Category Archives: Commercial negotiation

10 tips for dealing with non-performing licensees

performanceTypically 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.

treborIn 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.

prejudiceThe 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.

 

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Filed under Commercial negotiation, Intellectual Property

Let’s get rid of the ratchet men

two wayLast week, IP Draughts co-presented a two-day course on clinical trial agreements. With practice-based courses, the discussion becomes interesting, at least for the presenter, when the people attending provide their own insights on the topics being discussed. This happened in abundance last week, and IP Draughts is grateful to all who contributed.

A theme that emerged in this course was whether a company’s template agreements should focus solely on providing maximum protection for the company, or instead should try to provide a balanced set of reasonable obligations on both parties.

What prompted the discussion was IP Draughts taking the class through the terms of a US biotech company’s template clinical trials agreement. The terms were excessively one-sided, giving the company maximum flexibility to tell the investigator what to do or not do.  They seemed to ignore the fact that the investigator has certain responsibilities under EU regulations to be responsible for its own actions and to seek consent from regulatory bodies (eg ethics committees), rather than just dance to the sponsoring company’s tune. It was interesting to compare these terms with the terms that are generally used in the UK, as issued by the Department of Health and negotiated between interested parties. The latter terms are much more pro-investigator, but they also try to address issues of concern to both parties including their regulatory obligations.

The wider issue is whether a company should have standard contract terms that seek to provide maximum protection to the company and largely ignore the interests of the other party. This type of approach is common in some market sectors. In M&A and some financial transactions, it seems that a buyer/investor will often wish to include in the agreement as many provisions as possible to protect its interests and minimise its risks. Or at least, they won’t tell their lawyers to minimise the use of legalistic contract terms, which may amount to the same thing.

This seems to have led to the proliferation of practices that, in other market sectors, can seem ludicrously aggressive and one-sided, eg demanding indemnities in respect of all breaches of warranty, having a party “represent and warrant” (supposedly to give additional remedies in tort as well as contract), and so on. It seems that lawyers in those sectors rarely stand up to their clients and tell them to stop being extreme and to stick to some simple, balanced terms. That just isn’t “done”. A forratchetmer colleague of IP Draughts, a corporate lawyer, called the lawyers who indulged in this type of competitive negotiation “ratchet men”, because they would squeeze out a concession, bank it, then move on to demand another, moving only in one direction like a ratchet mechanism.

In IP Draughts’ world, lawyers are usually “on tap” rather than “on top”. In other words, they are there as a resource but do not usually dictate the structure and agenda of negotiations. In this world, there is pressure to keep contract terms as simple as possible, and not to take extreme positions, because it is not efficient and does not lead to harmonious negotiations. A factor that possibly influences the negotiations is that these contract relationships tend to be long-term and require cooperation between the parties, rather than being a one-off in the way that an M&A deal tends to be.

IP Draughts suspects that some in-house lawyers, influenced perhaps by their training in large law firms, consider it to be their job simply to draft terms that protect their organisation, and that including terms to protect the other party is not part of their brief.

IP Draughts would like to encourage all lawyers to draft balanced documents, and all clients to give clear instructions that this is what they expect. By all means weight them to some extent in favour of your client or your employer, but not at the expense of seeing the other party’s point of view or addressing their legitimate concerns.

 

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Managing ambiguity in IP transactions

uncertaintyA job description recently caught IP Draughts’ eye. It requires candidates to “demonstrate the ability to operate effectively in highly ambiguous situations”. (The vacancy is for a legal manager in a university technology transfer office. If you are interested, you will need to hurry: the deadline for applications is the end of this month.)

Brief searching on the internet confirms that this quality is much valued in senior managers of organisations.

Ambiguity in this sense doesn’t seem to have quite the same meaning as a contract drafter might use it, to describe a contractual obligation that, through imperfect wording, may have more than one interpretation. Used in this way, ambiguity can be contrasted with uncertainty. The meaning of a contractual obligation may be uncertain, without there being any choice of meanings.

Instead, the term seems to be used in management theory to refer to dealing with uncertainty. Another way of referring to this quality is that a person is required to have the personal qualities to exercise good judgment in situations where he has incomplete information or conflicting pressures. This approach is sometimes contrasted with the one required for a techical role, such as a patent attorney, where the dominant requirement may be to apply technical skills in a consistent and rigorous manner.

IP Draughts can certainly see that senior managers need to be able to manage ambiguity, though if they are managing a team of technical specialists they may need to keep their feet in both camps, and be able to switch into technical mode when the situation requires.

It seems that one way of managing ambiguity is to build up a consensus among one’s colleagues.

alarm bellApplying these ideas to the task of drafting and negotiating IP contracts, several alarm bells go off in IP Draughts’ mind.

First, that (to put it provocatively) taking a touchy-feely approach to deciding what should be included in the contract is likely to result in sub-optimal terms. Instead, a careful analysis is required of the risks, the parties’ bargaining positions, the alternatives to doing the deal, terms that are deal-breakers, and so on. Once the analysis has been done – and it may be that you have incomplete information for making some of that analysis – a judgment call may be required. But the technical approach should be the starting point.

Second, that the drafting of the contract is a technical task, which requires the rigorous application of technical skills and not a “managing ambiguity” approach. “Drafting by committee” is the worst way of drafting, except perhaps in the final stage of negotiations, when there are only a few outstanding points, and when text can be displayed on a projector screen for all the negotiators to agree upon in “real time”.

Third, that the commercial decision-maker in negotiations may need to manage ambiguity when deciding how far to push a point. Sometimes negotiators refer to “constructive ambiguity” when agreeing a contract term that is not clear, but which they think gives them some “wriggle room” to argue for a particular meaning if a dispute arises. In IP Draughts’ view, some negotiators are far too sanguine about accepting terms of this kind, and the practice should be kept to an absolute minimum, if it is used at all.  He knows that some lawyers and commercial managers have a different view on this point.

In a university setting, there is so much ambiguity (in the management theory sense) that it is very easy to take bad decisions in relation to IP contracts based on a “muddle through” approach. Sources of ambiguity include:

  1. Are we trying to do a good IP deal, or to promote a researcher’s academic career, or to get technology out into public use, or to obtain short term revenues?
  2. Are there any terms that we cannot accept, or are unattractive contract terms just one element that goes into the mix when a senior manager takes a “managing ambiguity” approach to deciding whether to accept a deal? (Other elements may include keeping an important academic happy.)
  3. Do any of us have a good general overview of all the issues that go into an IP transaction, including legal risk issues, getting the technology into public use, advancing the research interests of the university, understanding how far one should push a commercial company in difficult negotiations, being willing to forego important funding if the terms are not right, and so on. Universities tend to be siloes of expertise, with the top management sometimes woefully under-experienced in the realities of commercial negotiations and commercial risk management. This may mean that the decision-maker (if one can be clearly discerned in a committee-based structure) lacks the necessary information and experience to manage ambiguity in an appropriate way.

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As was mentioned earlier, another way of labelling this subject is to refer to exercising good business judgment; this label focuses on the outcome rather than the process of arriving at the outcome, but they may amount to the same thing. In the context of negotiating contracts, lawyers are sometimes asked for their views on what terms should go into the contract; in other words, to make a judgment call.

wise monkeysThe traditional approach of external law firms is to drum into their junior associates the importance of avoiding giving a view on any commercial issue, and to keep good file notes to demonstrate how pure and undefiled they have been in relation to giving commercial advice. Commercial issues are for the client to decide! Of course clients don’t like this response, when they ask their lawyers for assistance on a difficult commercial issue.

IP Draughts chafed against this instruction when he was a junior associate, perhaps because he had been an in-house lawyer for 3 years before joining a traditional law firm. In-house lawyers are expected to be part of a commercial team, and not to stick to a purely technical role.

25 years on, IP Draughts can see some merit in the traditional approach. Nowadays he has enough experience to make commercial judgment calls; then he probably didn’t. Really, the client should only ask a partner or very senior associate to help with commercial questions.

Also, IP Draughts is less naive than he was as a junior associate. He has learnt that, while some clients want you to be part of their commercial team, appreciate  a “roll your sleeves up” approach, and won’t blame you if your commercial view turns out to be wrong (this is the type of client we try to cultivate), others take a more hard-nosed approach, and quite like the idea of being able to blame their lawyers for their own, poor decision-making. With the latter type of client, it makes good sense for the law firm to take a hands-off, ultra-careful approach.

 

 

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Just get the deal done!

try harderRonald Reagan once declared that the most terrifying words in the English language were: I’m from the Government, and I’m here to help. IP Draughts has a candidate for the most frustrating words that a contract negotiator will hear: just get the deal done.

Typically these words are uttered by a senior executive who has no direct involvement in the negotiations, and who is impatient for an agreement to be signed.  They may be passed down through several layers of management, like Chinese whispers, until they reach the poor, bloody infantry who are trying to ensure that the contract terms are appropriate for the organisation.

sopOften, it is not clear what this message means. IP Draughts would like to suggest that companies implement a Standard Operating Procedure (SOP) for Pressurising Negotiators. This will ensure that senior executives and contract negotiators have a clear understanding of their roles and responsibilities when pressure of this kind is applied.

Under the SOP, senior executives would be able to choose which of several messages to pass down to the negotiators.  For instance, they might include the following alternatives, each of which is followed by an explanation of what the instruction really means.

  1. Just get the deal done (my decision) – A1.” I have carefully considered the outstanding points in the negotiations and, based on my greater knowledge of the company’s commercial priorities, I have decided to concede all of those outstanding points in order to get the deal done in time for [the end of a financial reporting period] [the office golf outing]. Please just accept the terms on offer and get the agreement signed.
  2. Just get the deal done (my decision) – A2.” I have carefully considered the outstanding points in the negotiations and, based on my greater knowledge of the company’s commercial priorities, I have decided we can probably concede all of those outstanding points in order to get the deal done in time for [the end of a financial reporting period] [the office golf outing]. However, there are still a few [days] [hours] [minutes] to go before that deadline, and I would like you to keep negotiating as hard as you can right up to that deadline and [concede] [come back to me for a final decision on conceding] when there is no time left for further discussion.
  3. Just get the deal done (my decision) – A3.” I have no interest in the contract terms, and no real understanding of the risks involved in accepting those terms, but I have decided to concede all of those outstanding points in order to get the deal done in time for [the end of a financial reporting period] [the office golf outing]. Please just accept the terms on offer and get the agreement signed.
  4. Just get the deal done (I’m not responsible) – B1.”  I have no interest in the contract terms, and no real understanding of the risks involved in accepting those terms, but I am frustrated that the agreement is taking longer to negotiate than I would like. I hope that my instruction to get the deal done will somehow make the negotiators work harder to get the deal done. At the same time, please note that I haven’t instructed you to concede important points, just told you to hurry up and get the deal done: you are responsible for deciding what terms to accept in the contract, and I will blame you if the terms are not appropriate.”
  5. Just get the deal done (I’m not responsible) – B2.” I have no interest in the contract terms, and no real understanding of the risks involved in accepting those terms, but I am frustrated that the agreement is taking longer to negotiate than I would like. My interest is purely in the getting on with the project after the agreement is signed. I hope that my instruction to get the deal done will somehow make the negotiators work harder to get the deal done. I haven’t given any thought to who is responsible if my pressure results in a sub-optimal deal, nor am I really sure who takes the final decision on accepting contract terms.  I will probably blame you and/or deny responsibility if problems emerge after the contract is signed.
  6. Just get the deal done (I will support you) – B3.” I am frustrated by how long the negotiations are taking, and I felt it was important that you should be aware of my perspective as a senior member of the management team. My advice is that the parties should move promptly to a conclusion. However, I do not wish to interfere with the negotiations and I  trust you to proceed in the best way for our organisation. I will support you fully if the negotiations stretch out for a longer period, as I know you are doing your best for the organisation. Equally, if you decide to concede points in light of my advice, and in future the company suffers from these concessions, I will support you in that decision.

Have we missed any of the most likely alternative meanings? What is your experience of giving, or receiving, an instruction to get the deal done?

 

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Filed under Commercial negotiation