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Sometimes its Better not to Negotiate #1
Sometimes it is better not to negotiate. There are alternatives.
Alternative #1: Making the other party better informed and its timing
The other party may be inexperienced in technology licensing. It may be an SME, or a start-up company. It may be a large national company with little or no licensing experience. Even an international company with operations in a number of countries may lack licensing experience or may be involved in licensing so infrequently that its staff lack licensing experience.
Negotiating with an inexperienced party can sometimes be harder than negotiating with the toughest negotiator.
An inexperienced party may presume that every proposal you make is your opening position which it must negotiate and improve in its favour. But of course, most of your proposals, whether they are communicated in a meeting, in a term sheet, or in the first draft of a license agreement, are not an opening position at all. They simply reflect the usual way that a particular issue is normally dealt with in a license. But the inexperienced party does not know that. You try to explain what you proposed is the normal way the issue is dealt with. But the other party thinks you are negotiating, and it continues to seek an improvement on what has been suggested. What can you do to make the other party less likely to negotiate issues like these?
An inexperienced party may be unfamiliar with the common features of a license. I recall a transaction when the first time a licensee came across the concept of a Field was in the first draft of a license agreement. The licensee had assumed that it was getting all patent rights. When the concept of Field was explained, the licensee perceived this as devaluing what the licensee thought it was to get and wanted all the financial terms halved. A modest up-front license fee payable on the signing of the license had been agreed. Halving that would not be disastrous. But halving the royalty rate was quite inappropriate. There were long discussions to better inform the licensee about the concepts of Field, and exclusivity in the Field. I think at the end of the day the licensee understood. However, the licensee could not admit that it previously had not understood. It stuck to its guns, refusing to shift from its demand that royalties be halved. A solution was ultimately found, but it was sub-optimal for the licensor.
I recall another transaction when a licensee saw for the first time a sub-licensing restriction. It appeared in the first draft of a license agreement. In quite common terms it prohibited the licensee from granting a sub-license without the licensor’s prior written consent, which was not to be unreasonably withheld. The licensee thought that the concept of not unreasonably withholding consent was meaningless and empowered the licensor to give or withhold consent at its whim, which of course is not the case.
There are many other similar occasions covering all types of license terms: decision making in patent prosecution, responsibility for patent costs, responsibility for patent infringement, risk allocation, publication etc.
In each case, an inexperienced licensee insisted on negotiating an unexceptional feature of the license that is typically not negotiated. In each case the licensor sought to make the inexperienced licensee better informed. In each case the licensee’s perception was that the licensor was refusing to negotiate, making the licensee more determined to improve the offered term. The licensee did not know what an improvement to the offered term would be, and therefore did not know what it was aiming to achieve. All it knew is that it had to keep resisting the licensor until it secured something it perceived to be better than was offered, or until it had secured a concession somewhere else.
This results in a negotiation becoming stressed. Worse, it stresses the relationship between the parties. Face saving solutions need to be invented sometimes. On other occasions, needless concessions are made to appease the inexperienced licensee.
A better informed licensee can judge that specific issues are being dealt with in an unexceptional way, and will not seek to inappropriately negotiate terms that should not be negotiated.
The task is to better inform the licensee.
But how can that be done without the licensee mistaking efforts to better inform as just being part of the negotiation, to be resisted.
It is a question of timing.
If the efforts to better inform the licensee are made in the middle of the negotiation, the licensee will perceive those efforts as just part of the negotiation. A negotiation by its nature is competitive. What is said in a negotiation is perceived to be a party’s competitive efforts to improve its position.
However, if the efforts to better inform the licensee are made before the negotiation commences, the licensee will not necessarily perceive the discussion as competitive. The goal is to better inform the license when the climate or mood of the parties’ relationship is not a competitive one in the middle of a negotiation, but rather one of information sharing.
A strategy that often works is to scope out the license terms before the negotiation starts. At a first “negotiation” meeting a licensor might say:
“Before we start negotiating the terms of the license, let’s first scope out what the license needs to cover.”
This is not a contentious statement. A prospective licensee will agree or acquiesce. What has the licensor achieved?
Two things: the licensor has separated out two phases: a “scoping phase” and a “negotiation phase;” and the licensor has established that the scoping phase is not “a negotiation,” but something different to a negotiation.
The licensor continues:
“Let’s just briefly go through my license checklist.”
The licensor hands to the licensee a single page with a checklist of license terms. It should be no more than a single page. Length should not be important, but it is. A single page is easily “consumable.”
The checklist must not state a position on any term. A checklist of single words, or a few words, is best:
Legal entity that will be the licensee
Try not to include anything in the checklist that may be contentious. The purpose of the checklist and the scoping exercise is to sign off on issues that you do not want to be contentious later. You do not want the scoping exercise to turn into a competitive negotiation. That would destroy what was sought to be achieved.
This scoping meeting now provides the licensor the opportunity to go down the list, describing each term, and better informing the licensee.
The mood or climate of the meeting not being a competitive negotiation, but just going down a checklist, the licensee is unlikely to perceive what is said as being a negotiation position. The mood or climate also encourages the licensee to ask questions. The inexperienced licensee will want to become better informed in this non-competitive information sharing session.
Describing license terms in this non-competitive climate, introducing the inexperienced licensee to unfamiliar license concepts is more likely to result in an inexperienced licensee accepting what is explained. It is also a good relationship building opportunity which lays an excellent platform for the negotiation that will soon start.
When the negotiation starts it will focus on the most important commercial terms. When the first draft of the license agreement is shared, the inexperienced licensee will recognise many of its provisions and recall the discussion that took place at the “checklist” meeting. Those terms not having been introduced in a competitive climate, the licensee is more likely to be accepting of those terms.
Better informing a licensee in a non-competitive mood or climate will be more successful than seeking to better inform a license in the middle of a competitive negotiation.
For another example of timing when seeking to better inform a prospective licensee, see this previous edition of IP Bits: Negotiating IP Ownership.