An Exclusive License Agreement Explained
An exclusive license agreement is generally considered a legally binding agreement or contract. In terms of IP, this means that with an exclusive license, the licensor cannot use it, publish it or try to sell it to someone else. An exclusive license agreement deals with the details and limitations for the use of the license provided – which is usually to one particular party. An exclusive license agreement can be exclusively granted for a time period, territory, field of use or any limitation that is agreed to by the parties to the contract. When an exclusive license contract is registered with the relevant government registry department (e.g. trademarks), it can help protect licensees against infringement claims from third parties.
With non-exclusive licenses, rights are granted on a non-exclusive basis, meaning that it does not prevent a licensor from making the same rights available to others. With an exclusive license, nothing is stopping the licensor from using the same rights themselves in conjunction with granting other rights . An exclusive license agreement can prevent the licensor from providing different license rights to different parties. The main agreement element being the right to use the IP in a certain way and for a certain time period. The provision of rights in an exclusive license does not necessarily preclude other rights.
Rights can be limited and controlled through a negotiation process and then granted in writing in the license agreement. To be considered an exclusive license in many jurisdictions, the exclusive license has to be entered into in writing, signed by the licensor and may need to be registered at the patent or trademarks office.
In most jurisdictions an exclusive license provides the licensee with the same rights as the licensor. It is common practice to have a reservation clause in an exclusive license agreement, which will give the licensor an express right to exclude the licensee from doing something or entering into certain agreement(s) after the exclusive license is signed.
Essential Elements of an Exclusive License Agreement
The schedule subsequent to the basic commercial terms agreed to in the term sheet or letter of intent form the foundation of the final exclusive license agreement. Such terms include for example, a definition of the parties (the licensor and the licensee), the licensed space, the duration and the territory of the license.
An exclusive license agreement requires that the parties enumerate the rights and obligations at issue, beyond those basic commercial terms. For example, the parties should also address the territory to which the license applies, which may be limited to a particular region within a country or which may extend across numerous states, countries, or continents. It is not uncommon to see restrictions in the territory granted in an exclusive license. For example, if the licensor is itself engaged in business in certain territories, it may wish retain the ability to use the licensed property, within those territories outside of the scope of the license. Conversely, the licensing party may seek to maintain its choice regarding the territory in which the licensee could operate, particularly if its ability to enter is restricted by third-party agreements or other substantive considerations.
Another example of an as-yet-undecided provision in an exclusive license agreement is the issue of sublicensing. The licensor may have substantial concerns with the prospect of the licensee sub-licensing its rights to third parties. Likewise, there are a variety of commercial structures and considerations that will impact the inclusion, or exclusion of, a sublicensing provision. For example, if financing for a life science venture is being sought, the licensee will often seek the ability to sublicense rights to potential acquirers of the assets, since, generally speaking, investors prefer to have a return directly from their investment, rather than having the return be dependent on their ability to enforce patent rights against others who commercialize the same product.
Advantages of an Exclusive License Agreement
The primary benefit to a licensor is the ability to accelerate the commercialization of their product or service while controlling the costs and risks associated with research and development in a complex and competitive marketplace. In contrast, a licensee has the meaningful benefit of without having to buy or lease and would instead license the technology with an exclusive right to manufacture a product or service within a particular territory or field of use for a period of time. Having an exclusive license on the particular technology offers the licensee the potential to be one of the few or the only companies to offer a product or service based on the underlying technology for the duration of its license, which in turn increases the potential for significant return on investment.
Key Considerations Prior to Signing an Exclusive License Agreement
Before finalizing an exclusive license agreement, you will want to include the following terms and make sure various due diligence steps are taken:
1. Profit share. How are profits shared? In most situations, the profit share from each country where the pharmaceutical drug is to be developed will vary. You will want to analyze different profit shares based upon different territories. For example, if the drug will be sold in the United States, Canada, Europe, Africa, Asia, and South America, you probably would want to assign different cut-off levels for the sales of the pharmaceutical drugs in each group of territories.
Ideally, you would even like to specify specific countries for your profit share calculations so that you can account for any differences in the pharmaceutical markets. For example, one country may require many years of clinical trials and, therefore, the parties can agree to a lower multiple of multiple until the clinical trials have proven successful.
2. Due Diligence Considerations. Before signing the exclusive license agreement, you will want to make sure that the full due diligence of the relevant patent(s) has been performed. Some of the items you will want to consider are: (1) whether the patent is valid and enforceable; (2) whether the patent can dominate other similar patents; (3) whether the patent or application is novel and be patentable; (4) whether the patent is allowed to issue; (5) whether there are any inventorship issues; (6) whether there are any inconsistent claims in the specification; (7) whether the specification is enabled; (8) whether the patent is subject to any restrictions; and (9) whether the drug will infringe any other patents .
If you discover any of these issues, then you will want to address these issues with opposing counsel. For example, if you discover that the exclusive license application is not enabled, then you will want to ask opposing counsel to have the claims either removed or for a re-write of the specification to include enablement. Similarly, for issues relating to claim interference, inventorship, restrictions, and inventions made with federal funds, you will want to ask opposing counsel to have the patent applications corrected or disclaimed.
3. Representations and Warranties. When negotiating the exclusive license agreement, you should make sure that any representations and warranties in the agreement are included as to the validity of the patents and patent applications, the enforcement rights to the patents, and rights to any improvements made on the patented technology. An exclusive license agreement is only as good as the right to enforce it. Also, make sure that any representations and warranties are backed up by performance deposits. Whenever possible, you want to be able to hold performance bonds that can be enforceable in the event that the licensing company violates any of its agreements.
4. Performance Obligations. Make sure that the performance obligations are specific and the milestones at which a party must disclose its progress are clearly set forth in the agreement. This applies not only to the development of the pharmaceutical drug but also to profits that must be paid in the event cable agreements are breached. Failure to meet these performance obligations may result in the granting of rights to the patent to the non-defaulting party.
Legal Enforcement Issues and Challenges
Exclusive license agreements, while powerful contractual tools, can give rise to legal challenges. Enforcement of the agreement is the most fundamental issue. Without a successful enforcement strategy, the exclusive license may fail to provide the economic and other protections that are sought. That said, this issue is often overlooked or compromised in practice through the use of dispute resolution mechanisms that do not involve litigation. Exclusive license agreements, unless they have a clear integration clause, tend to incorporate many different definitions, representations, acknowledgments, laws and listings of assets. The resulting inconsistent agreement can create problems in enforcement. Such inconsistencies can be short-circuited by ensuring that the final agreement is clear, consistent and incorporates all of the rights and obligations. This involves coordinating a team of legal and business people who are skilled in the area that is at risk. A second enforcement issue that arises in many exclusive license agreements is jurisdiction. This is particularly true if the licensee operates internationally. The issue is that an exclusive license is now binding on the licensee and its affiliates in may jurisdictions. Such jurisdictional issues can be avoided by selecting an appropriate forum for enforcement in the exclusive license agreement itself. Dispute resolution mechanisms are another aspect where exclusive license agreement can differ, and these differences can result in high costs. Such disputes about enforcement can be expensive and time consuming. This is not to say that enforcement disputes are a bad thing. Once the parties begin negotiating the agreement, desires about how to enforce the exclusive license arise. For example, does the licensor want costs of enforcement to be paid by the licensee? Is arbitration preferred over court enforcement? Is a liquidated damages provision acceptable? Or are some combination of these desirable? The terms of an exclusive license agreement must be carefully considered to achieve a desired outcome in enforcement, and the related cost of enforcement.
Case Law and Examples
An example of an exclusive patent license in the biotechnology industry is the broad agreement between California biotech giant Amgen Inc. ("Amgen") and the University of California where Amgen licensed a portfolio of intellectual property related to the treatment of several cancers. In exchange for payment of royalties for licensed products, Amgen received all of UC’s rights to develop and market any therapy for cancers in the United States, Europe, and several other key markets. What made this agreement especially interesting was that Amgen succeeded Roche AG as the licensed producer of Epogen and Neupogen, recombinant drugs for anemia and low blood counts. Such arrangements are common within the pharmaceutical industry, with larger pharmaceutical companies acquiring rights to produce drugs from smaller entities. However, the Amgen-UC deal added a twist: the contract also allowed Amgen to purchase the drug components from UC. For the first time ever, the lines between contract manufacturer, supplier, and licensee were successfully blurred. By all accounts , this agreement benefited all parties: UC collected $120 million in milestone payments (nearly half of which was delivered upfront), Amgen enjoyed instantaneous access to the rights to manufacture its best-selling drugs; and the public had access to quality medicines at a competitive price.
Another example of an exclusive license agreement is the joint development and commercialization agreement entered into by Nintendo Co., Ltd., the Nintendo-supported game development company Retro Studios, and Criterion Games, a subsidiary of Electronic Arts. The three entitites entered into the agreement to develop a new, exclusive, multi-platform gaming franchise called "Metroid Prime." Under the agreement, Nintendo provided support including financial assistance, concept development, and specific game elements to the development project, while Criterion was responsible for game engine development and design. Based on the final product, Nintendo, Retro Studios, and Criterion would share the profits on the retail sales of the game. The Metroid game franchise became a primary revenue source for Nintendo, netting over $110,000,000 million in 2007 alone.