notice to Licensee given within days from the end of the calendar year in question. (b) Licensee shall be entitled to terminate this Agreement before its expiration, upon notice to Licensor given, at Licensee s discretion, within days of the end of any calendar year after. 17 Commercial Terms Early Termination (2) Termination (continued) (c) One party shall be entitled to terminate this Agreement before its expiration should the other commit a material breach thereof upon written notice setting out such breach. The abandoning of the manufacture of the Apparatus by Licensee, its failure to render the royalty statements, its delays of days or more in the making of the royalty payments, its engaging in the activities prohibited under Section 20, shall, without limitation, constitute material breaches of this Agreement. Termination by the licensee is specifically contemplated in the event that the royalty payment has not reached the minimum agreed-upon level. 18 9

10 Commercial Terms Determining Adequate Royalties 1 Factors for determining an adequate royalty rate Exclusive ( ) or non-exclusive ( ) license Definition of royalty base whole product ( ) or relevant portion ( ) Definition of net sales price One time payments ( ), down payments ( ) Payment percentage of turn over ( ), fixed rate for each unit ( ) Most favorite clause 2 Sources for determining an adequate royalty rate Literature Jurisprudence Germany: Arbitral awards of the Court of Arbitration at the German Patent Office with respect to inventor's remuneration Royalty information from own concluded agreements 19 Any questions relating to Commercial Terms of Technology License Agreements? 20 10