Basics Of Licensing IP

License AgreementsA brief review of the types of negotiated license agreements, applicable law, and the parts of agreementsby Steve Ritchey1

A License Agreement is a Unique Business ArrangementMemorializes Evolving Business RelationshipDefines Immediate Rights & ObligationsBusiness peoples’ primary concernsConveys Parties’ Intentions as to Future EventsTechnology becomes obsoleteMerger or acquisitionChanges in law or market powerLawyers’ primary concerns dealing with remedies associated with possible future eventsPeople that negotiated the agreement will probably not be around when a problem arises2

General Rules Try to avoid ambiguitiesResolved against the drafterUse terminology consistentlyStrive for completeness and clarityOveremphasizing brevity and simplicity often leads to ambiguity and disputesNegotiated ambiguity is to be toleratedUse boilerplate with care3

Transfer of Patent RightsPatent is a Right to ExcludeMake, Use, Sell, Offer for Sale, ImportMay license each separatelyTransfer of Right to Exclude is an AssignmentWaiver of Right to Exclude is a License4

Assignment or LicenseSubstance over Form Contract terms, not title, controlsExclusive license may be an assignment“All substantial rights transferred” such as to a specific geographic part of the U.S. or the entire U.S., or an undivided share of the patent. Assignment may be found despite conditions subsequentPayment of royaltiesBest effortsOther conditions outside control of assignor5

Assignment or LicenseWhy is it important?Tax LiabilityLicense – ordinary incomeAssignment – capital gains and depreciationTransfer of all substantial rights is assignment for tax purposesStanding to Sue for InfringementPatent owner or exclusive licensee alone or joining licensor“all substantial rights” standard is different for tax and standing to sue for infringementVery fact specific; granting unqualified right to sue tends to be dispositive; but qualified right to sue not effective (e.g., licensee has first right to sue but if declined licensor has right) 6

Agreements to AssignApplies to any arrangement in which Inventions are expectedConsulting Contracts, development agreementsEmployment contracts; don’t rely on implied right to ownAgreement to assign vs. present assignment Equitable title vs. Legal titleEquitable remedies vs. DamagesAssignment of Right, Title, and Interest does not convey right to sue for past infringement; must be separately granted7

Joint Ownership General rule in US - an owner may license without permission from or accounting to other owner(s)Contract provisions will controlMay grant immunity from suit by other ownerNeed not share license royaltiesMay not grant exclusive license but may grant exclusive right to that owner’s interestAll Owners Needed for SuitOwners may not be compelled unless in a contract8

Primary Types of Negotiated LicensesExpress LicensesExclusive LicensesNonexclusive LicensesCovenant not to sueField of Use LicensesCross LicensesGrantback Licenses Sublicenses9

Express LicensesWritten or oralWritten contractExchange of correspondenceOral if terms provablePartial performanceAcceptance of payment10

Exclusive Licenses May be an Assignment - rareAgreement not to grant further licensesMay be preexisting nonexclusive licensesAgreement not to practice under patentReservation of rightMay be limited in time, territory, and fieldExclusive Licensee may sue for infringementCan compel joinder of LicensorThough implied, it is advisable to specify terms such as control of litigation, sharing of costs and recovery11

Exclusive Licenses (cont.)Implied Obligation to Exploit“Best Efforts” or “Due Diligence” provisions can be vagueAdvisable to expressly agree on what constituted best efforts or due diligenceAlternatively, set minimum annual royalties with termination or conversion to nonexclusive licenseDisclaimer of obligation possible but may bring the “consideration” in question 12

Possible concerns associated with Exclusive Licenses If total value of agreement is over $50M it may be an Asset Transfer requiring Hart-Scott-Rodino FilingPossible Antitrust Consequences - fact specific; inconsistent enforcementExclusive rights are “assets” and their acquisition in certain circumstances can violate Section 7 of Clayton Act (a holding company used to promote monopoly)Failure to grant sublicensing rights may imply or expressly require illicit interaction between licensee and licensor in granting or withholding further licensesExclusive licenses for particular fields can be evidence of illegal allocation and segregation of those fields13

Nonexclusive Licenses Simply a promise not to sue for patent infringementLicensee gets no protection from unlicensed competitionAbsent contract provision for abating third party infringement Licensor may grant other licensesNonexclusive licensee may seek most favored licensee protection (often difficult to arrive at terms, contentious)14

Covenant Not to Sue A personal promise – not a transferable license May not run with patent only particular identified product (patent may cover multiple products)Likely considered to cover covenantee and its customers if covenantor knew covenantee will continue making and selling patented productsAdvisable that agreement granting covenant not to sue expressly address scopePatentee reserves right to sue covenantee’s customersPatent-based scope vs. product-based scope15

Field of Use LicenseWhere a patented invention has different uses, such uses may be separately licensedCan maximize the use of the technology and thereby revenue Practice outside of licensed field is an infringementDivisions can be by, e.g., market, size, uses, applicationsThe key is the definition of the fieldMay be exclusive or nonexclusiveMay have antitrust consequences (intentional restraint of normal competition)16

Cross LicenseParties exchange technologiesBlocking patent(s)Can be patents on different technologies“Consideration” may be more than the license (e.g., money, litigation settlement)May have antitrust consequencesParties agree to consult before granting further licensesPatent pools combining most of the relevant technologies; normally not a problem so long as each member can license someone outside the pool; in the past Justice Dept tended not to view patent pools favorably but that has changed significantly over the past couple of decades17

Grantback LicensesA license directed to “improvements,” which are typically defined as inventions made by the licensee that cannot be practiced without infringing the licensed patent(s)“Consideration” in the license agreement includes the grantbackCan be exclusive, nonexclusive, limited to field, etc.18

SublicensesStructure: Patent Owner -> Licensee -> SublicenseePurpose: to allow for broad dissemination of technologyDifferent from “have made” right, which is implied unless expressly restricted; right to sell typically includes “have sold” unless expressly addressedUnless specified in license agreement, a licensee is generally not responsible for actions of the sublicensee19

Sublicenses (cont.)Authority to grant sublicensesThe right to grant sublicenses must be expressly set for in license agreementScope of licensee’s authority to grant sublicenses is determined by the terms of the license agreementSublicense cannot be less restrictive than license (e.g., can’t have a lower royalty rate or to a larger territory)Advisable to specify terms for sublicenses in license agreement (e.g., can sublicensees grant sublicenses, up-front payments, minimum payments, etc.)Advisable to require that licensee notify licensor of sublicensees to avoid accidental suits20

Sublicenses (cont.)An authorized sublicense is, in effect, an agreement between the licensor and the sublicenseeUnless specified otherwise, a sublicense usually continues despite early termination of the license agreement; sublicensee will then render payments and other obligations to the licensorCaution: sublicensing involves agency lawPossibility for revocation of authority to grant sublicenses; possible protection from revocability if licensee obtains a property interest in the patentLicensor may be estopped from denying sublicensee’s right — detrimental reliance of sublicensee; possibly require licensor review and approval of sublicenses or require licensee to allow sublicensee to review license21

Parts of a License AgreementPreamble – identifies the parties and usually the effective dateRecitals – described background relationship of the partiesDefinitions – probably the most difficult and time consuming portion of an agreement to negotiate and draft; Avoids ambiguity from inaccurate repetition; where parties use different words it is presumed different meanings were intendedAids in achieving conciseness and claritySpecify omissions and inclusionsSpecial meanings to termsCaution – avoid circularity in definitions22

Definitions (cont.)Licensed Patents Identify specific existing patents and applicationsConsider whether continuations, continuations-in-part, divisionals, corresponding foreign patents, utility models, design patents, inventor’s certificates, reissues, patents of additions, extensions, etc. are to be includedInventions made for a specified period of timeLicensed ProductsMay serve to limit scope of license if defined as less than scope of patents; field of use may also serve this purpose 23

Grant Clause – licensor grants to licenseeAgrees to grant for future (e.g., an option agreementSubsidiaries, affiliates, controlled companies - usually addressed in definitionsConsider change of control clauses (e.g., licensed subsidiary could retain license after it is sold).Consider whether performance obligations must be met by each individual subsidiary24

Grant Clause (cont.)Can include combinations of exclusive, nonexclusive, field of use, grantbacks, cross licenses, etc.Expressly include right to grant sublicensesUnder whatLicensed patentsKnow-how, technical informationTo do whatMake, use, sell, offer for sale, import, export, otherwise dispose of, etc.Should expressly exclude implied rights to “have made” or “have sold”, if intended25

Grant Clause (cont.)Geographic scope – U.S., its territories, and possessions, other specified countries, worldwide; can be defined as “Licensed Territory”Term of the Grant – unless agreed otherwise the term of the grant is usually presumed to be for the life of the patents.Reservations – explicit provisions inconsistent with license grant such as licensor reserving right to practice patent when granting an exclusive license or prior licenses26

Money – usually the most significant part of the “consideration” Sum certain payments — paid-up license, pay over time, or a combinationMilestone payments — can be milestones for both parties (e.g., licensee reaching a development stage or licensor having a patent issue)Royalties — payments based in some manner on sales or use of Licensed Products or licensed methods; may be based on patents, know-how, or a combinationReimbursement of patent prosecution costs27

Royalties Arrive at a Royalty Base then a Royalty RateIdeally royalty base should (a) relate directly to the licensee’s use of the licensed rights and (b) be amenable to reliable accounting and auditingThus, it will vary with the licensed technology.Consider patent claim scopeProducts to be soldProcesses to be usedBase can be broader than claim if voluntary or negotiated (e.g., patented product is seatbelt but royalty is based on cost of auto)– can possibly implicate antitrust concerns28

Royalties (cont.)Examples for a royalty base when licensed process or product is not soldVolume of raw material used (often appropriate for process license) or production volume (often used where product is intermediate or subcomponent)Not inflation sensitive, without escalation provisionExample of royalty base when licensed process or product is soldNet or gross sales price often usedRecords routinely keptDirectly related to use of technologyAutomatically adjusts for inflation and competition29

Royalties (cont.)“Reach-through” license – tie royalties to sales of identified products not manufactured directly through use of patented product or methodTypically used for biotech technologies where use is difficult to police (e.g., research tools)Can be beneficial to both partiesAllows licensees to use technology and defer payments until use yields commercial resultsAllows licensors to have potential for enhanced royalty income based on larger payoff from sales of downstream products rather than certain, but smaller, upfront feesCan result in royalty payments being made after patent expiration; not patent misuse if structured properly For example, royalty paid on the sales of products discovered with research tool for life of patent on discovered product or if not patented for x years from first sale30

Royalties (cont.)Other factors that may impact royalty base and royalty ratesDifferent levels of value added may affect royalty base and royalty rateSales to Related Companies / non-arms length transactionsOther dispositions – leases, given away, use by licenseePatent applications vs. issued patents, trade secrets31

Royalties as IncentivesMinimum annual royalties – to maintain license or exclusivityAdvance minimum royalty paymentsPossibly increasing over time to encourage effortVariable RoyaltiesTypically rate is inverse to production volumeVary royalty rate with profit margin; if competition decreases prices, royalty rate is automatically decreased but if efficiency increases both parties earn more32

Royalty Reporting & AccountingLicensee is usually expressly required to keep sufficient records to determine the royalties due licensorLicensor usually has right to audit records of licensee, normally at licensor’s expense unless discrepancy exceeds a thresholdThe content of reports is negotiable but should be specified along with reporting period(s) and timing of payments Post-termination report is typical33

Indemnification from torts Primarily for limiting the liability of licensor for damages arising from sale or use of licensed products and processes Typically includes duty to defend and indemnifyLicensee may be required to maintain liability insurance listing licensor as additional named insured34

Representations & WarrantiesUsual for LicensorsPower to grant licenseNo inconsistent actions have been nor will be takenTitle to patentLicensor will not practice under the patent, if exclusive license with no reservationDisclaim (a) validity or scope of patent, (b) noninfringement of third party patents, (c) merchantability, (d) license under other patents, and (e) use of licensor’s name.35

Succession or Assignment of Rights and ObligationsDetermine whether one or both of the parties can assign their rights and obligations under the agreement to third parties and to what extentAdvisable to require assignee to expressly agree to be bound to the terms of the agreementAbility to assign allows for flexibility in spinning off, mergers, sale of relevant business assets, etc.Assignment to competitors can be a concern36

BankruptcyTreatment of license agreements provided for in bankruptcy codeA license agreement is an asset of a licenseeA clause terminating a license upon filing for bankruptcy is not illegal but may not be enforceable; could be helpful if bankruptcy petition is rejectedMost licenses are considered “executory contracts” and may be rejected or assigned by bankruptcy trusteeConsider requiring notice of acts that may signal impending bankruptcy (e.g., pledging of assets or making late payments) or obtaining a security interest in license37

Abating Infringement by Third PartyNonexclusive licensee may be harmed by a tolerated infringer – absent contract provisions, no right to bring suitExclusive licensee may bring suit and join licensorLicensor agrees to abate infringementEstablish criteria – how much infringement, how much proof of infringement, noticeOther conditions – possibly limit to one suit at a timePossible remedies for Licensor’s failure to abateTermination, suspension or reduction of royalties, licensee having right to sue in name of licensor38

Term and TerminationAbsent specified term it is typically presumed to be for life of patentsTermination on “Material Breach” Usually notice and cure provisionsActs considered to be material may be definedTermination without cause – usually only appropriate for nonexclusive licenseesTermination for failing to pay minimum annual amountsTermination because of financial problems39

Term and Termination (cont.)Specify effects of terminationAccrued royalties, reporting, auditingDisposition of existing productsConfidentialitySublicensesRight to use know-how/trade secrets40

Dispute ResolutionAlternative Dispute Resolution – arbitration, mediationChoice of law, specify rules, panel size and qualifications, location, language, time limits, etc.Court proceedings even if ADR is applicable to compel arbitration or appealing an awardJurisdiction, venue, choice of lawInternational choices of law – US courts likely to enforce41

Challenges to Validity of Licensed Patents by LicenseePublic policy reasons for allowing challenges – strong public interest in free competition and in ideas in the public domain; licensee may have the greatest economic incentive to change validityCannot enforce a promise not to challengeBut may be able to terminate in the event of a challengeMedImmune – US Supreme Court (2007) case held that licensee can file Declaratory Judgment action alleging invalidity without repudiating license (continuing to meet its obligations such as paying royalties) 42

Other ProvisionsPatent marking – required for licensor to recover damages; recent case law may result in a trend of increased false marking lawsuits based on expired patentsForce majeure – excuses performance prevented by cause outside of control of partySeverability – any provision held to be illegal is severed from the agreement so long as it does not go to the heart of the agreement Amendment – usually required to be in writing and agreed to by both partiesWaiver – waiving a breach does not waive subsequent breachesIntegration – this is the entire agreement and supersedes all other prior agreements or understandingsGovernment approvals – for example, U.S. export control, USDA, etc.43

ConclusionThe law around licensing is fact specific, complex, and sometimes contradictory. This presentation focused on the general rules; exceptions apply to nearly all of the general rules. Therefore, consult an attorney to obtain legal advice for your particular situation.Disclaimer: This presentation is intended for information only and should not be considered legal advice.44

Basics Of Licensing IP

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Basics Of Licensing IP