GUIDELINES FOR CHOOSING AND TRANSFERRING TECHNOLOGY

SAUDI INDUSTRIAL DEVELOPMENT FUND

Techguide 11, R.P..Gaskin

TABLE OF CONTENTS Introduction General procedures

1.0 Preparatory steps 1.1 Specification of the product 1.2. Evaluation of technology requirements 1.3. Identification of alternative sources of available technology 1.4. Pre-qualification of potential technology suppliers 1.5. Generation of a pre-feasibility study to confirm project viability and obtain industrial license 1.6. Decision on short list of suppliers 1.7. Decision on technology transfer method 2.0 Negotiation 2.1 Technology transfer agreement and license 2.2. Negotiation 2.3 Joint venture agreement if appropriate 2.4 Trade mark agreement if appropriate 2.4 Technical assistance agreement 2.5 Plant design package (front-end engineering) and invitation to bid documentation: 3.0. Implementation 3.1 Circulation of >invitation to bid documentation= to short listed potential suppliers of plant and buildings, and invite tenders 3.2. Setting up a project management team 3.3. Evaluation of bids, and deciding on contractors 3.4 Preparation of finalized feasibility study and business plan 3.5. Placement of machinery and equipment, and construction and building contracts. 3.6 Supervision of construction and monitoring the progress of contracts 3.7. Commissioning of equipment 3.8. Further acquisition and development of core technology

General notes Glossary of terms

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INTRODUCTION Technology is defined as means of converting raw materials or components into finished products, and consists of two elements, hardware and software: Hardware covers all the machinery and equipment know-how required by the technology. Software covers all expertise needed for product and process design, scientific and technical skills needed to instal, operate and maintain the hardware, people skills, specifications and quantities of raw materials required. Transferring technology is not easy, and the process of locating and negotiating with potential suppliers constitutes a very difficult task. There is no one procedure which will fit every technology transfer situation, each situation requiring a customised solution to fit the specific business situation, technology, intellectual property, and existing laws and regulations. Having said this, this document attempts to give guidelines to help clients in the general procedures to be adopted in obtaining the required technology. For those unfamiliar with some of the terms used in his document, a glossary of terms in included, together with some general comments on alternative strategies which could be adopted. GENERAL PROCEDURES 1.0 PREPARATORY STEPS
1.1

Specification of the product: this first step requires some market research in order to gain enough knowledge about the product to chose the most appropriate technology, whether the project will fit in with the company=s long term plans, and to assess product costs. The market research may include information available in-house, and information obtained from trade publications. The key information will usually requires answers to the following key points: Does it fit in with the companies= long term strategy? New or existing or branded product. Number of product variants required. Outline specification for each variant. Raw materials, components and packaging required for each different variation or pack. Probable sales of each variant, in export and home markets. Competitive situation in the marketplace Local and export quality requirements, and Saudi or International standards to be met.

1.2

Evaluation of technology requirements: it may be that the technology required to manufacture the product falls well within the companies= existing technical areas of competence. If not, the company has to recognize the need for some technology acquisition and transfer into the company. The key features of this step are: 3

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 Is the technology or technologies required suitable for Saudi Arabia, taking into account local rules, legislation, customs If the product requires components to be assembled, consideration should be given to make or buy of the various components. Is the technology stable, or is it likely to change. What local resources are available (labour, materials etc) 1.3 Identification of alternative sources of available technology: the object here is to obtain information on the ownership of any patents, and possible suppliers of both patents and technology, and components if required. This information can usually be obtained from the following sources: Advertising Libraries (Thomas Register) Embassies Universities Trade organizations Competitors technology Known suppliers Consultants Industrial Banks Stockbrokers Trade shows, exhibitions Pre-qualification of potential technology suppliers: information on potential suppliers can be obtained from company brochures, annual reports, meetings with representatives of the company, site visits, and formal letters inviting companies to participate. The information needed will usually consist of : Scope of technology available, including: - product specifications and drawings, registration with authorities if required - formulations or bill of quantity - machinery and equipment specification - process and QC instruction, training - R&D, product development - trained personnel for secondment - access to core technology - marketing support available First estimate for cost of technology supply Fees Royalties Term of agreement Preliminary cost estimates Capital (including buildings, equipment, vehicles, furniture, pre-operating costs)
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1.4

Operating costs, (including materials, payroll, utilities, G&A) Financial strength of supplier Patented technology or not. Flexibility of equipment to make new products, or product variants. Appropriate means of technology transfer (joint venture, licensing, strategic alliances).

It should be noted that complete turn-key packages often offer poorer value for money than alternative contracting arrangements which allow competitive tendering. 1.5 Generation of a pre-feasibility study to confirm project viability, and obtain industrial license: by using the preliminary cost elements, a first estimate of capital requirements and project profitability can be obtained. Decision on short list of three or four possible technology suppliers: this step includes the formal evaluation by consultants, or by in-house team, item by item, using the information obtained in the previous step. Decision on technology transfer method: this will depend on the chosen supplier, and considerations will include: patented technology or not joint venture license strategic alliance offset projects

1.6

1.7

2.0 NEGOTIATION 2.1 Negotiation of technology transfer agreement and license: the best results are usually obtained by pursuing more than one opportunity at a time, having a defined scope of technologies required in advance, flexibility of approach by understand the needs of the other party, avoiding personal conflict. It is usually better to have a legal input when major terms have been agreed. The major issues to be negotiated include: duration of agreement exclusive or non-exclusive nature and scope of agreement, patents, trademarks territory sublicence rights down payments for know-how royalty payments, including any minimum payments required by licensor technical support and training
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 ownership of improvements pursuit of patents tooling rights defense against patent infringement rights of examination of records disputes and jurisdiction termination provision and rights renewal use of technology after contract period hazards and pollution warranties force majeure time scales reference to other associated contracts supervision of erection 2.2 Negotiation of joint venture agreement if appropriate: considerations for a successful joint venture partner normally include financial strength of the partner, quality of personnel, market reputation, production skills, influence with banks, government, negotiating attitude, and it is important to come to an agreement which both parties see as a win-win situation. The final agreement will cover: Parties entering into agreement, names, addresses New company name Objects of the company Duration of agreement Head office location Issued capital and shares to be allocated Board of management, and powers Negotiation of the trade mark agreement if appropriate: this agreement should cover definition of granted rights territory rights regarding inspection of goods rights of owner to approve advertising material term of agreement termination Negotiation of the technical assistance agreement: where this is separate from the main technology agreement it should cover duration of agreement nature and scope of agreement technical support from licensor on product development technical support for process problems/improvements 6

2.3

2.4

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 training to obtain core technology knowledge training to obtain hands-on-skills availability of skilled personnel if required disputes and jurisdiction termination provision and rights renewal force majeure costs 2.5 Negotiation of plant design package (front-end engineering) and invitation to bid documentation: the design and ITB documentation is usually contracted out to specialist consultants, engineering companies, but can be done by the technology supplier and inhouse engineering staff. Basic design information is required from the technology supplier. The key Invitation-to-bid documentation will include: Plant and machinery specifications building specifications Drawings, layouts, flow charts Utility requirements. It is usual for a cost estimate to be prepared at this stage Product specification and guaranteed capacity 3.0 3.1 IMPLEMENTATION Circulation of >invitation to bid documentation= to short listed potential suppliers of plant and buildings, and invite tenders: the documentation will specify whether the requirement is for a lumpsum contract, turnkey contract, or cost plus contract. Costplus contracts are normally expensive, and costs can escalate beyond expectations, and these are normally only used when the scope of the contract is ill-defined. Setting up a project management team: consideration should be given to the use of a multi-disciplined team of consultants, contractors, and in-house specialists. The duties of the team will include overseeing, managing, coordinating all design, procurement and construction management activities. It will also issue regular progress reports, covering costs, progress against agreed timetables, and updated completion dates. Evaluation of bids, and deciding on contractors: this will usually be performed by preparing an item-by-item comparison table, making adjustments for omissions in the bids. The key considerations in making a decision will include: Cost Time scales On-shore/offshore components Country of equipment manufacture 7

3.2

3.3

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 Currency considerations Qualifications for bidding, reputation Financial strength Previous experience in country and technology Warranties on performance 3.4 Preparation of finalized feasibility study and business plan: SIDF has separate guideline for preparation, and the information is not repeated in this document. However, it should be noted that SIDF requires full backup documentation to support any figures presented in relation to a loan. Placement of machinery and equipment, and construction and building contracts. The contracts will cover: schedule of equipment with specifications price, and staged payment details fob, cif, ex-works considerations delivery dates insurance inspection by third party at manufacturers premises. acceptance certificate details permits for exports, imports Indemnity clause action in event of non-payment force majeure arbitration to settle disputes local permits and licenses government regulations Supervision of construction: A separate construction supervision team, consisting of inhouse personnel, or consultants (PMCs), is often employed to ensure that the quality or workmanship is satisfactory, resulting in lower maintenance costs, fewer production problems, and longer life. Monitor the progress of contracts: this will be done by the project team and can include inspection of items at manufacturers. Commissioning of equipment: this is usually done in the presence of representatives from vendors, licensors, and owners, and arrangements should cover a certificate of acceptance by owner. Further acquisition and development of core technology: this involves the planned human resource development and training, from start of the project, and is required so that the project owner obtains not only an understanding of Know-how, but also 8

3.5

3.6

3.7 3.8

3.9

Techguide 10, R.P.Gaskin

Know-why. Training can include training at a similar licensors plant, or secondment of trained personnel from the licensor. Generally agreements specify that all improvements resulting from the application of technology by the licensee become the property of the licensor. A licensor may not allow a licensor to make any changes on branded products.

Techguide 10, R.P.Gaskin

GENERAL NOTES 1 Alternative sources of information for technology acquisition not requiring technology transfer include mergers, acquisition, reverse engineering, R&D in-house 2 The different types of contract for plant and building supply can be lumpsum or cost-plus. Lumpsum agreements are suitable when the scope of work is well defined, and is generally the most desirable. Cost-plus agreements (Re-imbursable) are generally suitable when the scope of work is illdefined, or subject to change. Engineering, procurement and construction contract: this is only usually met in process industries, where one contractor takes the responsibility for a number of sub-contracts. turnkey contracts: these generally offer less good value for money. 3 A turnkey package can include the following options in increasing order of effectiveness: an investor can ask a supplier for a list of supplies an investor can give the supplier a list of local sub-contractors in whom the supplier has confidence, but supplier makes the final selection an investor can give the supplier a list of local sub-contractors with whom the supplier should sub-contract for services and goods investor procures the goods and services on behalf of the turnkey supplier investor participates not only in procurement but also in the selection and design of part of the equipment and organisational procedures. investor coordinates the complete project 4 A marketing assistance agreement may be appropriate, and this is not covered in the main text. Such an agreement may include buy-back and offtake clauses. 5 The guidelines for preparing a feasibility study have been outlined in a separate S.I.D.F. publication.

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GLOSSARY OF TERMS The following list of words and phrases is intended to help negotiators in international licensing to more clearly understand each other and to generally improve communications. This is a special list of words and phrases that may have plural or different meanings and it includes suggestions on the most appropriate word or phrase to use. This list is not intended to be a dictionary. The list will alert negotiators to potential misunderstandings. Act of God An event beyond the reasonable control of the parties preventing the carrying out or delaying of an obligation. Words or phrases sometimes used for the same meaning: force majeure, catastrophic event or happening, event not under control of a party. Preferred phrase: force majeure. Affiliate See Subsidiary. Agreement A binding contract between parties such as a license, however some countries such as China interpret an agreement as nonbinding but a contract is considered binding. Preferred term: contract or license contract. Agreement date See Execution date and Effective date. Agreement not to license others See Sole license. Arms-length transaction Idiomatic English, means a transaction between strangers who have no financial interest in each other or no ties. May present difficulties in translation. Assign, Assignment Used primarily in connection with the transfer of the tangible evidence of a right such as a patent or trademark or copyright. Words sometimes used for the same meaning: grant, transfer, convey. Preferred word: assign or assignment. See Exclusive license. Authorize See License. Available to the public See Generally known to the public and Public domain. Term is not equivalent to "generally known to the public," something that is available to the public in a library is not necessarily generally known. Best effort Means the degree of commitment to an obligation. Has been interpreted by some court decisions to mean surprisingly high degrees of effort, perhaps the highest degree of effort ever used even though such effort would be unreasonable under the circumstances. Preferred phrases: bonafide effort, reasonable effort or diligent effort as appropriate or set minimum performance standards.
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Bona fide effort See Best effort. Cancel or cancellation See Terminate. Commencement date See Effective date. Composed of See Consisting of. Comprising Means a group of items which includes those named and others not named-open ended. Other words and phrases sometimes used for the same meaning: including, such as. Preferred phrase: including but not limited to. See Consisting of and Composed of which are sometimes erroneously used to mean comprising. Confidential information See Secrecy agreement. Confidential information Means information not generally known to the public. Supplier may not necessarily own information. Other words and phrases sometimes used and in some instances erroneously for same meaning: propriety information, secret information, trade secret, know-how. Preferred phrase: confidential information. Consisting of Means only those items mentioned-closed ended. Other phrase sometimes used for the same meaning: composed of Preferred phrase: use the word "only" in conjunction with the above. See Comprising which is sometimes erroneously used to mean consisting of. Contract See Agreement. Convey Used in connection with real property and assignments, not often used in licensing. See Grant and Assign. Corporate Address See Place of business. Covenant not to sue See Nonexclusive license. Cross license Means when each party to an agreement grants a license to the other on the same subject matter. Term is used most often as a title and not as a technical licensing term in the body of the agreement.
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Customer Usually a purchaser of goods or services, term is generic in time - first purchaser such as distributor or last purchaser such as retail purchaser. Terms sometimes used for same meaning: end user, purchaser. Preferred phrase: final customer if end user is intended or intermediate customer or direct customer as appropriate. Domicile Means place of residence, used in connection with tax law, should not be used in licenses. Sometimes used to indicate place of incorporation. See Place of business. Down Payment See Lump sum. Due Diligence A term used by investment bankers. Means evaluating the situation or technology within a short period of time. Not used in licensing. Effective date Means the date the agreement comes into full force and effect. Date may be before or after the date of signing of agreement by all parties. Words and phrases sometimes used and in some instances erroneously for same meaning: execution date, agreement date, commencement date, signing date. Preferred phrase: effective date. See Execution date. Election A requirement to make a choice. Word sometimes used for same meaning: option. Preferred word: election when appropriate. See Option. Employment Agreement An agreement between employer and employee usually including provisions setting forth obligations of employee regarding confidential information, assignment of inventions, and obligations after termination of employment. Normally does not deal with monetary matters. Words and phrases sometimes used for same meaning: technical agreement, secrecy agreement, confidentiality agreement, assignment agreement. Preferred phrase: employment agreement. See Secrecy agreement. End User Means final customer or purchaser. Is an idiomatic English term and may be difficult to translate. Preferred phrase: final customer. See Customer. Exclusive License Means licensor grants the licensee the sole right to practice the invention or use trademark to the exclusion of licensor and others; may be limited to territory, field, product or time. Normally exclusive licensee has right to license others. Phrases sometimes used, and in some instances erroneously, single license, assignment, limited license. Preferred phrase: exclusive license. See Sole license. Execution Date Means the date all parties have signed the agreement. Sometimes means the date an executory
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obligation has been fulfilled. Words and phrases sometimes used, and in some instances erroneously, for same meaning: agreement date, effective date of agreement. Preferred phrase: agreement execution date. See Effective date. Expiration Date See Term of agreement. Field of Use Relates to the scope of license, such as a particular product for a particular use. Should define product and area of use. First Option See First refusal. First Refusal, Right of Right of one party of an agreement to receive a right, commitment or a license from another party of the agreement prior to being offered to any third party. Usually coupled with a time limit or a payment or both. Term per se not usually used in agreements but instead the specific terms of right are written out. Phrases sometimes used for same meaning: first option, right to improvement inventions, right to expand scope or to select other fields. In communications, right should be clearly defined and specified. Fixed Fee or Royalty See Lump sum and Minimum royalty. First-Class mail Does not have meaning in most countries outside the U.S.A. In international licensing use term regular mail or airmail as appropriate. Force Majeure An event beyond the reasonable control of the parties, preventing the carrying out or delaying of an obligation. Words and phrases sometimes used for the same meaning: act of God, catastrophic event or happening, event not under control of party. Preferred phrase: force majeure. Freedom See License and Right. Generally Known to Public Means information not confidential or secret. Information may, however, be subject to proprietary rights, such as information described in a valid, unexpired patent. Words and phrases sometimes used for same meaning: in the public domain, non-confidential, not secret, available to public, publicly known. Preferred phrase: generally known to the public. See Public domain. Grant Used primarily in connection with a license, such as "grant a license." Sometimes misunderstood to mean a warranty by licensor that no other licenses are required from third parties. Words and phrases sometimes used for meaning: convey, transfer, assign. Preferred word: grant. Guarantee
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See Warranty and Indemnification. Hold Harmless See Indemnification and Nonexclusive license and Warranty. Immunity From Suit See Nonexclusive license. Including See Comprising. Indemnification Usually the licensor agrees to pay specified liabilities, such as repay any court awarded monetary damages, to licensee if he/she infringes another's patent or trademark in practising licensed inventions or using licensed trademark. Words and phrases sometimes used for same meaning: hold harmless, guarantee, liability, warranty. Preferred phrase: indemnification. See Warranty. Industrial Property See Intellectual property. Initial Payment See Lump sum. Intellectual Property Ownership rights given by law in intellectual information such as inventions, patents, trademarks, trade names, logos, copyrights, know-how, trade secrets. Words and phrases sometimes used for same meanings: Industrial property, proprietary information. Preferred phrase: intellectual property. See Proprietary information. Know-how (Information) Know-how be confidential or non-confidential and it may be proprietary or non-proprietary (such as in a text book). It may be technical or nontechnical. See Confidential information, Trade secret and Proprietary information. Letter of Intent Has different meanings in different countries. In U.S.A. merely an outline of objectives for negotiations, usually not binding. In Japan, usually a binding agreement, with terms embodied in a letter of intent. Further negotiations focus only on terms not set out in letter. Unless intended to be a binding agreement, use another term such as "non-binding proposal." Liability See Indemnification and Warranty. License Means permission to practice all or a part of a proprietary right. Words and phrases sometimes used for same meaning: right, right and license, permission, authorize, freedom. Preferred word: license. See Nonexclusive license and Right. 15

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License Rights See Proprietary rights. Limited License See Exclusive license. Logo See Trademarks. Lump Sum Idiomatic English. Means a single monetary payment. Words and phrases sometimes used for same meaning: down payment, initial payment or fee, fixed fee. Preferred phrase: lump sum. Minimum Performance See Best effort and Minimum royalty. Minimum Royalty Obligation to pay certain amount periodically, otherwise the license may be changed or terminated automatically or at option of licensor. Words and phrases sometimes used for same meaning: promise to pay, promissory notes, fixed royalty. Preferred phrase: minimum royalty. Non-confidential See Generally known to the public. Non-confidential Agreement See Secrecy agreement. Nonexclusive License A license that does not prohibit the licensor from licensing others in the same field, or on the same product, or same territory, etc. Words and phrases sometimes used for same meaning: license, sublicense, immunity from suit, holds harmless, covenant not to sue. Preferred phrase: nonexclusive license. Option Right to make a choice, not a requirement. Word sometimes used for same meaning: election. Preferred word: option. See Election. Owned See Proprietary rights. Paid-Up License A license which does not require further royalties because some consideration has been given in advance including cash but not necessarily cash. Phrase sometimes used for same meaning: royalty free license. Preferred phrase: Paid up license with no future royalty payments. Permission See License. Personal License Idiomatic English, means a non-assignable, nontransferable license, usually license terminates on
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death of individual or dissolution or merger of corporation or firm. Place of Business Means principal place of business or corporate offices. Words and phrases sometimes used, and in some instances erroneously, for same meaning: domicile, corporate address, place of incorporation, location of corporate offices, principal place of business. Preferred phrase: a place of business. See Domicile. Place of incorporation Used primarily for identification purposes in license agreements. Domicile. Principal Place of Business See Place of business. Promise of Promissory See Minimum royalty. Proprietary Information Means information owned by supplier but not necessarily confidential. Misused to mean confidential information. Words and phrases sometimes used, and in some instances erroneously, for same meaning: confidential information, all rights and title in intellectual property, owned, controlled. Preferred phrase: proprietary information. See Confidential information and Intellectual property. Property Rights Rights conferred by law for ownership or control (generic). Words and phrases sometimes used for the same meaning: patent, trademark and copyright rights, license rights, intellectual property rights, right, proprietary information, title, confidential information. Preferred phrase: proprietary rights. Public Domain Means free to use; free of patent, trademark and copyright rights. Misnomer for generally known to the public. Words and phrases sometimes used for same meaning: non-confidential, not secret, publicly known, available to the public. In the context of non-confidentiality, preferred phrase: generally known to the public or available to the public (something that is available to public may not be generally known to public). Rescind See Terminate. Right Means permission to practice all or part of a proprietary right. Has different meanings in different countries. Sometimes broader than a license but with restrictions on grantor. Words and phrases sometimes used for same meaning: license, right and license, permission, authorize, freedom. Preferred word: license. See License. Royalty-Free License See Paid-up license. Scope See Field of use. Sometimes refers to territory, type of license (e.g., nonexclusive), subject matter.
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See Place of business and

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When used, it should be clearly defined. Seldom used alone. Secrecy Agreement An agreement between two or more parties setting forth conditions of accepting or not accepting confidential information. Words and phrases sometimes used for same meaning; confidential agreement, non-confidential agreement, employment agreement, technical agreement. Preferred phrase: secrecy agreement when accepting confidential information, non-confidentiality agreement when not accepting confidential information. Secret Information See Confidential information and Proprietary information. Semi-Exclusive License See Sole License. Service Mark See Trademark Signing Date See Execution date and Effective date. Single License See Exclusive license and Sole license. Sole License Means licensor grant licensee exclusive license except for retained nonexclusive license of licensor. Has different meanings in different countries and regions. Phrases sometimes used, and sometimes erroneously, for same meaning: single license, exclusive license, semi-exclusive license, agreement not to license others. Preferred phrase: exclusive license except for a nonexclusive license retained by licensor. See Exclusive license and Nonexclusive license. Sublicense Right The right of a licensee to grant licenses to others. Phrase sometimes used for same meaning: exclusive license right, sub-contract right. Preferred phrase: right to grant licenses to others. Subsidiary Means a company at least partially owned by another company, the parent company. Should be defined in the license agreement. Words and phrases sometimes used for same meaning; affiliate, related company, joint venture. Preferred word: subsidiary with definition. Technical Agreement See Employment agreement. Term of Agreement Means length of agreement until it automatically terminates by an event or date certain. Not to be confused with right to terminate or cancel agreement before term of license agreement is up or termination of a specific right or obligation under the agreement. Words and phrases sometimes used for same or similar meaning: expiration of agreement, expiration date, termination date. Preferred
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phrase: term of agreement or the termination of a specific right or obligation under the agreement. Termination Date See Term of agreement. Terminate or Termination Termination of an agreement prior to its normal term as the result of an event or the option of one of the parties. Not to be confused with term of agreement. Words sometimes used for same meaning: cancel or cancellation, abrogate, default, rescind. Preferred word: terminate or termination. Territory Refers to the geographical area covered by a license; may be territory of sale or territory of manufacturer or both. Term must be defined in agreement. Trade Name Usually the name of a business enterprise. May or may not be protected by law. See Trade mark. Trademark A mark, word or phrase for which the law has given the owner a right to exclude others from using. Often confused with trade name. Words and phrases sometimes used, and in some instances erroneously for same meaning: trade name, logo, motto, service mark, character. Preferred word: trademark. Trade Secret Means confidential information which is protected by law. Has different meanings in different countries. Limited or no protection in some countries. Words and phrases sometimes used, and in some instances erroneously for same meaning: confidential information, proprietary information, secret information, know-how. Preferred phrase: confidential information or trade secret depending on use of term and jurisdiction. Transfer Use in connection with real property and assignment of title, not often used in licensing. See Grant, Assign, and Convey. Warranty, Warrant Licensor's guarantee of ownership of licensed proprietary rights, right to grant license, no conflict with other licenses granted by licensor, non-infringement of other patents in practising license, usefulness of information for purpose of agreement, practicability of information, operability, nontoxicity and nonhazardous. The guarantee or obligation of licensor must be defined by type, duration, and monetary or other obligations. Words and phrases used for same or similar meaning: guarantee, liability, damages, indemnification. Preferred term: warrant with definition of scope and subject matter. See Indemnification.

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