Royalty triggers in license agreements can be a sloppy, complicated mess, and they’ve ended up in litigation more often than most technology transfer executives care to think about. As one attorney notes, basing an increased royalty rate on, say, “sales” of the technology at issue may simply beg the question of the exact legal definition of “sales.” Despite the frequent legal squishiness royalty triggers introduce, however, tech transfer experts generally agree they’re worth the trouble — when used properly – and they can sometimes mean the difference between getting the deal done and watching a commercialization opportunity vanish. Jim Baker, PhD, director of technology and economic development at Michigan Technological University, is one of the cautious ones. He’s not a fan of royalty triggers, but he recognizes the need for their use in appropriate circumstances, and he doesn’t hesitate to include them if that’s what it takes to get an agreement signed. “We use them very rarely, but find it necessary sometimes,” he says. “We are careful when we put them in, and we use the advice of legal counsel to make sure that they are clear, objective, and enforceable.” The key to averting problems later, he says, is ensuring any triggers “are based on clear, objective, distinct events. As with most contract terms, if there is any room for interpretation, it may lead to a dispute, and the all-too-common way to resolve disputes is litigation.

Considering the potential complications, why bother with triggers? Sometimes, experts say, it’s the only way to overcome a negotiating impasse. “All things considered, and when appropriate, a moving rate may allow a deal to get done that might not otherwise be able to get done,” Baker explains. “There are other ways to get there, such as starting with an option or a narrow field-of-use license with an option to other fields. But the value of a given technology may be very non-linear over its life cycle, and triggers are a tool to do a fair deal that acknowledges that non-linearity. If the value is likely to swing incrementally, then a trigger is probably more trouble than it is worth and it would be easier to just set something agreeable at the onset. But if the value will swing by a factor of five or 10, then it may be necessary to get something locked in.” A detailed article on the pros, cons, and proper use of royalty triggers appears in the March issue of Technology Transfer Tactics. For subscription information, CLICK HERE.

Posted March 25th, 2009 under Tech Transfer

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