7. February 2008 by Martin Suter.

One of the most contentious areas in licensing negotiations is in the area of ownership of derivative IP. The most effective articulation of the issue that I have seen was by Jill Riola, a highly capable licensing attorney working at Akerman Senterfitt in Orlando. During negotiations with a team of attorneys from a Fortune 500 firm that was licensing our IP, she brought it back to first principles:

·         We own our IP (blue Play-Doh)

·         You own your IP (red Play-Doh)

·         We are granting you the right to create purple Play-Doh, using our blue in combination with your red

·         But you do not own purple Play-Doh, because by definition, purple must contain some blue.

Furthermore, when viewed this way, all of the terms contained within the licensing agreement, including restrictions on Field of Use, royalty rates, etc., apply for all shades of purple Play-Doh.

We could get down in the weeds and occasionally lose sight of the issue, so it was amusing to watch how Jill would bring it back to first principles. “If it’s blue Play-Doh it’s ours…You own all of the red you can develop, but if it’s purple, you don’t own it, and you owe us if you sell any.”

Agree on who owns what Play-Doh upfront, and the specifics of the agreement will be much easier to draft later.

That’s my .02!

Martin

(martin.suter@iplicensing.net)

Play-Doh is a registered trademark of Hasbro, Inc. Its use herein is strictly to illustrate a legal concept. No endorsement by Hasbro is expressed or implied.

Posted in License Terms, Licensing, Derivative Work, IP | Print | No Comments »

3. February 2008 by Martin Suter.

How many people have considered that Microsoft is, at its core, a licensing company? And the licensing deal that essentially created the entire industry was the non-exclusive license to IBM for DOS in the 80’s. How different a company would Microsoft have been had they signed an exclusive licensing deal? Chances are that it wouldn’t still be around. Bill Gates certainly wouldn’t have become the richest guy in the world. As a licensing guy, I can only speculate on whether it was IBM’s negotiating naivete or Microsoft’s chutzpah that led to the deal being structured as it was.

Having sat on both sides of the table on various occasions, I have frequently found myself in a position where I’ve been able to help get to consensus because I understand where the conflicts may be and have been able to work through them.

Licensees almost always contend that they require some form of market exclusivity for competitive advantage. “Why would I sign a deal with you today if, tomorrow, my competitors can do the same thing?”

Licensors are thinking the exact opposite, “I can’t put all my eggs in one basket? I want to capture as much of the market opportunity as is possible, not be limited to a fraction of it.”

Perhaps even more importantly, what is the impact on the company’s potential for a liquidity event for its investors? Remember, once you’ve granted exclusive rights to a 3^rd-party, that prevents not only you, but any acquiring company, from pursuing that space. This may take a whole category of company off the list of potential acquirers at a later date. Try explaining that one to your investors!

So how do you reconcile these two positions?

The “need” for market exclusivity can often be a catalyst for M&A discussions, especially if the technology being licensed is the core franchise around which you’ve begun to build the company, or if the breadth of market exclusivity on the table prevents you from extracting value in other markets. But once again, these can be tricky waters to navigate. A technology acquisition requires you to consider valuation through a very realistic lens. The acquiring company will do an estimated build cost (# of person years x fully loaded cost per person year, around $200K per), and then offer a multiple based on their assessment of the value of time-to-market and your IP position, typically 3X-7X. As the inventor/entrepreneur, you need to be very realistic about their ability to get close enough to replicating that which you’ve built. Pride can get in the way, but do you really believe that Microsoft/Qualcomm/Oracle/Cisco engineers couldn’t do it?

If M&A discussions aren’t an option, then, in most cases, non-exclusivity should be the preferred path. One of the things, that the licensee doesn’t want to happen, is to invest its time and resources creating demand for a key feature, only to have a competitor come in and erode their margins selling the same widget at a reduced cost. A concession, that can help address this, is a form of price protection. In this type of clause, the licensor will agree to not license for license in comparable deals. The concept of comparability is key here. The consideration must be for similar product types, in similar quantities over a similar time period. If a subsequent licensee is pays a lesser royalty rate (or other form of consideration), a reduction in royalty rate will be accorded to the original licensee as well.

So, you’ve now heard that M&A is not an option at this time and non-exclusive rights aren’t either. Under what conditions can exclusivity make sense? My answer is twofold: Money solves a lot of problems, and that it is possible to tightly constrain the scope of a license, thus preserving your ability to license to others or for an acquiring company to practice in any field but the restricted field for which you’ve granted exclusivity.

How do you constrain the license grants? By placing boxes around the grants…I’ll explain more next time.

That’s my .02!

Martin Suter

(martin.suter@iplicensing.net)

Posted in M&A, Exclusivity, License Terms, Licensing, Microsoft | Print | No Comments »

1. February 2008 by Martin Suter.

So you’re now thinking that licensing makes sense as a means of accelerating the time-to-market and monetizing your leading-edge technology. You’ve identified the gorilla as well as the chimps in your space, and managed to get the attention of at least one of them. They’ve probably begun posturing and now they’re coming to the table to discuss terms. For most companies, this is a classic “Oh shit!” moment.

As I blogged previously, before you agree to sit down, it is imperative that you have established clear guiding principles. Your internal stakeholders must understand, talk through and agree to a position on the major issues. These are the “non-negotiables”, and can help prevent bad decisions from being made in the heat of a negotiation. Each of these must be taken seriously, as getting them wrong can have a huge impact on valuation and even exit potential.

Issues to lose sleep over

·         Exclusivity vs. non-exclusivity

·         Derivative works

·         Field of Use, Territory

·         Indemnification

·         Consideration (cash flow, NPV, etc.)

Each of these merits its own discussion. As my plane is now on final approach, I’ll have to get to these in future blogs.

That’s my .02!

Martin Suter

(martin.suter@iplicensing,net)

Posted in License Terms, Strategy, Licensing | Print | No Comments »