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Reaching agreement

You (and the company) must remember at all times that the object of negotiation is not to win but to reach agreement.

If one side wins the other loses. The loser (not always the inventor) may then start behaving in ways which prevent the agreement from working properly. It is therefore far better for the company and the inventor to aim for an outcome that satisfies both parties.

A licensing agreement usually involves two rounds of negotiation, each leading to the signing of an agreement.  The first level is heads of agreement, the second full agreement.

Heads of agreement

This is essentially a preliminary agreement documented in plain language. Its purpose is to identify the figures, terms and conditions that you and the company are broadly happy with.

Before you start negotiating, you must know what kind of a deal you want and be able to justify it. The tactic of some inventors - simply saying ‘Not enough' to every offer - is likely to bring negotiations to an early end!

Though heads of agreement talks tend to work best without formalities or legal representation on either side, you should rely on the ‘off-stage' advice of your patent attorney and other legal representatives throughout the process. It may help to have other members of your team present for some of the time.

Heads of agreement are not final and legally binding, so you must never let the company exploit or ‘work' your IP in any way until a full agreement is signed.

What should be in a heads of agreement document?

The following list of items is for guidance only and is not comprehensive. It merely indicates the considerable range of topics which must be discussed. You must seek advice from your legal representative on what should or should not be included in your own heads of agreement document.

  • What is being licensed?

    List and describe all the IPR on offer.

  • How exclusive is the licence?

    Will only the licensee (the company) be allowed to manufacture and sell the product, or will there be limitations which allow others (perhaps including the inventor) to manufacture and sell?

  • Which countries will be covered?

    Note that you cannot control activity in countries where you have no IP protection.

  • Which markets will be covered?

    You may be able to negotiate separate licences with separate companies for different markets.

  • The basic agreed royalty rate
  • What can the licensee deduct from the value of sales?

    You must specify which costs are deductible. If you do not, some companies will claim every imaginable deduction in order to reduce your royalty payment.

  • Guarantee of payment

    You need some guarantee of payment to prevent the company acquiring a licence and then being either slow to work it or doing nothing at all with it.

  • Right of termination

    The licence can be terminated if the licensee fails to meet agreed minimum royalty levels, or fails to perform some other agreed obligation.

  • Confidentiality clause

    This requires the licensee to safeguard all disclosures.

  • How long will the licence last?

    A term of one to five years with renewal options may be best, as that makes it easier for you to get rid of a poorly-performing licensee.

  • Who owns improvements?

    If the company develops ‘your' technology over time, who owns the IP in any improvements?

  • Who challenges patent infringers?

    Fighting legal challenges can be expensive and stressful. It may be worth accepting a lower royalty in return for transferring this risk to the licensee.

  • Standard clauses

    There can be many of these, dealing mainly with operational detail such as royalty payment dates, scrutiny of accounts, how disputes will be resolved etc.

As negotiations progress, discuss with your legal representatives the possible effect of every clause. Ignore any pressure to reach a rapid agreement. If any clause is unclear, insist on renegotiation until it is clear. But do not forget that the purpose of negotiation is to reach agreement - so do not expect every clause to be written entirely in your favour.

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