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Loaded Questions to Watch Out For (or to Ask)

Loaded Question #1

Licensee to Licensor: “Can you tell me what royalties you are expecting?” 

At some stage in the license negotiation financial terms have to be addressed. 

Sometimes this question is asked at a very early stage in discussions, before the negotiation even commences, or just as it starts. So early in fact that a licensor might be taken by surprise by the question being asked at that early time. 

Why does a licensee ask that question so early in a license negotiation? 

It may be because the licensee wants to how the “ballpark” of financial terms before commencing an expensive and time consuming due diligence. 

Or, it may be to secure an advantage. 

A licensee may perceive the licensor to have a weak bargaining position. This may be because, for example, 

  1. the licensor seeks to license out at an early stage in the development of the technology 

  2. the licensor may be a university or research organisation, and may be assessed by a licensee to have limited other options, or even no other options 

  3. the licensor may have been searching for a long time for a licensee, and is perceived to be anxious not to lose opportunity it has with the licensee that is asking the question. 


What does a licensee seek to achieve by asking that question so early in a license negotiation? 


Where the technology is early stage, or where the licensor is a university or research organisation, or otherwise perceived to be anxious, the earlier the question of the licensor’s royalty expectations is asked, the weaker the licensor’s bargaining position is perceived to be. 

A licensor does not want to ask for too much, in case doing so deters the potential licensee. A licensor might, at such an early stage, respond by stating a royalty, or a royalty range, which is at the low end of the commercial spectrum for the technology concerned. The licensee of course will respond by replying that the licensor’s expectation is too high (whatever the licensor stated), but that the licensee is sure something can be negotiated. 

The result is that the licensee has achieved its objective of the licensor's opening offer for a royalty rate being low, and being able to be negotiated down further. 

How should a licensor deal with such a question when it arrives at such an early stage? 

The licensor should sidestep the question. There is no need to conceal the lack of readiness to negotiate on that question, and every reason to be candid. That is especially so where a licensor must still undertake steps to be fully prepared for the financial negotiation. 

“We haven’t quite finished our royalty analysis, so I can’t meaningfully answer that today.”

The object is to defer the negotiation to a time of the licensor's own choosing, when ready to negotiate, and not to be drawn prematurely into a negotiation of financial terms. 

Indeed, even if the licensor was ready to negotiate financial terms, a licensor doing so when the licensee perceives the licensor to have a weak bargaining position will disadvantage the licensor. It would be better for the licensor to defer the license negotiation until a time when the licensor has negated any such perception that the licensee may have. 


Loaded Question #2

Licensor to Licensee: “Can you tell me what your sales forecasts are” 

A licensor that asks this question may be seeking to judge how committed, or how confident the licensee is in its commercialisation of the licensed product. 

It may also be to assist the licensor formulate minimum diligence obligations that the licensee must perform or achieve, such as minimum sales to be made, or minimum royalties to be paid, with the potential result that the license is terminated if these are not performed or achieved.

A licensee may try to avoid this question, not wanting to be committed to minimum sales. But that will not always be possible.

A licensee will not want to respond too conservatively. The risk is that if it does, a competing licensee might be preferred by the licensor. 

The licensee will not wish to respond too optimistically either. The licensor might dismiss the licensee as being fanciful, and prefer another licensee. 

An optimistic response might also be the basis for the licensor formulating minimum sales obligations, or minimum royalty obligations, based on the licensee’s optimistic response. If the licensee’s response is too optimistic, it will afterwards be difficult for the licensee to argue that it is not able to achieve the forecasts it had itself estimated. 

The licensee’s dilemma is that it does not want to forecast too high, nor too low, each carrying its own disadvantages. How might a licensee consider responding? 

A response has to be considered. Again, the question may be asked at a time when the licensee has not completed an assessment or analysis of the market to enable reliable forecasts to be made. One strategy therefore is to defer responding until a considered assessment has been made. 

Another strategy is to focus on a different type of diligence obligation, rather than the risky minimum sales, or the equally risky minimum royalty obligations. 

A licensee’s assessment of the market may not be able to result in a reliable forecast. A licensee therefore may assume the risk of the termination of the license, if it cannot achieve the minimum sales. 

But what the licensee can assess with confidence is the amount of the licensee’s investment in the technology and its commercialisation. A licensee can reasonably forecast how much it will spend on the technology's future development, and how much it will spend on its marketing campaigns. 

The licensee can consider binding itself to this predictable low-risk diligence obligation, instead of the higher risk minimum sales or minimum royalty obligation. 

“The market and competitors are unpredictable for firm sales estimates. But what we can commit to is to invest a minimum amount in R&D, and marketing campaigns during the first 2 or 3 years.”

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