A patent licence negotiation can be an arduous process. Parties will cluster in a room (or increasingly over Zoom) for hours, taking breaks only for coffee or to use the bathroom, to hammer out an agreement.
Both sides want to walk out with good news for their bosses – which is normally that they have managed to sign an agreement that sets out an acceptable price for the technology, and that talks haven’t descended into litigation.
But despite best efforts on both sides, talks frequently break down, or at least hit roadblocks – and one of the key causes is patent valuation, according to in-house sources from Uber, Netlist and On Demand Pharmaceuticals. Agreeing on the value of a patent or a portfolio is often difficult because there tends to be a large gap between what the licensor wants and what the other side is willing to pay.
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Kurt Brasch, director of patent transactions at Uber in Chicago, says this gap is one of the biggest problems he faces in negotiations because the parties must spend a lot of time trying to break down the chasm between them.
“Valuations in the IP world are very much left up to the imagination and change drastically depending on the court system, who the USPTO director is and – to be honest – which way the wind is blowing that day,” he says.
But there are ways around this. Patent owners that want to agree a good price often compare their technologies to other tech in the market and prepare presentations to explain how the patented tech can add value to licensees’ businesses.
But even when both parties can agree on price, they may still butt heads on other issues such as what kind of role indemnification should play in the contract.
Valuation ventures
Patent owners can more easily value their IP if they have access to information on comparable licensing deals for similar technology, sources say.
But if patent owners have trouble finding comparable IP, they can structure their agreements in ways that give them flexibility in terms of future payments.
Joseph Contrera, chief IP counsel at On Demand Pharmaceuticals in Maryland, says a licensor that is unsure about whether a price is fair can narrow the contract’s field of use and charge more later if the other party wants to do something else with the tech.
He adds that there are tools that can give patent owners ideas of royalty rates generally associated with the products or services in the prospective markets. The Association of University Technology Managers and the Licensing Executives Society, for example, publish this information for their memberships, he says.
Licensees that don’t want to pay too much for patents can also draft clauses in agreements to assuage their concerns.
Brian Kacedon, partner at Finnegan in Washington DC, says businesses can request most-favoured licensee clauses or at least draft clauses to ensure that they don’t pay significantly more than what others are paying for the tech.
He adds that companies can look at what their competitors are paying for the same or similar tech if they can get access to that information.
Delving into disagreements
Sources say that when parties disagree over cost, the negotiation depends on how tied each side is to its original offer.
Brasch at Uber says if a licensor believes it can get $100 million for a deal and a licensee is not willing to pay, the parties may need a court decision to help change either side’s mind.
He says a summary judgment discussion or an inter partes review can help make the companies act more reasonably in negotiations.
Of course, a business may sometimes struggle to get another company to take a licence at all. Although a patent owner can also turn to the courts in this instance, litigation is not its only option.
Marc Frechette, chief licensing officer at California-based Netlist, which licenses memory module hardware, says operating companies can bundle their patent agreements with other benefits such as source code, know-how, and joint development arrangements to incentivise prospective licensees to sign contracts.
Licensing companies, he says, can demonstrate that licensees will save money by taking licences and that they aren’t being treated differently from their competitors. They can also motivate companies to sign licensing agreements by demonstrating the value of their portfolios.
Prepping private practice
Private practice lawyers can play key roles in these licensing negotiations, say sources.
Brasch at Uber says his company comes up with a lot of strategy internally, but it relies on private practice attorneys to do a lot of the “legwork” and take the patents apart to understand validity issues, infringement contentions and file histories. He also takes some strategic advice from counsel with a lot of experience in the court system.
He emphasises that he wants outside counsel to meet deadlines, produce quality work and – most importantly – do their due diligence.
“I don’t want to be caught in a discussion where they missed something. That puts me at a great disadvantage.”
But while in-house sources value technical expertise, they also care about outside practitioners’ personalities.
Brasch says he wants a private practice attorney who can work well with the other side and be personable. He says it’s fine if outside counsel get tough, but they should keep the negotiations moving along.
“I don’t want emotions to play a part in the negotiation. I want people to make decisions based on the facts,” he says.
Sources also want their private practice lawyers to be prepared for negotiations so they can meet any challenges brought on by the other side.
Contrera at On Demand Pharmaceuticals points out that licensees do research on their expected returns on investments and know the general ranges that they are willing to spend on technologies.
He adds that they come into negotiations with low prices. As a result, private practice lawyers that represent patent owners also need to do their homework before the discussions, know what the minimum value of the technology is and avoid going below that.
Indemnity issues
A company may struggle to get excited about a licence fee if it clashes with the other side on how to handle indemnification. A party that indemnifies another agrees to protect it from liability for damages.
Attorneys say that when two sophisticated corporations enter an agreement, they often decide that neither side will indemnify the other or that they’ll mutually indemnify each other.
A patent owner, after all, may want the licensee to shield it from liability if the licensee makes a product that harms people. And licensees may request indemnification against any liability related to patent infringement for the technologies.
But these considerations can get complicated when parties deal with smaller or government-owned entities.
Contrera at On Demand Pharmaceuticals says people in start-ups and universities have a lot of rules about indemnification. He adds that a lot of universities are state-owned and are not allowed to indemnify other people – and licensees that are not sophisticated may not realise that.
Kacedon at Finnegan adds that it’s important for a party that indemnifies another to set out a reasonable limitation or a cap on how much it can be responsible for. He adds that an indemnifier should also make sure that if it is responsible for litigation, it gets to control the litigation.
He says companies should think twice about asking smaller businesses to indemnify them because the small entities may not have the resources to stand behind a litigation.
Before they enter hours-long Zoom negotiations, counsel should think carefully about indemnification and valuation to maximise their chances of reaching a favourable licence agreement.
If they do, they may be able to hammer out these agreements quicker, take fewer breaks and save on licensing costs – or at least on coffee.
