day 5 afternoon - ford and prowse
TRANSCRIPT
Lead to Win
Lead to Win
Key Contracts that enable development,
sales and “partnership” success
June 24, 2009
Robert Ford
Thomas Prowse
Gowlings Kanata Technology Law Office
Lead to WinSlide 2
Agenda
Theme: Key Contracts that enable success
• Start-ups and the role of contracts
• NDAs and the anatomy of an agreement
• License Agreements
• Sales & Channel Agreements
• Strategic Alliance & “Partnership” Agreements
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Start-ups and the role of contracts
What is role of contracts for a start-up?
• While a start-up naturally focuses on matters within its
operational control, the reality is that many internal matters and
most external matters will be governed by contracts
• These agreements will include the “internal” agreements already
touched on, including shareholder agreements and employment
agreements
• The focus of this session is on agreements with external third
parties including NDAs, License Agreements, Supply Chain
Agreements, Sales & Channel Agreements, and Strategic
Alliance & “Partnership” Agreements
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Start-ups and the role of contracts (cont’d)
What is role of contracts for a start-up?
• Since these classes of agreements will provide much of the
business structure for the start-up, they should be seen as a key
foundation for, and an integral part of, the start-up operation
• As such, these agreements are best seen as a key enabler of
business success
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NDAs and the anatomy of an agreement
What is an NDA?• An NDA (or Non Disclosure Agreement) is an agreement under
which a party agrees to maintain the confidential nature of information received from another party
• The NDA sets out the limited purpose for which the confidential information may be used
• The NDA may be one-way or mutual and typically has a short time duration
• The NDA normally states that the confidential information is being provided on an “as is” basis
• Protect from loss of patent rights
• Protect from loss of trade secret and confidential information
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NDAs and the anatomy of an agreement (cont’d)
What isn’t an NDA?
• An NDA (or Non Disclosure Agreement) is not an
agreement for the ownership or licensing of intellectual
property rights
• An NDA is not an agreement for the development of a
product or the provision of a service
• An NDA is not an agreement for the license or sale of a
product
• An NDA is not an agreement for the delivery of a service
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NDAs and the anatomy of an agreement (cont’d)
The anatomy of an Non Disclosure Agreement
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NDAs and the anatomy of an agreement (cont’d)
First element: The Parties
• The agreement needs to set out the legal name of the
contracting entities as well as other entity particulars such as
address and province or state of incorporation
This Agreement is between [insert Company full legal name],
with an office at [insert business address], and [insert
Company full legal name], with an office at [insert business
address].
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NDAs and the anatomy of an agreement (cont’d)
Second element: The activity or purpose
• The agreement needs to set out the purpose of the
agreement and/or the activity being pursued by the
contracting entities
The parties are engaged in business discussions related to
_______________________________ (“Activity”), which may
result in the disclosure of Confidential Information as defined
below.
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NDAs and the anatomy of an agreement (cont’d)
Third element: Subject matter (& definitions)
• The agreement needs to set out the subject matter of the
agreement as well as any definitions needed to give
meaning to terms used in the agreement
“Discloser” shall mean a party hereto which discloses
information to the other party.
“Recipient” shall mean a party hereto which receives
information from the other party.
“Confidential Information” means ….
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NDAs and the anatomy of an agreement (cont’d)
Fourth element: Rights & obligations
• The agreement needs to set out the rights and obligations
of the contracting entities under the agreement (and may
specify certain remedies in the event of a breach of these
obligations)
The Recipient shall use the Confidential Information only in
connection with the Activity ….
Except with the express prior written authorization from
Discloser, Recipient shall not copy or transmit ….
Upon written request from the Discloser, the Recipient will
promptly deliver to the Discloser, or destroy ….
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NDAs and the anatomy of an agreement (cont’d)
Fifth element: Limitation of Liability etc.
• The agreement needs to set out the ground rules for the
contracting entities with respect to Limitation of Liability,
Caps on Damages, Indemnities etc.
All Confidential Information is provided „as is‟ without warranty
assurance, guarantee or representations of any kind and shall
remain the sole property of the Discloser. No license is either
granted or implied by the conveying of Confidential Information
to the Recipient.
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NDAs and the anatomy of an agreement (cont’d)
Sixth element: Term (& Termination)
• The agreement needs to set out the Term for the agreement
(including its start date) as well as the ground rules for the
contracting entities with respect to its renewal or termination
(and any continuing rights & obligations)
Confidential information may be exchanged between the
parties under this Agreement for a period of one (1) year from
the Effective Date. The parties shall retain in confidence all
Confidential Information of the other party for a period of five
(5) years from the date of each disclosure.
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NDAs and the anatomy of an agreement (cont’d)
Seventh element: Governing Law etc.
• The agreement should set out the body of law to be used
for the interpretation of the agreement and will sometimes
specify the place where the contracting entities would like
legal actions (or mediation) to take place as well as other
general terms and conditions
This Agreement is governed by, and is to be construed and
interpreted in accordance with, the laws of the Province of
Ontario and the laws of Canada applicable in that Province,
excluding any conflict of law provisions.
Lead to WinSlide 15
License Agreements (cont’d)
License Grant – Heart of the Agreement
• exclusive, sole or non-exclusive?
• territory? i.e. geographical limitations?
• field of use?
• specific rights? eg. make/have made
• transferable?
• sub-licensable?
Lead to WinSlide 16
License Agreements (cont’d)
Royalties
• What is a “Reasonable Royalty”? Factors include:
• Prevailing royalty rates in the industry
• R & D costs of developing technology
• Nature of the technology
• State of the technology (does it need to be commercialized?)
• Strength of protection
• Nature of competing technologies
• Expected market penetration
• Technology transfer
• Many other variables
Lead to WinSlide 17
License Agreements (cont’d)
Royalties
• Many theories to quantify royalty rates. Can consult an expert if
client has not already determined this issue. Three primary
methods:
(1) Cost Method - how much costs are saved
(2) Comparables Method - compare similar deals in the
industry for rates
(3) Income Method - project future incomes by accounting
methods with discount rates (i.e., anticipated profits)
Lead to WinSlide 18
License Agreements (cont’d)
Royalties
• Up front/ lump sum/ per milestone
• Fixed amounts:
• Advance lump sum (fully paid up)
• Lump sum payable in instalments
• Fixed but dependent on future events or milestones
Used where Licensor wants to recoup development or other
costs, mitigate risk that Licensee will not perform
Lead to WinSlide 19
License Agreements (cont’d)
Royalties
• Running royalties (per unit/ net revenues)
• Variable and dependent on extent of exploitation (sales
volume, quantity of material used, articles sold).
Lead to WinSlide 20
License Agreements (cont’d)
Royalties
Various examples:
• $50,000 upon execution of Agreement
• running royalties equal to 10% of the Net Sales of Licensed
Product sold during the Term
• a royalty of $20 per Licensed Product manufactured by
Licensee
Lead to WinSlide 21
License Agreements (cont’d)
Royalties
• Minimum payments
• important with exclusive licenses to guarantee revenues
• mandatory (must achieve or agreement or territory
terminates)
• permissive (allows for top-ups)
Lead to WinSlide 22
License Agreements (cont’d)
Royalties
• Failure of Licensee to meet minimums may result in mandatory
or permissive actions
• Termination of Agreement
• Revocation of exclusivity, territorial scope, etc.
• Licensee must “top up” royalty payments to meet minimums
Lead to WinSlide 23
License Agreements (cont’d)
Representations and Warranties• Performance
• Link to Technical Specifications
• Time Limited
• Intellectual Property Infringement
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License Agreements (cont’d)
Indemnities• Intellectual Property Infringement
• Personal Injury
• Property Damage
Lead to WinSlide 25
License Agreements (cont’d)
Infringement and Indemnity
• Licensee will want full IP warranty and indemnity
• Licensor will want to limit scope of indemnity
Lead to WinSlide 26
License Agreements (cont’d)
Warranties
• Scope of warranties depends on nature of the license
arrangement
• Consumer products usually “as is, where is”
• High end or custom products have broader warranties
• Scope of warranties is always a point of contention between
the parties
Lead to WinSlide 27
License Agreements (cont’d)
Warranties
• Minimum warranties may include:
• Licensor is the owner of all IP in the licensed materials
• Use will not infringe IP or other rights of a third party
• Licensed materials (e.g. software) will perform in accordance
with specifications or documentation – should be objective
and measurable – not mere promo materials
Lead to WinSlide 28
License Agreements (cont’d)
Warranties
• Warranties may have time limitations – ties in with acceptance
testing
• May be limited remedies for breach of warranty – ties in with
maintenance and support
Lead to WinSlide 29
License Agreements (cont’d)
Disclaimers
• Parties will want to disclaim all other reps, warranties express or
implied, and conditions not expressly set out in Agreement
Lead to WinSlide 30
License Agreements (cont’d)
Term and Termination
• Life of the IP
• Specified Term
• Need enough time to commercialize the technology
Lead to WinSlide 31
License Agreements (cont’d)
Term and Termination
• Must give careful consideration to what rights and obligations
should survive termination:
• Payment of royalties for existing inventory
• Audit rights
• Indemnity obligations
• Obligations of confidentiality and non-disclosure
• Limitations of liability
Lead to WinSlide 32
License Agreements (cont’d)
General Terms/ Boilerplate
• Choice of Law
• Alternate Dispute Resolution
• Entire Contract
• Severability
• Compliance with Laws
• Force Majeure
• Assignment/ Change of Control
• Surviving Provisions
• Notices
Lead to WinSlide 33
License Agreements (cont’d)
Some License Agreement Traps
• Joint Ownership of IP
• Contractor or employee ownership of the licensed technology
Lead to WinSlide 34
License Agreements (cont’d)
Keys to Licensing Success
• Aligning the objectives of the agreement with the party’s
strategic objectives
• Proper resource allocation after deal signed
• Regular and full communication between the parties
• Addressing issues as they arise with flexibility and consensus
Lead to WinSlide 35
Sales & Channel Agreements
Types of Distribution Arrangements
• Direct Sales
• Sales Reps/Sales Agents
• Resellers and Dealers
• Mass-Market Sellers
• Value-Added Resellers (VAR)
• Original Equipment Manufacturer (OEM)
• System Integrators
• Vendor Programs
Lead to WinSlide 36
Sales & Channel Agreements (cont’d)
Key Terms
• Product Definition
• License Terms
• IP Infringement Indemnification
• Exclusivity
• Marketing Efforts
• Payments
• Limitation of Liability (dealing with the outrageous and asking for it yourself with a straight face)
• Exclusion of Warranties
• Termination
• Non-Solicit/Non-Competition
• Confidentiality
• Trade-Marks
Lead to WinSlide 37
Sales & Channel Agreements (cont’d)
Product Definition
• What’s included and what’s not included
• Rights to receive Updates/Upgrades/Modifications
• Ownership of improvements, particular in OEM or VAR
arrangements where Distributor may make modifications to
Vendor’s Product
Lead to WinSlide 38
Sales & Channel Agreements (cont’d)
Rights of Distributor with respect to your Product
• Right to reproduce/copy
• Right to modify
• Retain ownership of “improvements”
• Right to sublicense
• Specify terms of sublicense
• Survival of sublicenses on termination of Distribution
Agreement
• Third-party technology
• Who’s responsible for obtaining licenses from third parties
for third party material in the Product
• Pass on restrictions imposed by third parties to Distributor
and End Users
Lead to WinSlide 39
Sales & Channel Agreements (cont’d)
Exclusivity• Dimensions of exclusivity:
• Geographic
• Product
• Field of Use
• Industry
• Cascades of refusal
• Requiring upfront prepayments and/or other “skin-in-the-game”
• The price of exclusivity is typically a minimum sales obligation
Lead to WinSlide 40
Sales & Channel Agreements (cont’d)
IP Infringement Indemnification
• Protects the Distributor from liability if the Product infringes a
third party’s rights, typically patent rights
• Manufacturer may want an indemnity from an OEM or VAR if
they will modify the Product
• Scope of indemnity: If giving the indemnity, try to limit the
jurisdiction to U.S./Canadian IP Rights
• Indemnitor’s right or obligation to Repair/Replace/Modify if
commercially reasonable, if not commercially reasonable, then
Vendor may refund the purchase price
Lead to WinSlide 41
Sales & Channel Agreements (cont’d)
Payments
• How is the Distributor compensated?
• Sales Agents typically earn commissions
• How are commissions earned?
• What sales are commissionable, and what are not, must
be clearly set-out
• Commissions paid only on revenue received by the
Manufacturer
• Is commission payable for some period following
termination?
Lead to WinSlide 42
Sales & Channel Agreements (cont’d)
Payments
• Resellers are typically compensated based on their margin
• VAR’s and OEM’s may pay “Royalties”
• Typically a percentage of license fees received by the
Distributor
• Net Revenue versus Gross Revenue
• Minimum Royalties
• Requirement to keep records and audit right in favour of
Manufacturer
• Records and audit right to confirm compliance
Lead to WinSlide 43
Sales & Channel Agreements (cont’d)
Termination
• Terminating distributors can be difficult, particularly where no
written agreement is in place
• Common law requirement to give notice
• Duration of notice dependent on certain factors which
include:
• exclusivity;
• duration of relationship;
• value of the product line relative to other lines carried
by distributor;
• effort; and
• expenditures incurred to build market
Lead to WinSlide 44
Sales & Channel Agreements (cont’d)
Termination
• Optics are important – is the Manufacturer a “pirate” stealing
the fruits of the Distributor’s effort by terminating the
relationship
• Importance of documenting poor performance and
communication of expectations
• Termination for Convenience
• Termination for Breach
Lead to WinSlide 45
Sales & Channel Agreements (cont’d)
Non-Solicit/Non-Competition
• Limiting Distributors ability to leverage its experience to assist a
competitor
• Needs to be reasonable in its duration and scope to be
enforceable
Lead to WinSlide 46
Strategic Alliance & “Partnership” Agreements
What is a “Joint Venture”?
• Describes a wide variety of legal relationships
• Any relationship where two corporations agree to work together
to address a market, product, technology or resource
• Shared Risk, Shared Management, Shared Reward
Lead to WinSlide 47
Strategic Alliance & “Partnership” Agreements
Why Form a Joint Venture?
• Frequently, developing and commercializing new products or
accessing a new market is too complex and expensive for a
company to do it alone
• Leveraging Resources, each party brings certain things to the
table:
• Money
• Intellectual Property Rights
• Personnel
• Access to Sales Channels
Lead to WinSlide 48
Strategic Alliance & “Partnership” Agreements
Partnering for the start-up
• Obtain Funding
• Leverage Technology
• Access to Development Resources
• Take Advantage of Installed Base
• Credibility
• Access to Markets
Lead to WinSlide 49
Strategic Alliance & “Partnership” Agreements
Concerns
• Loss of Control/Vision/Flexibility
• Loss of Upside
• Risk of Creating Competition
• Free Rider Concerns
Lead to WinSlide 50
Strategic Alliance & “Partnership” Agreements
Structuring the Joint Venture
• Contractual Alliance vs. True Joint Venture
• True Joint Venture
• Separate Legal Entity (Corporation, Limited Partnership)
• Jointly Owned and Managed
• Contractual Joint Venture
• Relationship between one or more corporations defined
by contract (typically a “Joint-Venture Agreement”)
Lead to WinSlide 51
Strategic Alliance & “Partnership” Agreements
Choice of Structure
• Tax Issues
• Flow through to JV v. Corporate Taxation
• Assignment/Divestiture of Assets to Corp. or retention
• Liability Issues
• Corporate vs. Individual/Joint & Several
• Structural/Control Issues
• Corporate Structure & Rules; Formalities
Lead to WinSlide 52
Strategic Alliance & “Partnership” Agreements
Choice of Structure• Strategic Variables
• Fields of Use
• Geographic Territory
• Control of Development
• Many other
• Financial Variables
• Royalty/Profit Sharing
• Equity
• “Pre-Market Payments”
Lead to WinSlide 53
Strategic Alliance & “Partnership” Agreements
Key Issues – Due Diligence
• Includes review of:
• Parties entering into the alliance and contributions
• Corporate/contracting documents
• Public searches
• Subsidiary(ies) and involvement
• Proprietary Rights of the parties
• Validity, Ownership
• Employee Confidentiality Agreements and Assignments
Lead to WinSlide 54
Strategic Alliance & “Partnership” Agreements
Key Issues – IP Ownership
• Can be a difficult issue to deal with and should be carefully
considered in each case
• Avoid tendency to “jointly own” or to ignore the issue
• Consider “Pre”, “During”, and “Post” Rights
Lead to WinSlide 55
Strategic Alliance & “Partnership” Agreements
Key Issues - Background IP
• Background IP of the parties needs to be protected and licensed subject to the terms of an appropriate license agreement
• What rights will be granted and how will the scope of such rights be limited?
• Exclusivity Issues
• Geographic
• Field of Use
• Sublicenses
• Restrictions
Lead to WinSlide 56
Strategic Alliance & “Partnership” Agreements
Key Issues – Foreground IP
• Different IP Ownership Models
• One Party Owns, with license to the other Party
• Development and License Agreement set out each
Party’s rights
• Joint Ownership
• Complex
• Need to define the Parties rights in a “Joint-Ownership”
Agreement
Lead to WinSlide 57
Strategic Alliance & “Partnership” Agreements
Key Issues – Foreground IP
• Joint Ownership Agreement (or terms to be included in the JV
Agreement)• Rights to exploit the IP
• The right to grant non-exclusive licenses to third parties
• Protection of the Intellectual Property
• Registration
• Enforcement
• Associated Costs
• Termination
Lead to WinSlide 58
Strategic Alliance & “Partnership” Agreements
Other Key Issues
• Governance and Control
• Dispute Resolution
• Exit Strategies
Lead to WinSlide 59
Q & A
• ?
Lead to WinSlide 60
Thank you!
Thomas Prowse
613.783.8988
Robert Ford
613.786.0142