Deeper Into the Licensing Abyss

In an earlier post I touched upon the importance of proper contracting language, but I barely poked the surface. Today I thought I’d delve a little deeper so you can better understand some of the ways licensing agreements can affect a business.In life sciences, one area where attorneys can be particularly useful is helping Clinical Research Organizations (CROs) with licensing agreements.

A CRO, for those unfamiliar, is sort of a middle man. It contracts up with a sponsor, a company producing a new drug or device or what have you, and then contracts down with subcontractors to use and test the new technology. Subcontractors include clinics and clinical research assistants, who go to medical sites where the new drug or device is being used and make sure data are properly maintained.

Licensing agreements are made between the sponsor and its subcontractors — sometimes passing through the CRO as well — granting them the right to use the new technology for testing purposes, but without conveying any ownership interest in it.

For example, right now I’m dealing with a company that came up with technology that uses genetics to measure the rate at which an individual metabolizes a drug. To test its device, the company will grant a license to a clinic to use it, but the license won’t transfer any patent rights, or any intellectual property rights.

Where I also get involved with a CRO is when a sponsor sometimes tries to include some type of licensing fee, which, in my opinion, is inappropriate in the context of a licensing agreement for testing drugs or equipment. Think about it: CROs aren’t making a profit from the use of a new technology, they’re simply testing it. If they're being paid to test a device, why should they also have to pay a licensing fee while seeing if it works?

Attorneys can also make a big difference by ensuring that the contract language of a licensing agreement is consistent between biotech companies, CROs, vendors, clinics and clinical research assistants. In other words, if there is a licensing agreement between a CRO and sponsor company, the subcontractors need to be similarly bound to the terms of that licensing agreement. Otherwise, there could be situations where subcontractors are using a particular device or software and think they have ownership interest in it, maybe even modifying it and putting their name on it.

For instance, a client of mine was running a licensed biostatistical software program to process data on the efficacy of a particular experimental drug. The client hired a subcontractor, but didn't tell him about its licensing agreement. He started tweaking the software and wanted to use it for other clients.  This was not a good situation:  the client did not have a work for hire provision in its subcontractor agreement, so technically the subcontractor had ownership, but that ownership was adverse to the licensing agreement with the sponsor. 

Fortunately, I was able to negotiate a resolution to the competing claims of ownership, and draft licensing language for my client to avoid this situation in the future.  If you deal with licensing agreements in your particular line of work, make sure to get legal advice.

The Importance of Insurance

When people hear the term “insurance,” they automatically assume that it is some form of coverage broadly defined in general terms. What many do not realize is that insurance is so much more than simple coverage for accidents and other unforeseen events, and being properly insured is an important aspect of doing business.

Insurance should perform a very crucial function: to protect a person or business entering into a transaction. One cannot always shift risk and responsibility to another party in the transaction.

The type and amount of insurance necessary is critical. Those who may have insurance may not be covered for what is actually needed, and those who have the proper type may not have enough to cover the potential damages one is exposed to in a business transaction. The specifics are dangerous traps, and many do not read between the lines where they should.

For instance, I have a Clinical Research client I formed in 2008. Clinical Research Organizations (CROs) assist in the testing of experimental drugs from conception through FDA approval.Once the company was up and running, they spoke with a broker who obtained an insurance policy.Six months later, they asked me to evaluate whether they were property covered for their particular line of work.

They were not.

The broker had simply procured them a medical malpractice policy, even though a CRO does not practice medicine. There was a specific exclusion in the policy precluding testing for administration of drug trials, which is exactly what a CRO does.

For six months they were operating with no insurance protection. I was able to put the client in touch with a qualified broker and obtain a full refund of the premium they had paid for the useless coverage. Legal advice regarding the adequacy of insurance is critical.

I have another client who contracted with a tile contractor who worked on condominiums for six full years before realizing that the insurance company had included a condominium exclusion that the contractor was unaware of. Unfortunately, the exclusion was discovered too late and my client and the tile subcontractor incurred substantial unanticipated costs due to the exclusion. Although the condominium exclusion was never blatantly stated, it was clearly within the policy and no coverage was provided.

The bottom line is, if you want protection during your transactions, you need to have the right insurance. And to get the right insurance, legal advice regarding the adequacy and sufficiency of insurance is critical.

Life Sciences, in Lieu of Chocolate

Science and technology fascinate me. Perhaps this isn’t the first sentiment you imagine hearing from an attorney, but it occurs to me daily. My enthusiasm for the life sciences industry and the intelligent people who make up its moving parts is one reason why I look forward to coming to work every day.

I was tempted to surprise the whole industry with a box of chocolates, but for today I’ll simply share a few pieces of what I value most.

I entered life sciences law with a strong desire to help companies start from scratch. As I mention on the website, my first client in this field was a Clinical Research Organization (CRO). The four individuals behind it have backgrounds in different areas of the field: pediatric oncology, managing FDA compliance issues and pharmacy. These clients fill the room with brain power, but as good as they are at what they do, they’re not attorneys. Companies in this industry have so many moving parts; they need someone on their side who understands contracts and licensing. For example, they need an operating agreement to explain how the business will run and how decisions will be made. This particular company has taken off in leaps and bounds in the four years since we started working together.

Always Changing

Due to fluctuations in venture capital and government funding, life sciences is a continuously changing environment. As soon as someone gets funding, everyone in the industry knows who they are and wants to start a new business with them or buy their existing operation. This is why new companies should involve an attorney from day one. Clients come to me knowing as much about indemnity, choice of entity and portion of liability as I know about biostatistics. This doesn’t prevent me from handling their agreements and licensing. We teach each other, and it’s in those learning experiences that I find my job so much fun!

Always Innovating

The intellectual abilities of my clients keep me on my toes. Every innovation brings a new set of issues to address on the legal side. I’m good at dealing with these issues. When you have smart people from varied backgrounds coming together and creating something new that’s financially viable, it’s an exciting thing to be a part of. These companies have a bright future not only in Seattle and San Francisco, but nationwide.

Always Building

The ultimate reward of working with life sciences companies from the very beginning is watching their rapid growth. Legally secure, my clients have a strong foundation to build on. The potential is huge because nothing can come up and bite them from behind. As their business grows, my business grows. Once the legal corners are squared, my role is to make sure the company is moving in the right direction.

The life sciences draw all kinds of curious people. Working with sponsors and vendors, or negotiating biotechnology agreements and software licenses allows me to hear about advancements directly from the source. In an industry that’s always changing, innovating and building, I get to learn something new about the world every day.

Small Business Pitfalls: Why Attorneys Make Cents – Part II

In my last post, I began making the case for retaining a qualified attorney to help you start and grow your business. You know by now the complexities of business law but may be still stuck on price and value. To you, I offer some of the insights I’ve gained that illustrate why it’s cheaper in the long run to have an attorney on your side.

Counting the Costs

The hazards of starting and running a successful small business are many. And frankly, they are all really expensive. Startup clients often call me midway through their attempt to start an LLC. They’ve done something wrong and they’re stuck. More often than not, charting the right course from the outset is a lot cheaper than untangling a mess. I also get questions down the line from established small business owners who’ve yet to understand when they are signing a document, they can be representing both themselves and the company — setting both up for liability.

Another source of panic calls I get is from people who’ve set up with the wrong structure, are in trouble and need help keeping their personal assets separate from company assets. I also counsel clients on choosing the proper insurance.

Furthermore, licensing requirements are another source of pain for new businesses caught unawares in legal dramas. For example, if a contractor goes into business as a landscaper and doesn’t have a contractor’s license, he can’t sue if he doesn’t get paid. I don’t think a lot of people know that. You may think you can just open a business and start working. But a contractor, for instance, has to have a bond to be licensed with the state of Washington for a minimum amount of $6,000.00 or $12,000.00, depending on the type of business.

Been There, Still There

One of the biggest benefits of developing a long-term relationship with an attorney is that he or she will know your company well whenever a problem arises. Waiting to call an attorney when you’re in trouble or being sued virtually ensures you’ll pay more because the lawyer will clock more hours getting up to speed. Moreover, I especially enjoy the continuity of advising on startup through to contract negotiations and as businesses grow, handling mergers and acquisitions.

If you’re going to spend the enormous amount of time required to start and build a business, and stake your future on it, you should make sure your legal foundation is solid. The myriad laws surrounding taxes, licensing, permits, new regulations, intellectual property, franchising, advertising, hiring non-citizens, contracts, operating online, environmental codes, workplace safety, acquiring and selling real estate and others are just plain confusing. The best way to ensure you start on the right foot is to sit down with a qualified attorney who explains everything in plain English and goes through the pros and cons of each issue so that you can make the best decisions possible.

Small Business Pitfalls: Why Attorneys Make Cents

Most small business owners hesitate enlisting the help of an attorney until they’re forced to. It may be a cost perception, or it may feel like an indulgence your growing company can’t afford. There are a number of reasons, however, why having an experienced business law attorney at your side makes not just sense, but cents.

Here’s the first of a two-part series offering a number of reasons it makes the most sense to have an attorney right from the start.

Avoiding Unnecessary Complications

From the moment you decide to start a business, you begin reaching out to experts in a variety of areas to help you make sure you start out properly. Hiring the right attorney is likewise a sound investment in the future of your business. Working with new business owners is perhaps one of the most enjoyable aspects of my practice, because I can help you bring great ideas and exceptional talents to a waiting market while avoiding the snares and legal pitfalls that await you as you navigate the minefields of running a profitable operation.

Right Business Structure

My first step in helping a new business is to consult with you and discuss the different options available. Choosing what type of entity: corporation, limited liability company, or general partnership, is a crucial step. While most new business owners operate from the assumption that they may have to form a corporation, I work with my clients to understand the many reasons why an LLC can be a much sleeker way to do business for many, avoiding the annual reporting requirements while still getting many of the tax advantages of an S corp.

Filing Requirements and Contract Negotiations

When starting a new business, it’s absolutely crucial to understand the paperwork required - requirements not only from the IRS but at the state and local level too that you might not even be aware of.

I really appreciate when clients come to me asking for guidance about employment issues and contracts. Constantly changing laws have made the employer–employee relationship more complex, especially for businesses that hire independent contractors. If the contractor-employee line is crossed, it can create an IRS nightmare and an unpleasant exchange with the Washington Department of Labor and Industries. Not only will carefully considered policies and practices help your business avoid litigation, but they allow you to instill a sense of trust and leadership that will help you as you grow. When you care about your people and your partners, you must think about your legal relationships with them.

Next month, I’ll share more about the cents in hiring a business attorney.

Business Attorneys Are a Form of Indemnification

How many times do you agree to a company’s terms of service or sign an agreement without actually reading what you’re signing? While you may be willing to simply click the button and agree to the terms of service to create your account with Amazon and watch that movie you’re anxious to stream, the same attitude can cost your business more than you could imagine.

One of the most important aspects of owning your own business is protecting yourself from damages caused by other people. An experienced business attorney can help you protect your business and assets, creating a shield through carefully constructed language.

Let’s say you own a hotel and you’re having a contractor come in to do some work on the lobby and the contractor’s ladder falls, taking out a chandelier and injuring a guest. The contractor would be responsible for the damages, right?

That all depends on what kind of indemnification clause you agreed to in the contract you signed. I don't know how many times I have had clients come to me with contracts they’d signed without reading or understanding them, leaving them open to significant loss caused by the negligible hands of others.

In the hotel example, let’s say the contractor’s contract indemnified him, his employees and his company so that any damage done by his crew was the responsibility of the hotel. A contract constructed this way basically gave the contractor a get out jail free card with the hotel. The hotel would not only be responsible for the damages but liable for any civil suit brought by the guest. Without proper indemnification, you can be liable not only for the damage caused by the contractor, but also medical bills and other provisions if anyone is injured.

Properly constructed contracts that provide clearly spelled out indemnification protect you and your business from other people's mistakes. I recently negotiated a very favorable contract for a company that leases trucks for film productions. The contract is worded in such a way that if anything happens to that vehicle that is not the sole fault of my client, the film company pays 100 percent of the damages.

Should the film company that negotiated the lease with my client have negotiated for better terms? Yes. Did they? No. I was able to get a very positive provision in my client’s contract that shields his company from risk. Indemnification and contract negotiation require the skill of an experienced attorney. It's important as a business owner to make sure your rights and interests are properly represented and protected.

The law is a complex animal, and too often people try to take on legal contracts and negotiations themselves without the help of lawyers. This leaves them open to costly mistakes and manipulation by others who have the legal knowledge. Indemnification is only one aspect of contract negotiation, but it is an important one. Think twice before creating a contract yourself (or signing one you don’t understand), because it could lead to significant costs down the line.

Your Legal Entity Is the Life Jacket of Your Business

Living in the Seattle area, it’s probably not too surprising to discover that I have a boat. I love owning a boat, but one thing about living on the Sound that I’ve learned is that there’s a lot of prep that has to be done before the boat gets launched. The same thing is true about launching a business.

There’s more to consider when launching a new business than what the name should be, and a lot of the decisions you make about the business should be made before you start. One of the most critical decisions you’ll make about your business is what kind of legal entity to create. It can be very confusing. Many calls I receive for help are from people who are half-way through trying to set up their business using an online service like LegalZoom and they suddenly realize just how complicated the matter can be.

Everything from how you handle banking to how you are taxed will be affected by the type of entity you create, so choosing the right type for you and your business is crucial. In the coming months, we’ll explore the advantages and disadvantages of different types of legal business entities in more detail.

Business Types

There are several different options you have when forming your business. Which you choose depends entirely on the needs of you as a person, the needs of the business, and the number of people involved in the ownership of the company. There is inherent risk in operating a business, but choosing the right entity formation can help minimize your risk.

Sole Proprietorship. A sole proprietorship is the simplest and the least costly to create. However, it does not offer any protection for personal assets against risk. Basically, the individual is simply operating under his or her own name or using a business name for doing business by filing a DBA form with their county clerk. The individual owns and operates the firm, assumes all the debt and liability of the firm, and files taxes using his or her own social security number at the end of the year.

Partnerships. A partnership is similar to a sole proprietorship. It is easy to form, with minimal start up costs. The only difference is that two or more people come together to form the business and agree to work together as co-owners of the business, usually under a partnership agreement or contract.

Limited Liability Corporations. Limited liability corporations (LLC) have become the most popular form of business entity, combining the strength of a partnership with the protection of a corporation without assuming the corporate tax structure. The terms of an LLC as an entity are governed by state statute, so laws will vary from state to state.

C Corporation. A C corporation is so named because it is governed by subchapter C in the IRS code governing corporations. A C Corporation files taxes as an entity and must have shareholders who elect a board of directors to make business decisions. The risks associated with a C Corporation are minimal compared to the other forms of business, but the costs associated with start up can be quite high.

S Corporation. To overcome the singular disadvantage of a C Corporation, in which both the corporate entity and the individuals who share in its profits are taxed on the same income, an S Corporation can be organized. The organizational structure of an S corporation is similar to that of a C Corporation, but in an S Corporation, the members can elect to be taxed individually for the profits generated by the business rather than be required to pay corporate taxes. The S Corp—as well as the Limited Liability Entity—has the added benefit of providing the owners savings on Self Employment Tax.

The forgoing information should be considered informational only and not construed as legal advice. Before selecting a business entity, a person should consult an attorney in his or her jurisdiction.