The rising cost of energy and resources and the transition to a low-carbon economy have driven research, development and investment efforts in clean technologies. The global cleantech market is currently valued at US$1 trillion and is expected to grow to US$3 trillion by 2020. This opportunity has caused a surge in cleantech innovation in Canada. Over the past 10 years both public and private institutions have created significant intellectual property (IP) assets. In this article we summarize important considerations for organizations considering licensing as a route to monetize their IP in the cleantech space.
The most obvious preparatory measure one can take is to ensure you have a robust, diversified, commercially-relevant IP portfolio. A valuable portfolio will be market-driven, have a strategic focus and comprise a variety of types of IP. For example, while having a great patent to a ground-breaking technology is good; having several patents, patent applications, registered designs, trade-secrets and know-how is better.
The portfolio should be as ‘clean’ as possible. Prior to negotiations it is a good idea to clarify ownership issues, review employment and contractor agreements, check confidential disclosure or material transfer agreements, and register assignment agreements with intellectual property offices. Engaging IP counsel to undertake an IP audit before entering into discussions can be a simple and cost-effective risk mitigation measure.
In the cleantech industry, a license agreement will frequently include both tangible and intangible assets. For example, in the biofuel space, the technology will usually include some form of process involving production facilities, trade-secrets & know-how relating to the operation of the plant, as well as patents on the underlying technology. The license may also involve access to key personnel. Defining exactly what assets are to be licensed, exclusively or non-exclusively, and for which jurisdictions, is an essential step in any negotiation.
The technological, legal and regulatory landscape of the cleantech industry is rapidly evolving and it will frequently be necessary to include an ‘improvements’ clause in any license. Parties must first consider just what improvements will be covered by the license and then determine how such improvements will be owned and valued. While it may be tempting to jointly own any improvements this is often a recipe for future disagreements and litigation, not least since joint ownership is treated differently under the laws of different jurisdictions. For example, under U.S. law each joint owner of a patent can grant a license to another party without accounting to the other co-owners, whereas under Canadian law a co-owner cannot grant a license to another party without the consent of the other co-owners. Moreover, a licensee needs to consider how the license of improvements is going to impact future business plans/opportunities.
Furthermore, because of this ever-changing environment, particular attention should be paid to representations or warranties made in a cleantech license agreement. Even within North America the regulatory framework is uncertain and fragmented making any warranty as to the compliance of a particular technology with national, provincial, state or municipal standards problematic.
There has been a marked increase in litigation in the cleantech space over the past few years. License agreements should anticipate litigation and address the roles and responsibilities of each party in any action. Indemnities and protocols for handling infringement claims should be carefully considered.
Consideration should also be given to the end of life of the licensing relationship, including dealing with matters such as repatriation of confidential information, return of products or equipment, and cessation of the use of the licensed IP.
Partner Selection and Joint-Ventures
Given the relatively small domestic market, judicious selection of strategic partners can be an excellent way for Canadian cleantech companies to secure access to important markets, commercialization know-how, and production resources. Similarly, joint-ventures can provide enormous development benefits, shortening timelines and improving commercial viability. Well-matched partners will complement one another’s strengths with all parties contributing something of value — expertise, technology, money, resources, etc. — to the relationship. The agreement will often include a license and it is critical to document each party’s contributions and the permissions granted under the terms of the license.
The legal framework to international licensing is multi-layered. At the first level, the license should include a choice of law clause stipulating the law that will govern the contract, e.g., the laws of Canada, the laws of a foreign licensee, or the laws of a so-called “neutral” jurisdiction. In any event, the license must be reviewed by a lawyer qualified to practice in the jurisdiction of the chosen law to avoid nasty surprises.
Regardless of which law is chosen, the so-called public policy laws of the local jurisdiction will continue to be mandatory. These laws are designed to protect the local country’s businesses and citizens, and cannot be contracted out of by a choice of law clause. These mandatory laws may include such things as mandatory warranties, import and customs, dealer protection, criminal laws, bankruptcy and insolvency, ownership and transfer of IP improvements, taxes, privacy laws, and foreign exchange and investment controls. In addition to the mandatory laws, applicable regulatory laws will need to be complied with, including import restrictions.
Finally, IP laws and protection are jurisdiction-specific. Consideration should be given to obtaining protection in the local jurisdiction for patents, copyrights and trade-marks. Once again, having the license reviewed by a lawyer qualified to practice in the local jurisdiction is essential to ensuring common license terms used in Canadian contracts do not run afoul of local IP laws dealing with such things as patent misuse, royalty terms, tying arrangements, prohibitions against challenging IP and grant-backs of IP.
Arbitration is often a preferable alternative to being sued in a foreign jurisdiction, and thus it may be wise to require disputes be submitted to arbitration in the license. An effective international arbitration clause should stipulate the arbitral body and arbitral rules, the place of arbitration, and the language of the arbitration. Exemptions from arbitration should be considered for remedies where recourse is required to the local courts for enforcement, such as interim or injunctive relief. Here again, local legal advice may be required when considering arbitration carve-outs because if the carve-outs favour one party over the other, it may render the arbitration clause vulnerable to being set aside under local laws.
Cross-border licensing also has implications under various tax requirements. For example, for taxation purposes, there may be considerations of whether the license could actually be treated as a disposition based on factors such as exclusivity, licensed territory, fields of use and duration.
Withholding tax requirements of the laws of the countries involved and under international tax treaties must also be considered. If withholding taxes apply, the license should contemplate whether the fees are payable net of the withholding taxes or must be grossed-up for the withholding taxes, as well as how foreign tax credit offsets that may be available to one of the parties will be treated. For transactions between related entities, such as offshoring to a subsidiary or between international affiliates, careful attention must also be paid to transfer pricing requirements in order to avoid subsequent adjustments and onerous penalties by tax authorities.
The complexity of cross-border licensing in the cleantech space makes selection of appropriate counsel critical. Appropriate expertise will typically only be found in firms with a strong technological focus and international outlook.