10 tips for dealing with non-performing licensees

Typically in exclusive licence agreements, and sometimes in non-exclusive licence agreements, the licensee has obligations to “perform” – to bring licensed products to market and to maximise sales. One of the reasons for including such obligations is that the licensor wants to avoid the  licensee “sitting on” the licensed IP, failing to exploit it yet preventing the licensor from doing so.

Below are 10 tips for dealing with the situation where a licensor considers that its licensee (under an existing licence agreement) is not performing its obligations to exploit the licensed IP, and is unable to get satisfactory information from the licensee that provides reassurance that the licensee is in compliance with its contractual obligations. In IP Draughts’ experience, this situation is not uncommon. Sometimes, it happens because the licensee is undergoing a corporate reorganisation and the project in which the licensed IP is used has been put “on ice” for many months while a new strategy is developed; the licensee may be unwilling to admit this has happened. Other times, the licensee is just very poor at communicating, or doesn’t wish to spend the time and effort necessary to keep the licensor fully informed of progress. On a few occasions IP Draughts has encountered a licensee who has stopped developing the licensed technology altogether, but is unwilling to admit this or negotiate a termination agreement, or sees no pressing need to do so. Meanwhile the licensor’s patent life is ticking away.

In all of these situations, the licensor’s attempts to communicate meaningfully with the licensee have failed, and something a little stronger is required. It may not be necessary to go as far as starting litigation, or formally terminating the licence agreement (though sometimes it will), but the licensee needs to see a determined course of action on the part of the licensor that is likely to lead to these outcomes if the licensee fails to respond appropriately.

Having said that, IP Draughts is not in favour of bluffing as, once the bluff is called, it is difficult to get the licensee to take the licensor seriously thereafter. Steady, unflashy, unexaggerated, clear, patient, determined, timely and above all believable action, with consistent follow-through, is the order of the day.

These are general tips, and different actions may be required in individual situations. The most important point to make is that you should consult at an early stage with your legal adviser and together work up a strategy for dealing with the non-performing licensee.

The tips are set out in order of activity, but some of them should be happening at roughly the same time. For example, it is conventional to assert rights in an “open” letter at the same time as making proposals for settlement in a “without prejudice” letter. Your legal adviser should be familiar with all of these steps and advising you on them.

1. Take legal advice. This point goes before all others. Don’t think in terms of legal advice meaning that you have to escalate the problem into something larger than it needs to be, or spend a huge amount on legal fees. A good lawyer will help you to take appropriate action, which may be a very light hand on the tiller in the early stages, to make sure you don’t steer into the rocks. At some stage, it may be appropriate to obtain a formal opinion on your rights and remedies, eg before you decide to give formal notice of breach or terminate the agreement.
2. Read the contract. What, exactly, are the licensee’s obligations under the contract, and what are the consequences of failure to perform the obligations? Sometimes, people make assumptions on these points without checking the contract carefully.
3. Marshall your facts. Put together a file of all relevant documents, including the agreement, correspondence, and reports. Make sure that people in your organisation who have had dealings with the licensee have made file notes of those dealings, particularly if they are relevant to the question of performance, eg if the licensee made statements on the subject in conversations. But do all of this in a disciplined way, based on advice from your lawyer (see above). Too often, a situation of this kind causes clients to send internal emails to one another that comment on the rights and wrongs of the situation. Those emails and other documents may be disclosable to the other side in litigation, and they may say things that don’t help your case. Your lawyer will be able to advise you on whether such communications and documents (a) should be avoided altogether, or (b) should be conducted in a managed way. For example, sometimes it may be appropriate to send such emails to the lawyer and thereby take advantage of “legal privilege” exceptions to disclosure. Other times, discussions should happen face-to-face, and not be recorded.
4. Reserve your rights. If you have evidence that suggests that the licensee is not performing, don’t wait for weeks before communicating with the licensee. Sometimes, it is important to send a holding letter in which you indicate that you have concerns and are investigating them, and in the meantime you “reserve all your rights”. This should help to avoid an argument that you have waived your legal rights by delay.
5. Follow a clear strategy. Develop a clear strategy for dealing with the dispute, and don’t fall into the trap of just reacting to communications from the licensee. Follow through on your strategy in a steady way. Make sure that senior management has bought into the strategy and is not deflected by noise emanating from the licensee (or from doom-merchants within your organisation). At the same time, keep re-assessing your options in light of any further information received from the licensee.
6. Give notice of breach. Once you know your facts, have taken legal advice and are clear that a breach of contract has occurred, you may wish to give formal notice of that breach to the licensee. Think ahead a few steps as to what you want to happen. Are you intending to go through with termination or just try to shock the licensee into action. How will they react to a formal notice? How will your organisation react if the licensee escalates hostilities in light of the formal notice? Is your organisation prepared to follow through?
7. Try to keep talking. In parallel to any formal legal action, such as giving notice of breach, it is usually desirable to try to engage in a dialogue with the licensee, with a view to resolving what has now become a dispute. A conventional way of doing this is to send the licensee communications that are marked “without prejudice” and which are intended to be part of negotiations to settle the dispute. These communications are run in parallel to the “open” communications that set out your organisation’s legal position. An advantage of without prejudice communications is that they shouldn’t be seen by the judge and therefore it is easier to be a little freer in what you say. As with all of these tips, individual jurisdictions may have different rules on these matters, so it is important to take advice from a local lawyer.
8. Don’t lose focus. Dealing with a non-performing licensee may not seem the most valuable or inspiring use of your time, particularly if you think the reason for non-performance is that the market for the licensed products is not good. It may be tempting to try to deal with the matter during lulls in your workload, when you are not busy doing deals that look likely to generate greater income. Unfortunately, this attitude can result in a patchy and inconsistent approach to resolving the dispute. This often looks weak, and results in delays. In IP Draughts’ experience, the best way of working to resolve disputes is to be steady and consistent. If the licensee doesn’t respond to your letter, don’t wait 6 weeks before following up. Make a note in the diary to follow up in, say, 16 or 17 days (2 weeks plus a couple of days for postal delays). Keep acting in a timely way. Plan ahead as to how and when you will escalate if the licensee ignores you. Don’t act precipitately, but also don’t fail to act. The best credit controllers take a similar approach and so should you.
9. Be prepared to compromise. Even if you think you have a cast-iron case, it is usually worthwhile to bend a little to achieve an agreed outcome. And most cases are not cast-iron, in which case it becomes even more attractive to try to settle the dispute.
10. Try to enter into a written settlement agreement. Even if the outcome is to terminate the agreement, it is generally desirable to have an agreed basis of termination, recorded in a termination and settlement agreement.