Neil: Okay. I think we're ready to get started. Probably be a few more joining as it goes along but, welcome everyone. Thank you very much for attending this latest installment of our webinar services, 'The Life Cycle of a Smart Idea'. My name is Neil Henderson and I'm based out of Toronto, Canada where we've just come out of lockdown. Thank goodness. I'll be moderating the webinar today. Just to start a couple of housekeeping notes. The first one is that we will be recording the webinar today and it should be available on our website within a few days. The second one is if you do have questions we'll be using the Q&A feature in Zoom. It's that button located at the bottom of your screen. So just enter any questions there and we'll try and deal with them during the webinar. If we don't get any questions there are breakout rooms at the end of the webinar where you can ask your question and follow up with any of the panelists. To get going, today's webinar is part 1 of a 3-part series focused on scaling and commercialization. Whether you're going from small to medium, or medium to large, we will provide you with information that you can use to commercialize IP strategically throughout the scaling process as you grow. We have a great panel from around the world. Great coverage geographically and they are all very experienced in both legal and business aspects of commercialization agreements and its implications for IP in the broader business world.
Starting off we have Paul Armitage, who's based out of Vancouver, Canada. Paul is a go to person for technology commercialization. He has over 20 years of experience in technology commercial transactions and is a great guy as well.
We've got Mathilda Davidson, is based out of London, UK. Mathilda advises across the spectrum of transactional intellectual property matters, with a focus on life science and R&D partnering deals.
We also have Vivian Desmonts, who's based out of Guangzhou, China. He's worked for over 15 years in China and is very well versed in the intricacies of Chinese law on foreign investment, M&A, technology transactions and employment law.
So to get us started we will have a brief polling question to see what's on your mind with regard to scaling and commercialization. So please take a second and put in your vote with regard growing and protecting IP, international expansion, finding new partners, funding investment M&A. These are all pretty important things as you're growing and scaling your business but clearly people are mostly interested in growing and protecting your IP, with 60%. That's great. Thank you everyone for your feedback and growing and protecting your IP is what this is all about so you're in the right place.
Just to set the framework, we're looking at this as whatever stage you're at, in terms of your growth, you're going to have challenges. Scaling up IP usually just means things like adding to your patent portfolio. Adding to your trademark portfolio. Whether it's in terms of numbers or in terms of the geographic scope. We can obviously help with all those things but today we wanted to focus on the various commercial agreements that can also help you scale and grow your business using your IP. Whether it's distributor agreements, manufacturing agreements, licencing agreements, these can all be used strategically to help you grow. As you know, commercial agreements, they always require some local understanding of the key elements of IP and business in some of those key jurisdictions. We've got people here to talk about all those key jurisdictions. So in this webinar you will learn about the key elements of commercial agreements with a particular focus on IP licencing agreements. We will also cover how to be ready to bring in investment money or use M&A for growth and commercialization. So, we are going to begin with commercial agreements and some of the clauses that you need to consider for making a successful business transaction. I'll turn it over to Paul to begin the discussion. Paul, please.
Paul: Yes, thank you, Neil. We're going to start by looking at some powerful, sometimes overlooked clauses that you can include in your commercial agreements to really take the IP clauses in those agreements to the next level. Here we could be talking about a licence agreement, a distribution agreement, joint venture collaborations, strategic alliance, really whatever the case may be. So first topic we're going to look at is exclusivity. Now, exclusivity is a topic that should be covered in any agreement that's dealing with intellectual property, and there are really four variations on exclusivity. First off there is the true exclusive licence. In this scenario the licensor licences all the IP rights exclusively to a single licencee and that includes as against the licensor itself. So in other words, the licensor can no longer practice the IP itself, and there's only a single licencee that's permitted to use the IP. The second variation of exclusivity is the converse which is, of course, a non-exclusive licence and a non-exclusive licence, not only does the licensor retain the right to continue to practice the IP itself, but it can also create multiple licencees, re-licensing the same IP to multiple companies. The third type of exclusivity is what's commonly called a sole licence. Under a sole licence, once again the licensor retains the rights to practice the IP itself, but it agrees to only create a single licencee. Finally there's what's called retained rights. So the context of an exclusive licence, even though the licensor grants an exclusive licence to the licencee, the licensor nonetheless retains certain rights itself. For example, to use the same IP for a different product in a different field or application or a different territory.
Neil: Sorry, with exclusive licences the big part is that you can ask for more money up front or for a higher royalty. So exclusivity can be a very good bargaining chip.
Paul: Yes, yes. Exclusivity, typically, is one of the most valuable assets that a licensor of intellectual property has. So moving on from exclusivity we move to non-competition. Non-competition is similar but different to your exclusivity because what non-competition refers to is including clauses in your agreement that would prevent your licensor from competing against your products in the market place. So it's potentially a very powerful clause to include in your agreements. Now whenever you're looking at including a non-competition clause in your agreement, however, one needs to be aware of the rules around enforceability of these types of clauses because in many jurisdictions it could be enforceability issues as matter of law around non-competition clauses. For example, in many jurisdictions, generally speaking in order to be enforceable a non-competition clause has to be reasonable as to scope and territory.
The next topic we're going to look at are improvements. So improvements always refer to improvements that are made to the licenced intellectual property after the date of the initial licence. These can be made by either the licensor or by the licencee and it's useful to look at improvements in the context of an agreement on the perspective of both of those parties. So first off, if you are the licencee of intellectual property you may wish to ensure that all of the future improvements of your licensor are automatically included under your agreement. Otherwise you may find yourself in the uncomfortable position a few years down the road of having to go back to your licensor to get new licence rights to their future improvements and, of course, pay more money for that at that time. If you happen to be the licensor in the relationship you may have an interest in obtaining access to the improvements that your licencees make. You may want this access to be either ongoing during the term of the agreement or when the agreement is over. So when the agreement terminates or expires you may wish to get back from the licencee what improvements the licencee may have made to the licenced technology during the term of the agreement. The mechanism that that would occur is what's called a grab back clause and under a grab back clause the improvements of the licencee are transferred, either by way of an assignment, or by licence back to the licensor. However, one needs to be aware of when dealing with grab backs that local law requirements or restrictions may apply that affect the enforceability of the grab back clauses. So recently we were acting for a Canadian company that was licencing technology to China and there we involved our Guangzhou office to help us navigate through the Chinese law of grab backs and Vivian is going to speak to that now.
Vivian: Thanks, Paul. Yes, what you've explained on technology improvements, this is particularly in some jurisdictions like China, where you have your manufactories developing their own technologies. These factories might very well become competitors of the clients at some point. So it's really strict of what has just been said by Paul. Let's take the example of a Canadian purchaser of goods to be manufactured by a supplier in China and their own arrangement and this purchaser or licensor shares its own technology and equipment to the supply in China. Well, during the manufacturing process of the goods, if the supplier develops a technology improvement which is patentable, in China that party would be considered the inventor of the improvement. So normally all the IP rights of it, despite the fact that the supplier has developed the technology improvement thanks to its client's technology on the first hand, you see. The key take away here is not because the technology improvement has been made on your technology that you will automatically own it. In fact, it's actually to the contrary. So now in China the law has changed just a few years ago and it's possible, actually highly recommended, to specify in your written contract that any technology improvements, made by the licencee, shall be owned by the licensor. You really need to write that down on the contract, provided that there's a reasonable compensation to be paid to the licencee. In Chinese law we require that this reasonable compensation be paid in addition to the normal purchase price of the goods that the licensor would pay to the supplier. I understand that there is also some similar rules in the UK and the rest of Europe. Mathilda, do you want to touch upon it?
Mathilda: Yes, thanks, Vivian. That's really interesting to hear on China. In the UK we don't have that specific requirement that you mentioned, for reasonable compensation, but the overall position on ownership of improvements is very similar to the one you've outlined in China. Unfortunately, as you flagged up, with IP just because you've paid for something, or it's based on your core technology, it doesn't necessarily mean that you own it. If the agreement in question is silent then under English law ownership will typically follow inventorship and the party creating the improvement will own it. What that means, of course, is that you do need to think about this up front and deal with improvements specifically in the contract to avoid issues down the line. Plus as Paul and Vivian have said, you need to be alive to local law considerations, such as competition issues, that may affect what you can and can't do.
Paul: Yes, great. So the next topic we're going to look at it are diligence efforts of the licencee. So here, if you are the licensor, you may have a concern that after licencing your intellectual property to the licencee, the licencee just sits on it and doesn't actually wind up taking a product to market. So this is sometimes called shelving of IP or in the UK it's called a discontinuance of IP. So to avoid shelving or discontinuance, if you are the licensor you usually have to include in your contract various milestone events that need to be achieved by the licencee such as there's a certain amount of money, make a regulatory filing for a product, bring a product to market and then attach timelines to each of those events. So, for example, bring a product to market within 3 years after signing the agreement. Then, as the licensor, you want to make sure that there are consequences attached to the failure by the licencee to miss those time limits. For example, a common consequence that's repeated is the conversion of an exclusive licence to a non-exclusive licence. Now, this may seem like a reasonably fair way to deal with a diligence failure by a licencee, because it doesn't totally take the rights away, it just allows the licensor to appoint someone else who may have better success in the marketplace. However, there is some potential downside to that mechanism from the perspective of the licensor, because if you are the licensor, as we alluded to earlier, exclusivity is one of your most valuable assets and one of your strongest chips you can play in the world of IP. So if you convert your exclusive licencee to a non-exclusive licencee, that means you can't give anyone else a purely exclusive licence, and therefore that may affect the value of your other deal that you may want to do. So as an alternative to conversion, an option of course, is termination. So if the diligence timeline is missed the licensor can then terminate the licence, take back the IP and find a new partner. Of course, if you are the licensee you can have a very different perspective on things, and your concern would be that you have invested all this time and money in developing the intellectual property and then suddenly you have the rug pulled out from underneath you due to failure to meet the relatively arbitrary timeline, over which you may not have full control. So the question, of course, is how do you square this circle? For the interests of the licensor in having definite time limits in the agreement and the interest of the licencee in having more flexible arrangement, which is usually couched in terms of using commercially reasonable efforts, or CRE, to achieve product development and commercialization. So the various ways this can be done, and no doubt this would be a subject of negotiation between the parties. One approach is to allow for an opportunity for a licencee, in the case of a missed timeline, to have the opportunity to produce a new development and commercialization plan, create a new time limit and really give them the opportunity to cure the initial breach. Another approach is to mix and match timelines with commercial reasonable efforts. So the timelines could be attached to events over which the licencee has control. So for example, raise 5 million dollars within 18 months of signing the agreement, but commercially reasonable efforts could be used for more future events over which the licencee may have less control over the definite timing. Such as the timing for obtaining a regulatory approval for product because, of course the exact timing, that would be dependent on the regulatory process itself.
Neil: I've also seen where there's a sort of cure provision where basically the licencee can just pay a certain amount of money to cure that lack of diligence, at least for a short time. There's lots of negotiable options here.
Paul: Yes. It's whatever your minds can come up with. This sort of, so to speak, squared up circle and make both parties comfortable with the deal. The next set of clauses we're going to look at are rights of first refusal or rights of first negotiation. The basic theory with these clauses, of course, is that if you are in business with a company that had a good idea once, a good piece of technology for you on one occasion, there's a very good chance that that company will have something that's useful for you as well in the future. So what the rights of first refusal and rights of first negotiation do is they give you the right of first choice over new offerings by your licensor. That could be a new product. It could be entering a new territory. It could be a new application or field of use of the existing technology. Now, the essential difference between a right of first refusal and a right of first negotiation is that the former allows the holder of the right to match a specific deal, whereas in a right of first negotiation once the trigger occurs, for example the licensor makes the decision to launch a new product, the licencee would then have the right to negotiate what the terms of the licencee acquiring rights to the products might be. Now, bear in mind, when we're talking about rights of first refusal and rights of first negotiation is having an understanding going into it what really are the rights you're acquiring under those clauses. Mathilda will speak about that.
Mathilda: Yeah, well thanks, Paul. I think one of the big issues here, which you and I have discussed in the past, is around the enforceability question. A right of first refusal, a right of first negotiation can seem a very neat way of future-proofing your agreements. There can be challenges about just how enforceable they are in practice. In particular, when I see these types of provisions drafted out in an English law context, they didn't really typically amount to much more than an agreement to agree. Which is not enforceable under English law. Of course, in your agreement you can put in some useful architecture around them as to how the process will work. But I would be cautious, particularly from the English law perspective, about over relying on them. As in reality, the most you can really hope to achieve is a right to participate in any future partnering or sale discussions. It's not a 100% guaranteed outcome.
Paul: Great. Okay, so the next clause we're going to look at is what's called a change of control provision. So what this refers to is what is the effect on an existing agreement if one of the parties to the agreement, could be the licensor, could be the licencee, undergoes a change of control. So in other words, they sell their company and new owners are brought in. If a change of control occurs what effect, if any, should that have on the contract between the parties. If you are a licensor of intellectual property, an interesting clause that is occasionally used, is to give the licensor some share of the upside of that change of control by your licencee. This could be in the form of more consideration, a payment of some sort, or perhaps even a share of the proceeds from that sale. The basic logic to that clause, of course, is that it is the licensor's valuable intellectual property in the first place, but allowed the licencee to sell its company for a good price and therefore the licensor should share some part of that upside. Of course there are many issues with this clause, and many other aspects of change of control clauses, that need to be thought about when writing these clauses into your agreements and both Vivian and Mathilda will talk about some of the ins and outs of these clauses.
Vivian: Yes, thanks, Paul. For M&A transactions this kind of clause can be quite tricky, if not a deal breaker. Sometimes when you're interested in a client company which has technologies that are interest for you but some of this technology is actually under licence agreement by a third party. What we see in practice is that some of these licence agreements, with a change of control clause, the licence agreement would be automatically terminated in case of sale of the company. Or sometimes the transfer of the licence agreement, with the technology that you're interested in, transfer would be subject to prior approval by the licensor, the third party. So this kind of clause usually it's really a powerful tool for the licensors in order to prevent that their licencees don't sell to their competitors, for example.
Mathilda: Yes, thanks, Vivian and actually for exactly the reasons you've outlined because stay partial in favour of licensors. These clauses can be pretty tricky to negotiate, I would say, and I've seen some very, very firm pushback from licencees because they can be such a significant limitation. For example, on a founder's option exit, and they can also put off potential investors as well. So it's a proceed with caution, I would say.
Neil: Yeah, that's definitely true. You want to maintain as much control as you can, whichever side you are on. Next up we're going to move into some further specifics for different types of agreements and Vivian is going to lead us on this discussion. Thanks, Vivian.
Vivian: I'm happy to do it. Thanks, Neil. So let's start with a standard non-disclosure agreement, NDA. This is something that usually in practice companies will easily think of and will get signed before sharing any confidential information, IP or technical know how with another company. It's also quite a good practice to include in an NDA some other restrictions, in addition to a non-disclosure, such as non-competition or non-solicitation. We call that type of agreement NNN, that's what we usually draft for clients dealing with companies in China. As you may know, NDAs or NNNs, while they're pretty straightforward, relatively standard, the key take away on my part would be that they're actually generally too simplistic from a legal point of view. They don't protect so well the company disclosing confidential information. Why? It's because in practice if after signing the NDA you actually don't have any commercial cooperation with the other party, the recipient, or the recipient doesn't have any proper consideration, then in many countries the local courts, in case of dispute, may deem that, for example, in your NDA there's a very high penalty clause in case of disclosure, the court may actually consider this high penalty clause as not reasonable and can legally reduce that amount. So as lawyers, in that case, we would need to find some other legal basis to prevent the recipient of using your confidential information of technology. We would use, for example, unfair competition or we would try to challenge their IP registration, made by that recipient. So it's far from ideal. So generally, NDAs, they're just a first step for negotiating, computing other contractual arrangements such as distribution agreements or IP licence agreements that I'm going to discuss too.
Neil: One point to note there is that for an NDA do your homework before signing the NDA. Don't think that the NDA is going to protect you. Try and make sure that the party you're dealing with is reasonably trustworthy, that you have some knowledge about them and then enter the NDA. I think that's a good way of putting that. Thanks.
Vivian: Thanks, Neil. In the region what we can see so often in practice is that North American clients or European clients they would feel reassured signing with a Hong Kong SAR, China (hereinafter referred to as "Hong Kong") company that owns and operates the factory in Mainland China. But that Hong Kong company is competition company so advice would be to sign the NDA directly with the factory or the companies in Mainland China, and not their holding company in Hong Kong, or it could be like joint party. Moving onto another type of agreement, distribution agreements, some key elements that you ought to have in your toolkit. First of all, you need to make sure that your own IP rights that you're going to grant a licence to the distributor, such as trademarks or patents, you need to make sure that they're already really duly registered in the jurisdiction where the distributor is going to use them or sell your products. If you don't directly own this IP rights in that jurisdiction you need to clarify in the agreement, the distribution agreement, who owns these IP rights or you need to confirm that you have a right to sublicence that IP right to the distributor. Another point that in the distribution agreement, you need to ensure you grant a proper licence or right to use your IP, with details on the scope of products or services, duration, termination rights, how to deal with the consequences of termination of the licence agreement or distribution agreement. Then you may want to consider some imposing civil restrictions on the licencee or the distributor such as a prohibition to register the brand under its full name. Or what we can see so often in practice, for example in China, the distributor would then register the Chinese translation of your brand under its own trademark in China. You can't imagine the number of times that we've seen that in practice and we always advise our clients then to get back or sometimes purchase back the Chinese trademark. Another obligation you may want to impose on the distributor, or licencee, is to report to you as a licensor, any infringement that they would notice on their own market. Infringements by third parties and then in the contract you may want to fix which party, either you as a licensor or the distributor, shall follow the legal proceedings in that market, conduct the legal proceedings and the strategy, who will pay for the litigation in that market. Litigation against the third party infringing your IP. Then another key item that you need to bear in mind in distribution agreements, or when computing distribution agreements and sharing confidential information, is that you need to keep your confidential information confidential, in practice. You need to ask yourself the question, "Do you need to protect and how should you protect your list of suppliers, your list of clients, the list of pricing, the list of references of spare parts, for example? Do you want everyone working at your distributor to have full access to all these or do you consider that confidential? In that case have you at least, or your colleagues, have set up passwords on the Excel files, or any pertaining files that are going to be sent to that other party." It may sound trivial or like stating the obvious but you'd surprised how many times we see commercial or technical teams share confidential information quite carelessly with other parties. That's an issue, especially in case of dispute or litigation, because then it will be quite difficult to convince courts to recognize there's been a disclosure of confidential information, or violation of your trade secret, if your own company hasn't even made the effort to protect that confidential information when sharing it with other parties. I think, Paul, you wanted to share some experience of our clients contracting with distributors in different foreign jurisdictions?
Paul: Yes. Thank you. So one of the things to be aware of when doing overseas distribution, in addition to your finely crafted agreement that has all the required elements to it, when entering foreign jurisdictions and the local jurisdictions, some countries have what are called data protection or franchise laws that give certain rights to the local distributor regardless of what your contract says. These rights, for example, could be the right to compensation on termination of the agreement. It could be protections against termination of the agreement. Of course the basic theory behind those local statutes is a public policy concerning that the local distributor that has built up the local market should get some benefit for that, as a protection for that, for the work that it's put in. So what this highlights is the importance of obtaining local law advice when your dealing with overseas distribution. For example, here at Gowling, when I'm acting for a Canadian company that's entering different parts of the world I can liaise with an office in Guangzhou, Singapore, France, the UK and really any other place where there is a local law issue, or you don't necessarily know what the issue is but you need to run down these points to make sure you understand what you're getting yourself into, when you're beginning to set up distributors in foreign jurisdictions.
Vivian: Thanks, Paul. Moving on then, and as you grow another type of contract that you may want to consider signing, and also depending on how much your IP assets are valuable or how your technologies advanced, you may want to consider computing an IP licence agreement to better protect your registered IP. Or maybe also protect your non-registered IP such as technical know how that hasn't been patented. So for IP licence agreements you also need to start with the assumption that in many jurisdictions, like in China, that there may be high turnover employees and so your secrets really have a risk of being lost, in practice. So to impose contractual obligations on the licencee to put in place a system to ensure that your technology, your trade secrets, are duly protected as much as they can be, in practice. To consider, for example, if it's possible to limit the amount of information that is going to be disclosed. What does your industry partner really need to know? Physically don't disclose sensitive information unless unnecessarily and to anyone working at the licencee, you may want to target the persons who really need to have access to all or part of the confidential information related to your technology or IP. Specify what type of confidential information, the non-disclosure obligation in the different contracts you have concluded, will cover and that needs to be also imposed down the chain. Not only to the company itself but also you want that company, the licencee, to impose confidentiality obligations to its employees, to its company officers, to its subcontractors and so on. Then for manufacturing agreements, you may want to also specify who owns the molds and tooling which are necessary to manufacture the products using your technology or IP. How the licencee should return or destroy these molds and tooling after termination of the agreement. In China I would say there's a real cultural gap about the ownership of molds and tooling, where foreign clients manufacturing goods in China, they generally believe that they own the molds and the tooling because the Chinese suppliers made them pay for it. While actually at the same time these same Chinese suppliers actually believe that the molds they've been manufactured or paid to produce a certain amount of goods sold to you, and for example, a mold to produce 10,000 items of your goods and using your IP, after the 10,000 goods have been produced they believe they own the mold and the tooling and they can even use it for other purpose or other clients if they want. So you really need to clarify that in the IP licence agreement and in your discussions with the suppliers. Then in IP licence agreements, of course, you have the question of royalties, royalty terms. You need to ask yourself the question, "Is your IP is going to be licenced free of charge or for a fixed fee?" This is sometimes necessary for tax reasons or transfer pricing issues. Or maybe the royalties will be a percentage of the revenue generated by the licencee, thanks to your IP. They can also be some royalties of fees paid if you're going to provide some technical training, regularly to the licencee, and/or share some technology improvements that you have developed on your side. So in practice and legally, royalty terms, they're fully negotiable and this will be based on your company's negotiating power and it's case by case. By the way, our law firm I understand is going to hold another webinar soon on this topic of IP valuation so be sure to follow our mailings and social media action. Another issue I wanted to point out regarding IP licence agreements or even distribution agreements is geographical licencing. Geographic restrictions are generally allowed and they're not necessarily defined by our country. It can very well be distinctive region in one country. So for example, in China where I sit, you may restrict your licencee to use your IP and sell your goods just in Shanghai and its region or just in South China, ... and Hong Kong because it's different logistics that work and in the short issue even different consumer habits. Or the geographic restrictions can be a greater part of the world like Southeast Asia or whole Asia Pacific. In any case, you may want to impose some ... or distributors on the geographic restrictions, money to their sales with regular reporting duties, as per the contract, otherwise what we've seen from clients that sometimes their distributors would compete with each other in the world. Maybe sometimes too fiercely in the market of the other. That would discourage some distributors or licencees to invest in the actual restriction market because then there would be a grey market of unauthorized resellers. That would then ultimately end up reducing the market prices of your goods using your IP, and then its another commercial debate on whether you prefer sending more goods in the short term with different distributors competing with each other very fiercely, or if you want to maintain a robust and clear distribution channel authorized by you. Paul, I think you wanted to raise another important point about international licencing.
Paul: Yes. So if you're the licensor and you're doing international licencing of intellectual property it's important to understand what the IP laws are of the countries that you're licencing your technology into to. For example, what are their IP protections and what are their needs and balances of them around things for such as protection of inventions, copyright, trademarks and then also elements of your intellectual property that may be very valuable, such as know how, databases, look and feel. These items which may not fit squarely into the traditional categories of copyright, patent and trademark. What are the protections available in those countries? Therefore once you understand that it allows you to include the rights terms in your contract to ensure you are getting maximum protection. So in this regard Vivian will touch on unique concept of utility model IP in China and Mathilda will talk about the importance of understanding your local inventor compensation rules.
Vivian: Thanks, Paul. In China we have one kind of patent. We call it UTT models, a category which is often overlooked by our clients from North America or Europe because they may not have seen IP rights in the whole jurisdiction. Basically a UTT model, in China, it's meant to protect incremental invention on products. The legal protection is not as strong as an invention patent, like we say a real patent, because it's easier to be challenged by third parties. It's valid only for 10 years instead of 20 years for other patents. But UTT models offer a lot of advantages such as a lower level of scrutiny by the Patent Office in China for the substantive examination. You can get a UTT model registered much more quicker and for a lower cost than an invention patent. You have lower requirements, legally, on the novelty of the invention. Lower official fees and annuities. No publication before the grant so that's also quite useful if you want to keep your invention confidential before you actually get some registration with a UTT model patent. Usually, in practice, it would take like 6 to 12 months to obtain a UTT model in China instead of the classic 2 or 3 years for an invention patent. Mathilda, over to you about the inventors.
Mathilda: Thanks, Vivian. As Paul mentioned another country specific difference to be aware of is inventor compensation or protection rules which do differ by territory. In Europe, Germany for example, is well known for having some particularly inventor friendly requirements for ongoing compensation. In fact, in a recent deal I've also come across some protection for academic inventors in Sweden which are, I would say, very particular and were certainly new to me before I'd worked on that deal. Of course it's something that we and our clients have had to work around on that particular project.
Paul: Another area that tends to vary by country is the whole treatment of joint ownership of intellectual property. For example, in the United States, unless there's an agreement to the contrary and this is where your contract comes into play, unless it's covered off in your agreement each joint owner of a patent can independently licence or assign its interest in the joint patent to another party, without either any compensation or accounting back to the joint owner, or the consent of the joint owner. So what this means is that each co-owner of a joint patent can dilute the IP by signing up licencees. So if you're a joint owner, and you're attempting to enforce your IP against some infringer on the market place, you may find yourself in the unexpected position that your infringer may go to your joint owner and obtain a licence from the joint owner that therefore prevents you from enforcing IP. So once again, unless these topics are covered off in your agreement, if your dealing with joint ownership in the US you may find yourself in an unexpected position. In Canada, the situation is different. In Canada each joint owner of a patent can assign their entire right in the patent, without the consent of the other co-owner, but they cannot licence their rights to another party without the consent of the co-owner. So what that means is that the IP can't be diluted, if you're dealing with a Canadian joint ownership situation. Now Vivian and Mathilda will touch on the treatment of joint IP in both China and the UK.
Vivian: Thanks, Paul. On that question of joint ownership, it is surprisingly the situation in China is actually similar to the US, I would say. Chinese patent law authorizes co-owners the right to independently use the licence to patent to third parties by way of non-exclusive licence. In that event any profits resulting from such licence to a third party must be shared to the other co-owner. Regarding trademarks, joint ownership of trademarks, China's law isn't so clear for patents and our recommendation is we need to conclude a detailed written contract with the co-owner on the rights and obligations of each party, making sure that this contract is also registered with the relevant authority here in China for trademarks.
Mathilda: Thanks, Vivian. Yes, I would wholeheartedly agree if you're going down a co-ownership route then a decent written agreement is an absolute must, wherever in the world you happen to be. When it comes to jointly owned technology in the UK, another different scenario, and the default position here is that each joint proprietor of a patent can use the patented technology itself but cannot licence, assign or mortgage the patented technology without the consent of the co-owner. Of course that default can be varied by agreement, as Paul flagged up, but the starting position is actually even more restrictive than the position that Paul outlined in Canada.
Neil: I think the key for joint ownership is get it in writing. Make sure it's very well documented. The world is changing and we are seeing more and more requests for joint ownership and so the advice is if you can avoid it, that's great, but if you've got to do it, we can set you up properly to make sure that you're protected in that situation.
So now that we've covered off a lot of the terms in these commercial agreements we thought we'd switch gears a bit and talk about money. Getting investment. Using your money to buy a company or possibly having an exit where you sell your company through M&A. So, turning it over to Mathilda to discuss some of the key aspects in these types of transactions.
Mathilda: Thanks, Neil. I guess the key message is, for this section, are number one, to think ahead and number two, to think like a potential partner or buyer when looking to take yourself to market. Whoever they are, and your potential buyers, partners, investors will probably want to do due diligence on you. They need to do it from their own governance perspective, but also from an IP perspective they need the comfort of knowing that your key IP is appropriately protected ,and that you've got the key measures under agreements in place to be able to exploit it. I would say you can't start thinking about this stuff too early. It's all about getting your house in order ahead of time so there are no nasty surprises during the diligence process. As a starter I would suggest three key areas to focus on.
Firstly, registrations such as patents or trademarks. Look at your current filings. Are there any gaps? Can you bolster any key areas with additional filings? Have you secured rights in the appropriate territories? Are your payments up to date? One I come across very frequently, are the rights registered in the correct company or individual name? These are all issues that can be addressed and get into ... ahead of time saves a lot of heartache and money down the tracks when they could trip the whole deal up.
Secondly, don't forget your key unregistered IP. Typically the issue here comes down to do you own, and can you show that you own, your key unregistered IP? To answer that question look at how that key unregistered IP was developed. For example, did you use contractors? Under English law, IP will usually be owned by the person that creates it, unless they're an employee in which case it will be owned by their employer. We do find that in certain sectors, for example tech or creative services, businesses make a lot of use of contractors. Unless they have an agreement specifically transferring the IP to the commissioning company then that IP may well still be in the hands of the contractor. That is exactly the sort of issue you need to sort out. Ideally before potential buyers, partners or investors start asking awkward questions.
Thirdly, look at your existing IP agreements. So all of the licences, commercial agreements that Paul and Vivian have talked about earlier in this webinar. Check your key agreement terms. Are they impacted by the proposed transaction? Do you have a change of control clause in there? Are they easily terminable by the other side in short notice? Do they contain broad access rights to affiliate IP, for example, that could act as a poison pill for a potential buyer? Payments, again. Are you up to date on payments under your IP agreements or will the new transaction itself trigger any payments to your existing partners?
In a nutshell it's important to have an accurate picture of where you stand with your current partners before opening discussions with new ones. I think Paul has some thoughts on how that equally applies in the context for a licencing deal.
Paul: Yes, thank you. Yes, exactly as Mathilda says, many of the issues that Mathilda has identified in the context of due diligence for M&A or an investment also apply in the context of a licencing transaction. For example, if you have a licencee does your licensor actually own, or is the registered owner, of all the patents that it's going to purport to licence to you? Another scenario is sub-licencing. So if your licensor is sub-licencing any rights that it holds from other people it may be important for a licencee to want to review what those head licences are, verify that they actually convey the necessary rights to your licensor, so your licensor in turn can pass those rights on to you. Then, in addition to actually doing the due diligence on the agreements, it may be important to include in your licence agreement covenants by your licensor to maintain those head licences in force and to not terminate them or allow them to expire during the term of your licence.
Mathilda: Yeah, absolutely, Paul. Important points. I guess to sum up on this, when you're looking at scaling through seeking partners or buyers, you need to ensure your IP protection status is fit for purpose and that you've done an audit to ensure you know what your rights are. This can sound like a lot of work but there are people who can help you with this. Our IP professionals around the world help clients with this all the time. Depending on your IP position you might want to consider having an external IP audit or IP valuation by way of seller due diligence before any M&A activity. In fact, Vivian's already mentioned, IP valuation is itself a specialist topic that we will be focusing on in the third of this mini-series of commercializing IP. So, watch out for that. Then finally, in this section, I'm going to hand over to Vivian and he's going to let us know about some particular considerations around M&A activity in China.
Neil: Vivian, I'm just going to jump in here. We're very short on time and it's more or less time to go to breakout rooms so maybe Vivian can raise his points about the China specific aspects here in the breakout room for the China jurisdiction. Thanks everyone and thank you to all of our attendees. We do have breakout rooms that we are able to go into now. So we're going to set that up. We hope that you've enjoyed our discussion and we hope that you will come back for our future webinars as we continue this series on commercialization. In order to go to the breakout rooms you'll need to click on a link that has been sent to you or I believe the link may also be in the chat. So if you click on that link we'll go to a staging area for the breakout rooms and thanks again to all our panelists and also to all of you for attending. We'll see you in the breakout rooms very shortly. Thank you.