Scaling and commercialising strategies: key forms of agreement

10 minute read
03 March 2022

This article was originally published on IAM Media.

Paul Armitage (Canada), Vivian Desmonts (China) and Mathilda Davidson (United Kingdom) discuss the types of agreements that arise when a business is looking to commercialise its intellectual property strategically, and why it is important to seek local law advice throughout the scaling process.

Non-disclosure agreements

Vivian Desmonts (VD): Let us start with standard non-disclosure agreements (NDAs). These are something that companies will easily think of and sign when they begin sharing confidential information, intellectual property and/or technical know-how with another company. It is good practice for NDAs to include some other restrictions, such as non-competition and non-solicitation. We commonly call this NNN, as in non-disclosure, non-use and non-circumvention.

For NDAs and NNNs, the key takeaway is that they are generally too simplistic and do not protect the company disclosing the confidential information very well. It is often difficult to enforce an NDA in another jurisdiction. In practice, if after signing the NDA, there is no actual commercial cooperation with the other party, or proper consideration cannot be obtained, then in many countries the local courts may deem the penalty clause in the NDA to be too high or not reasonable. NDAs are just a first step for negotiating and concluding other contractual arrangements.

Distribution agreements

Then there are distribution agreements. You should consider the following key elements:

First, when concluding a distribution agreement, you need to make sure that you own the IP rights, including trademarks and/or patents, in the jurisdiction where the distributor is going to use your intellectual property, or sell your products. If you do not directly own these, then you need to clarify in the agreement who owns them and that you have a right to sublicense.

Second, ensure your distribution agreement grants a proper licence to the distributor of your IP right, with details on the scope of products or services, duration, termination rights and how to deal with the consequences of terminating the licence.

Finally, impose relevant obligations on the licensee, including:

  • a prohibition registering the brand and/or its translation in a foreign language as a trademark under its own name on its jurisdiction or market; and
  • an obligation to report to the licensor any infringement by third parties on that market and choose who shall file/conduct and pay for the legal proceedings against the third party infringing your IP right.

Do not underestimate the importance of a robust confidentiality clause and ensure that in practice confidential information is kept confidential. Consider whether there should be special markings, such as the wording 'confidential' on your list of suppliers, list of clients, list of pricing and so on. Have you at least set up a password on Excel files or other electronic files with confidential information? This may sound trivial, but it could be important in case of a dispute. It may sometimes be difficult to convince courts to recognise that there has been a disclosure of trade secrets if you yourself have not made the effort to keep that information confidential when sharing it with the distributor. 

Paul Armitage (PA): When you are signing up distributors in foreign jurisdictions, you should be aware that some countries have local dealer protection or franchise laws that may, as a matter of public policy, give your distributor rights overriding your contract with them, for example compensation to your distributor on termination of the agreement, in recognition of the distributor's efforts at building the local market, or even protections against termination of the agreement.

This highlights the importance of obtaining local law advice in your international distribution deals. When I am acting for a company in Canada that is looking to distribute overseas, I can work with our local offices in the United Kingdom, France, Germany, China, Singapore, Russia, Dubai or other places that may be relevant to the deal to obtain this vital local law advice. 

Intellectual property or technical know-how licensing agreements

VDDepending on how much your IP assets and/or technologies are valued or advanced, you may need to consider concluding a robust licence agreement on your registered or non-registered intellectual property. Start with the assumption that, in certain jurisdictions, there may be a high staff turnover, and so secrets can be lost in practice.

You should look to impose obligations on the licensee to put in place a trade secret protection system. Consider if it is possible to limit information that is disclosed – what does the licensee really need to know? Obviously, you should not unnecessarily disclose key or sensitive information.

Remember to specify what type of confidential information the non-disclosure obligations cover, and that it needs to be imposed down the chain: not only to the company itself, but also to its employees, company officers, subcontractors and so on. Specify that the licensee may use the technology only for the purpose of your contract, and guarantees that it shall not use your technology for any other purpose.

Consider non-competition and non-solicitation clauses for employees and officers of the licensee. In certain jurisdictions, the licensee may need to pay compensation to their employees for non-competition duties and may want you, the licensor, to bear the cost. For manufacturing agreements, specify who owns the moulds and tooling; how the licensee shall return or destroy these after termination of the agreement; and so on. For your royalty terms, you need to ask yourself if the intellectual property is going to be licensed free of charge, for a fixed fee (sometimes necessary for tax reasons and transfer pricing) or for a percentage of the revenue generated by your intellectual property. These terms are fully negotiable and, in practice, will be based on the stage of development and your company's negotiating power.

Mathilda Davidson (MD): It is also important to consider whether your prospective licence partner is the right partner for you. Each side will typically wish to do due diligence on the other before entering into a licensing transaction. The licensee wants to know that the licensor owns the relevant rights, and the licensor wants to know that the licensee is capable of using them in a way that will drive value. Further, if part of the IP package will be sub-licensed from a third party, the licensee will want to review the head licences, to make sure that the licensor has the requisite rights to sublicense. Each party will also be keen to obtain covenants from the other that it will not breach the head licence and (in the case of the licensor) take appropriate steps to maintain it in force.

Geographic licensing

VDGeographic restrictions are generally allowed and are not necessarily defined by country. For example, in China: the market in Shanghai and its region is very different from that in North China or South China. It contains different distribution channels, different types of industrial base, logistics and international ports, even a different language and culture; so the consumption habits also differ. Many distributors or manufacturers in China would want an exclusive licence for mainland China, as well as for Hong Kong Special Administrative Region of China and Taiwan. In that case, you may want to consider exclusive licence just for Shanghai and the neighbouring provinces of Zhejiang and Jiangsu, instead of granting rights for the whole of China.

PAFor international licensing, if you are the licensor, it is very important to understand the IP laws of the countries that you are licensing your intellectual property into. For example, what IP protections exist in local countries for copyright, inventions, trademarks or aspects of intellectual property including databases, look and feel or know-how that may not fit neatly into the traditional IP categories of copyrights, patents or trademarks.

VDOne example is utility models in China, a category of patents that is often overlooked by North American and European companies, because there may not be a similar IP right in their home jurisdiction. Essentially, a utility model is a form of patent that is meant to protect incremental inventions on products. The legal protection is not as strong as an invention patent, because it is easier for third parties to challenge and it is valid only for 10 years, instead of 20 years. But utility models offer several advantages, such as a lower level of scrutiny for the substantive examination by the patent office, lower requirements on the novelty of the invention, lower official fees and annuities and no publication before grant, thus resulting in a faster grant (usually six to 12 months, instead of two to three years for an invention patent).  

MD: Another key thing to watch in this area is inventor compensation or inventor protection rules, which again differ by country. For example, in Europe, Germany is well known for having some inventor-friendly requirements for compensation, and some of the Nordic countries also have specific protections for academic inventors. Other countries have similar regimes. If there is significant intellectual property coming out of one of these territories, you need to be aware of any local law wrinkles, in order to avoid tripping up.

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