To sell or to license: how to choose the right strategy to commercialise technology rights
High-level issues arise when an entity is considering transferring some, or all, of its rights in a technology to another party. Two common ways to transfer rights are through sale and licensing. While technology rights can include patent rights (whether enforceable or in the application stage), copyright and, trade secrets, this article will focus on patent rights and copyright alone.
A relationship based upon a sale is typically short lived, meaning that once the appropriate agreements have been executed, the title transfer documents filed at the appropriate register and the funds transferred, the seller and the buyer can effectively go their separate ways. This is a convenient means of facilitating the seller’s various business needs, which might include:
- an exit strategy;
- consolidating the seller’s business; or
- as a means of raising capital.
In contrast, a relationship based on a licence tends to last for longer. You may, for example, be considering licensing the rights to your new sand-blasting technology to Company X. However, in exchange for the licence, you will require Company X to adhere to certain conditions set out in the terms. You will negotiate with it how much and when it has to pay you a royalty, but you may also require it provide you with access to its financial records so that you can audit whether it is fulfilling its royalty payment obligations. There may also be conditions imposed on you that extend over the terms of the licence. Further, licences can support business needs by providing a flow of income that is derived from the efforts of your licensee.
Within a sale-based relationship, the seller should consider if it will sell all global rights or rights in a specific jurisdiction/s. If you are the seller, you should expect a potential buyer to investigate the scope of the rights for sale in the specific jurisdictions of most importance to its commercial plans. Simply because you filed patent applications in 25 different jurisdictions does not mean that the potential buyer will be interested in acquiring rights in all of those. Such investigations by the potential buyer typically include assessing your chain-of-title to sell those rights and the administrative status of any registered (or registerable) rights in the jurisdictions of interest. However, depending on how important patent protection is for the potential buyer, you should also prepare yourself for the costs associated with a thorough review of the patent(s) in question. For example, the potential buyer may further investigate the scope of protection provided under any issued patents and the challenges that any pending applications may be facing during patent prosecution in jurisdictions of interest. Since each jurisdiction has differences in its patent laws and rules, patent jurisprudence and procedures for challenging patent rights (whether post-grant or during prosecution), you should be prepared for the cost of retaining local IP counsel in those jurisdictions most important to the potential buyer’s commercial plans.
Does your transaction include software?
For any sale that includes a transfer of copyright (eg, if you are selling software and the underlying copyright-protected code), you should be prepared to address questions from the potential buyer about the means by which you purport to have received the copyright from the original author(s) of the code.
Some jurisdictions have particular requirements for the transfer of copyright and, if those are not met, then enforcement may be at risk. This is a common issue that arises when software is developed by external contractors many years before the proposed sale. During the development phase of the software, there may be no written agreements in place with the external contractor specifically addressing the transfer of copyright. The absence of these may call into question your claim to own the copyright in the underlying code. Another issue that may arise is whether the jurisdiction of interest to the potential buyer has signed and ratified an international treaty specific to copyright-protected works, as this may affect the local enforceability and terms. Returning to our example, if your software was developed entirely in Canada, but the potential buyer plans to commercialise it in Thailand, then an analysis of whether Thai courts will recognise the copyright of Canadian origin should be undertaken. Again, the assistance of local counsel to address any jurisdiction-specific copyright issues may be necessary.
What if you only want to sell your rights in a particular jurisdiction?
If a sale occurs relating to only a portion of your global technology rights, then the sale agreement should address whether the seller is able to enforce post-sale conditions on how the buyer can commercialise the technology. For example, if the buyer acquires the rights to manufacture and sell your technology in Africa and you retain all other rights, presumably you would like to have contractual assurances that the buyer will adhere to particular standards so that the user’s experience is somewhat uniform across jurisdictions, regardless of whether it is you or the buyer providing that experience.
Set out the licensed rights in an agreement
When considering a licence of technology rights, it is necessary to establish precisely what rights are being granted. These are provided in a granting clause of the licence agreement, and they often include whether the licence is:
- exclusive – meaning that even you, as the licensor, cannot practice in competition with a licensee;
- sole – meaning that you are the only other party that can practice in competition with the licensee; or
- non-exclusive – meaning that you are able to grant similar or overlapping rights to further licensees.
Granting clauses may also address further issues of:
- in which jurisdiction(s) the licensee can commercialise the technology;
- in what verticals (or fields of use) the licensee can commercialise the technology in; and
- whether the licensee can sub-license or not.
The remainder of the written agreement will set out other important terms and conditions – including the licence payment scheme, often in the form of royalties.
Know the applicable local rules
If you are negotiating with a potential licensee about acquiring rights to commercialise the technology in a specific jurisdiction, then it is crucial that both parties understand the local rules. Some jurisdictions may require licence agreements to be registered with the local government (or patent office), while others may also have further requirements to recognise the licensee’s right to enforce the patent against a potential infringing party.
How to address improvements under a licence
A further consideration in licensing is how you want to address the development of any improvements in technology during the term of the licence agreement. If you grant the licensee the right to develop improvements, then how those improvements are treated should be clearly set out in the licence agreement. This issue can be nuanced by the licensee developing improvements within a jurisdiction that has foreign filing licence requirements. If any patent applications are drafted and filed, in respect of the improvements you should get comfort that these comply with local foreign filing licence requirements to avoid the risk of the locally filed patent being invalidated.
The question of whether to sell or license rights in your technology is one that should be based on the type of relationship you are looking to develop, which in turn can be informed by your business needs. Whether the transfer of technology rights occurs under a sale or a licence, if the rights relate to various jurisdictions, having advice from IP counsel in all relevant jurisdictions is recommended in order to identify any specific issue(s) that could arise under the local rules. This is the best approach to ensure that both parties enjoy some success when entering into such relationships.
Note: the comments, opinions and views provided above are those of the author alone and they do not represent the comments, opinions or views of Gowling WLG (Canada) LLP. This article is provided as general information and should not be taken as legal advice.
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