Introduction

Technology licence agreements are essential for transferring and commercializing intellectual property across industries. As innovation accelerates, negotiating these agreements requires careful attention to legal, financial, and operational considerations. Adopting clear best practices helps both licensors and licensees manage risks and achieve mutually beneficial outcomes. This practice note provides a high-level overview of best practices for both parties, covering key dimensions such as scope of rights, IP ownership, improvements, royalties, confidentiality, performance obligations, termination, and risk allocation.

Scope of Rights / Licence

• Licensors: Should narrowly define the scope of rights, granting only what is necessary for the licensee’s intended use. This includes:
  • Setting capacity limits
  • Specifying consequences for exceeding them
  • Retaining control for future commercialization
  • Restricting sublicensing
  • Using carve-outs for their own research
  • Ensuring clarity on field and territory of use
  • Avoiding ambiguous language
• Licensees: Should seek broad, exclusive rights, the ability to sublicense, and operational flexibility. They may request “most favoured licensee” clauses, avoid restrictive carve-outs, and ensure the licence cannot be easily revoked.

Effectiveness

• Licensors: May differentiate between the date the agreement has been signed by both parties – often defined as the effective date – and the date on which the licence program commences – often defined as the base date or zero date.  They will also stipulate the consequences if the licence program does not commence within a specified period from the effective date.
• Licensees: May require a suspensive condition, making commencement subject to board or regulatory approvals. Licensees should investigate required regulatory approvals and their conditions.

IP Ownership

• Licensors: Should retain IP ownership of licensed IP and reserve commercialization rights for improvements. They should provide “best of knowledge” warranties that the licensed IP does not infringe on the rights of others and is free from undisclosed issues, and specify procedures for infringement claims.
• Licensees: Need clarity on the licensed IP, assurances of freedom to operate, and a clear chain of title. They should clarify background and foreground IP and hold licensors liable for infringement claims.

Improvements & Derivative Works

• Licensors: Often demand grant-back or licensing rights to improvements made by licensees, including rights to use and license those improvements to others. Regular disclosures and monitoring of derivatives may be required.
• Licensees: Should define “improvement” clearly, retain rights to improve and use the technology, and resist mandatory assignment of improvements. Ensure that improvements made by the licensor be included in the licence without paying additional royalties or licence fees. They should oppose overbroad grant-back provisions and seek the right to commercialize improvements independently.

Royalty Structures & Financials

• Licensors: Typically use a mix of lump-sum fees and running royalties, with minimum thresholds and milestone payments. Royalty rates should be benchmarked to industry standards and indexed for inflation, with adjustments for exclusivity and territory. Specify tax implications on licence fees, e.g. in the event the parties are based in different countries, that licence fees payable are net amounts after deduction of any direct or indirect taxes and duties that are required to be withheld or paid in any country other than the licensor’s country.
• Licensees: Should align payments with successful application/commercialization, favor running royalties, seek paid-up options, and negotiate royalty relief (caps, tiers, or deferred payments). Clarify withholding or other taxes payable and the implications of any double tax agreement between the countries of the licensor and the licensee.

Confidentiality

• Licensors: Should control disclosure, define the scope of confidential information, and impose strict obligations that survive termination of the licence. Set conditions for disclosure of confidential information to contractors and vendors. Remedies for breach should be specified.
• Licensees: Should clarify definitions, reduce obligations, and limit the duration and exceptions of confidentiality terms. They should negotiate reasonable terms, avoid overreach, and limit post-termination restrictions. Also include provisions to protect its own confidential information as may be disclosed to the licensor.

Performance Obligations & Milestones

• Licensors: Set minimum performance requirements, milestones, and reporting obligations, with remedies for non-performance and progressive milestone payments.
• Licensees: Should negotiate realistic milestones, resist vague or punitive terms, prefer milestone payments over upfront fees, and seek cure periods and grace rights.

Termination Clauses & Exit

• Licensors: Retain rights to terminate the licence for material breach, insolvency, failure to meet milestones, or regulatory violations. They should maintain flexible exit options, reclaim rights, impose post-termination controls, and convert exclusivity on default. An orderly wind-down and survival of key terms are important.
• Licensees: Should ensure notice and cure periods, avoid broad termination rights for licensors, secure wind-down rights, retain improvements, and limit triggers and consequences of termination.

Risk Allocation & Indemnification

• Licensors: Aim to shift risk to licensees through indemnities and insurance requirements, limiting their own liability and excluding consequential damages.
• Licensees: Should resist broad indemnities, seek cross-indemnities, carve out gross negligence, and negotiate reciprocal insurance and warranties.

Exclusivity & Territorial Rights

• Licensors: Limit exclusivity and require performance for exclusive rights, with step-in rights if commitments are unmet.
• Licensees: Seek broad exclusivity in key fields or territories, negotiate options for expansion, and ensure competitive advantage through review-based expansion.

Sublicensing & Assignment

• Licensors: Restrict, condition, and monitor sublicensing, limiting assignment to prevent unwanted parties from acquiring rights and requiring approval for transfers.
• Licensees: Seek rights to sublicense, transfer, or assign the licence to other entities, aiming for flexibility in commercialization and avoiding unreasonable restrictions.

Applicable Law and Dispute Resolution

• Licensors: Prefer agreements governed by familiar legal systems, specifying mediation or arbitration processes and jurisdiction.
• Licensees: Seek efficient, neutral dispute resolution mechanisms, avoid unfavorable jurisdictions, and ensure enforceability.

Benchmarking & Trends

• Licensors: Use market comparisons to justify terms, follow legal and market trends, and adjust for the technology lifecycle.
• Licensees: Benchmark royalty rates, scope, and governance to industry norms, using market data to ensure parity.

Negotiation Tactics

• Licensors: Maintain leverage, prepare fallback positions, use term sheets, manage information, and leverage ambiguity in drafts.
• Licensees: Conduct due diligence on the licensor and IP, prepare alternatives and BATNA, use phased negotiation, and anchor with broad language.

Audit & Reporting

• Licensors: Enforce strict audit rights, conduct plant visits, require regular reporting, and periodic financial reviews to monitor compliance.
• Licensees: Negotiate reciprocal audit rights, restrict audit frequency and scope, ensure transparency, and limit reporting burdens.

Transition & Exit Planning

• Licensors: Plan for product wind-down, customer communications, handover of pending projects, and survival of critical terms.
• Licensees: Secure transition support, retain know-how, plan for continued use of technology, and minimize disruption.

Use of Technology / Compliance

• Licensors: Leverage AI and blockchain for compliance, reporting, and enforcement, automating processes where possible.
• Licensees: Ensure access to compliance tools, require transparency in automated processes, and demand auditability.

Market Trends & Innovation

• Licensors: Monitor sector growth, regional dynamics, and new licensing models such as patent pools and open innovation.
• Licensees: Stay informed on market trends, adapt negotiation strategies to new models, and leverage collaborative opportunities.

Conclusion

Effective negotiation of technology licence agreements requires clarity, diligence, and a balanced approach to risk and value. By applying established best practices, both licensors and licensees can reduce disputes, foster collaboration, and support innovation. For specialized guidance or industry benchmarks, consult professional advisors or recognized data platforms.

References and Further Reading

• https://michaeledwards.uk/best-practices-for-drafting-and-negotiating-ip-licensing-agreements/
• https://snz.co.za/articles/commercial/negotiating-licences-issues-to-consider/
• https://aaronhall.com/legal-tips-negotiating-ip-licensing-terms/

Disclaimer: The information provided in this document is intended solely for general informational purposes. It does not constitute legal advice, nor should it be relied upon as a substitute for consultation with qualified legal professionals regarding specific circumstances.