This is the first of what, I hope, will become a series looking at recurring issues in commercial negotiations. This post looks at the question of assignment of ownership of IP that protects early-stage technology, and why some parties are so reluctant to agree to it.
Owning the IP in technology that is central to your business model has obvious attractions. Many technology licensees would much prefer to have taken an assignment of ownership. Many investors will insist that it is not realistic to expect them to commit to a company that does not own the technology it uses. Tables will be thumped and investors’ faces will go purple with emotion as they try to persuade the owner of the technology to assign it over. This is even though (or perhaps because?) investors find it hard to explain what the practical difference is between an assignment and a robust, exclusive, all fields, worldwide licence.
Research institutions in particular are often reluctant to grant an assignment (eg to a spin-out company that they have formed). There are good reasons for this:
- Chief among them is the fact that a licence allows the owner to exert some control over the future use of the IP. Licensees can be prevented from using the IP for unsavoury purposes and can be required to apply the IP for the benefit of those who need it most (as opposed to those who can pay the most for it). Prohibiting the use of imaging software for adult entertainment, and ensuring that drugs are sold at affordable prices in the poorer regions where the disease is rife, are just two examples.
- Second, a licence can be drafted (even if it is an exclusive licence) that allows the owner to continue to make use of the IP. From the institution’s perspective, this is vital if a research group is to continue to use the technology for research.
- Third, with the judicious adjustment (ie lowering) of royalty rates, the licence can be structured such that much of the commercial risk rests with the licensee who can be expected to bear the costs of further development and commercialisation. This approach is popular with risk-averse or impecunious institutions. This is sensible if the IP owner has the wit to accept that the licensee is better placed to drive commercialisation.
- Fourth, ownership of the IP does not change. If the licensee proves to be flaky, ineffectual, incompetent or insolvent, the licence can be terminated. The IP remains in the hands of its owner from where it can be further developed or commercialised. (Legal note: contractual provisions allowing termination on insolvency don’t work in all jurisdictions.)
- Fifth, of course, licences produce revenue. To be more accurate (and less optimistic): carefully drafted licences of good quality technology that meets hitherto unmet needs in the marketplace will probably produce revenue in the fullness of time. Moreover, licences produce revenue in direct proportion to the actual sales of the relevant product. So, there is no need to turn to the crystal ball to attribute a realistic value to the technology before it has even reached prototype stage, which might be the case if the technology is sold (assigned) for a lump sum payment.
Just to be even handed, I admit that there can be advantages to assigning ownership. It allows the original owner to end their involvement and their liability for any further development or registration costs. It makes potential investors in the exploiting company happier. It can produce revenue in the immediate or short term (and possibly faster than a licence will). If the technology is well developed then there may be sufficient sales information to agree an accurate valuation. But these advantages are more likely to be relevant where the IP is well established and not where it is early stage.
My view is that licensing is more likely to be the better solution for the owner of early stage IP, particularly (but not only) if the owner is an academic or charitable institution. Ownership gives a greater degree of control and input and also a more realistic financial return (albeit that this revenue may not start to flow for a while).