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The IP License Agreement: A View from 5,000 Feet

It is commonplace for medical device manufacturers to “license” technology to allow them to either manufacture, sell or develop a product. Licensing of patents, trademarks, copyrights or trade secrets (collectively, intellectual property or IP) from third parties is governed by a special kind of contract called a license agreement that is unique to each licensing relationship. This article will generally discuss many of the critical provisions that should be included in such an agreement.

According to the Merriam-Webster Online Dictionary, the definition of a license is “permission to act” or “freedom to act.” Typically, a license will be granted by one party (the licensor) to a second party (the licensee) to allow the second party to use the licensed IP for a period of time to do certain things with that IP.

Team Formation

Before pen is put to paper on the license agreement, each party must determine their corporate objectives for the license. The fundamental question is, why are you trying to obtain the license, or if you are on the other side, why are you granting the license? Do you need the technology to produce a product, or do you need to raise cash? With these answered, you are then in a position to move to the next step, which is to form the in-house team that will be tasked with negotiating the agreement. The team may include a technology expert, a business development executive, a C-level or equivalent executive who has the decision making authority and an attorney who is familiar with licensing agreements. The team should meet before starting any negotiations to assess the strength of their company’s license position, which may include looking at the company’s current research and development abilities related to the target technology, the competency of the marketing and sales department and a review of the other side’s strength and weaknesses. Having a handle on your adversary’s abilities will determine the degree of flexibility that you may need to show with any proposed license provisions.

Term Sheets

When two parties decide to move forward with a license “deal,” the first step is to find out what each party wants before drafting and negotiating the actual license agreement. How is this accomplished? Usually, the two parties will try to draw up a Term Sheet. This will list key terms and conditions to be included in the license, and provides a framework for attorneys to draft corresponding clauses for inclusion in the license agreement. Examples of Term Sheet items include the IP definition, term of the agreement, license category (i.e., exclusive, non-exclusive, etc.), royalty rate, royalty rate calculation and payment terms, minimum royalties, indemnification, warranties and termination conditions. Term Sheets are signed by the parties and are usually binding.

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