License and collaboration agreements usually obligate licensees to exercise diligence to develop and commercialize the licensed products. The level of efforts and resources that the licensee is required to expend is usually established in the definition of "commercially reasonable efforts" (CRE) or "diligent efforts." As a licensee's failure to expend such efforts may lead to termination of its rights, if not damages, licensees rightly focus on this definition. Often overlooked, but equally import, are the diligence covenants themselves, as the covenants establish the scope of activities to which the diligence obligation applies, as well as important conditions and exceptions to that obligation.

The appropriate covenants should be crafted for the specific transaction, but often extend to issues such as the number of or specific indications to be pursued and the number and identity of countries in which such activities would occur (e.g., major markets). Depending on the development stage of the product or the scope of the license, the agreement may even include specific timelines for specific activities, such as using CRE to complete a particular clinical study by June 2026, or, in the context of a manufacturing transfer, using CRE to validate and qualify a manufacturer within 12 months after the effective date.

Another condition that should be included in the covenants is when the diligence obligation takes effect. Should the licensee's obligation to use CRE begin on the effective date, even if the licensor is conducting development activities? Should it only take effect upon completion of any know-how or technology transfer? Or perhaps only if the results of any ongoing studies meet their respective primary endpoints? An agreement that is silent on timing may obligate a licensee to expend efforts earlier than the parties intended and where doing so may not be reasonable.

While licensees should continue to take a careful approach in negotiating the CRE (or equivalent) definition to be used in connection with their diligence efforts, they should also carefully consider the drafting of their specific diligence obligations with respect to the product. Otherwise, a licensee may inadvertently find itself committed to use efforts to develop and commercialize the licensed product on a broader scale, earlier timeframe, and under a set of conditions that are not commercially practicable.