Starting off on the Wrong Foot: The Formation of Licensing Agreements in the Shadow of the Court

Abstract

Prior research on contract design and interorganizational governance has emphasized how the grant of exclusive licenses help reduce transactional hazards between parties. While these licensing deals are typically negotiated and signed on their own volition, the literature is scant on the inclusion of exclusivity provisions when parties are forced to negotiate and come to an agreement. We fill this gap by comparing the inclusion of exclusivity in volitional licensing agreements and those that are signed as a result of settlement of patent litigation between parties. It is likely that negotiations between both parties for a licensing agreement post settlement happen in an environment of mistrust caused by their involvement in a patent lawsuit. We suggest that licensing agreements signed post settlement are less likely to include exclusivity provisions due to an increase in transactional hazards between the parties. Additionally, evidence from our data suggest that while exclusivity is used as a contractual safeguard to protect licensee investments in complementary assets especially when there is uncertainty in the technology, this relationship is adversely impacted in the deals signed post settlement. Finally, we also examine the inclusion of exclusivity provisions in settlement contracts signed between parties that relied on relational governance mechanisms such as past licensing relationships. Evidence on these comparisons between contracts are provided from licensing deals in the biopharmaceuticals industry.