News
Early termination of license agreements, Constanze Ulmer Eilfort
Issue 18 | September 2012
www.plg-uk.com
Business Development
& Licensing Journal
For the Pharmaceutical Licensing Groups
Early termination
of license agreements
As is often the case with marriage, the possibility of an early termination
and its potential consequences are often disregarded when entering into
a license agreement. Addressing the possibility of divorce in advance may
point to a lack of confidence in a joint future, but provision for license
termination and its repercussions is critical.
Dr Constanze Ulmer-Eilfort, LL.M., Attorney-at-Law, Baker & McKenzie, Munich
P
arties entering into a license
agreement are enthusiastic about
concluding the deal and working
together, and do not want to think
about termination. But the majority of
all collaboration and license agreements
for a compound in pre-clinical or clinical
development are being terminated before
any commercial sales. The licensee will ask
for flexibility in order to be able to move
away from its performance obligations. The
licensor, on the other hand, will want to
ensure that the licensed technology is not
devaluated by an early termination and that
the development project or the marketing of
the licensed technology is not delayed.
Several different types of events may
trigger a termination, and each has a
different potential remedy.
Termination at will
About the author
Dr Constanze Ulmer-Eilfort is a Partner
at Baker & McKenzie Partnerschaft von
Rechtsanwälten, Wirtschaftsprüfern,
Steuerberatern und Solicitors in Munich.
She has more than 15 years’ experience
in advising high-tech, pharmaceutical and
media companies on the commercialisation of
intellectual property rights.
T: + 49 (0)89 5523 8236
E: constanze.ulmer-eilfort@bakernet.com
In these circumstances, the licensee will
want to have the flexibility to terminate a
license agreement, either at any time and
without any cause, or for defined reasons,
such as commercial or scientific viability of
the licensed technology. A licensee that loses
interest in the licensed technology or no
longer believes that the technology will be
successful does not want to remain bound
by the agreement, namely by the duty to
meet certain performance obligations. It may
not be advisable for the licensor to bind the
licensee to a technology they are no longer
interested in. In such situation a commercial
solution should be found.
10 Business Development & Licensing Journal
For the licensor, a termination at will can
have severe negative consequences. Finding
a new licensee tends to be difficult if the first
licensee when terminating has documented
its diminished interest in the technology. To
mitigate such negative consequences, the
licensor may want the termination agreement
to allow a statement that the licensor has
reacquired the technology, rather than
received a notice of termination.
Furthermore, the licensor should ask
for compensation for losses incurred as a
result of such termination. Since it tends to
be difficult to prove the damages actually
incurred, providing for an exit fee to be paid
upon termination is advisable. This fee could
either be specified, or at least the formula to
calculate it, in the license agreement.
The licensor, on the other hand, typically
does not have a right to terminate at will.
The licensee cannot agree to the risk of
losing access to the licensed rights in the
event that the licensor finds a better way to
exploit the technology.
Termination for material breach
In this scenario, the licensor has the right
to terminate if the licensee is in material
breach of obligations under the agreement
and does not make good such a breach
within the agreed rectification period. The
licensee may be in material breach if it does
not make agreed payments on time or if it
does not meet performance obligations, for
example not commencing the studies or the
marketing required to exploit the technology.
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In order to avoid disputes over whether
there is a material breach, the license
agreement should specify the obligations
considered material and set out the
conditions under which such obligations
would be seen as breached. Otherwise,
depending on the applicable law, standard
practice is that it would be unreasonable for
the licensor (the terminating party) to remain
bound to the license agreement (under
German law, for example), or that the
breach deprives the licensor of the essential
benefits of the license agreement (under the
laws of England and Wales, for example).
The license agreement should provide
rectification periods, giving the licensee
the chance to rectify the breach to avoid
termination. Only if this ‘last chance’
period expires without the material breach
having been addressed is it reasonable for
the licensor to terminate. The length of
such periods may depend on the specific
obligations – the license agreement may,
for example, specify a rectification period of
15 days for payment obligations, while the
period for breach of performance obligations
may be as long as six months.
In practice, the termination of the license
agreement by the licensor after licensee
breach is often not accepted by the licensee.
There may be dispute over whether the
licensee is in breach and/or whether the
breach is material. Such dispute results in an
unfavourable situation for both parties, with
uncertainty as to whether termination has
come into effect. The licensor may not be
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able to find a new licensee willing to take
the risk that the original license is void, while
the licensee will not want to make further
investments into the technology if there is a
risk that it no longer owns the license. Either
party would have to file suit or commence
arbitration proceedings (whatever dispute
resolution process is agreed) to obtain
a declaratory judgment on termination.
This may take years and therefore has the
potential to destroy the commercial value of
the technology.
The license agreement should address
this possibility. A solution may be to specify
that if the licensee disputes the validity of
termination for breach, it must promptly
begin dispute resolution proceedings, that
an expedited process is to apply and that
the license in such event remains effective
pending a decision. Furthermore, if the
termination is subsequently declared valid,
the licensee would have to compensate
the licensor for damages incurred through
delaying the effective date of termination.
The licensee typically does not want
to terminate for a material breach by
the licensor. Unless otherwise agreed, a
termination would mean that the rights
to the technology revert to the licensor. If
there is a material breach by the licensor, for
example if it does not prosecute, maintain or
defend the licensed technology, or because
the licensee is in breach of its confidentiality
obligation by disclosing the licensed knowhow to a third party, then the licensee may
obtain a preliminary injunction and claim
The majority of
all collaboration and
license agreements
for a compound in
pre-clinical or clinical
development are
being terminated
before any
commercial sales.
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Issue 18 | September 2012 11
Insolvency
of the licensor is
the most critical
situation because
its administrator in
insolvency may take
the technology away
from the licensee.
>>
damages – but it would still not want to lose
the license.
Alternatively, the license agreement
can specify that, in such an event, the
licensee retains the right to use the licensed
technology, and that the terms and
conditions of the license agreement are
amended to reduce either party’s reciprocal
obligations. However, such a structure needs
to be considered carefully so that it does not
provide incentives to improve the rights and
obligations by way of a termination. Some
agreements even provide that, in the event
of a breach by the licensor, the licensee
could retain the licensed technology and
would no longer have to make payments
to the licensor. This typically is not a fair and
adequate response to licensor’s breach.
Insolvency
In looking at insolvency, a distinction needs
to be made between the insolvency of the
licensor and that of the licensee.
The licensor may want to terminate if the
licensee is insolvent and therefore no longer
in a position to invest in the technology and
make the agreed payments. Depending
on the applicable insolvency law – which
is the insolvency law applicable at the
residence of the insolvent company and not
the law on which the parties agreed in the
license agreement – there may be a ban
on terminating the license agreement and/
or the administrator in insolvency may have
the option to assume the license and meet
its obligations, or allow termination. It is
12 Business Development & Licensing Journal
advisable to act promptly and review what
means need to be taken to mitigate the
damages resulting from the insolvency of
the licensee.
Insolvency of the licensor is the most
critical situation, however. This is not because
the licensee would want to terminate, but
because the administrator in insolvency of
the licensor may take the licensed technology
away from the licensee. Under many laws
(the insolvency laws of the insolvent licensor)
the administrator in insolvency has an option
to assume or reject the license. The licensee
who has invested for years in a technology
may be confronted with a situation in which
the administrator decides that it is preferential
for the creditors to have the technology
exploited by someone else. Such a decision is
possible, for example, in Germany, England,
Switzerland, Austria and Sweden.
Often, one of the most difficult issues in
negotiating license agreements is to find an
acceptable mechanism to protect the licensee
in the event of licensor insolvency. While
the licensee will ask for a transfer of patent
rights, the licensor cannot dispose of rights
that would deprive them of other ways to
exploit the technology (outside the licensed
field, for example).
In the US, insolvency laws were amended
in 1988 to protect the licensee. According to
Sec. 365 (n) of the US Bankruptcy Code, the
licensee may elect to retain its licensed rights
provided payments continue to be made and
waives all claims against the licensor under
the agreement. Many other countries have
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The licensor may want to terminate the license
agreement if there is a change of control in the
licensee – if its shares have been taken over by another
company. The licensor will want to avoid a situation in
which the licensee is a competitor.
recently amended their laws accordingly,
including Canada and France. In Germany,
an amendment to the Insolvency Act is being
discussed in order to protect licensees.
Challenge of licensed patent rights
The licensor will want a right to terminate the
license agreement if the licensee challenges
the licensed patent rights. Non-challenge
clauses in license agreements, stating that
the licensee shall not challenge the rights,
are not effective under applicable EU Block
Exemption Regulations. However, a right to
terminate in the event of such a challenge
is effective – this provides almost the same
protection to the licensor as a contractual ban
on such challenges.
In the US, formerly it was not possible
for a licensee to challenge the licensed
technology. Under the principle of license
estoppel, there was an implicit obligation of
the licensee not to challenge. However, the
Supreme Court decision Medimmune vs.
Genentech 127 S.Ct. 764 (2007) changed
this. Now, US license agreements also
tend to provide for a right of the licensor
to terminate if the licensee challenges the
licensed patent rights.
Change of control
The licensor may want to terminate the
license agreement if there is a change of
control in the licensee – if its shares have
been taken over by another company.
The licensor will argue that it needs to
avoid a situation in which its licensee is
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a competitor, or in which it becomes a
company that has a history of failing to
meet contractual obligations or infringing
intellectual property rights.
For the licensee, such right to terminate is
difficult to accept. First, the licensee will baulk
at the risk of losing the licensed technology;
second, any corporate transaction may
become difficult as a potential buyer will be
held up by such change of control provision.
The licensee will try to convince the licensor
that a right to terminate for change of
control is not required. Specific provisions can
offer a compromise. For example, the license
agreement may provide that, in the event
the licensee is taken over by a competitor
of the licensor, the licensor will no longer
be obliged to make available improvements
to the technology, and that the licensor has
additional means to monitor the performance
of the license agreement by the licensee.
The licensee typically does not have – and
will not need – a right to terminate the
license agreement in the event of a change
of control of the licensor. However, the
licensee may request that his obligations to
share development results with the licensor
and to open his books to the licensor are to
be amended and restricted if the licensor is
taken over by a competitor of the licensee.
Consequences of termination
There are several possible consequences of
termination as set out below:
(a) Reversion of rights
While the license agreement may provide
>>
Issue 18 | September 2012 13
The agreement
should expressly
state that, in the event
of a termination,
the rights to the
licensed technology
automatically revert to
the licensor.
>>
that upon expiry of the license agreement
the licensee retains a fully paid up license,
in the event of a termination the licensee
should not retain any rights to the licensed
technology. The license agreement should
expressly state that, in the event of a
termination, the rights to the licensed
technology automatically revert to the
licensor. Otherwise and depending on
the applicable law, it may be necessary
to re-assign and re-transfer the licensed
technology to the licensor.
(b) Transfer of the project to the licensor
The licensor or its new licensee will
want to be in a position to continue the
exploitation of the licensed technology
without losing too much time or
incurring additional costs and expenses.
Consequently, the licensor will have to
claim:
ccess to the development results
a
controlled by the licensee, including
development data, marketing data and
corresponding documentation;
license to improvements generated
a
by the licensee and to any background
intellectual property rights of licensee
that are necessary to continue the
development and marketing of the
licensed technology;
license to any trademarks of the
a
licensee under which the licensed
technology is marketed;
transfer of regulatory approvals or
a
the status as an applicant for regulatory
approvals;
14 Business Development & Licensing Journal
transfer of materials owned by the
a
licensee, as the licensee will no longer be
able to use such material; and
transfer of agreements with CROs and
a
CMOs in order to be able to take over
ongoing studies and/or the manufacture
of products. To the extent a study
cannot be assigned to the licensor, the
agreement should provide that the
licensee continues the study on behalf
and at the cost of the licensor.
To avoid losing time, it may be advisable
to exchange data and improvements
during the term of the license agreement.
Experience shows that, after termination
of the license agreement, the licensee will
have less incentive to meet its contractual
obligations than during the time when the
agreement was effective.
In negotiating these consequences of
termination, the licensee often requests
some financial compensation, for example
a refund of its development costs,
and/or a royalty on sales based on its
technology. Whether such compensation
is appropriate needs to be decided on a
case-by-case basis. The licensor will argue
that the licensee decided that it was no
longer interested in the technology and
should therefore not expect to benefit
from a reversion of rights to the licensor.
Furthermore, access to data, improvements
and regulatory approvals may be perceived
as a compensation for damages incurred
by the licensor as a consequence of an
early termination of the agreement.
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Careful termination provision can be essential to
protect the technology. If the parties need to revisit the
terms of the agreement, the provisions on termination
and its consequences tend to be the ones that are most
frequently read and analysed.
(c) Assumption of sublicense agreements
When entering into a sublicense
agreement, the sublicensee needs to be
concerned about a potential termination
of the main license agreement. The
sublicensee typically has no influence
on the main agreement; if the main
agreement terminates, the sublicensee also
loses its rights to the licensed technology.
The main agreement should address
this issue and provide for protection of
a sublicense. The licensor should agree
to assume the sublicense (to enter into a
direct license with the sublicensee if the
main license terminates). The main license
would provide that the licensor shall
not be bound by any obligations of the
sublicensor that go beyond the obligations
of the licensor towards the licensee. Such
obligation of the licensor under the main
license will provide the reassurance a
sublicensee is looking for. The clause in the
license agreement could read:
Upon termination of this License
Agreement – irrespective of the reasons for
such termination – all sublicenses which
the Licensee has granted in accordance
with this License Agreement shall
continue to exist and shall be transferred
from Licensee to Licensor. However, the
Licensor shall not be obliged to honour the
Licensee’s obligations from sublicenses if
such obligations do not correspond to the
Licensor’s obligations in accordance with
this License Agreement.
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Conclusion
The reasons that may justify an early
termination and the consequences of
such termination must be fully considered
when entering into a license agreement.
Some creativity is required to capture all
the different events that may occur, and
negotiating provision for these is not easy as
it requires the parties to address situations
they never want to happen.
Carefully drafted termination provision can,
however, be essential to protect the value of
the licensed technology. Experience shows
that, if the parties need to revisit the terms
of the license agreement, the provisions on
termination and consequences of termination
tend to be the ones that are most frequently
read and analysed.
Issue 18 | September 2012 15
