Speaker 1  0:00  
Hello and welcome to today's autumn webinar sublicensing harsh scenarios and how to avoid them. My name is Dan McCollum, I am one of autumns educate team and today's staff hosts. All lines have been muted to ensure high quality audio and today's session is being recorded. If you have a question for the presenter, we encourage you to use the q&a feature of your zoom toolbar. Should you need close captioning during today's session, this zoom live transcript feature is turned on and available on your toolbar. Before we began, I would like to acknowledge and thank autumns online professional development sponsor, Marshall Gerstein, we appreciate your ongoing support. Now, I'd like to welcome today's panelist, Dr. Andrew Tingey, has over 20 years experience in a variety of commercial roles centered around licensing and other IP based transactions. Andrew has real hands on experience of deal making, and hundreds of IP based transactions from the perspectives of big corporate, venture capital and top tier technology transfer offices. Since moving to consulting, Andrew has successfully completed several IP transaction projects for clients, and multiple sectors, including in and out licensing, with an emphasis on valuation and determination of acceptable deal terms. Andrew was previously Head of Technology Transfer for Imperial College London, overseeing the formation of dozens of startups, companies and the completion of over 300 license agreements. We're excited to hear from you today, Andrew, it's all yours.

Speaker 2  1:47  
That's great. Thank you struggling to share the slides or are you just let me go straight into my you

Unknown Speaker  1:52  
can go straight to you. Excellent.

Speaker 2  1:59  
Okay, we should be looking at the first slide in the presentation now. So welcome, everybody. The title of today's presentation is sublicensing horror scenarios and how to avoid them. And thank you, Anne, for the introduction there. I think you've covered all the main points. Certainly, from my perspective, I've seen both sides of the negotiation table, if you like from tech transfer, having worked at Imperial College London, and also for large corporate as well negotiating in licenses of IP, and how these things crop up in different types of agreement, like jbase, and joint ventures, partnerships, etc, etc. It's amazing how pervasive license agreements are in that. So I've been doing this a long time. And I gave a presentation a few months ago. And looking for new material, I was wondering what sort of topic and licensing might be of interest. And I kind of settled on sublicensing because there isn't very much information out there. And I don't think it gets the always gets the attention it deserves in agreements. And it can go badly wrong. And I'll give you some examples of that during the presentation. So whilst there is some basic information in here, I hope there's going to be something for everybody. And I'll illustrate things that can go right and things that can go wrong, and what to do about them if they do. So let's get started. So I think when you negotiate a license agreement, you quite often spend a lot of time and effort on negotiating the key financial terms from the perspective of the of the licensee, and trying to get royalty rates, right and trying to get the amounts of fixed payments, right and all the other terms and conditions right? And then sometimes you can kind of ignore or forget about the fact that the licensee who you're negotiating negotiating with is not necessarily the entity which is going to take the product to market. And they might well look to sublicense your IP to somebody who is the classic case of that, from a TCO perspective might be a spin out, for example. So I've had long discussions with with spin outs about product rolls, his net sales or autism, things like that, knowing that that's been out is never going to produce product. Okay, is he going to license it via a sub license or maybe we're gonna get acquired or something like that it's going to happen, but the people I'm talking to are not going to have to pay the royalty which we're negotiating. And there's a couple of things about sub licensing. So you're looking at a point in the future and the value of the asset that you've licensed will have changed from the time when you've negotiated that for is licensed, so your licensee will have developed it nor de risked it, perhaps, maybe it's been bundled with other bits of IP. And maybe they've added a lot to it themselves. So it's not quite the same beast that you licensed to them in the first place. And somehow we've got to predict what that might look like, or introduce some safeguards to make sure that we don't end up on the bad end of the deal, because when the sublicense is negotiated, we are not going to be there, helping them with that they're going to do the sublicense themselves, they're going to negotiate that themselves. And there'll be doing it for their own benefit, not necessarily yours. Whilst you might be very friendly with them at that time, things will have moved on. When the first license was signed, things were moved on and had new investors and they've been pleasing another set of stakeholders. So maximizing roles is back to you as the tech transfer office is not going to be key for them, it's going to be maximizing return for their current set of stakeholders. So there will be a little bit of disconnect in terms of of interest there. And another example might be if you've licensed platform, IP, there may be technology areas, which are not core to the licensee that they're just going to essentially outsource the development and marketing of or it could be that there's a particular geography that they're not active in, and they need to find a partner to sublicense the IP two is active in that geography, and can take that product to market more effectively. So there are many, many cases in which sub licensing starts to become the dominant model business model for the licensee. And there are many scenarios where their interests are not going to be totally aligned with yours. So how can we how can we configure this? Well, the easiest thing we could do would be to simply switch off supply syncing, which is relatively easy to do in the agreement, you just withhold the right to sublicense as long as you make that specific and explicit, it's not a good idea to kind of stay silent on sublicensing. And hope that people just realize what that means you've got to sort of specifically have language in there, which says you don't have the right to sublicense. The issue then is, as we've just discussed, it could be vital to the business model of the licensee that they sublicense it otherwise, they're going to miss out on key markets or key applications of the technology. And then you as the licensor are not going to get the amount of royalties that they think you're going to get. So that's a fairly drastic course of action to take. And probably it's not going to be applicable in all circumstances. And the other thing is, even if you explicitly turn off sublicensing, you have to be a bit careful about the grant of rights clause language, because if it has things like have made, or have sold in there, you've already got the implied ability to sublicense in the licensing for that purpose. And there are specific issues that I've heard about with have made and a lot of people have actually come up to me and told me that this happens, there is evidence sort of for it kind of online, but I've never actually experienced it myself. And that is that you have Outsourced production of a licensed product. And that entity is busy making whatever it is the widget or the product that you intend to sell, and then it delivers that consignment to you. And yet, somehow they've made a lot more than you originally thought. And some of those find their way to the marketplace without you realizing. So essentially, you now have a licensed product being sold in the market and you're not gonna get royalties on it. Now, who do you go after then everybody will say it's somebody else's fault. And they have made the manufacturing company can't they're not infringing your IP, they've got that handmade, implied license to manufacture. But it might specify how much so again, the people have come to me with a story and said that, well, we did this and then all this stuff just ended up on the on the marketplace, and we didn't know where it come from. So what can you do about that? Well, I mean, you can have specific clause language that relates to have my agents sort of separate that out and specify that, for example, everything that's manufactured under that clause has to be returned to your licensee. Or you can even ask to see the purchase order numbers. So you can check the amounts being made and things like that begin as well. It's a bit of a theme. If we're going to do things like that, of course, somebody has to check these things and make sure they're right. And that takes time and takes effort and takes people so maybe you do want to do do that maybe you don't want to do that, but it's just a watch out on on have made that. So the other thing is your main strategy over licensing. So if you're intending with a platform technology, for example, to do a lot of non exclusive licenses, then you probably don't want to allow your first licensee to sublicense because they're going to go off and do all that for you. And take, as you will see more of the income in doing so. So you may unless there's a very good reason for them to have some licensing rights, switch that off for non exclusive licenses so that you get to do those licenses rather than them. So right at a fundamental level, there are some decisions to make about whether you're going to allow sub licensing or not allow sub licensing, and already some very fundamental basic terms and conditions that you want to apply to that. So assuming we do want to sublicense and then we're going to have to be very specific about what happens in those circumstances. That's what we're going to come on to next. So hopefully, you're all with me. Don't forget, if you've got any questions during the course of the seminar, please put them in the chat. I can't see them as they pop up. Because I'm just seeing the full screen in the presentation. But we'll come back to them at the end and do our best to to answer them.

Speaker 2  11:25  
Okay, so let's just diagram out what's going to happen, right, we're sitting here as the as the licensor. And there'll be a licensee, and we're going to transfer our IP rights to the licensee under the license. And then there's going to be a sub licensee. And somehow we get the IP rights to them. Well, that'll be a contract, as we've discussed between the licensee and the sub licensee, which we're not going to negotiate. And we call these lists of terminology I'll use throughout the presentation. So the top one is the head license that's between us and the licensee. And there'll be a sub license then between the licensee and the sub licensee, I've also seen the term, sublicense, or and sublicensee. But that for me, it starts getting a bit confusing. So stick to call in the licensee in the sublicensee, for now. And hopefully, the sublicensee will make some sales. And they will start paying royalties back to the licensee. Again, a key point they don't pay them straight back to you was licensor their contractors with the licensee, so that's who they're gonna pay. And then somehow, those royalties have to get back to us through the licensee. So they're gonna be playing a role in collecting and paying those royalties and calculating them. So you have to give them the set of rules on how to do that. Okay, so in this case, we've got these light gray areas, or IP rights, and the red arrows are waters and cash flowing, I'll try to stick to that color scheme later on in the presentation as well. Like the form of those roles is going to be different in in many cases, it could be fixed fees per unit could be annual fees, it could be milestone payments, it could be signature fees, it could be running royalties, and things like that. So we're going to have to decide how we're going to deal with all these different things in the sublicense and give this precise set of instructions to a licensee on how to collect them, and how to send them back to us because we what we don't want is then deciding for themselves how to do that. Because again, as we've discussed, they'll probably do that in their favor rather than yours as the licensor. So the first thing that you can do is specify that any transaction they do any sublicense is at arm's length. And probably you've seen this language previously. What does arm's length mean? Well, we've got a definition here. Essentially, what this says is that the two parties of that transaction, so the licensee and the sub licensee have to act in an independent manner. So in other words, they will be doing this deal as if they didn't know each other and have no other business relationship, ensuring that you get a fair business deal. So in other words, you're going to get fair value for the IP. It prevents them from doing a so called sweetheart deal. So for example, they minimize the value of the IP that you've licensed them in order to get a better price on the IP they've developed themselves, for example. So the fact that it's at arm's length means that they can't undervalue your IP in a sense, they've got to act properly unfairly in that. So they are acting in their own self interest and not subject to pressure from the other party, which is all great in principle, but this doesn't this is quite a subjective measure in some case. says there's no objective way of deciding. That's definitely arm's length. And the other problem is that if the licensing sublicensee are in a wider partnership, they're collaborating on other projects and things like that, there's going to be big incentive for them to cement that friendship by doing a non arm's length deal. So it's going to be difficult to police and decide, but it's better than nothing. And at least if you've got that language in there, it means they can't give away your IP for nothing. So a reasonable again, very top level safeguard.

Speaker 2  15:41  
When it comes to these financial terms, which are now supposed to be at arm's length, there are two basic ways that the licensor can collect these royalties. So there's what we call a net receipts, royalty, net receipts being all the income that we're going to get from the sub license. And the other way is to actually split up the payments, and have a sublicensee royalty, and a percentage of fixed payments. So at this point, you sometimes it is sublicensee roles, he'd been called up, reach through or a pass through royalty. Again, terminology wise, that can get confusing because it can apply to other scenarios where you're trying to claim royalties on different products. So I'm going to stick to sublicensee royalty, because everybody knows what I'm talking about. And percentage of fixed payments as well, which is handled slightly differently and present their own problems actually. So I don't have a snappy way of describing the second scenario, which I did clinical, he's got any suggestions, maybe you can put that in the chat molar credit you and the next time I do this presentation. But so these are the these are the two approaches, we're gonna go through them in turn, how they work, essentially, each one has its own pros and cons. By the way, neither of these are perfect solutions. But let's outline some scenarios. And you can see how they might be used. So again, let me build that out for you. Here we are with our licensor with a head license with a licensee. And then they got the licensee is going to sub license to the sub licensee, and the sub licensee is going to make sales on which it has to pay royalties of some description, and always going to make fixed payments back to somebody which indicates to the licensee so that goes on money back to the licensee. And then this method simply says whatever you get in terms of income from the sub license, we are going to take a percentage of it, regardless of where it's come from, regardless of whether it's sales, royalties, milestones, annual fees, whatever type of other financial term recently, the sub license agreement, we will simply take a percentage of it back to us and we don't care how or why that's been derived from a percentage of it. Okay, so this looks quite simple. On the face of it, it's subject to a few complications. But essentially, it's reasonably easy to calculate. Let me give you a worked example here. So we set this rule team. So let's say it's 10%. Net receipts royalty, and the licensee does a sub license with a million dollar milestone there, and 7% royalties, so their sub licensee hits that milestone and make sales of $14 million. So the income to us is a million. So it comes to the licensees 1,000,002 point 8 million of sales royalties, and we are on 10% of that. So the return to us as a license or as $100,000 plus, that's 10% of the milestone, and $290,000, which is the percentage of the running royalties, and we get a total of $380,000. So maybe you can see already this might be affected by certain types of feel, particularly ones where cash does not change hands. A couple of examples of that would be for example, if the sublicensee gives equity to the licensee instead of cash. What can we do about that? Because there's no money changing hands at that point. So can we get 10% of the equity the shares, but difficult to administer? And maybe sublicensee doesn't want us license or owning equity in it. Its relationship is not with you it's with the licensee. I have seen clauses in license agreements where the licensee has to pay the cash value of those shares back to the license or if it takes equity, which again is okay. If you You can come up with a reasonable value for the cash value of those shares. Because the idea is presumably that these shares are going to increase in value over time and become more valuable. So should we get the value but they might be in the future value they are today, or something in between that can be quite tricky to work out. The other type of scenario is that maybe there's a cross license. In other words, actually, two parties, the licensee and the sub licensee, have decided that they both got IP that they need to license and they equate the value, or at least one largely offsets the value of the other. And in that case, again, locash is changing paths. So what value do we get out of this? Because they've done a deal, which involves cross licensing. So that could be an arm's length deal. And equity base deal could be an arm's length deal, but suddenly, we don't see any type of cachet. So Matt, can be a bit tricky to, to work out as well. What the cash value of those things might be, even if that's specified in the license agreement. And the other problem is, what happens if there's more than one sub licensee. So we've got the same diagram here. But now sublicensee, decides to sublicense its IP rights, again, to a sub sub licensee. And that happens again to a sub sub sub licensee. You might think this is extreme, but I've seen this happen. I've seen an instance where literally additional layers were introduced to dilute royalty payments back to the licensor, okay, so if you don't control this, somehow, you're going to be further and further away from where the sales are actually happening, and where the fixed payments are going to be made. And collecting it through a network of sublicensees is going to get very, very difficult. Because if anything goes wrong, they'll start blaming one of the other entities for the problem. And suddenly, you're left with not very much at all. So how do we deal with this? We're getting further and further away from the money, can we put some sort of controls on to stop this happening or prevent it somehow. And there are ways you could do that.

Speaker 2  22:27  
Which we'll come back to. So the other thing is actually setting what this net receipts percentage should be. Again, there are lots of resources out there. To tell you what royalty rates ought to be in various industries, there are far fewer that explain what net receipts ought to be in different industries, or should they be broadly the same, and you know, whatever, whatever and or should, it depends on the state of the technology. So again, no hard and fast rules here, this often comes down to experience and discussion with the licensee actually itself about what you can put into that original license agreement. But whatever happens, we are assuming that by the time sub licensing happens, there's been some sort of added value by the licensee, before they're going to do is sublicense your technology within a year of signing the first license, they're essentially just being a distributor. And they shouldn't be getting a huge chunk of the royalties that come out of it. So you may want to tear this royalty down so that if they sublicense early, the net proceeds percentage is very high could be 50%, or even more, in some cases, to deter them from just flipping the technology off to somebody else. And then gradually over time, you assume they add more value to it until maybe after five years in this case, you can assume they've added 90% of the value and they're actually doing their own deal and taking the cost of that. So they're going to keep 90% of those net receipts and pass plus 10% on to you. So that seems to be a sort of fair way of doing it. But these time periods, these percentages are not set. It's hard to sort of work out what they should be you can get more of an idea in life sciences and pharma than for other sectors. But again, although some sort of tearing down make sense, the absolutes are often down to negotiation at this point. So what is the other approach then if we're struggling to set net receipts percentages, how can we deal with that and also prevent some of the problems that we get with that net receipts approach, but what we can do is apply the second method which is sublicensee royalty, and this time we're going to split these income streams. So again, let me build this up for you. Also have a license or licensee or sub license See, again that flow of IP rights had license sublicense. But now we're going to divide up what happens between sales royalties and fixed payments, we're going to set different rules. So for us net sales, the running royalties are going to be collected again by the by the licensee, and also fixed payments. But once we apply this percentage to fixed payments again, so we're going to take a percentage of those, I'll come back to how that might work. We deal with sales waters a bit differently. Okay. We're going to set what the sales rules he is going to be even in sublicense. So essentially, now, it doesn't matter who's making the sales, it is a sales role to that we set the place to it. So we are guaranteed that sales royalty, regardless of who makes the sales could be the licensee making the sales completed sublicensee We're going to get that fixed percentage which is specified right at the beginning of this process. So whilst the fixed payments, percentage might be variable, if we know what the sales are, we know what we should be getting in terms of royalties here. And if we look again, at how that works in practice, let's look at that same scenario again, right. So we've chosen the same fixed payments royalty as the net proceeds royalties, we get 10% of all the fixed payments sublicensee royalty, we set at 4%. And then our licensee goes off and negotiates a sub license with that same $1 million milestone, and 7% of sales royalties, okay. The sublicensee, same performance hits that milestone, like sales of 14 million, the income to the licensee is exactly the same as 1 million for the milestone 2.8 million in royalties, but this time we return to the place and so rather than being $390,000 is 1.8 million, because we've got that guaranteed sales royalty on sales. Okay. So that looks great. From the licensor perspective, right? We just got nearly six times the amount of royalties we would have done otherwise happy days. The problem is that we we kind of crippling the licensee at this point. Now in this scenario, we've set the sublicensee royalty of 4%. Okay, and they've managed to do a deal for seven, but that means they're handing over more than half the net sales royalties back to the licensor. Okay, if they could only get a sublicense royalty of five, they'd be paying 80% of their relatives back to the licensor. So effectively then we would make it an economic for them to sublicense. So we've got to be really careful, we don't set that sublicensee royalty too high. And it probably won't be the same as the sales royalty that your licensee gets for exactly that reason, because we can just make the whole sub licensing process on economic very quickly. Although it gives us some advantages. And again, setting exactly what that sublicense royalty should be, can be difficult. Again, in life sciences and pharma. There is data to say okay, well, if they sublicense at this point, then they should be getting a royalty rate of X after it saves after phase two or something like that, with a certain degree of confidence, but if they have to sublicense earlier for some reason, then that is not going to make sense. And they will be locked into a deal where they have to charge and pass through this sublicensing royalty. So that can get ugly for the licensee very quickly. So, if we answer the question, should it be the same as the net sales royalty? Probably not. So that's something you're going to have to deal with and think about. And we are again, we're trying to predict the future, right at the beginning of the licensing process, and work out what they're gonna do further down the line and start setting parameters on it, which you can expect generates quite a lot of pushback from the licensee. And the other issue is, okay, so you said about the percentage of fixed payments, but we're talking about two different deals here. So what happens if the milestones are different? Okay, in some respect. So in this scenario, okay, on the left, we've got our head license. This is what we agreed with the licensee, and we have a first commercial sales milestone of a million, same as in the previous scenario, but when they negotiate their sublicense, they managed to get two milestones in there one for first commercial sale in the EU for 2,000,001 first commercial sale in The US for 2 million. So now what can we get? Right? Well, do we get the first milestone? Do we get back plus some percentage of the second milestone or both milestones that they've negotiated? And would it be legitimate to take a percentage of that, given that they're not the same? They're worded differently? So how does that work? And again, you're going to have to be very, very precise in your contracting language about how this is handled, because there will be differences. And I've, again, I've seen language, which says, Well, if you get a milestone triggered, then anything that's earlier in the development pathway, in terms of milestones is automatically triggered in the head license. And if there are other milestones, as in this case, then yeah, we get a percentage, but it's only the first one, or it's essentially the first one and half that percentage of the second one. You can you can play all these sort of games and do all sorts of different things. But whatever you do, you've got to be precise about it. And again, it's a good idea to have a couple of worked examples in the agreement are a big fan of that, especially if the royalty calculations are going to be complex in explaining what happens. So these are the inputs, just like I had on those previous slides, this examines some likely scenarios, and this is what the payout would be. So there's no argument, there's no other we didn't realize it's going to be like that. It's all in the agreement in black and white for people to take a look at. And that's quite often good practice. So we will probably have to deal with this situation whereby these milestones are different, and again, contracts our way around it.

Speaker 2  31:46  
So if we summarize them, just from the financial perspective, these two approaches, net receipts, which is just again, a percentage of anything that comes in, it's relatively simple to calculate, you know, for both the licensor and the licensee, it gives the licensee flexibility to come up with what deal terms it likes, for that sub license, at least got some surety about what's going to happen afterwards. However, it's vulnerable unless you take steps in the contract to prevent it from these cross licenses for equity licenses with no cash changing hands. And also, if there are multiple sublicense tears, you know, what happens? Are we still going to get the same percentage or is this somehow diluted in a way that we can't easily predict. With the sublicensee royalty approach, we've got this different calculation for different income streams, which is a little bit more of a challenge to calculate. If we get our sub licensing royalty wrong, we can make sub licensing completely uneconomic for the licensee, but we do get surety on royalties from sales, whatever happens, and we don't care how many tears they sublicense through, because we're still gonna get that sales royalty payment back for paid back to us. Walking out however that is configured. So pros and cons of each approach. And also, we have to deal with this issue that I just mentioned, of different milestones and things like that, how to contract it. So easy approach, more complicated approach, both have their pros and cons both have their place. And it was all about the context and what you're trying to achieve in your agreement. Now, the other issue is that we may want to put in other terms and conditions in a sublicense other than just financial important as the financial aspects are to us. There'll be other things that concern tech transfer offices and universities that they're part of. And one of those might be the sectors in which that sub license can occur. Again, you'll probably have your own policies in each different university. But certainly at Imperial, we would not be able to license to tobacco companies, or to gambling institutions and a few other prohibited sectors as well. So we'd want to make sure that our licensee can't do that, either. So there'll be that specific prohibition in the license agreement, you cannot sublicense to any company in these sectors. And again, make that very, very clear. The other thing we can do is actually control the number of tiers of sub licensing. So we can say, well, you can you can sub license, but you can only sub license through two tiers maximum. So that's somewhat solves the problem of the net receives approach and having multiple hundreds of tiers of Sub Sub Sub Sub Sub licensees in there. Again, sometimes, you know, I've heard pushback on that. And when saying, Well, why do you got to limit it because blah, blah, blah, okay. So, the thing to do in that circumstance is just ask them why they would leave you multiple, multiple tiers, we'll come up with a scenario where that might ever apply. And nobody's ever really come up with a plausible scenario in which you need to go more than two tiers. But that way, because otherwise you, you know, you're extrapolating something, which is not very likely to happen. And so that's a good way of sort of just flushing out if you want to limit the number of tiers of sublicensing, you know, come up with a scenario where you need more, and I would wager a few dollars, they're not gonna be able to do that. So that'll be sufficient to get that into the contract. And of course, there are other terms of conditions that you may well want to flow through the agreement. So that might be indemnities. And, for example, because you're going to want to be indemnified by somebody and you don't want your licensees around, say, Well, I was not me anymore. I'm not selling sublicensee. So that indemnity for your host institution, which is very important, needs to flow through as an absolute. And again, you know, I've seen that as an absolute requirement in sublicenses. To reproduce word for word, indemnity that's in the head license, you know, sometimes in block capitals highlighted, so it's absolutely no doubt it's there. And who is the beneficiary of that indemnity as well. There may be reserved research rights again as well. So guaranteeing let's move for a little while we get so. So it may be that your academics want to continue working on the technology. And you want to make sure that right is preserved through the sublicense as well. So again, you may want to insist the wording on that reserve, the right is preserved in any sublicense as well. So there's no argument about what it actually involves. And finally, there may be reporting requirements as well. So if you're required to report on progress in commercializing the technology on an annual basis, and you've specified that for your licensee, you might want to again, replicate that in your sublicense as well, so that they are bound to do that. So you still get those reports. And it's not somehow, you know, passers by the the licensee saying, oh, yeah, well, we're not doing that anymore. Again, the sub licensees doing it, and suddenly, you've got nothing really to report. Now, it's great if you, you can trust your licensee implicitly. But you may insist that actually, we want to see copies of the sub license. So in other words, if you execute a sub license, we want to see it and verify that you've done all these things, and we're going to check it that may be redacted or not redacted. Again, for anything sensitive or financial in there, it may be that the licensee says well, we're going to give you a redacted copy and things like that. But if you're going to see these things, and essentially, you're going to approve them. Again, as I mentioned earlier, you've got to have somebody who's sort of available to do that, because they will be expecting you to turn this round fairly quickly. Because they don't want to hold up their transaction, because all of a sudden, everybody's gone on holiday, and the person that can sign it off isn't available. You've got to have somebody who's there and available to do these things in short order, and understands the contracts and the context and everything else. Because if you've reviewed it, and you've passed it, and you said, you know, that's great, you've missed something, well, that's tough. You've approved it, but hesitation, so it's gonna go through. So bear that in mind. And that's a good again, sort of rule of thumb, if you're going to ask for approvals and control, you have to have somebody available to exert that control and do it in a timely way.

Speaker 2  38:50  
Okay. So we also need to think about the nasty scenario of termination. And again, quite often in joint venture agreements, the biggest section of that is what to do if the joint venture breaks up. There's nobody really wants to negotiate, but it's a necessity. So we have to think about what's going to happen in a situation where we have to terminate the agreement. So for example, what happens if a sub licensee breaches or sub license and hence, probably I had license to? Well, for one thing, you want to make sure that you are not having to deal with the sub licensee in that scenario, and you're going to want to make the licensee liable for any breaches of a sublicense as if it was them that have committed that breach, so that you don't have to rectify the situation they do. Or there'll be consequences for them. Because you don't have to have any control, as I said, apart from maybe that sort of sector restrictions on who they choose to do business with them and who they choose to sublicense to. So. You want to be in a situation where they are going to deal with that scenario and have you. So in the alternative scenario, where actually it's the licensee has breached the agreement somehow, what happens to all the sub licenses and there could be quite a few, if you imagine a software license, this could have been distributed to resellers, there probably be an end user license agreement for users of all bought lists in good faith, and all of a sudden, had license to terminated, they could be in a bad situation. So the typical approaches here are that you can opt in, opt out or tail out. So what does this mean? What this means is that the sub licensee can opt into a license directly with you as the license or so in a sense, they've got like a standby license if you like that kicks in. If that had license is terminated, for any reason, an opt out is exactly the same scenario, but it's default. So they're automatically licensed directly to you as license or if that had licenses terminated. A tail out, just gives them a period of time whereby they can sort out whatever they're doing, maybe they get six months or something like that. And I'll give you the final alternative, or sell the remaining stock or whatever it is they've got, and then they cease to be licensed. After that, again, particular consideration of what you're going to be doing with end users. And also as licensed so when you really want to take on a lot of sub licenses, if that has really been the business model of your licensee, and all of a sudden, something's gone wrong with that relationship. So again, things to consider there are different approaches here. I believe the default in legal position in many jurisdictions is that if the head license is terminated, or sub licenses are automatically terminated, unless there is language to the contrary, simply because the licensee no longer has the rights to sublicense anymore, because the head license is gone. So if you don't write anything in there, the default position seems to be that everybody will lose their license, including all the sub licensees, which may or may not be a desirable situation for you. So that's termination. Another thing that we'll have to deal with, of course, is affiliates. And these fall into sort of special category. It's preferable, necessarily legal advice always had not licensed directly to affiliates. And that grant language will be you know, it's an exclusive license to Company X plus their affiliates. Well, you don't know who their affiliates are, there could be hundreds of them. And if there's a breach by an affiliate, then you have to find out who that is and then go after them separately. So it's much better. The advice again, that I've been given to license directly to your licensee, and have them be allowed to sublicense unlimited and unlimited fashion to their affiliates, as long as they remain affiliates. But the affiliates in terms of royalty collection are treated as licensees. So they can't in some way, say that their sub licensing and then the affiliates are selling things then all of a sudden, this sort of net receipts percentage kicks in and like keep 90% of the money. They're gonna have to treat them as if they were strict licensees. But if an affiliate sublicenses, then that is a sub license, royalty, but somehow still gonna have to be collected through the licensee because you only want to be dealing with one entity, as I said at the beginning. So again, let me diagram that out for you because things start to get fun now. So you've got your license or licensee. Now licensees affiliate. We're gonna do the head license with the licensee, licensee can sublicense to their affiliate, they're going to pay back royalties. The affiliate pays royalties direct to the licensee and like ACU but this time there's no percentage reduction or anything. It's as if they were the licensing. Both of them could have sub licensees. Like get the sub license, sublicense royalties come back, but again, it's all funneled back through the licensee. We put that up again, just in case that one a bit too quickly for you. So slightly complicated diagram. But what this is saying is an affiliate has a sub license, but it's treated as a direct licensee for collecting royalties. That's all you have to think about really there. Okay, so I'm actually getting you're gonna spend all his time and effort negotiating the main terms of the license and the royalty rate the license, even though this may end up being sublicense. Now you've got to go through this other negotiations I've just been describing on how on earth you deal with sublicenses. And the general approach to the sort of negotiations is in this kind of triangle and it's my contention that you Can't have all these three things, right? You can either go fast, you can get a higher value deal, or you can be flexible. But what you can't do is do all these things. Because by definition, right, if you're going to be flexible, and you're going to try and do a high value deal, you're going to be negotiating for a long time. If you're not going to be flexible, but you want a high value deal, and you're gonna go quickly, the only way you can do that, really is to have a template and say, well, we're not really going to vary the template. If you really don't care about what happens downstream from the deal, and value and things like that, yes, it'd be flexible and allow pretty much anything in the agreement, you can go fast and not endlessly review it. But that means you're probably gonna end up doing quite a few poor deals that may have, in some cases, some serious consequences for your organization at the end of it, although you've got a lot of deals, there are some sort of nasties waiting in there to happen. So bear in mind that after you've negotiated the sort of main financial terms, you may be into another discussion on the sublicensing terms as well. And can you fit that into your negotiation strategy. So finally, I just wanted to sort of mention that this presentation, as you've gathered is written mainly from the licensed source perspective, because I think the vast majority of the audience here is tech transfer professionals or people representing universities. So quite often you are going to be the license or in most cases, you're going to be the license or, but I have also been a sub licensee, and the licensee, even at a university, and we're collecting and bundling IP together. So and also working for a company, you kind of you do get the other end of this and see what it's like for them. So that's sort of spare a thought for the sublicensee. At this point, and what what their perspective is, well, for a start, you know, what you mainly want here is obviously to get the full rights to do what you need to do with the technology. Okay, so you develop it to exploit it, sell it in the marketplace, otherwise, nobody gets any role, since regardless of whatever construction, you've put in the agreement. So somehow, those rights are going to come through to us and not be obstructed somehow. If there's lots of different packages of IP, or there's many tiers of sublicense, it can be really challenging to understand all the sets of obligations that are being imposed. And indeed, you know, having assembled in the past a package of IP and then license this on to a larger company, you know, there are pages and pages of warranties and indemnities, each imposed by different institutions, different bodies, they've got to weigh their way through all that and say, Okay, well, so this applies if that scenario occurs. And then if this bid, we're not using them that occurs, you know, it's very, very challenging to understand all these sets of obligations and make sure that you can appear to them don't inadvertently breach. Plus, the fact is a sublicensee. Typically, you're required to indemnify everybody, probably the licensee and the licensor, you haven't developed this IP. And you probably haven't done any due diligence on the original technology package on the original IP package was just sort of relying on the fact that licensees done that. So you're on the hook for anything that goes wrong. And you haven't been given the opportunity to really kick the tires on this in many situations, which can be quite a scary kind of thing. You know, if this has been a long time in development, for example.

Speaker 2  48:45  
And finally, you know, just that point on what happens in a termination scenario, you probably want to make sure that you've got a fallback position, which is not contingent on the license or receiving payments, by which I mean, if you're a sub licensee, and you're paying all these royalties in these constructs that I've shown you in the diagrams, you don't have any control over whether the licensee is actually passing any of that on the license, or if they keep the money or misrepresent it, or, you know, there's a problem with how they're siphoning off their percentage or whatever. And that's a material breach and the license gets terminated. As a result, you're sitting there going well, I paid my bit. So you may want this sort of standby license. And of course, you notice automatic default safety line that connects you to the license or if that goes wrong, and there's a problem with the licensee. So, again, a different perspective. And there it is, you can have that opt in that opt out or that tail scenario. So the summarize the whole thing now, like I just told you so what you've seen is that you can significantly affect to your income as a license or from a license by changing sublicense terms, okay, if you switch from one to another in the same scenario of sales, you get completely different amounts of money. So it's a good idea to sort of model how you want to do that. Depending on the mechanism you choose, it can be quite complicated to work out how to collect this income. And if you turn that dial a bit too high, you can end up making an economic for the licensee to even sublicense at all. And finally, you should consider what other elements of control you need in that sublicense, and make sure that that head license contains all those elements that need to be flowed through specify that they need to be in the sublicense as well, then you can be pretty sure that you're going to get them. So I like to thank you for your attention. I think we do have a few minutes for questions. And I'm seeing that all bar pop up. We've got at least four. So that's great. But please do if I don't get to answer your questions today for any reason. Look me up on LinkedIn. I'm there. And I'm always happy to chat matters, licensing. So thank you very much. Can't hear the applause. But I'm sure it's there. And that will stop now. Let's see if we can answer some of these questions. Okay, right. I'm looking at the top. Right. So we have Amy Dodon Hoff. We have had some issues where licensing sub licensee do an r&d agreement and a link to sub license as a sign agreement or separate agreement so that r&d payments from the sub licensee to the licensee, but the payments are structured as r&d milestones with no accounting to the sub licensee, are those treated as sublicense income with university payment are focused not collected on that? Oh, that's a great, that's a great question. I love that one. I'm thinking, Well, it depends on what you're going to classify as income. Because if net receipts is like everything to do with a sublicense, then you could make an argument, say r&d payments are included. But I don't think your licensee will be very happy to help that. Particularly if they haven't put a margin on those r&d payments, then they're going to be paying off stuff they should be spending on r&d back to you as the licensor. So unless I think you'd need to specify exactly what's in and what's out. I have an open discussion, the licensee says okay, well, you wouldn't be getting this r&d payment. If it weren't for our license, our head license. So if you do, and you put a margin on it, we're having some of that and specify that percentage. Hope that answers your question. That's very good one. So now we have an anonymous attendee in a software license agreement, our end users considered sublicensees. Should we think about having two different terms on definitions of licensee attendees? Yeah, Dave, that's perfectly possible. Indeed, end users sort of a special kind of sublicensee, because they're not likely to sublicense any further, they just want to use it. So particularly for software, it's important that they can enjoy those rights if they've paid to access the software and, you know, the metal their fees and things like that doesn't seem reasonable to me at least that their license gets terminated if the licensee has done something untoward. Okay. Hopefully, I've answered that, if not put in the chat and tell me where I've gone wrong. So again, we have Catherine, could you share how to deal with affiliated versus contractors? Okay, so I think I would tackle that by saying affiliates are in the sort of same business and doing the same activities as the licensing, whereas contractors are probably more the in that have made have sold. kind of scenario. So with the half main thing, again, you probably want to control or ask your licensee to control what they're exactly doing with this, have made things so the manufacturing on your behalf, are you controlling the numbers? Are you making sure you're receiving all of them, and things like that? So again, that the contractors are in a specific category and probably not performing the same role as affiliates in most cases? And again, I don't think your licensee should be using an affiliate as have made in most cases, if they're then going on and selling something as well. They shouldn't be treated as a licensee for the purposes of collecting royalties. But again, good question. Good question. Right. Treating licensees affiliate as a sub licensee, but then require appointments if they were licensee, things more failed to license all Yes, it is. How would you justify this arrangement? If you get pushback from the licensee and negotiations? Okay, another great question. Okay, you may well get pushed back on that. But what you can say to them is, well, we don't know who it's a big company, for example, and your licensing to maybe the US subsidiary or HQ for that company, they might well have a European subsidiary Australasia, and who knows where, right, so you don't know how many affiliates they've got. Lots of companies have hundreds of individual companies under that one umbrella, okay, and you just want them to operate on the same terms. And you do not want to have to go after, you know, DSM, Japan, just putting that example out there and not suggesting in any way that DSM would have a breach of license agreement, rather than just dealing with the company you signed the original license agreement with. So that's the key point there. And it seems reasonable that if they're making sales, again, at arm's length, you're not charging for internal transfers and things like that. If the if the product to the IP has been transferred between subsidiaries, if they go on and then sell to the customer, they should be treated as if they were a licensee. So I think that's the best way to tackle that. Right, could you please comment on exhaustion of patent rights or withdraw away between sales and sublicense? Okay, all right. Well, I'm not a patent attorney. And I think a patent or selling would be much better place to question which sounds like a bit of a cop out because it is in a patent exhaustion is a very complicated, complicated business, in terms of when you are deemed to have exhausted your patent rights. So I think if there's any way I answer that, which is not quite answering it, I'm afraid Luminara is that if you've got some doubt between what is a sale and what is a sublicense, I would consult a patent attorney or a legal professional at that point, to deal with your particular context. If there's some ambiguity there. And then we've got anonymous. Attendee question was answered, thank you. Okay. I'm not sure which one that was, but I'm happy that it has been answered. Okay. I think that's it, I don't think any more questions unless there's one.

Unknown Speaker  57:34  
Last chance, right.

Speaker 2  57:35  
Okay. Here we go. A bit of a naive question. All these are the best ones. And the sublicensees perspective, if they innovate the technology massively or add substantial r&d? How does royalty gain through this relate back to the licensee to the hit license? Or is it protected by the terms and negotiate with the licensee to greater extent? Yes. What I didn't really go into today was things like kind of product bundling combination products type clauses, but typically, those are constructed to say, Okay, if you put IP that I've created with IP that you have licensed me, you only get royalties on the value of your IP in that combination product. So let's say I have a piece of software, which does spreadsheet calculations. And then there's interface software that goes on with that, and the product is sold, we can assign a notional value for what the spreadsheet part of that software is worth, and what the interface part of it is worth. And we kind of have to agree that there are mechanisms for doing it. One of which is if you've sold the spreadsheet as a separate product previously, you simply say, Well, that's the kind of average rate for it. So even the combination product is worth saying, you can also put safeguards in to make sure that your IP is not being unfairly discounted in a combination product to accentuate or improve the value of somebody else's IP, but you can put a flaw in what the what the minimum contribution of your IP to that combination product is. So again, it is so to answer your question anonymous attendee it is, it is partly defined by the terms and negotiate with a licensee, but there are also norms and licensing agreements, which deal with exactly that problem. Okay,

Speaker 1  59:30  
okay. All right. 101. That's really good timing. Almost

Speaker 2  59:36  
like I planned it, which I didn't, by the way, but there you go. But thank you very much. There was some great questions. I hope you've you've taken something from the presentation, I will make the slides fully available to autumn. Direct directly after this. So please do look through and any more questions that you have have a chance to answer after day. Just look me up on LinkedIn. I'm right there.

Speaker 1  59:59  
Thank you, Andrew. Are you for this informative presentation and thanks to all of our attendees here that joined us today, a recording of this webinar will be available for viewing in the Learning Center within a week of this event. And it is included with your registration and Andrew slides will be there as well. Please complete the webinar evaluation which will open when you sign off of the session and you will be sent another one and the follow up email tomorrow. This helps us serve you better. So thanks again for joining us and everybody. Have a great day. Thank you

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