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Licensing & Strategic Alliances Series
April 3‚ 2012
Five Key Issues to Consider When Negotiating In-License
Agreements With Nonprofit Entities
Part I in a Continuing
Series on Licensing and Strategic Alliances
By Tania Rodrigues Cleary and John J. Cheney
Many of the most successful and profitable technologies being
developed and commercialized by technology-based companies, particularly in
the areas of life sciences and clean technology, were initially developed
by universities and other nonprofit institutions. Since these
technologies are frequently out-licensed by the nonprofit institutions at
early stages of development, most of the responsibility for developing and
commercializing these technologies will be assumed by commercial entities.
In most cases, the ability of a company to succeed in producing a
commercial product based on licensed technology will largely depend on how
successful the company is in obtaining funding from the investment
community. The process of obtaining such funding will involve the conduct
of a significant amount of diligence by the entity’s existing and/or potential
investors and will include, among other things, a review of the terms of
all in-license agreements. Any such in-license agreement that fails to
include certain critical provisions or includes provisions that are viewed
by existing or potential investors as overly burdensome or unreasonable can
severely inhibit the company’s ability to raise funding from investors.
These provisions that may be subject to heightened scrutiny include
monetary terms − such as up-front fees, sublicense fees, and milestone
and royalty payments − as well as other provisions that relate to the
rights to technology improvements and diligence obligations. Set forth
below are five issues that will typically attract the interest of potential
investors and should be considered by a company when negotiating an
in-license agreement with respect to technology from a nonprofit
institution.
1. Rights to Improvements. The inclusion in the in-license of a precise
definition of the technology being licensed, the scope of the license
grant, and any limitations upon the scope of the license is, of course, of
great significance to the company and its potential investors. However, in
addition to the rights granted to the company on the date of execution of
the license agreement, attention should be paid to the rights of the
company to any future improvements that may be developed by the nonprofit
entity. Most nonprofit entities are reluctant – either as a matter of
policy or due to the restrictions of the Bayh-Dole Act – to grant rights to
new technologies that are developed by the nonprofit entity after the
effective date of the license agreement. On the other hand, the company
(and its investors) has an interest in securing rights to any future
improvements to the licensed technology that the nonprofit entity develops
after the effective date of the license agreement to avoid both the need to
negotiate new terms each time an improvement is identified and the risk of
having a competitor gain access to the improved technology. In most cases,
the company should be able to negotiate an understanding in its in-license
agreement that the license grant covers improvements that are “dominated”
by the original licensed patent rights. In addition, if the nonprofit
entity is reluctant to grant an automatic license to future improvements,
the company should consider attempting to obtain an option or a right of
first refusal to license future improvements on terms to be negotiated in
good faith at the time the improvement is identified. The company may also
consider including other limitations that may make it easier for it to
obtain rights to such improvements, including limiting its rights to only
those improvements that arise from the laboratory of the inventor(s) of the
licensed technology and/or to limit its rights to improvements made during
a definitive period following the effective date of the in-license
agreement.
2. Right to Sublicense.
The company will typically try to avoid the imposition of any restrictions
upon its ability to sublicense the licensed technology to a third party in
order to enhance the likelihood that such technology will be successfully
commercialized. This issue has become even more important in the current
market as companies increasingly turn to non-dilutive sources of funding –
such as strategic partnerships and collaborations – which usually will
require the company to grant a sublicense to its collaborative partner.
Nonprofit entities may attempt to include limitations on the company’s
right to grant sublicenses through a variety of mechanisms including by
requiring notice to the nonprofit entity in advance of a sublicense and/or
prior consent of the nonprofit entity. The company should resist the
inclusion of any limitations on its right to grant sublicenses to the
licensed technology. Further, the company should consider clarifying the
effect that termination of its in-license agreement with the nonprofit entity
will have on any outstanding sublicenses. At a minimum, the company should
attempt to negotiate an obligation of the nonprofit entity to negotiate in
good faith a direct license with the sublicensee in the event of
termination of its in-license agreement. In order to avoid the potential
for future disputes over such terms, the in-license agreement should
provide that, in the event of such termination, the nonprofit entity will
automatically enter into a license agreement directly with the sublicensee on
substantially similar terms as those contained in the in-license agreement
between the company and the nonprofit entity. Such provisions are crucial
since any sublicensee will invariably require assurances as to the
survivability of its rights to the licensed technology whether through a
sublicense with the company or a direct license with the nonprofit entity.
3. Diligence Obligations. Most nonprofit institutions will insist upon
a right to terminate the license agreement in the event that the company
fails to meet certain performance or diligence obligations. These diligence
obligations may include a general requirement to use commercially
reasonable efforts in developing the licensed technology or specific
requirements to achieve certain financial, development, or regulatory goals
by certain dates (including raising a certain amount of external funding,
making certain filings with the FDA or other applicable regulatory
authorities, and/or making the first sale of a product incorporating the
licensed technology). Given that a failure to meet a diligence obligation
may result in termination of the license agreement, the company should take
care to negotiate reasonable diligence obligations that include some
flexibility, including rights to cure failures to meet specific diligence
milestones and/or automatic extensions of diligence dates (which are
sometimes granted in exchange for an additional payment) if the company is
otherwise using commercially reasonable efforts to develop the licensed
technology.
4. Control over Patent
Prosecution. In many cases, the nonprofit entity, as the
owner of the technology, will negotiate to retain control over the
prosecution of licensed patents. Most nonprofit entities are, however,
willing to grant the company the right to review and comment upon patent
prosecution strategy and filings applicable to the licensed patents.
Further, even if the nonprofit entity seeks to retain control over patent
prosecution, it will typically require the company to assume the costs
related to future patent prosecution and, in many cases, all or a portion
of the costs related to the filing and prosecution of the licensed patents
conducted prior to the effective date of the license agreement. Since
control over patent prosecution is viewed favorably by the investment
community, the company should attempt to retain as much influence over the
process as possible, including its right to choose counsel of its own to
assist with patent prosecution and/or the right to participate in the
choice of the nonprofit entity’s counsel who will manage the patent
prosecution process. Further, in some cases, the nonprofit entity will
agree to permit the company, as the exclusive licensee of the licensed
patents, to control the prosecution, albeit with the inclusion of certain
controls, including covenants to diligently prosecute patents in certain
jurisdictions and to reasonably consider all comments and suggestions made
by the nonprofit entity or its patent counsel with respect to the
prosecution of the patents.
5. Change in Control
Transactions. A change of
control transaction involving the company will frequently highlight the
delicate balance between the interest of the investors of the company in
realizing a gain on its investment and the interest of the nonprofit entity
in being able to control the entity that is developing and commercializing
its licensed technology. In most cases, the company should resist granting
any right to the nonprofit entity to directly or indirectly influence its
ability to consummate a change of control whether through a requirement
that the nonprofit entity consent in advance to any such change of control
transaction or otherwise. The company may consider offering to provide the
nonprofit entity with prior written notice of a sale transaction or even
the payment of a fee to the nonprofit entity upon consummation of the sale
transaction, the amount of which may be dependent upon the period of time
between the execution of the license agreement and the consummation of the
change of control transaction and the importance of the licensed technology
to the value of the company.
* * *
The five issues described above are not the only issues that
require attention by companies during in-license negotiations; however,
these issues are often overlooked. Companies should not be hesitant to
raise these issues during negotiations as these provisions can be
structured in a variety of ways to address the concerns of the company
(including its existing and potential investors) and the nonprofit entity.
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