Negotiating and Drafting

Technology Transfer Agreements, License

Agreements and Franchise Agreements

PATRICIA A. O. BUNYE
Senior Partner
TECHNOLOGY TRANSFER ARRANGEMENT

Section 4.2, IP Code

“4.2. The term "technology transfer arrangements" refers to contracts or

agreements involving the transfer of systematic knowledge for the
manufacture of a product, the application of a process, or rendering of a
service including management contracts; and the transfer, assignment or
licensing of all forms of intellectual property rights, including licensing
of computer software except computer software developed for mass
market.” (Emphasis supplied)

Technology Licensing is not necessarily synonymous with technology

transfer:

Transfer occurs when the licensor delivers the technology and knowledge
to the licensee and the licensee learns how to effectively use, adapt and
where possible improve the technology and knowledge.
LICENSING

What is licensing? In a strictly legal sense, a license is the grant by one person to another,
of permission to do something that the first person has a legal right to prohibit due to an
exclusionary right, such as intellectual property.

In the context of our discussions on the commercialization of intellectual property, we may

also use the following definition of licensing:

“A license is the granting of permission or rights to make, use and/or sell a certain product,
design or process or to perform certain other actions, the granting being done by a party
who has the right to do so.”

An intellectual property license agreement usually includes a variety of grants in which a

licensor sells or leases to a licensee the use of certain industrial property rights and/or
technical expertise. These rights may include patents, trademarks, copyrights, trade
secrets, know how and technical assistance.
In the context of technology transfer, the term “license” is used to include
any relationship of cooperation between parties, whereby one party, the
licensor [possessor of the technology], gives assistance, usually in the form
of know-how, technical or marketing skills and often, the right to use the
intellectual property, in return for compensation, usually in money, from the
other party, the licensee, who wishes to obtain the advantage of the other’s
technology.

The word “technology” here is not limited to technology in the scientific or

engineering sense. Much of the most valuable “technology” may be in the
form of business management, financial management or marketing
expertise.
FRANCHISE AGREEMENT

DTI Bureau Order No. 10-24

Series of 2010
Issued on 17 November 2010

A written contract or agreement between two or more parties by which

a Franchisor grants the Franchisee the right to engage in the business of
offering, selling, or distributing goods or services under a marketing
plan/system/concept, for a certain consideration. Unless otherwise
provided, said right includes the use of a trademark, service mark, trade
name / business name, know-how, logo-type advertising, or other
commercial symbols associated with a particular business.
 BASIS FOR COMPARISON LICENSING
Definition Licensing is an arrangement which
grants permission or rights to
make, use and/or sell a certain
product, design or process or to
perform certain other actions, the
granting being done by a party who
has the right to do so.”
Governed by In the Philippines: Contract
Law/Intellectual Property Law
Registration Not necessary
Training and support Assistance, usually in the form of
know-how, technical or marketing
skills
Degree of control The licensor has control of the use
of intellectual property by the
licensee, but has no control of the
licensee's business.
FRANCHISING
Franchising is an arrangement in
which the franchisor permits
franchisee to use business model
or brand name for a fee, to
conduct business independently.
In the Philippines: Contract Law
In other countries: Franchise
Law/Securities Law
Mandatory, where there is a
Franchise Law requiring it
Provided
Franchisor exerts considerable
control over franchisee's
business and process.
DTI Bureau Order No. 10-24
Series of 2010
Issued on 17 November 2010

DTI-Bureau of Trade Regulation and Consumer Protection (BTRCP) Advisory on Due Diligence to be
Undertaken by a Prospective Franchisee

Franchise Disclosure Information: refers to a set of information and documents that needs to be
disclosed by the Franchisor to the Franchisee and/or prospective Franchisee.

Due Diligence to be undertaken by a prospective Franchisee:

Before a person decides to engage in or acquires a franchise business, due diligence should be done
by the prospective franchisee.

1. Secure or ask Disclosure Information for the Franchisor as follows:

Business address, email address, internet home page / website, fax numbers and other contact
details

Copy of DTI or SEC Registration

Copy of DTI or SEC Registration

Parent companies and affiliates, if any, and their respective roles in the Franchise, and
Franchisors declaration if any affiliate is a supplier and what they will supply

Names of the Board of Directors and officers with a brief description of their qualifications and
background, ownership of interests and references

The contact number and business location of existing Franchisees

Executed promotional / marketing materials

Description of the business concept, which includes brand image, brand personality, unique
selling proposition, target market, mission and vision, among others

Basic information on training, commercial and / or technical assistance

Certificate that the Franchisor is a member in good standing of any Franchisor Association and
that the Franchisor has not pending administrative, civil or criminal case

Declaration of the Initial Fee, amount that will be collected and services covering these fees
Declaration of the Initial Fee, amount that will be collected and services covering these fees

Training that will be provided, number of persons, how long and training modules

Number of years Company has operated and number of years it has franchised with
corresponding numbers of company owned branches and franchised outlets

Draft of Franchise Agreement

Full disclosure of the financial requirements of the franchise business

A provision that requires the franchise applicant to seek adequate legal and financial counsel
before signing the Franchise agreement

Mechanism for dispute resolution

2. Call or visit or consult any of the following:

Franchisor Association (FIFA Filipino International Franchise Association)

DTI Regional or Provincial Offices

Securities and Exchange Commission

DTI Direct

Certified Franchise Executive

Franchise Consultant

Self-Policing of Members

The Advisory aims to promote and encourage the Franchise industry to self-police its own ranks
by setting a Code of Ethics and Standards for grievance or dispute resolution mechanism to
redress complaints against its members, including issues arising from transactions with their
franchisees, prospective or otherwise.
There is no one way to commercialize technology and no best way.

Ø Each technology has its own set of variables impacting on it.

Ø Whatever process is employed, important to gather as much

INFORMATION as possible to be able to produce the APPROPRIATE
PLAN.

In any mode of commercialization: DUE DILIGENCE AND WELL-CRAFTED

CONTRACTS ARE KEY!

Need for sound legal advice: AVOID inadvertent loss of IP rights, missed
opportunities to get the best deal. GAIN full understanding of alternative
ways to implement a sharing, transfer or exchange of IP rights. Perform legal
due diligence.
 NEGOTIATING THE AGREEMENT
PREPARATION FOR NEGOTIATIONS

A.What is the business reason for this license?

B.What leverage does each party have?
C.What is the time frame for signing the license agreement?
D.Who is on the negotiating team?
E.What are your positions on the key issues of the license?
F.What is your negotiating strategy?
G.Will you need preliminary agreements?

What is your negotiating strategy?

For each term in the term sheet, what is your “first line”?
For each term in the term sheet, what is your “bottom line”?
What are the other party’s first line and bottom line likely to be?
What are the alternatives if your bottom line cannot be gained?
Use your internal term sheet throughout as a guide to the negotiation and as a communication tool for your
negotiating team.
Will you need preliminary agreements?

1. Confidentiality agreements/Nondisclosure Agreements

2. Interim Agreements/Feasibility Agreements/Prototype Agreements
3. Material Transfer Agreements

Do not use Letters of Intent or Memoranda of Understanding.

PRACTICAL CONSIDERATIONS

Be a good listener.

Ask good questions.

Be aware of cultural practices that may or may not enhance the negotiations.

Give face whenever possible. Allow others to save face.

Be straightforward; avoid overstating the positive and understating the negative

Negotiations must be conducted by both in a non-adversarial manner with each party

showing respect for the contribution and needs of the other.

License must be built on a trust relationship, since problems will arise from events not
anticipated by contract language.
Aim at structuring an agreement that both sides believe is fair.

The parties involved are not competitors, and mutual gain will occur only if there is full
cooperation and respect.

Negotiation is 70% preparation and 30% knowing what to do. The side that seems
smarter is often just better prepared.

Being prepared includes knowing how to deal with different cultures or backgrounds,
business practices or even the natural differences in personality found in all people.

The final negotiated agreement must balance the interests of both the licensor and
licensee such that a win-win situation develops. This is best reached through proper
preparation, sufficient knowledge and appreciation of the interests, needs and
backgrounds of all the negotiating parties.

If you are terminating the negotiations, make a clean break with goodwill on both sides.
Try to preserve the relationships forged, since the situation may change and it may be
possible to reopen the negotiations in the future.
DRAFTING THE AGREEMENT

• As the proprietor of the technology, the licensor should be in a position to suggest

that it be the one to furnish the initial draft of the written agreements.

• The party which drafted the agreement sets the entire tone of an agreement and can
easily insert many reasonable provisions in the first instance that otherwise might
have to be bargained for later, requiring possible unnecessary concessions to the
other side, if they are omitted from the initial draft. Further, the initial draft might
contain provisions which the proprietor might be willing to reduce or eliminate during
negotiations, for which it might obtain some reciprocal concession.

• Remember that the Licensor and Licensee are not competitors. Licensor will only
receive significant royalties if a product is successful in the marketplace.

• If the parties have worked with a term sheet, and have recorded tentative
agreements, the drafting of the agreement should, in theory, not be difficult.

• With respect to key terms make sure that you have reached agreement, not merely
agreement to agree at some point in the future. Lack of clarity on key terms often
leads to business conflict.
• Usual backdrop: continuing relationship between the licensor and the licensee. Interchange of
development and experience flowing from both sides as the technology is developed, and as it is
refined and improved, often by both licensor and licensee.

• The legal relationship between the parties should take this into account and the contract
between them should make appropriate provisions.

• There is no ‘right’ or ‘wrong’ way to draft a license agreement, provided the agreement says
what it means, and says it clearly and makes the necessary provisions for carrying out the
agreement reached between the parties.

• Effective license agreements are written in easy-to-understand, plain English, and they contain
terms that both sides view as fair.

• CRUCIAL QUESTION IF YOU ARE THE DRAFTER: Who are we representing?

“DREADFUL DRAFTING” – DOs and DON’Ts
John Ramsay/www.lesi.org

1. Escape the ‘legalistic drafting style’. This peculiar writing style is often old fashioned and
perpetuated by habit, laziness, and reliance on legal forms.

2. Don’t say too many things in 1 sentence. Long, long sentences increase the risk of errors. For
example, difficult to notice omitted words (or even phrases) in an extremely long sentence.

3. Too easy to adopt templates without considering particular needs of the client or the situation.

4. Cross references must be precise.

5. Avoid verbose, sloppy writing. Proofread, proofread, proofread.

6. Be concise, but precise. Use ‘user friendly’ language.

7. Use distinctive words in referring to LICENSOR and LICENSEE. It is very easy to mistakenly
interchange them.

8. Avoid phrases like “best efforts” (or even “reasonable efforts”) which invite litigation. They
are uncertain an ambiguous.

9. Make the draft answer “who, what, when and how”.

ELEMENTS OF A TYPICAL AGREEMENT:
1. Parties, date & place of signing, effective date of agreement

2. Term: License is usually for a given term with automatic renewal conditions effective unless
termination notice is given.

o Life of patent

o Specified period

o Initial period subject to renewal

o Option to cancel

3. Recitals or the premises upon which the agreement was reached. In the local context,
these are usually referred to as the ‘whereas’ clauses
4. Definitions: to ensure clarity and that the parties are uniform in their understanding of the
terms used. Properly written definitions save arguments and possible arbitration proceedings
or litigation. Be sure that all critical terms are clearly defined and understood. Among terms
which should be defined are:

§ Licensed Product
§ Field or Territory
§ Subsidiaries
§ Improvements
§ Net Sales
§ Items Peculiar to the License Subject

5. Representations, Warranties and Disclaimers

6. License Grant – This is clearly the most important aspect of any license. Properly written
and backed up by the proper definitions, the license grant will establish clearly for all those
concerned exactly what is to be licensed and what rights are being extended to the licensee by
the licensor. An unclear or improperly understood license grant clause is a guarantee for
problems and disputes between licensor and licensee.

§ What is the intellectual property being licensed: specification of the intellectual

property rights covered, and the rights and obligations of the parties in relation
to them
LICENSE GRANT

What is the subject matter of this license? What is the scope of rights? These grants may include the right:

to reproduce the technology

to display it

to modify it

to make derivative works from it (making new versions or entirely new products or technologies by
modifying and enhancing)

to use it (for research and product development)

to make it or have it made (for manufacture by licensee or contractor)

to distribute or sell it

to import it
to sub-license it to another who can do any or all of the above.

Is the thing that is being licensed completed?

If there is more work to be done? Can you live with the technology in an incomplete form?

Who owns the IP that underlies the technology?

Does the licensor own what he or she is licensing to you? Does he or she have the right to license it?
Does he or she have the right to license all other technologies that are needed to make the licensed
technology work?
7. Exclusive or Sole License - A grant of exclusivity is a grant of all rights to the licensed subject within the
territory licensed. A sole license is one that establishes the license as the only licensee while the licensor or
proprietor of the technology retains the right also to exercise or practice that technology within the licensed
territory.

For the licensor: is the potential licensee insisting that it requires exclusive rights in order to commercially
exploit the technology or product? If so, in the negotiation, you will want to ask for information and
documentation that justifies this argument.

Exclusive licenses are often considered where the licensee must make a substantial investment that
cannot be used for a different purpose (e.g. custom equipment, hiring specialized labor, committing
resources to development of the technology, setting up a business in a new territory, conducting clinical
trials and obtaining regulatory approval) in order to commercially exploit the technology.
 8. Sublicense Rights refers to the right of a licensee to sublicense or transfer the licensed
technology and rights to a third party.

9. Assignability: This provision is a very useful protection device for both licensor and licensee, especially
the former. Each party is likely to want have control over the other party’s ability to transfer or assign the
license to a third party.

10. Territory: What is the geographical area covered?

The license agreement must specify whether your rights are worldwide or limited to a designated
country or countries, region, or other territory.
FINANCIAL TERMS

How much will the licensee pay for the use of the technology? How do you approach the question
of intellectual property valuation in a technology license?

Cost method
Income method
Market method

LICENSEE PERSPECTIVE: If you are the licensee, in deciding your position on the financial terms, the
first thing to assess is whether you can afford the cost that the license will add to the product or
technology you are going to sell.

LICENSOR PERSPECTIVE: If you are the licensor, you should know early in the negotiations what
return you want for the value given.

11. Royalties and Fees

• Royalties: Per unit/based on gross or net prices or revenues

May be capped
Minimum

• Lump sum payments.

• These can be combined in different ways and taken together should reflect the fundamental
valuation.
12. Taxes

cf. mandatory provision in IP Code: 88.4. The Philippine taxes on all payments relating to the technology
transfer arrangement shall be borne by the licensor. (n)”

13. Improvements
1. Will the licensee receive rights to future releases, versions and products?
2. Will the licensee have rights to future versions of the technology or product?
3. Are service and support/ spare parts included in the license?
4. How do you deal with documentation, know-how, consulting and training?
5. What special terms relate to the future relationship of the parties?

Avoid agreements to agree in the future, as generally such commitments are not enforceable in the
absence of a clear financial agreement.
13. IP Infringement, Notices and IP Defense provisions are often desirable features to protect against
later disagreement or misunderstanding.

Respective rights or obligations of

a. Licensor
b. Licensee
c. Parties jointly
Defense of infringement suits

By licensor

Defend only; indemnify also

Liability dependent on

Prompt notification
Cooperation

Liability limited to

Arbitrary amount
Compensation received from licensee
 By licensee

Expenses offset against royalties payable licensor

Liability of licensor limited to cooperation

By parties jointly

Allocation of expenses
Responsibility for conduct of defense

Allocation of expenses and recoveries

Inaction or default by one party

a. Enforcement by other party

b. Termination of agreement by other party
c. Cancellation of exclusiveness by licensor
d. Cessation of royalty payments by licensee
14. Know How and Technical Assistance: what training and assistance is required to provided.
Technical Assistance is essential for know-how licenses and is expected for most patent licenses
involving elements of know-how. The licensee should ensure that such assistance rights are
adequately provided. Conversely, the licensor should be careful that the technical assistance
required does not exceed the proper coverage of the license, or the extent of compensation for
such service.

15. Confidentiality: What matters are required to be kept confidential .

16. Reporting, Audit and Inspection

17. IP Maintenance Quality Control or Diligence Provisions – See Section 150.1 of the IP Code

18. Accounting and Reporting provisions are not only necessary, but also should be enforced.
When licensor and licensee are good friends and in close rapport, the formalities of accounting
and reporting may be “overlooked” or treated casually. Such treatment is a bad practice.
Whether used or not, it is also a good idea to provide for the licensor’s right to inspect the
licensee’s books of record.
19. Visitation/Inspection of licensee to licensor and vice versa is normally expected in any
working license for transfer of technology. To avoid misunderstanding and even awkward liability
situations, visitation rights should be carefully defined, including:

» Time limitations
» Expenses

20. Dispute Resolution/Arbitration: Provision for arbitration of disputes is highly desirable,

particularly for international licenses. Often the arbitration clause is limited to the location and
rules. Usually, the licensor will want the courts of his country to have exclusive jurisdiction
because he knows them and knows what to expect. For the same reasons the licensee wants his
court to have exclusive jurisdiction. Often the fairest compromise is arbitration in a third country.
Before making a decision on this point the parties must know whether either or both courts will
accept the exclusive jurisdiction of the other, or will recognize arbitration. See Section 88.3 of
the IP Code:

88.3. In the event the technology transfer arrangement shall provide for arbitration,
the Procedure of Arbitration of the Arbitration Law of the Philippines or the
Arbitration Rules of the United Nations Commission on International Trade Law
(UNCITRAL) or the Rules of Conciliation and Arbitration of the International
Chamber of Commerce (ICC) shall apply and the venue of arbitration shall be the
Philippines or any neutral country”
21. Entire Agreement

Merger of prior discussions

Negations of implied warranties

22. Modifications or Changes: No change in any license should be made effective until it is made in
writing and formally notified to both parties as provided under Notices.

23. Approval of an agreement is often required by licensee governments. It should be incumbent upon
the licensee to obtain all necessary approvals, with any penalties accruing to the licensee if a
necessary approval is not obtained. In addition, it is often desirable to specify a time within which
the approval must be obtained
Registration with the DITTB

a. General Rule: Registration of TTA not mandatory

i. As a general rule, technology transfer arrangements which comply with

Sections 87 and 88 of the IP Code (i.e. which contain none of the
prohibited clauses under Section 87 and include all the mandatory
provisions required under Section 88) need not be registered with the
Documentation, Information and Technology Transfer Bureau (“DITTB”) of
the Intellectual Property Office ("IPO") [Sec. 92 of the IP Code].
ii. The policy behind the Prohibited Clauses and Mandatory Clauses in Sections
87 and 88, respectively, of the IP Code is to safeguard against licensing
provisions that will adversely affect free competition and trade. The rationale
behind licensing is to allow the fair and equitable transfer of technology and
to cut down monopolistic practices that stifle growth through overly
restrictive conditions.
b. Amendment/ Registration of TTA

i. Non-compliance with either the mandatory provisions or the prohibited

clauses shall render the technology transfer arrangement unenforceable,
unless the same is registered with, and approved by, the DITTB.

ii. Unenforceability, in this context, has been interpreted to mean that neither
party will be allowed to have any legal recourse against each other in case of
breach of contract. No Supreme Court decision on unenforceability, but see
Global Business Holdings, Inc. vs. Surecomp Software, B.V., 633 SCRA 94
(2010).

iii. In the event that the provisions of a technology transfer arrangement do not
fully comply with Sections 87 and 88 of the IP Code, the parties may amend
the said provisions of the agreement to conform to Sections 87 and 88 of the
IP Code, to avoid registering the agreement with the DITTB.
Request for Exemption (aka registration with the DITTB

i. It is also possible for the parties to retain the original provisions as drafted,
provided they file a request for an exemption from the DITTB's registration
requirements pursuant to Section 91 of the IP Code.

ii. Section 91 of the IP Code provides for exceptional circumstances that justify a
technology transfer arrangement’s non-compliance with either Section 87 or 88 of
the IP Code.
Prohibited Clauses in a Technology Transfer
Arrangement

“Sec. 87. Prohibited Clauses. - Except in cases under Section 91, the following provisions shall be
deemed prima facie to have an adverse on competition and trade:

87.1. Those which impose upon the licensee the obligation to acquire from a specific source capital
goods, intermediate products, raw materials, and other technologies, or of permanently employing
personnel indicated by the licensor;

87.2. Those pursuant to which the licensor reserves the right to fix the sale or resale prices of the
products manufactured on the basis of the license;

87.3. Those that contain restrictions regarding the volume and structure of production;

87.4 Those that prohibit the use of competitive technologies in a non-exclusive technology transfer
agreement;

87.5. Those that establish a full or partial purchase option in favor of the licensor;

87.6. Those that obligate the licensee to transfer for free to the licensor the inventions or
improvements that may be obtained through the use of the licensed technology;

87.7. Those that require payment of royalties to the owners of patents for patents which are not
used;
87.8. Those that prohibit the licensee to export the licensed product unless justified for the
protection of the legitimate interest of the licensor such as exports to countries where exclusive
licenses to manufacture and/or distribute the licensed product(s) have already been granted;

87.9. Those which restrict the use of the technology supplied after the expiration of the
technology transfer arrangement, except in cases of early termination of the technology transfer
arrangement due to reason(s) attributable to the licensee;

87.10. Those which require payments for patents and other industrial property rights after their
expiration, termination arrangement;

87.11. Those which require that the technology recipient shall not contest the validity of any of
the patents of the technology supplier;

87.12. Those which restrict the research and development activities of the licensee designed to
absorb and adapt the transferred technology to local conditions or to initiate research and
development programs in connection with new products, processes or equipment;

87.13. Those which prevent the licensee from adapting the imported technology to local
conditions, or introducing innovation to it, as long as it does not impair the quality standards
prescribed by the licensor;
 87.14. Those which exempt the licensor for liability for non-fulfilment of his responsibilities under the
technology transfer arrangement and/or liability arising from third party suits brought about by the use
of the licensed product or the licensed technology; and

87.15. Other clauses with equivalent effects.

Mandatory Provisions in a Technology Transfer Arrangement

“Sec. 88. Mandatory Provisions - The following provisions shall be included in voluntary license contracts:

88.1. That the laws of the Philippines shall govern the interpretation of the same and in the event of
litigation, the venue shall be the proper court in the place where the licensee has its principal office;

88.2. Continued access to improvements in techniques and processes related to the technology shall be
made available during the period of the technology transfer arrangement;

88.3. In the event the technology transfer arrangement shall provide for arbitration, the Procedure of
Arbitration of the Arbitration Law of the Philippines or the Arbitration Rules of the United Nations
Commission on International Trade Law (UNCITRAL) or the Rules of Conciliation and Arbitration of the
International Chamber of Commerce (ICC) shall apply and the venue of arbitration shall be the
Philippines or any neutral country; and

88.4. The Philippine taxes on all payments relating to the technology transfer arrangement shall be
borne by the licensor. (n)”
Effect of having any of the prohibited provisions and/or none of the mandatory provisions

“Sec. 92. Non-Registration with the Documentation, Information and Technology Transfer Bureau. - Technology
transfer arrangements that conform with the provisions of Sections 86 and 87 need not be registered with the
Documentation, Information and Technology Transfer Bureau. Non-conformance with any of the provisions of
Sections 87 and 88, however, shall automatically render the technology transfer arrangement unenforceable,
unless said technology transfer arrangement is approved and registered with the Documentation, Information
and Technology Transfer Bureau under the provisions of Section 91 on exceptional cases.”

“Sec. 91. Exceptional Cases. - In exceptional or meritorious cases where substantial benefits
will accrue to the economy, such as high technology content, increase in foreign exchange
earnings, employment generation, regional dispersal of industries and/or substitution with
or use of local raw materials, or in the case of Board of Investments, registered companies
with pioneer status, exemption from any of the above requirements may be allowed by the
Documentation, Information and Technology Transfer Bureau after evaluation thereof on a
case by case basis.”
24. Governing Law (cf. Section 88, IP Code)

25. Termination conditions or situations that would trigger termination of the agreement, and what
are the consequences of termination. Some provisions may survive the termination of the agreement.

§ try to foresee and to provide for not only what happens during the formation and
development of the relationship, but also to provide for the dismantling of the arrangement
when the parties decide not to continue their relationship. Care, however, must be taken so
that the parties do not spend too much time focusing on what can go wrong in an agreement
as this may only stall the negotiations.
AFTER THE AGREEMENT IS CONCLUDED

1. All executives, managers and staff in charge of implementing the agreement should full understand
the license and its terms to avoid violating its provisions, even unknowingly.

2. Tracking of deadlines

3. Key terms that require ongoing attention and reference to the agreement.
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PATRICIA A. O. BUNYE
Senior Partner

Website: www.cruzmarcelo.com
E-mail: po.bunye@cruzmarcelo.com