HoT licence spin-out playbook

Grant of Licence: the use rights that are being granted to the University’s IP and describes the key scope of the of the proposed licence, how and for what it can be used, and by whom.

An important aspect to consider is whether the licence is Exclusive or Non-Exclusive, as this will have knock-on implications for the remainder of the agreement. In general, an Exclusive Licence will have greater requirements for exploitation (on the Licensee) than a Non-Exclusive Licence, as the Company is getting greater access and control over the IP. Company’s generally require an Exclusive Licence, as they tend to be targeting a significant commercial opportunity and seek to gain ‘exclusive’ protection in their key ‘market’ along with requiring assurance for securing essential private investment. An Exclusive Licence is generally insisted on by investors, as a non-exclusive licence would mean that third parties can be granted competing licence rights.

The IP to be licensed should be described clearly. In particular, registered rights such as patent applications and patents should be identified by application or publication number(s). The description of IP will govern the scope of IP rights that are on the table for ultimately being licensed to the Company. Any and all forms of IP can be licensed, including patents, trademarks, copyright, design rights, database rights and know-how.

It is important to be clear about the type(s) of IP under discussion at the earliest stages of negotiations since the terms of the agreement are likely to be heavily influenced by the form of IP that is being licensed.

Know-how is generally licensed non-exclusively. However, in some cases exclusivity can be granted, where:

• The Know-how is capable of being defined clearly and therefore documented. This enables the parties to understand what know-how is being licensed and allows the TTO to conduct appropriate due diligence ahead of licensing.

The academic concerned is comfortable that the Know-how does not become publishable information and receives advice on any consequences.The template does not currently provide a section for detailed Know-how, but this can be added to a schedule if it is important to identify this during HoT negotiations.

The Field governs the sector or end-uses in which the IP can be used. Specifying the Field is essential to ensure that there is control over the appropriate use of the IP whilst giving the Company sufficient flexibility over product development and sales. Exclusive Licences can be granted to the Company but also to third parties in different Fields via separate licensing agreements. For example, a Licence to a therapeutic or diagnostic technology could be granted to the Company for veterinary purposes only, and to a different company for use solely in humans. However, as well as granting a licence for use of the IP in a specific Field, in line with policies of the University, it may also be necessary to prohibit the use of IP in other areas or fields that could cause reputational damage to the University such as tobacco, gambling and weapons. These are often referred to as Restricted Sectors and each University is likely to have its own policy.

It is often important to ensure that the description of the Field delineated for specific markets is not too broad, particularly for long-term licences or unique technologies. From the licensee perspective, the Field needs to be defined in a way that captures as clearly as possible the intended research and commercial applications. Depending on the circumstances, parties may need to consider competition law issues (for example, where a licensee is in a dominant position).

The Territory will govern where in the world the Company is entitled to use and commercialise products falling in scope of the licensed rights and preventing competitors from doing this, this can be either Worldwide or restricted to specific Territories. Companies tend to prefer the Territory to be as wide as possible, ie. Worldwide, but specific cases may involve other factors restricting the breadth of the Territories.

Some IP rights, such as patents are territorial, and this may need to be reflected in the HoTs. Also, it is important to pay attention to national security and export control matters as well as embargo / official sanction lists.

The Term is the agreed duration for which the licence agreement is active and enforceable. The Term will start on the effective date of the full licence agreement. Knowing how long the licence will last is important so that both the University and the Company know precisely how long their arrangement is supposed to last. This helps with planning, investments, and knowing when obligations might cease.

The Term could be perpetual for Know-how, for the “life” of the patent itself or another specified duration. The licence could also include an initial term (e.g. 1 year) with renewal periods that commence automatically unless terminated in advance, although this is unlikely in a spinout transaction.

Where IP, particularly patents, are licensed alongside know-how, it is common to see language such as “X years from first sale of a licensed product or the life of the patents, whichever is longer”. This may give the licensor rights to royalties for a sensible period if the patents fall away for any reason but prevent the licensee from paying Know-how only royalties for an unreasonably long period.

Other common ways to define Term are:

• Fixed Period: The duration of the agreement may last for a set number of years (e.g., "5 years from the Effective Date").
• Tied to an event: The licence could end at a specific event (e.g., "until the last relevant patent expires").

Extendable: The agreement might have an initial Term with options to renew for additional periods if both parties agree (or if specific conditions are met).

The University usually decides on whether it is able to grant sub-licensable rights and, if so, the degree of freedom provided to the Company to enter into any Sub-Licensing Agreements. It is important to state whether or not University consent is going to be required for the Company to grant sub-licenses. Considerations may also include any funder obligations or limitations, such as a requirement to inform a funder or request permissions to sub-license outputs of funded research.

In general, the sub-licence terms are set to be no less onerous than those set out by the University in the main ‘Licence’. For example, as with the main licence, there will be restrictions on the entity taking a sub-licence, for example, not tobacco or pornography companies. This ensures the University remains protected against adverse risk generated through any actions of the sub-licensee.

The Spinout will need to consider if any sub-licence automatically terminates with the head-licence. This may seem appropriate, but may impact the licensee’s ability to sub-licence the IP rights, potentially reducing the potential benefit that could be realised through the transaction.

The University needs to reserve certain rights in all its licence agreements and it is important to clarify these in the HOTs. These reservations are intended to balance the University's primary objective, as a research and teaching led organisation, to disseminate knowledge, with its ability to enter into appropriate commercialisation deals with its own spinouts and other partners.

One crucial Reserved Right is the right of the University, its staff and its students, to be able to continue to use the licensed IP for non-commercial research and teaching purposes, despite the fact an exclusive licence is granted to the spinout. In this case, we incorporate a reciprocal licence granted back for non-commercial research and teaching activities, including in collaboration with other non-commercial third parties. In addition, the University will insist on the ability to publish its research post-licensing, although short delays to publication to review for protectable IP or to remove any Company confidential information are usually acceptable and will be important from the perspective of the Company. The Company may wish to restrict publication of exclusively licensed know-how so as to retain its value in the Company.

The University is obligated to ensure that all research and the subsequent commercialisation of the IP generated by the research, adheres to high standards of ethics, integrity, and responsibility. This includes compliance with all legal and professional frameworks and thorough ethical reviews of relevant research.

The Company will eventually be required to ensure any ongoing R&D, testing of or using Licenced Products on humans or animals including clinical trials, shall first obtain relevant ethical, regulatory approvals and CE marking. The Company will also need to commit to not using Licensed IPR and Licensed Products in activity relating to certain Restricted Sectors that are delineated by the University.

Universities almost always take an equity position in their spinout Companies, with the level of equity being in line with University policy. Some Universities include equity as part of the consideration for the licence, whilst most others regard equity as ’reward’ for the historic support underpinning the spinout deal and they will subscribe for their shares in parallel with entering the licence agreement. Both practices are common across the UK higher education sector.

The University will insist that the Company undertakes Diligent and Reasonable Efforts (DRE) to develop and commercially exploit the licensed technologies or products. In order to generate impact from research outputs, it is important to Universities that the Company is actively developing and commercialising the licensed IP. As DRE can be difficult to enforce due to the degree of subjectivity, it is typical to see Diligence or Development Milestones included in the licence agreement. These are clearly defined milestones that need to be reached by a given date, e.g. initiation of clinical studies, or product launch. The Milestones should be considered in light of University’s reasonable expectations of timelines and the Company’s development and commercialisation plans. Failure to achieve the milestones in the specified timescales can be linked to a right of termination or possibly a loss of exclusivity (with a remedy period).

The timing and content of development and royalty reports are usually included in the HoTs. In some cases, there may be obligations to report progress to external funders at regular intervals and so it may be necessary to include these provisions in a HoT to ensure that this is feasible for the Licensee. Universities may also have a requirement to obtain information for the purposes of reporting relating to The Research Excellence Framework (REF).

Regular reporting can be particularly important in licences that include Milestone Payments. Regular reporting ensures that project outcomes can be monitored to understand when milestone payments are due.

Payment schedules can also be included in a HoTs to outline when royalty payments will be distributed e.g. quarterly, annually etc.

Audit Rights are insisted upon so that the University has the option to have an independent accountant ensure the payment reports and amount of any payments made are in accordance with the terms and conditions of the corresponding licence.

Assignment and Change of Control provisions govern when either party may transfer their rights and obligations, and also what happens if a Company gets acquired or is subject to change of control.

Universities will insist that the Company is not able to assign the licence agreement to another entity without the University’s prior consent. Also, if the Company undergoes a Change of Control (to be defined in the licence agreement) without prior consent the University may look to terminate the licence agreement.

Without these terms, the licensed rights could pass automatically to an acquirer of the Licensee without the University’s permission. This could cause a potential reputational risk or a situation in which the rights are passed to a company that may not be the most appropriate to commercialise the technology. Insisting on a right to give consent, often not to be unreasonably withheld, is a normal University position.

The University will require the Company to carry comprehensive general insurance and product liability cover; as a minimum, this should be at a level that reflects the Company’s and therefore the University’s potential liabilities under the licence agreement.

The licence agreement will set out the governing law, as well as the jurisdiction in which any dispute arising in connection with the licence agreement will be heard, e.g.,” law and courts of England and Wales”. This term sets out in advance which courts would have the necessary competence to resolve any such dispute. The governing law and jurisdiction generally correspond (though not always) to ensure that disputes are adjudicated under a consistent and expected legal framework.

The parties are likely to want to ensure that the exchange of information in relation to the licence negotiation (and information around the University technology and Company’s commercial plans) remain confidential. It is highly likely that the parties will have a NDA in place already. The parties may be content that this existing NDA is suitable and sufficient, although this should be discussed and agreed.

The HoT template provides an option (option A) for the parties to confirm this by reference to the existing NDA. The NDA would need to be made part of the HoT as a legally binding agreement and so would at least need to incorporate a Governing Law and Jurisdiction section.

If there is no NDA in place, or the existing NDA is unlikely to be sufficient to cover subsequent negotiations then the template provides an optional confidentiality clause (Option B). This would cover future negotiations but parties should discuss whether this conflicts with any existing NDA or is suitably robust to cover disclosures. If this option is chosen then again, this would need to be a legally binding provision.

The template agreement provides for the optional inclusion of an exclusivity period during which neither of the parties may enter into any agreement, negotiations or discussions for the grant of commercial licenses to the IP in the Field and the Territory with any third party.

Companies are generally keen on including an Exclusivity period so they know that the University will not negotiate licence terms with another party during this Exclusive period.

The University may grant a short exclusivity period, but there may be reasons for the University not to agree to this term. For example, the University may be in discussions with other potential licensees to secure the best deal for creating impact and income from the underlying IP assets.