In the research-heavy battery industry, licences provide a way for a patent holder to give permission to a third party to use their technology in exchange for a royalty.
The licensing of intellectual property (IP) provides great opportunities. For the holder of the IP rights, it presents an additional revenue stream or a means to commercialise the technology in a different country with a local partner while receiving a royalty. For the licensee, they are able to access patent-protected technology in exchange for a royalty and, depending on the terms, develop the technology and avoid the need for upfront research and development costs.
In the fast-moving battery technology space, research such as in alternative battery chemistries, battery types, and electrode materials is performed by many different parties. They include government-backed organisations, universities, and small start-ups. In some instances, these parties may not have the means or desire to fully commercialise the invention in a global marketplace. IP licensing provides a solution. However, licences come with terms and conditions and there are important matters to consider for both the licensor and the licensee.
What is the right way to approach the licensing of IP?
Once an IP licensing opportunity has been identified, obtaining legal advice at an early stage is worthwhile. In some instances, obtaining advice before approaching the other party may be appropriate so that the fundamental feasibility of the deal can be understood before making your commercial aims known.
There is always a risk the proposed deal may not work for some reason or, at least, does not work exactly as the parties originally envisaged. In addition, specialist legal advice can ensure that the licence itself achieves your commercial aims (as far as possible).
Exclusivity and performance
Whether you are licensing out (as licensor), or licensing in (as licensee), the issue of exclusivity and its relationship with royalties is an important one.
Typically, an exclusive licence seeks to address the issue of licensee performance in a number of ways:
- It sets a contractual obligation for the licensee to use its best or reasonable endeavours/efforts to exploit the licensed technology or property as widely as possible and to meet all reasonable customer demand for the licensed product in the licensed field or territory
- The licensor provides specific performance metrics or KPIs which, if the licensee does not satisfy them, the “exclusive” nature of the license is lost, and the licensor may appoint one or more other licensees in the same field or territory
- A short licence term with the need for an exclusive licence to be re-negotiated and re-agreed, rather than automatic renewal taking place or a long licence term being agreed
- The licensee is required to pay a minimum royalty regardless of the number of actual sales or income in order to keep the licence in place.
Each of these ways should be understood by both parties because the impact can be wide when disagreements take place.
For example, in some jurisdictions, a “best” endeavours/efforts obligation, while not being an absolute obligation, is an onerous one for a licensee because it could require the licensee to apply all its resources to the achievement of the object of the obligation (for example, meeting all reasonable customer demands for the licensed product) without having regard to the competing needs of other parts of its business.
In the field of battery manufacture, access to certain metals and chemicals can sometimes be challenging. With fluctuating supply and prices of such materials, the fulfilment of a “best” endeavours obligation in a licence could be challenging, at least in a way that is profitable for both parties involved.
The inclusion of such an obligation may be of real assistance to a licensor in dealing with an underperforming licensee, but clearly could be considered disproportionate by a licensee. However, because a “best” endeavours obligation is such an onerous one, it is rarely given in this context, at least by a properly advised licensee, and is generally amended to “reasonable” or “all reasonable”.
The less stringent obligation should still assist the licensor in dealing with a licensee who is doing nothing, or next to nothing, to exploit the licensed technology or property by allowing the licensor to terminate the licence for breach. In other circumstances (e.g. where the licensee is performing in some areas but not others), it may be difficult for the licensor to prove a breach since, in determining whether the licensee is using its reasonable endeavours/efforts, other calls on the licensee’s resources and time must be taken into account.
In relation to KPIs, where the licensor is familiar with the business of the licensee, the prior agreement of specific targets or KPIs in a schedule to the licence which is reviewed on a fairly regular basis (for example annually or every three years) can be a pragmatic way for the licensor and licensee to agree a minimum expected level of performance from the licensee. This may include marketing spend levels, dates for milestones on which the licensee will launch specific products or in additional territories, or the number of “new” customers to be achieved in a specific territory.
It is not uncommon for an agreement to state that an exclusive licensee will lose its exclusivity rights if it fails to meet KPIs or minimum performance standards for two consecutive assessment periods. This mechanism can provide additional options for a licensor to supplement its income in a particular field or territory if the existing licensee is underperforming.
A licensor should also consider the administrative burden of auditing, and conversely, the licensee should consider the administrative burden of reporting and being subjected to audit on these factors before using this structure.
Licence term
A licensor is never obliged to provide a long-term licence to a licensee.
There are a number of benefits, including certainty of commercial arrangements, or perhaps guaranteed income (where a minimum royalty is used), to agreeing to a long licence term. However, where the performance of a licensee is not established, or sensible targets could not be agreed upon, resorting to a shorter-term licence may provide the parties with the ability to exit the arrangement if it is not mutually beneficial, or even beneficial to one party.
This can be achieved by several methods, including a fixed-term licence where expiry is automatic, and a new licence must be agreed upon and executed to continue the relationship, or an elective break clause (e.g. two years into a four-year licence).
Minimum royalties
A mutually agreed minimum royalty obligation is usually a good way for a licensor to ensure a minimum level of commercial benefit from the arrangement.
Careful consideration also needs to be given to the consequences of the licensee not achieving sales sufficient to generate the minimum royalty.
For example, should the licensee be able to avoid termination in these circumstances by making up the shortfall between the earned royalties and the minimum or should the licensor be able to terminate the agreement in any event?
As mentioned above, it may be more appropriate for the licensee to simply lose its exclusivity in that field or territory as a result of failure to achieve the minimum royalties for two consecutive assessment periods (for example).
If the minimum royalty was set at the bottom end of the parties’ expectations, a licensor will probably not wish to settle for the payment of that sum for, say, the 20-year life of a patent. Looking at this situation from the other perspective, it is rare, in our experience, for the licensee to be given any termination rights when earned royalties are below the minimum royalty level.
Yet, if this is the situation and it continues for more than a year or two despite the licensee’s best efforts to market and sell the licensed products, then the licensee may be as, if not more, concerned than the licensor about the agreement continuing for many further years as it is likely that the arrangement is not commercially beneficial for the licensee either!
The licensee should, therefore, at least consider seeking to negotiate a reciprocal termination right to cover this situation.
Approach to exclusivity and royalties
As we have explained above, there are numerous factors that can be used to try and ensure a fair and controlled relationship between the licensor and the exclusive licensee, which avoid the parties being tied into an exclusive relationship that is not beneficial for the party concerned.
Most commonly, balancing these controls both commercially and legally will take time and forethought, and these are best agreed upon in the Heads of Terms. Engaging experienced legal counsel at the early stages of negotiation will mean that parties can receive guidance on a sensible balance of obligations as between licensee and licensor, and the implications of the proposed structures.
Your legal advisors should be commercially astute and, where possible, understand battery technology and your market segments well to ensure that you receive the best results in your agreements and understand any KPIs that may be in place.
Example – Licensing of technology developed with the support of the US government
It has been reported by NPR that UniEnergy Technologies of Seattle, US, licensed technology for a vanadium flow battery that was originally developed by the Pacific Northwest National Laboratory (PNNL), supported by the US Department of Energy’s Grid Storage Programme. Vanadis Power, a company based in the Netherlands is reported to have sub-licences to the technology.
Government-backed projects often come with restrictions that a licensee would need to be aware of. In fact, the patents themselves, which are mentioned below, carry a statement that “This invention was made with Government support under Contract DE-AC0576RL01830 awarded by the US Department of Energy. The Government has certain rights in the invention.”
The PNNL website lists patent applications that were applied for by Battelle Memorial Institute on behalf of the PNNL. Two patent families relating to Vanadium Redox Flow Batteries can be identified.
The first family has the title ‘Redox flow batteries based on supporting solutions containing chloride’.
The abstract describes the invention as “Redox flow battery systems having a supporting solution that contains C1– ions can exhibit improved performance and characteristics. Furthermore, a supporting solution having mixed SO42- and C1– ions can provide increased energy density and improved stability and solubility of one or more of the ionic species in the catholyte and/or anolyte. According to one example, a vanadium-based redox flow battery system is characterised by an anolyte having V2+ and V3+ in a supporting solution and a catholyte having V4+ and V5+ in a supporting solution. The supporting solution can contain C1– ions or a mixture of SO42- and C-1 ions.”
Applications were made in the US, Europe, Australia, Canada, China, Japan, and South Korea. The US and European members of the family have patent numbers US8628880(B2), US9077011(B2), US9123931(B2), US9819039(B2), and EP2622675 A.
The second family has the title ‘FE-V redox flow batteries’.
The abstract describes the invention as “A redox flow battery having a supporting solution that includes Cl– anions is characterised by an anolyte having V2+ and V3+ in the supporting solution, a catholyte having Fe2+ and Fe3+ in the supporting solution, and a membrane separating the anolyte and the catholyte. The anolyte and catholyte can have V cations and Fe cations, respectively, or the anolyte and catholyte can each contain both V and Fe cations in a mixture. Furthermore, the supporting solution can contain a mixture of SO42- and Cl– anions.”
Applications were made in the US, Europe, Australia, Canada, China, and South Korea. The US and European members of the family have patent numbers: US8771856 (B2) and EP2622674 (Status: Not granted – deemed to be withdrawn).
