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

+61 2 9393 0300

rob.mcinnes@sprusons.com.au

Rob McInnes

Any Questions?