Managing And Commercialising IP Assets Rob McInnes Principal
Apr 01, 2015
Managing And Commercialising IP Assets
Rob McInnes
Principal
How Does IP Add and Create Value?
Inhibits competition against the company’s existing products
Helps extract value from technologies not used in products sold directly
Allows technologies to be acquired with some assurance of value
Codifies the company’s knowledge both internally and to investors
HumanCapital
- expertise- know-how
- skills- creativity
Intellectual Capital- processes
- innovations- methodologies
Physical Capital
Intellectual Property
IP Is Legally Protected Knowledge or Creativity
Issues in IP Management
Dealing with staff and contractors
Dealing with research collaborators
Dealing with suppliers & customers
Planning and conducting R&D with IP issues in mind
Understanding the IP landscape
IP Landscape
To inform business strategy development and R&D planning
For competitor intelligence
To understand the technology and IP position of prospective licensees/collaborators
To determine what is available to in-license
To look for strategic and blocking IP opportunities
Different IP Business Strategies
Comprehensive product protection by building mutually reinforcing bundles of rights including patents, designs, copyright and brands
Placing roadblocks in competitors’ paths
Generating cross-licensing currency to deal with blocking rights of third parties
Building value for market perception
“Fit” with technology/IP deficits of prospective licensees
A Vision for IP Management
The marketing of products is supported by the maximum available IP protection and we capture the value that IP can bring to our new developments.
The identification of potential IP rights, and the IP protection process, becomes an integral part of strategy development and R&D projects.
Knowledge of the IP rights of competitors and other third parties is used as a resource in strategy development and in R&D projects and planning.
A Vision for IP Management
Opportunities for acquiring technology by licensing IP in, and exploiting technology by licensing IP out, are identified, evaluated and captured.
Brands are strong, consistently presented and well supported by our marketing materials.
We avoid infringing the IP rights of others.
We effectively defend our IP when it is threatened
Commercialisation Options
Licensing
» of a product
» of a technology
Collaboration
» to get to the starting blocks
Fully integrated trading business
Virtually integrated trading business
Start-up company
» stand-alone
» with an industry partner
» with a finance partner
Issues in Licence Agreements
Overall structure of a licence - commercial terms; performance obligations; allocating risk and liability.
Special issues with licensing research tools and reach through claims.
Pitfalls in royalty structures. Pitfalls in performance obligations and penalties for
failing to meet them. Identifying, allocating and mitigating risk in licence
agreements "Boilerplate" that matters - particularly indemnities and
dispute resolution
Anatomy of an IP Licence
What is being licensed?
Commercial terms
» royalties and other remuneration
» licensee’s obligations to perform
Allocation of risk and liability
Boilerplate
May also be a collaboration involved
Improvements
How to define?
» wide meaning or only dependent improvements
Ownership
Grant-backs and grant-forwards
Aggregation of improvements
Antitrust issues
Bases of Royalty Calculation
Percentage of sales
» gross/net confusion
» exclusions: taxes, freight & insurance, packaging, returns… anything else? cap these?
» deductibles: patent costs, sometimes R&D cost
Per unit made/sold
» avoids problems with defining “licensed product”
» indexation required
Share of sub-licensing income
Share of profit? No.
Minimum Royalties
No substitute for performance requirements
» quantitative eg minimum sales, marketing spend
» qualitative eg best endeavours
Beware giving the licensee a financial option to shelve the technology
» but may be unavoidable
Avoid reversion to non-exclusive as a consequence of non-performance
Dealing with Sub-Licensing
Try to deal with a licensee who:
» has direct market access, or
» will add value before sub-licensing
Option 1: royalty of X% of sales by licensee or its sub-licensees
Option 2: royalty of X% of the sub-licensing income of the licensee
» problems when the licensee creates new IP licensed in parallel with the original licensed IP
» ignore sub-licensing to related companies
Royalty Splitting
Important in pharma/bio especially
Collaborators develop IP then the commercialising party takes the project further
Non-commercialising party’s share diminishes as the commercialising party adds further value
Negotiating Royalties
Comparable transactions approach
» sources of information
» how comparable are the previous deals
First principles approach
» “25% rule of thumb” (LES/Bob Goldscheider)
» risk-adjusted relative investment (Noel Byrne)
Adjustment factors
» for negotiating up or down from starting point
25% Rule of Thumb Stated
The licensor should receive from the licensee around one quarter of the gain accruing to the licensee from the use of the licensed right
» operating profit in the case of goods
» “gain” may be a cost saving in an industrial process
Based on a notional “fair” apportionment of gain
» licensee undertakes greater investment, risk
Tested in survey published by LES
» Vol XXXVII No. 4 December 2002, p123
» median royalties are typically 25% of median gross profit for successfully licensed products
Limits of the 25% Rule
It’s a rule of thumb only
Based on a simplistic single innovator/ single right/single product model
Simple form doesn’t deal with licensee expenditure to get product to market
Requires data including information known better by the licensee
But a useful starting point
More sophisticated NPV approach is available
Adjustment Factors
stage of technology development
degree of know-how transfer
exclusivity
up front/milestone/ maintenance fees
funding of R&D
payment of patent costs
extent of economic monopoly conferred
other IP required
acceptance of product risk
acceptance of obligation to sue infringers
industry norms
Dealing with Royalty Stacking
When the parties anticipate that further IP will need to be licensed in to allow the licensed product to be sold
» eg delivery system for a drug/vaccine
Increasing importance of research tools/ growth in patent numbers
Distinguish “blocking rights” versus desirable but inessential rights
» licensor will seek tight definition of required rights
Performance Requirements
Adhere to a marketing plan
Milestones eg clinical, regulatory
Marketing as a percentage of sales
Maintain marketing infrastructure
Best endeavours/reasonable endeavours
Minimum payments
Sanction: termination or reversion to non-exclusive?
Risks Related to IP Coverage
Licensor: my bundle of patents/ applications in key countries plus proprietary information deserves a flat rate royalty
» in all jurisdictions for a defined term
Licensee: I won’t pay for what is not delivered; I will pay:
» patent royalties only on granted patents/active pending applications by jurisdiction
» know-how royalties only on secret, substantial and defined proprietary information
Infringement Risk
That the licensed IP will be infringed
» licensee will want to withhold royalties as it is not getting the exclusivity it paid for
» withhold a proportion?
» to be applied to infringement proceedings?
That the licensed product will infringe third party IP rights
» licensee will want to withhold royalties pending determination
» to be applied to defence of the claim?
» royalty stacking arrangements will apply
Non-performance of Licensed Products
Distinguish supply of goods from licensing of IP» Generally no fit-for-purpose type warranties except in turnkey
situations
» Product licensors will generally offer due-care-and-skill type warranties, but hard to give content to these warranties for licensors of bare IP rights
Public sector organisations will rarely offer, and may be prevented from giving, warranties
» Some won’t warrant ownership (perhaps wisely)
Watch insurance issues
Product Liability
Death or personal injury caused by defects in licensed products
Two separate issues:
» Warranties by the licensor to the licensee
» What happens if the licensor is sued by the injured party directly?
When is a developer/licensor of technology directly liable under product liability?
» Negligence actions depend on type of deal
» Strict (no-fault) liability an issue in the USA
Void Provisions in the EU
Provisions controlling licensee prices
Prohibition of supply to customers in other territories
Requiring the licensee to take non-patented materials if not necessary for quality or technical reasons
Grant-back provisions requiring the assignment of “severable” improvements
No-challenge provisions
“Per se” Unlawful in USA
“Naked” price-fixing
Output restraints
Market division among horizontal competitors
Collective boycotts to divide markets
Resale price maintenance
Australia - Patents Act
S 144
» conditions in a licence may not be used to force the purchase of non-patented goods or to prevent licensee from using other products or processes
» except where the licensor proves the licensee had the option of not submitting to the condition and it is terminable with compensation
» sanctions include unenforceability of the condition and the patent
Key Issues in a Collaboration
Managing the collaboration
IP identification and definition
IP ownership
What does the funding/commercial party get for its contribution?
Consideration back to the research party
Allocation of risk and liability
IP Ownership in Collaborations
Avoid joint ownership if practicable
Ownership can be allocated:
» To the commercial party with a royalty
» to the research party with a licence to the commercialising party
» by inventorship (favoured in USA)
» by field of interest
» by coverage of background IP
Special issues with US collaborations
Rights of the Funding Party
“Option” is used loosely The hierarchy of rights:
» ownership with a royalty
» automatic licence
» conditional licence
» option in the legal sense• where all terms agreed• subject to determination
» right of refusal
» right of negotiation