Some notes when drafting a technology transfer agreement

In a technology transfer transaction, a Technology Transfer Agreement plays a pivotal role in ensuring that the process of transferring technology, technical know-how, and intellectual property rights between the parties is carried out lawfully and transparently. Whether the subject matter is patented technology, trade secrets or software, drafting a clear and well-structured agreement is essential to protect the benefits of both the Transferor and the Transferee. This article presents key clauses and important contents that must be carefully considered when drafting a Technology Transfer Agreement to ensure a successful and legally effective transaction. 

1. Definition and interpretation of terms 

A clear “Definitions and interpretation of terms” section helps both parties accurately understand and agree upon key terms, thereby minimizing the risk of disputes arising from misunderstandings or misinterpretations. In this section, a detailed list of the technologies to be transferred, including the rights that the Transferor intends to transfer to the Transferee, must be fully enumerated and clearly explained. For instance, definitions of terms such as “technology”, “intellectual property”, “know-how” and “confidential information” must be explicitly distinguished and the scope of each term used in the agreement must be well-defined. This comprehensive approach will minimize the risks of misunderstanding and enhance legal protection for both parties. 

Additionally, the restrictions and limitations imposed by the Transferor on the Transferee regarding the use of the technology — such as whether the transfer is exclusive or non-exclusive, and whether the Transferee is allowed to sublicense or transfer the usage rights to third parties — must also be addressed in this section. 

2. Scope and Term of the License for Transferred Technology 

Defining the scope and term of the license for using the transferred technology in the Technology Transfer Agreement is crucial to establish clear boundaries and ensure alignment between the parties. Key elements that must be clarified include: 

• License Term: Normally, the duration for using the transferred technology is freely agreed upon by the parties in the Technology Transfer Agreement. Accordingly, the Transferor will set a specific period during which the Transferee is allowed to use the technology and this license term must be recorded in the Agreement. However, in some cases where the technology transfer involves patents, trademarks, or other forms of intellectual property with defined validity periods, the Transferor may allow the Transferee to use the technology for the duration of such patents, trademarks or intellectual properties, while also specifying any conditions for extending the license term if applicable. 

• Scope of License: Like the license term, the scope of license is also subject to mutual agreement in the contract. Nonetheless, the parties must clearly determine whether the license is exclusive or non-exclusive, and whether the Transferee is allowed to sublicense or transfer the usage rights to third parties after receiving the technology. This clarification affects the Transferee’s rights to use and dispose of the transferred technology and defines the Transferor’s remaining rights over the technology after the transfer. Furthermore, identifying the geographical scope of technology usage is essential to ensure compliance with local legal regulations and import-export control laws. 

3. Royalties for using technology 

Royalties under the Technology Transfer Agreement are payments made by the Transferee to the Transferor as compensation for the right to use proprietary technology. These payments can take various forms, such as a percentage of net sales, a fixed lump sum or guaranteed minimum payments. Royalties ensure that the Transferor is fairly compensated for transferring the technology while enabling the Transferee to commercially use the technology. 

When drafting royalty provisions, it is essential to clearly specify the type of royalty, the method of calculation, and avoid vague or ambiguous wording. The clause should also outline detailed payment information, including due dates, currency, and receiving account details, and should address the Transferor’s right to audit the Transferee’s records to verify the proper calculation of royalties. Regarding the duration of royalty payments, it is necessary to clarify whether royalties are to be paid throughout the term of agreement or in accordance with the protection term of the licensed intellectual property. 

4. Confidentiality and non-disclosure commitment

As technology transfer transactions often involve the exchange and access to confidential information, including a confidentiality and non-disclosure clause in the Technology Transfer Agreement is essential to safeguard the interests of the Transferor. Under this clause, the parties must clearly define what constitutes confidential information, such as patent, technical know-how, manufacturing processes, software, business data, or unpublished trade secrets. The Agreement must also explicitly state the Transferee’s obligation to protect and not disclose such confidential information to any third party, except in pre-agreed cases. For example, the Agreement may allow disclosure to employees or subcontractors, provided that such parties are bound by confidentiality obligations similar to those of the Transferee. 

It is important to specify the duration of confidentiality, which should typically extend for a defined period even after the Agreement’s termination to ensure long-term protection of sensitive information. Furthermore, the Agreement should include remedies in the event of a breach of confidentiality obligations, including the right to claim damages, the right to seek injunctive relief, and other measures to prevent or mitigate harm caused by unauthorized disclosure. 

5. Representations and warranties

To manage risks and protect the interests of the parties in a technology transfer transaction, the Technology Transfer Agreement should clearly set out the representations and warranties of each party. The Transferor should represent and warrant that they have full ownership and the right to transfer the technology described in the Agreement; that the technology transfer does not infringe upon the intellectual property rights or legitimate interests of any third party; and that the technology is accurately described and suitable for the agreed-upon use (where applicable). 

On the other hand, the Transferee should represent and warrant that they have the legal capacity to enter into and perform the Agreement and that they will comply with all applicable laws and regulations regarding the use of the transferred technology as stipulated in the Agreement. These representations and warranties are critical for allocating responsibilities, establishing a legal basis for claims in case of breaches, and minimizing legal risks during the performance of the Agreement. 

6. Intellectual property rights

In technology transfer transactions, managing intellectual property rights (IPR) is a key element to clearly delineate the rights and obligations of the parties. Accordingly, the Technology Transfer Agreement must specify the ownership of intellectual property assets existing prior to the transfer, as well as ownership of any new technologies, patents, or improvements arising after the transfer. The Agreement should also clearly define the rights and obligations of the parties concerning the improvement, upgrade, or joint development of technology, including the determination of ownership over resulting outcomes and the mechanisms for commercial exploitation if applicable. 

Moreover, the clause should clarify the responsibilities for registering, maintaining, and renewing intellectual property rights, such as patents, trademarks, or rights to improvements. A particular case to consider is where new technology or patent are created through joint collaboration between the parties, the intellectual property rights clause will help determine ownership, or alternatively, provide for joint ownership and specify the exploitation rights of each party. In summary, a clear and comprehensive approach to managing intellectual property rights will significantly limit the risk of disputes and effectively protect the commercial value of the transferred technology. 

Through the above analysis, it is evident that drafting a Technology Transfer Agreement requires meticulous attention not only to fundamental clauses but also to more complex and specialized provisions as discussed. Properly identifying and drafting these clauses not only protects the legitimate rights and interests of the parties but also enhances the enforceability of the Agreement and reduces the likelihood of disputes arising during cooperation. With Part 01 and Part 02, this article series has outlined key factors that should be carefully considered when drafting a Technology Transfer Agreement. Apolat Legal hopes that this series will serve as a useful reference for businesses and relevant parties in establishing a solid legal framework for technology transfer activities. 

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