Negotiating a patent and know-how licence can be a time-consuming and costly exercise. However, given the long-term nature and importance of these agreements, the parties should consider key legal and commercial issues at the outset to ensure an acceptable balance of risk and reward is struck.
Defining the scope of the proposed licence at the outset sets the tone for an efficient negotiation and minimises the risk of disputes arising in the future. The parties should discuss:
- What IP rights will be licensed
- Whether the licence will be exclusive or non-exclusive
- The geographical scope and field of use
- The key payment terms, and
- The duration of the licence
These points may be covered in a non-binding term sheet at the outset of discussions.
Provisions regarding the ownership of improvements to the licensed technology are important for life sciences businesses to consider, particularly where such improvements could make the difference to whether a product progresses to commercialisation or not.
The licensee will wish to ensure that it benefits from any improvements made by the licensor to the IP during the term. The licensor may wish to obtain access to improvements made by the licensee, but parties should note that competition law may prevent a licensor from requiring a licensee to license back improvements by way of an exclusive licence.
Assignment and sublicensing
A common negotiation challenge is striking a balance between: (i) protecting the patents and know-how by restricting the licensee’s ability to assign and sublicence its rights, and (ii) allowing the licensee the freedom it needs to successfully exploit the licensed technology.
In the life sciences industry, small pharmaceutical companies and their assets are often acquired by larger pharmaceutical companies. It is therefore common for smaller licensees to negotiate against any obstacles to assignment, such as a termination for change of control clause or an obligation to seek the licensor’s consent. Balanced against a genuine need for control, a licensor may consider that restrictive assignment provisions could impede successful commercialisation of the technology (which would not be in either party’s interest).
To reach a compromise in the drafting, where a licensee is required to obtain a licensor’s consent prior to an assignment or transfer of rights, the licensor may agree not to unreasonably withhold or delay such consent.
If sublicensing is permitted, common controls include requiring:
- The licensee to replicate the relevant contractual terms in the sublicence agreement
- The licensee to take responsibility for sublicensees’ acts and omissions, and
- Upon termination, sublicensees’ destruction of any supplied materials or know-how.
Payment terms are crucial to any licence agreement and go to the heart of the commercial deal, essentially representing the trade-off for the ability to exploit the licensed technology.
Common financial mechanisms in licence agreements are royalties calculated as a percentage of product net sales and milestone fees (e.g., payments due per clinical trial phase and upon regulatory approval of a product).
Drafting points to consider include:
- How “net sales” of product will be defined, and any permitted deductions
- A reduced, “know-how only” royalty rate for when licensed patents expire, and
- The licensor’s right to audit a licensee’s accounts to ensure accurate reporting.
The licensor may also consider a buy-out mechanism allowing the licensee to pay a larger upfront fee as an alternative to the payments otherwise due throughout the term. The licensee effectively takes on the risk of the product not progressing successfully through regulatory hurdles, balanced against the potential reward of a lower overall cost if it does. The licensor benefits from the certainty of a significant, one-off payment.
Where the product created using the licensed technology will be a cell and gene therapy, the parties may consider alternative pricing models such as an annuity-based mechanism (where the cost is spread over several years) or a patient outcomes-based model.
Warranties and indemnities
A licensor will not want to give warranties guaranteeing the validity of patents or confirming that the licensed technology will not infringe the rights of any third parties because these matters are not fully within the licensor’s knowledge or control. However, the latter is often a point of considerable negotiation because a licensee will generally be particularly concerned to ensure that its use of the licensed technology will not infringe any third party rights.
A licensor however will generally provide warranties regarding its ownership of the patents, timely payment of renewal fees, and knowledge of past or current infringements of the licensed IP rights by third parties.
A key concern for the licensor is IP protection, so termination provisions may grant the licensor the right to terminate if the licensee’s actions could or have jeopardised the IP.
The licensee will want to ensure it can terminate the agreement upon notice for reasons such as the licensed technology not working as envisaged. However, the licensee will not want the licensor to have reciprocal termination rights, given the licensee’s investment of significant resources in developing and marketing products which rely on the licensed technology.
For pharmaceutical companies, the ethical implications of termination are significant where it would result in patients losing access to medicine. Agreements often provide for a transition period following termination to allow the licensee to dispose of existing stock (subject to usual royalty payments).
Dispute resolution and enforcement
Although parties will likely plan for a long and successful partnership, it is important to consider the appropriate forum for resolving any disagreements. Parties should agree on the jurisdiction and governing law at the outset, considering factors such as where each is based and where the licensed activities will take place.
In the life sciences sector, dispute resolution by arbitration is a popular alternative to litigation for various reasons, including:
- Privacy and confidentiality (i.e. no public hearings or publicly available documents) which is particularly beneficial when a dispute will involve confidential information
- The ability to choose arbitrators who are subject matter experts, and
- The ease of enforcement across borders, which is important given the global nature of the life sciences industry and cross-border pharmaceutical partnerships.
The new Unified Patent Court (UPC) offers a single method of dispute resolution for patent owners in Europe without having to bring parallel litigation in multiple jurisdictions. Life sciences cases have been prominent since the UPC’s opening on 1 June 2023, suggesting that early case law will be influenced by reference to life sciences patent litigation. Although the UK is not participating in the UPC, all businesses (including UK businesses) that own patents or SPCs in participating EU Member States automatically became subject to the jurisdiction of the UPC unless they opted out prior to 1 June 2023. Licensees should therefore check to establish whether the UPC will apply to the licensed patent portfolio.
Ideally, parties to a patent and know-how licence agreement in the life sciences sector should consider all the points above prior to negotiations. While the interests of licensors and licensees often compete, both parties will ultimately seek a productive partnership and a successful commercialised product. Through careful preparation and constructive discussion around key terms of the licence agreement, this can be achieved.