The present article sets out from the deliberations typically arising in connection with negotiating and drawing up contracts and licence agreements concerning intellectual property rights. As point of departure, this article deals with the topic in a quite general way; of course, however, focusing in particular on licensing agreements in the biotechnological industry. The starting point is the viewpoint of the typical licensor interested in being able to control the right that is possibly the subject-matter of the protection. And this no matter whether the right is based on a patent owned by the licensor, or on an exclusive licence granted by a third person.
In its basic form, the licence to exploit the protected right (for reasons of clarity these rights, which, as it is, are the subject-matter of the licence agreement and are typically patented compounds, including in particular chemical compounds, are the following referred to merely as the “Material”) consists of the licence agreement per se. This article therefore sets out from the most important elements in precisely such an agreement in view of clarifying possibilities and restrictions. Typically, these are in particular provisions re. (1) the field of use; (2) non-exclusiveness; (3) terms of payment; and (4) multifunctional material, which especially give rise to challenges. The following is a review of the extent of the provisions, one by one, so as to outline the perspective of both the licensor and the licensee.
The word licence is derived from the Latin word “licentia”, which in direct translation means permission. Thus, a licence agreement is a permission allowing the licensee to use the object specified in the agreement and belonging to the licensor under the terms also specified in the agreement. In order for it to be possible to enter into a licence agreement and to thereby temporarily transfer the right to a specified use, there must exist an asset to be licensed. In intellectual property law, the asset is typically a trademark; a copyright; a design; a utility model; or a patent. However, it may also be a matter of rights enjoying no legislative protection. However, such rights would typically be characterized by being non-enforceable, or enforceable only to a limited extent. Another and somewhat more peculiar definition of the concept of licence is that it is an undertaking by the rights owner (licensor) not to prosecute the licensee.
Had it not been for the licence agreement, it might have been a case of patents law violation and the licensee might have been said to be an infringer. That licence agreements are entered into by, on the one hand (typically), the rights owner and, on the other hand, the licensee is of course because the parties have a perhaps mutually fortifying relationship. The rights owner has a more or less tangible asset, while the licensee has a need or an initiative which needs or could be fortified by using the asset in question. Since the asset is typically protected and cannot readily be copied or replicated (for example by a patent), an agreement must be drawn up as to lawful exploitation. In addition to the provisions mentioned above, such an agreement contains a number of standard elements; eg fixing of duration; definition of territory; settlement of disputes; venue; renewals etc.
Field of use
The typical licence agreement is drawn up in English, and the provision is usually called “Field of Use”. As the wording suggests, the provision governs and delimits the licensee’s access to use the material for a specific use. Generally, a provision as to field of use will stipulate whether the licence is exclusive/non-exclusive; refer to the Material (typically the patent/patents); delimit the territory within which it may be used; and define the nature of the use per se. The use as such may be all fields of use; such as selling; importing; manufacturing; processing etc.
Provisions governing the field of use call for special attention within biotech where the Material is typically very complex and might have several properties. Imagine a Material with eg. potentially both diagnostic, prophylactic, and healing properties; in respect, however, of different types of conditions/ indications. Perhaps use for humans as well as for animals. If the necessary deliberations are not included in the wording, the licensor risks putting himself partially out of the action. An exclusive and not adequately restricted provision potentially bars the licensor from not only maximizing his rights but also from expedient exploitation and distribution rights wise. Hence, wordings of provisions as to the field of use require great circumspection, and it is extremely important that the wording be precise and unambiguous. What one should bear mind ultimately is the court’s assessment of the concrete wording – would a judge, being the independent and impartial party that he is, consider the wording to be unambiguously and precisely defined?
Of course, the perspective is not the same seeing the exploita- tion from the point of view of the licensee and licensor, respectively. The licensor wants to maximize his use of the Material and in so doing has an evident interest in restricting the field of use as much as possible. Maybe the Material has turned out to have properties in diamentrally different directions so that potentially separate licences could be granted on the basis hereof. Perhaps the properties might have surfaced merely at a very early stage so that there is in no way certainty of real results. Nevertheless, it would be decisive here to have a precisely defined delimitation so that the potential exploitation of the “secondary” properties is taken into consideration.
On the other hand, as point of departure, the licensee wants the broadest possible protection with very general use, or with no restrictions at all. However, in practice, this will depend entirely on the concrete situation. If we are dealing with Material at a very early stage of development, the licensee would, ceteris paribus, tend to receive a less restricted licence than if the Material is finished developed, and where perhaps a license has already been granted to another licensee. In the first situation there are typically also considerations as to financing, which in respect of the licensee creates a strong incentive to less or no restriction of the field of use.
The very nature of granting of a non-exclusive licence involves also a right to grant further non-exclusive licences. This necessitates deliberations as to restrictions as regards, for example, territory and field of use as the potential consequences hereof might amount to inexpedient competition among the individual licensees and result in poor exploitation of the Material (although, typically, the licensor’s point or departure would be that non-exclusive licences maximize the value). As described above in respect of the restrictions as to the field of use, licensor and licensee quite naturally have opposite interests.
Although non-exclusiveness in licensing matters is quite common this is not – because of the typically hefty development costs – seen as often in biotech, and is typically used in connection with more borderline inventions, such as drug transportation/drug delivery. Thus, in this connection non-exclusive licences are typically seen where the licensee, on the basis of an own patent, takes out a non-exclusive licence on the first mentioned method in order on that background to obtain exclusiveness as to the total package.
As described under Field of Use there are many possibilities of tailoring the licence to the nature of the exploitation. If, as point of departure, the licensor wants to grant non- exclusive licences, a licensee may argue to the contrary by restricting the licence eg to the nature of the exploitation and/or the relevant territory. If the exploitation could take place by treating eg. humans as well as animals, exclusive licences can be granted for the respective forms of exploitation to the effect that one licensee obtains exclusive rights to the use on animals (and nothing else), while another licensee obtains exclusive rights to the use on humans (and nothing else).
Although the terms of payment may vary considerably from licence to licence, and al- though these terms clearly concern the more commercial part of the licence agreement, there is nevertheless in practice a tendency as to the nature of the payments marking in particular biotech licences. Usually, there is a fee for the licence itself to be paid in connection with the entering into the agreement as such. (License Fee). Additionally, there are typically annual fees which, however, might also be sub-divided into other periods; eg Periodic Fees; Milestone Payments; Royalties; and typically also payments for obtaining a patent (Patent Prosecution). Although rates and percentages have some typical margins, they are subjects to general market and business forces and depend, like in so many other situations, on mutual inter parts, relationship and strength.
Talking Licence Fees, the size greatly depends on at which stage in the developmentalprocess the licensor stands. Typically, the fee should be seen in the light of the developmental costs associated with the invention where the licensor, on an advance basis, recovers some of his investment. Conversely, the licensee might have partaken in the development, or the licence might be so cost-intensive on the part of the licensee that this part of the payment lapses entirely. Milestone payments are quite common and are often based on the crucial points in the developmental phase. In such case, the licensee pays, on a running basis, for successful accomplishment of the milestone in question; for example “identification of drug candidate”; or “carrying out of clinical experiments”. The annual fees are often royalty payment related. They create an incentive for the the licensee to exploit the licence and normally lapse when the licensee has achieved certain minimum sales. What is the idea is that the annual fee should have a size forcing the licensee to exploit the Material in order to thereby annul the annual fee and create profits, not only for himself, but also for the licensor. It happens that a licensee takes out an (exclusive) licence in order to precisely prevent the propagation of the Material, which would not generally be in the interest of the licensor. Hence, the balance is to fix the size of the annual fee so suitably high (but not too high - in which case it might deter potential licensees) that it deters”passive” licensees from bidding in.
The complexes of problems associated with multi-purpose material are closely connected with the Field of Use. If the properties have been mapped, this of course offers wide possibilities of sub-dividing the licence in order to thereby maximize the exploitation; see also above under Field of Use. If, on the other hand, the Material has not been finished developed, there are good possibilities (and risks) for the licensee as well as for the licensor of obtaining favourable contractual terms.
Imagine a situation in which an investor is faced with a potential, albeit uncertain, break- through in the company that has been invested in. The company has seen indications that the substance researched possesses healing properties as regards a specified cancer disease, but also has potential, albeit not yet researched, indications, of an entirely different property. In his engagement with the company, the investor – the potential licensee – has an option to take out a licence; but seeing that the option expires at some point in time and as the cost of taking out the licence depends on the developmental stage of the Material in question (for example at milestone regulation/identification of candidates etc), it may be all important for profitability that the option is used at the “right” point in time.
If the option is used at the specified point in time, the licensee would readily be in a situation where a licence is obtained for all potential forms of exploitation of the Material, since this is how far the company has gotten, and as at this point in time the patent application would be as broad as possible. If the licence is not taken out until at a later point in time, the licensee risks getting a restricted licence at a higher price, whereas the licensor is in a situation in which several (exclusive) licences could be granted with resulting higher profit. On the other hand, the opposite risk situation exists if a licence is not taken out now and if subsequently it turns out that the Material failed and/or did not possess the properties it was thought to possess.
It is a fact that licensing of intellectual rights plays an extremely prominent part in modern society and also in the global economy as such. Numerous business models, such as for example franchising and technology transfers, are based solely on IPR licensing, and today licence regulation is a separate field of jurisprudence composed of general contract law and the set of intellectual property rules. Investment is increasingly made globally in the safeguarding of intellectual rights of companies, and as licences are a natural collateral consequence hereof the sums spent on entering into licence agreements are increasing correspondingly. Today it is not uncommon therefore for a manufacturer/licensee to have to realize that his profits on own products are beaten by the licensor’s earnings from the very licences allowing the manufacturer to manufacture the products to begin with.