HookedonFishing, Inc. is an international company that produces a variety of boat propellers that are sold to companies that produce and sell fishing boats. Industry market estimates are that 2.5 million boat propellers are sold annually in the U.S., and about 4 million being sold annually worldwide. HookedonFishing has about a 14% share of the market in the U.S., and 28% worldwide.
A number of HookedonFishing’s customers have been complaining that the propellers used on their boats have “spooked” fish away as their boats pulled into their designated fishing spots. As one might expect, outboard motors create noise under the boat. Both two and four-strokes were about twice as loud as an electric trolling motor, though the majority of the noise was caused by the propeller — not the powerhead.
Propel Tech LLC, a small start-up company out of Seattle, Washington, invented a silent propeller that can be used on a variety of motors. The design implemented by Propel Tech led to the company founders filing patent applications on the propeller and the method of generation forward movement without emitting sound. Propel Tech also applied for trademark registration of a Silent Prop™.
Unfortunately, Propel Tech has been struggling with financing some of its research and development efforts and is interested in partnering with a larger company who has the resources to fund production and market the Silent Prop™ propeller.
Serendipitously, Hank Jones, the CEO of HookedonFishing, and Pete Smith, the business development director at Propel Tech, were at a recent fishing convention. Knowing about HookedonFishing’s reputation in the propeller business, Pete secured a meeting with Hank.
Pete presented the opportunity he saw for HookedonFishing regarding the technology in a high-level, non-confidential way, and explained there was more worth discussing under a CDA, such as how the propeller’s coating is applied during manufacturing (although the full details would not be shared, even under the CDA, as they are trade secrets used in other ways by Propel Tech).
Hank asked a lot of questions to assess whether he wanted to bother with a CDA, including whether Propel Tech had designed a prototype of the Silent Prop™ propeller. Pete explained that they had not, but estimated that it would be about $50,000 for development, and that the product could be released within about 6 months to a year after the prototype was fine-tuned to make sure that the propeller software operates as designed. In fact, Propel Tech thought they might want to supply Silent Prop™ propellers to HookedonFishing because they could probably apply the coating at a lower cost than anyone else, at least in the U.S. Also, Propel Tech was concerned about trade secret misappropriation and the cost of litigation.
Hank was very interested in the Silent Prop™ propeller, especially after recalling his customers’ complaints. The worldwide annual boat convention was coming up and it would be great to have the product. He remembered that similar propellers sold by HookedonFishing as a result of a licensing arrangement had royalty rates of about 4-6%.
On the other hand, Propel Tech was looking for at least an upfront fee, a royalty, and milestone payments that would help fund Propel Tech’s other projects. Diligence and risk management were also concerns for the start-up.
Both parties agreed that they would go back to their respective offices, enter into a CDA and negotiate terms for a possible licensing arrangement.
Your job: You are the business development director at HookedonFishing. On his return to the office, CEO Hank Jones gives you the information above on the potential deal with Propel Tech and asks you to make a recommendation on moving the opportunity forward. Developing your recommendation requires you to complete the following tasks.
- List considerations for drafting the CDA terms specific to this deal. Are there any ‘watch-outs’ are there for HookedonFishing or will a plain vanilla CDA do the job?
- Identify all of the Propel Tech intellectual property that HookedonFishing might consider licensing.
- For each item of IP identified: (a) list the apparent strengths and weaknesses, and (b) facts / issues that HookedonFishing will want to confirm / research during due diligence if the deal goes forward.
- Using the company term sheet template (attached) draft a term sheet, including financial terms, that HookedonFishing could present to the Propel Tech that would put a HookedonFishing favorable but realistic opening position for the license negotiation.
HookedonFishing Inc. and [insert]
License Term Sheet
***Draft – For Discussion Purposes Only***
|Scope of Rights|
|Grant Scope|| |
|Reservation of Rights|| |
|Intellectual Property Rights|
|Patent Rights||United States Patent number <INSERT> and all U.S. and foreign applications and patents based thereon or claiming priority thereto or common priority therewith, including any continuations, divisions, reexaminations, reissues, substitutes, renewals or extensions of any of the foregoing.|
|Technical Information||Information, materials, [including Tangible Materials] unpatented inventions, and know-how existing [as of the effective date] [during the term][selected and provided by Licensor] [owned or controlled by Licensor]|
|Trade Secrets||[specify any trade secrets within Technical Information]|
|Tangible Materials|| |
|Licensed Products||Products and/or processes or services (a) covered by pending claims or infringing issued claims of Patent Rights; or (b) that are, incorporate, or derive from Technical Information, or were developed, made or sold using Technical Information; [or (c) are marked with the Trademarks]|
|Control||[Licensor] will control patent prosecution, defense and enforcement
[Licensee] will be provided opportunity to review and comment
|Costs||[Licensee will reimburse Licensor for costs and expenses associated with filing, prosecuting, maintaining Patent Rights, whether arising before or during the term of the license agreement]|
|License Fee||$XXX, non-refundable, non-creditable|
|Maintenance Fee||$XXX, payable annually, non-refundable, [non-creditable] [creditable against royalties due in that year]|
|Milestone Payments||Payable on a product-by-product basis|
|Royalties||X% of net sales, payable quarterly|
|Sublicensing Fees||X% of all remuneration from a sublicensee excluding royalties based on sales by sublicensee|
|Offsets||[Combination products, royalty stacking]|
|Development Plan||Licensee development plan for Licensed Products [to be incorporated into the license agreement and updated annually]|
|Development Milestones||Licensee will commit to reaching commercial development milestones [below] [specified in the license agreement]|
|Termination by Licensee||[At will upon X months’ prior notice]|
|Other||Other terms standard in licenses including indemnification and insurance|
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