December 18, 2017

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Dos And Donts Of Technology Transfer Agreements

- Manisha Singh, Partner [ LexOrbis ]
- Aniruddh Singh, Associate [ LexOrbis ]


While transfer of technology involves a number of financial and legal aspects, including IP issues, there are certain key elements that every technology transfer agreement must have. Read on to find out…

Transfer of technology has become one of the eminent factors driving economic growth of a country, especially in case of developing countries. The Indian government has also stressed exponentially on technology transfer in the past few years and recently expressed the issue of technology transfer with great importance in its opening statement at the 25th Session of the Standing Committee on the Law of Patents. The Department of Industrial Policy & Promotion (DIPP) has also formed a committee to identify areas where developed countries can be urged to share technology with India on the basis of bilateral trade agreements, not only for economic growth but also for the purpose of clean energy and on the issue of climate change. The prospective areas of technology transfer are food processing, energy, the environment, etc.

However, many technologically developed countries and organizations have exhibited their interest in sharing technology with India but their main concern remains the domestic commercial environment. Foreign officials acknowledged the developing transparent, predictable and open business environment with the minimum administrative burden in India and cited that intellectual property protection is essential for attracting cross-border monetary as well as technological investment. In such a contemporary scenario, it is of paramount importance to understand what aspects an organization should adhere to while entering a technology transfer agreement. Many financial aspects and a number of legal issues, including intellectual property issues, are associated with the transfer of technology or commercialization of technology. It is impractical to generalize the terms of contracts on such an issue as majority of the particulars of contracts depend on facts and circumstances of the respective technology transfer. But there are certain key elements that almost every technology transfer agreement must have. These key factors are discussed briefly for the purpose of efficient and productive transfer of technology by strengthening the protection of Intellectual Property Rights.

The Dos

At first instance, it is important to decide that the Transfer of Technology (TOT) agreement is a licensing agreement of intellectual property or just a know-how agreement concerned with the transfer of statutory recognized knowledge or skills. The content of such TOT agreement should be determined on the basis of the motive, strategy, capability, and resources of the organization which wants to draw technology from the licensor. It will act as guiding factor in determining the secrecy and confidentiality feature of the agreement.

Typically, the content of TOT agreement can be divided into three parts: mode of transfer, extent of transfer and use of technology under certain terms and conditions. The provisions related to all these should be drafted with utmost caution keeping the following heads in mind:

  • Specifying the Technology, Rights & Territory
    It is fundamental to describe the technology and the rights which are being transferred in detail whether being in the form of product or service or just technological knowledge. In the case of complex technologies, the specification of the same with the help of drawing blueprints are important and should cover even minute details so that uncertainty on any aspect of the particular technology should not be left unaddressed. It is suggested that a separate schedule including all rights being transferred should be incorporated in the contract and explicit proviso stating what things are excluded. In the same manner, the territoriality for commercial exploitation of the subject technology should also be determined so that the licensor of the subject technology does not directly or indirectly become the competitor of the license. In general practice, parties opt for an exclusive licensing agreement for a specified period in which the licensee has to pay royalty on a per-piece basis or according to the volume of sales and the license may become non–exclusive if the licensee is unable to meet the target in the stipulated time period, at the discretion of the licensor. The issue of sub-licensing by the licensee should also be addressed, and terms and conditions in case of such right granted.
  • Future Improvement and Updates
    It is essential to include the proviso in the agreement that will cover rights in future improvement in the particular technology. Such proviso will specifically provide that the updated technology is available to the licensor on specified set of consideration or attracts renegotiation of the contract. In case where improvement of technology is a result of the licensor’s efforts, such proviso will sort the ownership issue whether the technology is owned jointly or by the licensee alone. In case the licensee has sole ownership over the improved technology, the licensor can implicit a “Grant-Back Clause” in the agreement which will bind the licensee to give the licensor rights over the improved technology.
  • Warranty or Indemnity Clauses
    The main objective of the warranty clause is to save parties from any kind of losses incurred by them because of default on the part of other parties. The licensor will expressly indemnify the licensee that the technology licensed provides specific results and the said technology does not violate the rights of any third party. Such express proviso in the contract binds parties to compensate an innocent party suffering losses.
  • Confidentiality
    Before framing the confidentiality clause, it is crucial to identify confidential information. Such provisions should expressly provide for the standard of responsibility that the licensee should adhere to while handling the confidential data, especially protecting physical files containing confidential information, enter into a non-disclosure agreement with the allies’ whether employees or distributors, vendors, etc. The TOT agreement should also provide a list of persons to whom disclosure of such confidential information can be made and what will be the security procedures that have to be followed for maintaining secrecy according to industry standards. In case of breach of confidentiality by any party, indemnity clauses will be attracted.
  • Terms
    In general practice, the patented technology is transferred till expiration of statutory period, but in case of sharing of know-how or technology for foreign organizations, the Reserve Bank of India has fixed payment of royalty till a period of seven years from commencement of commercial production or 10 years from the date of agreement, whichever is earlier.
  • Prerequisite
    The Reserve Bank of India (RBI) and Secretariat for Industrial Assistance are authorities whose prior approval is mandatory and it is also obligatory to include all terms and conditions of the agreement specified by the RBI in its letter of approval in case of Foreign Technology Transfer.

Donts of Technology Transfer Agreements

Falling short while negotiating a TOT agreement may result in inefficient use of transferred technology. Presence of certain provisions in a TOT agreement may affect productivity in a negative manner. Therefore, it is advisable that attorneys of parties, whosoever are evaluating or drafting TOT agreements on behalf of their clients, should avoid inclusion of the following:

  • Unjustified Obligations
    The obligations, especially on the licensee, in any manner which adversely affect productivity, profitability or efficient working of the said technology should be avoided. The licensor having monopoly over the technology tries to impose certain restrictions on the licensee like obligating him/her to acquire raw material, source capital goods, etc. from a distributor specified by the licensor, or engaging the specified class of work force to deal with the subject technology indicated by the licensor. All this may disrupt the purpose of transfer of technology, so all those provisions should be avoided in TOT agreement. There are some other restrictions that should be avoided while drafting a technology transfer agreement which are as follows:
    • Fixing the price and resale price of the end product manufactured with the use of subject technology.
    • Limiting the volume and structure of production.
    • Clauses which obligate the licensee to pay for the patents or for other industrial property even after expiration of its statutory term.
  • Absolute Right Over Future Improvement
    The clauses providing absolute ownership to either party over future improvement carried out by the licensee should also be avoided. Such provisions increase the possibility of dispute at a later stage in case of improvement. So, the issue of future improvement should be properly addressed in the agreement and the rights of all the parties to the agreement should be balanced.
  • Unreasonable Restrictions
    Some unreasonable restrictions that parties try to incorporate in the TOT agreement which the opposite party should consider carefully before approving these clauses are:
    1. Restriction on the export of the licensed product even if it is not hampering the legitimate interest of the licensor.
    2. Restricting use of technology where the technology transfer agreement has expired except where the termination of the agreement took place at an early stage under the reasons specified in the agreement.
    3. In case of a non-exclusive technology transfer agreement, restricting the use of competitive technology.
    4. Restricting the licensee not to contest the validity of patents.
    5. Restricting the research and development programs on the technology transferred.

    These are some of the key features that organizations should look forward to while entering into a transfer of technology agreement. Though this is not an exhaustive analysis, there are many other attributes which should also be considered. Parties to such an agreement are expected to be sufficiently vigilant and shall opt for mutual benefiting terms so that rights and liabilities of the parties can be balanced and adequate protection to technology can be provided. The main motive of technology transfer should be economic growth and overall technological development.

Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.


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