Non-Exclusive Option Agreement Overview
The essence of an option agreement, either exclusive or non-exclusive, is that the property owner or developer grants to the purchaser or developer the right, but not the obligation, to purchase, lease or otherwise acquire the property described in the option agreement. So-called exclusive option agreements give a specified time period of exclusivity to the purchaser or developer, meaning that during the defined time period the owner cannot negotiate or deal with any third party for the sale of the property subject to the option agreement.
If an exclusive right is not granted in an option agreement, the owner/developer can always negotiate its own business deals or try to sell its property to whomever it wants . The only other basic component of an option agreement is the price that the owner will receive in return for granting the purchaser, lessee or developer the right to purchase or lease the property. Of course, in the case of a leasehold, in addition to the sale price a royalty stream or rental payment can be required.
A non-exclusive right to purchase, lease or otherwise deal with property obviously does not give any exclusivity to the purchaser or developer. This means that the owner/developer can always deal with whomever it wants to sell or lease its property, and technically the owner is not restricted from selling or leasing its property until its sells, leases or grants a right to purchase or lease the property to another party.
Benefits of a Non-Exclusive Option Agreement
Both companies and inventors can benefit from non-exclusive option deals. For the company, a non-exclusive option allows flexibility to see whether a product will be successful, without committing before knowing what the market will be like. The start-up company may not be able to predict the demand for its products even after invention. Therefore, it can help them to have several options in different fields, or about different products. These agreements may be limited to the test period of one or two years, or even longer, or they can be tailored to events such as regulatory approval or customer funding. A non-exclusive option agreement also provides a platform from which a start-up can venture into other fields through various partnerships.
For an inventor, who may have an idea but not the manufacturing resources, a non-exclusive option allows the inventor to retain his rights to provide the invention to others, while knowing the exclusive developer has the capability to manufacture it and bring it to the marketplace. Professors and researchers who lack access to manufacturing resources may prefer working with developers who take the invention and technology to the marketplace themselves.
Essential Terms for Non-Exclusive Option Agreements
The first key term to consider in a non-exclusive option agreement is its duration. Ideally, the agreement will define a target date for the decision to be made, as opposed to a fixed date. For products that take longer to develop, like the wireless technology developed by MedImmune, an option exercise period of two years is not uncommon. However, if the product is already close to commercialization, an option agreement with a three-month exercise period could be appropriate.
Another important issue concerns the rights granted. The non-exclusive license should include the right to manufacture, use and sell the product, but with limited use or performance royalties. While most charitable foundations will have limits on the extent of royalties or profit distribution, that should not preclude inclusion of a royalty provision. In the commercial world, the payment of a small royalty can not only provide an incentive to academia and hospitals to engage with industry, but also can open the door to other advancements. For a biotechnology company, for example, sublicensing could be a primary means of achieving commercialization. Royalties provide an incentive to industry partners. In addition, basing the royalty on sales can create an incentive to invest in marketing.
Consequently, the agreement should specify how the royalty is to be calculated, and it should include a sales milestone or benchmark. In most cases, where the product has no sales history, the agreement will rely on readily available benchmarks and estimates such as AMR Research’s Global Biopartners Report. In other cases, it might make sense for one or more of the parties who will be involved in the commercialization efforts to estimate sales.
Many universities are represented by the Association of University Technology Managers (AUTM), which publishes annual licensing survey data available on its website. Another AUTM resource, the Benchmarks for Universities, provides requests for proposals (RFP)-like guidelines for valuing intellectual property.
Use Cases for Non-Exclusive Option Agreements
Non-exclusive option agreements are popular in a number of industries. Option agreements have been around for many years in entertainment and in many technology-driven industries, but more are being drafted in other areas, such as real estate and public policy.
Entertainment:
Performers, writers and visual artists often want to give producers, distributors and publishers an exclusive opportunity to buy their works. Forming these relationships through open negotiations can be time-consuming. As an alternative, creators can use non-exclusive option agreements, which allow those negotiations to take place later on an exclusive basis.
Technology:
Companies often make their new products available to a select number of complementary companies under non-exclusive option agreements . A computer equipment manufacturer, for example, may enter into non-exclusive option agreements with a small group of software developers to give them the right to create software that will work exclusively with that manufacturer’s hardware. While these developers are under contract, the developers will design the software to be compatible with the manufacturer’s hardware; after a specified period of time, one of the developers will be selected to continue to develop the software exclusively.
Real Estate:
Real estate developers and investors create non-exclusive option agreements, which gives others time to raise the necessary funds to construct a project or handle due diligence before deciding whether or not to purchase a piece of property.
Legal Implications of Non-Exclusive Option Agreements
One legal consideration in a non-exclusive option agreement is how and when the license or transferable rights to the underlying intellectual property are granted to the parties. Practically speaking, and with general reference to such grants, what is being granted is an ability to do something in the future on conditional terms. The conditions under which any rights in intellectual property may be granted to a party in an option agreement as the result of exercise of the option need to be clearly articulated. Therefore, from the top of the chain to the clause at the bottom, the language should be unambiguous with express rights becoming vested on exercise of the option. In writing the language for a non-exclusive option, there is a practical balancing act to ensure that the option has some valid business purpose while still being restrictive enough to protect licensor interests in the underlying licensed or transferred intellectual property.
By way of clarification, an option agreement will usually include a restrictive clause indexed to the vertical and/or horizontal lines of the common stock prices of the licensor organization as a key component of how to exercise any rights arising out of the option.
Another legal consideration in constructing a non-exclusive option agreement is the mechanism for adjudicating the various disputes that may arise out of the agreement. This could range from taking arbitrations to court proceedings to a simple dispute resolution mechanism. Ultimately, what revisions you decide to make to the language will depend greatly on the particular context of the option agreement and the business rationale behind it.
Drafting a Non-Exclusive Option Agreement
When drafting a non-exclusive option agreement, it is essential to ensure the terms of the agreement are carefully set out to avoid any issues arising at a later date. When dealing with intellectual property of a larger corporation or institution, they often have templates and standard forms for option agreements. There can also be various styles of option agreements in use by individual companies or organisations. Therefore it is best to consult and engage intellectual property lawyers and individuals from the various departments of the company or organisation that might use the non-exclusive option to ensure that the agreement meets the requirements of all parties.
If a non-exclusive option agreement template is being obtained from a larger corporation or institution, it should be carefully reviewed and adapted to incorporate appropriate amendments to ensure that it is applicable to your situation and needs. It is also important to ensure that all forms of intellectual property are covered by the non-exclusive option agreement, for example, patents, trademarks etc. In many cases , the non-exclusive option agreement will grant the other party the right to license the intellectual property and have the option of obtaining an exclusive licence subject to payment of a fee or royalties.
Consideration must also be given to the duration of the non-exclusive option, how the option can be exercised, the scope and field of use, exclusivity during the term of the non-exclusive option and, if applicable, the geographic territory. It is critical that there is a licence agreement in place in respect of the use of the intellectual property if the non-exclusive option is exercised. The terms, limitations, license fees, territory and field of use should be discussed prior to the execution of the non-exclusive option agreement as this can also affect the consideration.
The ideal situation would be to have a non-exclusive option agreement template that fairly covers all parties involved, that deals with all matters that are relevant to the industry sector for the specific intellectual property that applies to your field of use and that your legal experts have advised is sound.