IP License Agreements: Common Issues and Solutions


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IP License Agreements: Common Issues and Solutions by Stuart Ash

Published in: Technology

IP License Agreements: Common Issues and Solutions

  1. 1. IP License Agreements Li A t Common Issues and SolutionsStuart Ash15th N Negotiating and D fti M j B i ti ti d Drafting Major Business A Agreements tOctober 29 – 30, 2102
  2. 2. SpeakerStuart Ash • Practice includesPartnerGowling Lafleur Henderson LLP • Trade-marksSuite 2600, 160 Elgin St. • CopyrightOttawa, Ontario • Technology Law(613) 786-8667 • IP transactionsstuart.ash@gowlings.comwww.gowlings.com 2
  3. 3. Introduction – Why is this important?• Important to have an good understanding of rights being licensed when drafting and negotiating license agreements • Many traps and p y p pitfalls for the unwary y• Like all agreements, best license agreements reflect goals of the parties and give each party what they need to successfully utilise the IP• Presentation will introduce you to some of the common issues encountered when drafting and negotiating an IP license agreement and some suggestions as t how t deal with th ti to h to d l ith them• Not a comprehensive guide to IP licensing 3
  4. 4. What is an IP license?• Grant of permission by owner of a right to person to do something that - but for the permission of the owner - would be an infringement of owner’s right• Not an assignment or transfer • Licensor retains legal and beneficial title• More than a mere covenant not to sue • Generally contains positive obligations 4
  5. 5. What is Intellectual Property?• Patent • Gives owner the exclusive right preclude others from making using and making, selling invention claimed in patent • Invention must be novel, useful and inventive • Protects ideas, processes ,p• Copyright • Bundle of rights that exists in relation to original literary, artistic, musical and dramatic works • Right to reproduce (copy), publish, perform in public, translate, communicate to public by means of telecommunication 5
  6. 6. What is Intellectual Property?• Trademarks • Name logo or other indicia that distinguishes wares services and Name, wares, business from wares services and business of others • Owner of a trademark has exclusive right to use mark in association with wares and services (and to preclude use of confusingly similar marks)• Trade Secrets / Confidential Information • Valuable information quality of confidence and which is disclosed in confidence • Quality of confidence – not generally known, owner has taken steps to preserve secrecy of information • Circumstances of confidence – must be disclosed in circumstances in which reasonable businessperson would conclude the information was meant to be kept confidential tt b k t fid ti l 6
  7. 7. Grant of License• Grant of license is the key term in a license agreement • Sets out what the licensee is permitted to do • Often sets out important limitations• Important to be clear, complete and specific 7
  8. 8. Grant of License• Should address the following • Parties – who is entitled to exercise rights? • Subject matter – what property is being licensed? • Rights – what is licensee allowed to do with subject matter? • Territory – where can rights be exercised? • Exclusivity - are rights exclusive, sole or non-exclusive? • Term – how long can the rights be exercised? • Payment – royalty-bearing or royalty-free? • Restrictions - are rights assignable? sublicensable? 8
  9. 9. Grant of License• Problems • Lack of specificity • Improper grant language • Over-granting 9
  10. 10. Grant of License• Example – Bad• Licensor grants licensee a perpetual irrevocable, worldwide license under perpetual, irrevocable Licensor’s intellectual property rights to use intellectual property of Licensor and its affiliates. 10
  11. 11. Grant of License• Example – Better• Subject to the terms and conditions of this Agreement Licensor grants to Agreement, Licensee, for the Term of this Agreement, a non-exclusive, royalty-free, non- transferable, non-sublicensable license to Use the Licensed Marks in the Territory in association with the Licensed Wares. Apart from the rights specifically granted h i Li ifi ll t d herein, Licensee i granted no other right, li is t d th i ht license or interest is respect of any property of Licensor.• “Licensed Marks” means the registered an/or unregistered trademarks set Licensed Marks out in Schedule A• “Licensed Wares “ means the wares set out in Schedule B (“Wares”) Licensed ( Wares )• “Territory” means Canada 11
  12. 12. Grant of License• Parties• Licensor • Does Licensor own the subject matter? (Is it a sublicense?)• Licensee • Who will be using the subject matter? • Will licensed property be used by subs and affiliates? (privity issues) • Does licensee require ability to sublicense? • Generally accepted that license cannot sublicense if agreement is silent • Need to understand how licensee intends to use the licensed property 12
  13. 13. Grant of License• Subject Matter• Important to specifically identify the subject matter of the license • What Licensor rights or property are being licensed? • “Licensor’s Intellectual Property” is unclear • Identify rights in a schedule or by application / registration number • “The Patents set out in Schedule A” • Use of definitions can be helpful • Clear definitions are particularly important when licensing confidential information i f ti• Are all or only some of Licensor’s rights being licensed? • All wares and services claimed in registration or certain wares only? • Invention claimed in the patent or only subject matter of certain claims? 13
  14. 14. Grant of License• Improvements • Included or excluded? (arises in patent licensing and technology ( g gy licensing) • Difference between Licensor Improvements and Licensee Improvements • Must negotiate between competing interests• Licensor Improvements • Licensee wants most current technology may believe it is entitled to technology, improvements as it is already paying for base technology • Licensor wants to be paid for new developments (not a subscription) • Often a matter of price (does payment provide for access to improvements?) • Software: Licensee is generally entitled to Updates if it pays or support and Maintenance (but not Upgrades) 14
  15. 15. Grant of License• Licensee Improvements • More complicated • Licensee wants to own benefit of their work, does not want assist competitors • Licensor does not want to be locked out of or blocked from development; may feel entitled to “springboard” developments p y p g p • Key issue is ownership • Licensor owns (takes assignment and licenses back) • Licensee owns (and licenses Licensor) • Terms and conditions need to be considered • Grant backs can be run afoul of EU law • Licensee may want to limit ability of Licensor to license competitors • Joint Ownership • Seems fair and commercially reasonably but fraught with problems 15
  16. 16. Grant of License• Scope of Rights• Important to clearly define what Licensee is entitled to do by use of clear and proper grant language• Different rights require different grant language • “Use” is a right in respect of some property but not all Use• Vague, improper or imprecise language can lead to conflict • Uncertainty is resolved against the drafter• Can get complicated quickly when different rights involved • Software, sound recordings, audio-visual works all have multiple rights• Key is to fully understand what licensee wants / needs to do with licensed property 16
  17. 17. Grant of License• Patents• Licensee can be granted rights to make, use and/or sell invention claimed• Rights are severable • Right to use process but not sell product • Right to manufacture ( g (make) and use but not sell ) • Right to make and sell• Consider limitations • Right to “have made” by others? By who? Where? have made • If so, for whose benefit? (Foundry right) • Some debate as to whether right to make includes right to “have made” • Can Licensee import and sell items made elsewhere? 17
  18. 18. Grant of License• Patents• Also consider limitations on “field of use” field use • Licensee’s use is often restricted to certain: • Purposes – “for Licensee’s internal business purposes” • Fields – “in the memory test devices field” in field • Applications – “for diagnostic but not therapeutic purposes” • Products – “for use in Licensee’s product X” • Allows licensor to parcel rights • May want to specifically exclude certain applications (medical, nuclear, military) 18
  19. 19. Grant of License• Trademark• Right to use the mark in association with specified goods and services• Can also grant right to use in business name or domain name• Can grant right to advertise and display ( g g p y (not use) )• Consider field of use limitations • Limitation to certain goods and services • Certain channels of trade 19
  20. 20. Grant of License• Copyright• Rights in a given work are often licensed separately • Software - right to use and reproduce but not to amend or modify • Music – SOCAN collects royalties for composers regarding right of public performance of musical works • Grant right to translate and publish a novel in French and distribute in Province of Quebec.• Make grant specific to the transaction – what rights are required? g p g q• Limitations • Restrict to certain languages, formats or technologies • Limitation on use or distribution of derivative works (distribute run time run-time software derived from Licensed software in Binary Code format only) 20
  21. 21. Grant of License• Trade Secrets / Confidential Information• Right to use and disclose• Fragile nature of right requires well defined limitations • Purpose • “for the purpose of exercising rights under this Agreement” is broad p p g g g • “For the sole purpose of evaluating functionality of Licensor’s technology and suitability of use by Licensee” • Disclose only for very limited purposes and with appropriate safeguards • Time – capture previously disclosed information? Information that may be disclosed in the future?• Often not licensed specifically but included in confidentiality provisions as a “bolt-on” bolt-on• Can be an issue if right to “use” confidential information” is not seen as a license 21
  22. 22. Grant of License• Territory• Most intellectual property rights are granted in respect of specific territories (particularly those that are registration based like patents and trademarks)• Licensor should specify the territory where licensee is entitled to exercise p y y rights 22
  23. 23. Grant of License• Territory• Care should be taken not to “over-grant” • Licensee often wants right to exercise rights worldwide • But licensor is limited to granting rights its owns (nemo dat) But, • Extent of grant has a direct impact scope of infringement liability • Market considerations • Is licensee capable of exploiting worldwide? • May be determined by nature of grant – inverse relationship between territory and exclusivity y y • Care should be taken to avoid competition law issues if geographic limitations are used to restrict competition amongst competitors 23
  24. 24. Grant of License• Term• Agreement should clearly specify when it begins and when it expires • Two views if agreement is silent • term is for duration of rights • term is perpetual p p • But courts may imply a right of termination on reasonable notice • Should also specify circumstance upon which it can be terminated, the consequences of termination and what rights and obligations survive termination• Term can be unlimited (perpetual), for duration of rights or for a defined period of time 24
  25. 25. Grant of License• Issues can arise when term continues longer than the rights • Competition law issues if collect royalties in respect of patent once it expires (if no other rights are licensed) • Can be a bad bargain for licensee (continue to pay royalties when competitors use for free)• T Term can be fl ibl or conditional b flexible diti l • Period of exclusivity can be limited by time or conditional upon meeting certain milestones • Term can be limited if rights found to be invalid or if patent does not issue• Important to keep in mind that “perpetual” and “irrevocable” are not the same thing 25
  26. 26. Grant of License• Obligations on termination• Unless otherwise stated rights and obligations of parties assumed to finish on expiry or termination of agreement f • Can have harsh unintended consequences for Licensee • May want to provide for transition or sell-off period sell off • Return of licensor property and confidential information• Be sure to “turn off” everything you’ve turned on• Survival • Important that some rights and obligations continue p p g g past term of license (payment of trailing royalties, indemnification and limitation of liability, Confidentiality obligations, restrictive or non-competition covenants) • Consider downstream effect of termination • Will sublicenses terminate? 26
  27. 27. Grant of License• Exclusivity• Who else can exploit the licensed property?• Exclusive • Broadest in scope - Only licensee can exercise (even to exclusion of licensor) • Significant competitive advantage • As close as you can get to assignment of rights • Exclusive license in copyright is an “interest” • Exclusive licensees have right to sue in their own name (without joining licensor) in certain circumstances • Careful legal and business consideration to be given before granting • Can licensor grant rights ? (other contractual obligations) • Is licensee in a position to exploit rights? • Often accompanied by best efforts clauses and minimum performance requirements 27
  28. 28. Grant of License• Sole • only licensee and licensor allowed to exploit rights granted (no other licenses granted) • Offers significant reduction in competition • “Sole and Exclusive” has different meaning in Canada than in US• Non-exclusive • Multiple licenses can be granted • Individual licensee enjoys no special status 28
  29. 29. Grant of License• Assignment• Frequently negotiated term• C Competing i t ti interests t • Licensor • Wants to be free to assign rights ( g g (including to reorganize or sell business) g g ) • Generally wants to prohibit or restrict Licensee’s ability to assign agreement including by way of merger or change of control • may not want licensed p p y to be used by others ( y property y (including competitors) g p ) • May not agree to same terms with all licensees • Licensee • Generally wants to be free to assign without consent • wants to be free to run its business without impediment (including to ability to reorganize, finance, sell business) • Wants to limit Licensor’s ability to assign agreement 29
  30. 30. Grant of License• Agreement should state whether it is assignable by • Licensor • Licensee • by both • by neither • on what terms• Effect of silence • General rule is that IP licenses are not assignable by licensee without consent of licensor • IP licenses are generally seen as personal and do not convey and property or proprietary right that is capable of being assigned f • Licensor is generally free to assign license agreement 30
  31. 31. Grant of License• Absolute prohibition on assignment may not be an effective business solution• Options • Require consent (which shall not be unreasonably withheld or delayed) • Require consent except for assignment to subsidiaries and affiliates or purchaser of all or substantially all of the Licensee’s business or assets • N consent required except f assignment to certain parties or class or No t i d t for i tt t i ti l parties (such as competitors)• Should reflect the (realistic) needs of the parties • Type of agreement (exclusivity, rights) • Does not need to be mutual 31
  32. 32. Obligations of the Parties• Intellectual property rights need to maintained and preserved to remain valid and enforceable • Specific actions must be taken in respect of certain types of property • Payment of fees required to maintain registration of licensed property• It is in the interest of both parties to ensure licensed property is properly maintained i t i d• Question is who will be entitled or responsible for preserving licensed property? • Often depends on the type of grant 32
  33. 33. Obligations of the Parties• Prosecution and maintenance• Certain rights require registration • Patents require payment of regular maintenance fees (and trademarks to a lesser degree) • Can be expensive• Typically licensor will take responsibility for prosecution as the owner of the rights g• Exclusive licensee may wish to control (or be required to pay)• Consider whether Licensor is obligated to maintain 33
  34. 34. Obligations of the Parties• Enforcement• Intellectual Property Rights can be diminished or lost by unchecked infringement • Value of rights is also diminished by infringement• Licensor is generally responsible for enforcement of rights in Licensed Property P t• Key questions: • Is Licensor is compelled to take action against infringers? • Is Licensee is allowed to take action in its own name if Licensor does not? • Who pays? Who controls? 34
  35. 35. Obligations of the Parties• Licensor generally does not want License to take action on its own • Licensee is weaker position (and my be less inclined) to defend licensed ( y ) property in the face of an attack on validity)• Rights and obligations of the parties should be set out in Agreement • if agreement is silent, Licensee may be able to take action in its own name (naming Licensor as a party) 35
  36. 36. Obligations of the Parties• Quality Control• S.50 of the Trade-Marks Act provides that use of a trademark by a licensee will be deemed to be use of trademark by the owner provided that owner controls the character and quality of the wares and services sold or performed by Licensee in association with the licensed mark• Failure to exercise quality control can lead to conclusion that the mark is not distinctive or enforceable• Important to remember that requirement is for actual control over character and quality of licensee’s goods and services (not over manner of use of the licensee s licensed mark) • Mere right to control is insufficient • Financial or management control is also insufficient (in and of itself) 36
  37. 37. Obligations of the Parties• Agreement should contain • obligation to comply with Licensor’s quality control g g y y guidelines or standards • Right to inspect • measures to enforce compliance 37
  38. 38. Obligations of the Parties• Confidentiality Obligations• Rights in confidential information are lost when information becomes public or loses quality of confidence• Agreement should contain provisions requiring Licensee to maintain confidentiality of Licensed Property• May reference particular standard • “Licensee shall protect Confidential Information using such measures at it p g uses to protects its own confidential information (and in no circumstances less than a reasonable degree of care)” 38
  39. 39. Obligations of the Parties• May specify certain specific procedures • Limits on copying; limit access to “need-to-know” employees • Require employees to have entered into confidentiality agreements • Compliance with Licensor security standards • Require notification of actual or suspected misuse or disclosure • require return or destruction on termination or expiry of agreement• Determine how long confidentiality obligations survive expiry or termination g y g p y• Watch the scope of residuals 39
  40. 40. Representations and Warranties• Reps and warranties, indemnification and limitation of liability clauses are used to allocate risk associated with exploitation of licensed property between the parties • who bears risk of invalidity or infringement of third party rights?• Often most heavily negotiated terms in a license agreement • Stakes are high – IP litigation very costly• Competing interests • Licensee wants comfort that it will be able to exploit rights it has bargained for, wants Licensor to “stand behind” licensed property • Licensor wants to limit its exposure, wants to avoid underwriting risks it cannot control (rights it does not know about, use of licensed property in new products and new territories) 40
  41. 41. Representations and Warranties• Common mistakes • F ili t i l d or address Failing to include dd • Reliance on boilerplate provisions • Unrealistic or unreasonable positioning and allocation of risk 41
  42. 42. Representations and Warranties• Common reps and warranties • Ownership • “Licensor own the Licensed Property free and clear of encumbrances and has the right to grant the licenses granted herein”. • Validity • “The Licensed Property is valid and enforceable”. • Non-infringement • “The Licensed Property and the Use thereof contemplated herein y does not and will not infringe the rights of any third party”. 42
  43. 43. Representations and Warranties• Validity• Who bears the risk of licensed rights being p g g proven to be invalid?• Competing interests • Licensee – does not want to pay for rights that are invalid • In many jurisdictions (including Canada) a finding of invalidity will not relieve Licensee form obligation to continue to pay royalties • Licensor – wants to limit exposure as it has no way of knowing for certain whether licensed rights are valid g• Limitations • Knowledge – “Licensor has no knowledge of any p g g y prior art which would render Licensed Patents invalid or unenforceable” • Notice – “Licensor has received no notice alleging that Licensed Patents are invalid” • May wish to provide that license terminates or payment of royalties ceases 43
  44. 44. Representations and Warranties• Non Infringement• Generally the most heavily negotiated representation and warranty• Challenge is to allocate risk in a manner that is realistic and reasonable in terms of the particular transaction • Who is in better position to have knowledge of the risk? • Nature and degree of risk assumed (jurisdictions? Type of products?) • Does the consideration paid account for assumption of such risk?• Competing interests • Licensor – greater familiarity with licensed property; stands to gain • Licensee – is in position to control its use• Often decided by relative bargaining position of the parties • sub-optimal approach- does not have to be “all-or-nothing” sub optimal approach all or nothing 44
  45. 45. Representations and Warranties• Limitations• Knowledge • “To the Licensor’s knowledge, the Licensed Property does not infringe, violate or misappropriate the intellectual property rights of any third party” • Most common limitation • Can be to the knowledge of company or specific individuals after due enquiry• Territory • “To the Licensor’s knowledge, the Licensed Property does not infringe, violate or misappropriate any Canadian or US patents. ” 45
  46. 46. Representations and Warranties• Time • “To the Licensor’s knowledge, the Licensed Property does not infringe, violate or misappropriate any Canadian or US patent issued or laid open as of the Effective Date.”• Disclosure • “Except as disclosed in Schedule D, to the Licensor’s knowledge, the Licensed Property does not infringe, violate or misappropriate any Canadian or US patent issued or laid open as of the Effective Date.”• N ti Notice • There are no claims or proceedings alleging that the Licensed Property or the use thereof infringes, violates or misappropriates the intellectual property rights of any third party nor has Licensor received any notice in writing that the Licensed Property or the use thereof infringes, violates or misappropriates the intellectual property rights of any third party. 46
  47. 47. Representations and Warranties• Known vs. Unknown Risks• Licensor assumes risk for things within its control • Infringement or misappropriation of copyright • Misappropriation of third party confidential information • Infringement of registered or laid open rights in Licensor’s primary markets• Licensee assumes risk arising in respect of its specific use or unknown risks • Use in new jurisdictions • Liability for new, unknown, out-of-territory or unregistered rights • P ti can also share unknown risks Parties l h k i k 47
  48. 48. Representations and Warranties• Important to remember that reps and warranties can exist outside of the agreement • Sales of Goods Acts • Uniform Commercial Code • UN Convention on International Sale of Goods • can import reps and warranties of merchantability, fitness for purpose and non-infringement• Important to use proper disclaimer language 48
  49. 49. Indemnification / Limitation of Liability• Indemnification• Closely linked to reps and warranties y p • Sometimes replace reps and warranties • Must also be read with limitation of liability provisions• Important to clearly identify • Who is being indemnified? (Everyone in chain of distribution?) • For what risks are indemnification provided? • Are there exceptions?• Also important to p p provide for indemnification p procedure • Notification of claims • Carriage and control of proceedings • Representation of indemnified party 49
  50. 50. Indemnification / Limitation of Liability• Licensor will want indemnification regarding • Breach of terms of agreement (including reps and warranties) • Non-IP liability relating to Licensee’s products (product liability) • Licensee’s compliance with applicable law• Licensee will want indemnification regarding • Breach of terms of agreement (including reps and warranties) • IP infringement 50
  51. 51. Indemnification / Limitation of Liability• E Exceptions ti • Licensor will often carve out indemnification for infringement arising from • Modifications to licensed property (by licensee or at Licensee’s request, or unauthorized modifications) • Use for unlicensed applications or purposes • Combination with other IP or products (if infringement arises as a result of combination)• Replace, Repair, Modify • Often proposed as an alternative (or additional) remedy for infringement • in the event of claim or threatened claim of infringement Licensor shall: • Replace the infringing licensed property with non-infringing property of equivalent non infringing functionality • Repair or modify the infringing licensed property so that it is no longer infringing • Refund some or all of the fees paid by Licensee and terminate the license 51
  52. 52. Indemnification / Limitation of Liability• Limitation of Liability• Limits financial exposure of the parties by putting a limit on direct damages (cost of replacement, restoration) and by (generally) excluding replacement consequential damages (economic damages such as lost profits)• Critical commercial term• Amount can be aggregate or divided into “baskets” 52
  53. 53. Indemnification / Limitation of Liability• Direct damages cap • Can be a dollar amount or function of fees paid by Licensee • C b all or pro-rated amount Can be ll t d t• Watch for common “carve outs” (exceptions to cap on direct damages and exclusion of consequential damages) • Damages to tangible property • Damages for personal injury or death • Damages for breach of confidentiality g y • Damages for wilful misconduct • Damages for IP infringement• Inverse relationship between non-infringement reps and warranties and p g p indemnification for infringement • Need to understand how these work together 53
  54. 54. Thank Youmontréal  ottawa  toronto  hamilton  waterloo region  calgary  vancouver  moscow  london