Basics Of Licensing IP


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A brief review of the types of negotiated license agreements, applicable law, and the parts of agreements

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Basics Of Licensing IP

  1. 1. License Agreements<br />A brief review of the types of negotiated license agreements, applicable law, and the parts of agreements<br />by Steve Ritchey<br />1<br />
  2. 2. A License Agreement is a Unique Business Arrangement<br />Memorializes Evolving Business Relationship<br />Defines Immediate Rights & Obligations<br />Business peoples’ primary concerns<br />Conveys Parties’ Intentions as to Future Events<br />Technology becomes obsolete<br />Merger or acquisition<br />Changes in law or market power<br />Lawyers’ primary concerns dealing with remedies associated with possible future events<br />People that negotiated the agreement will probably not be around when a problem arises<br />2<br />
  3. 3. General Rules <br />Try to avoid ambiguities<br />Resolved against the drafter<br />Use terminology consistently<br />Strive for completeness and clarity<br />Overemphasizing brevity and simplicity often leads to ambiguity and disputes<br />Negotiated ambiguity is to be tolerated<br />Use boilerplate with care<br />3<br />
  4. 4. Transfer of Patent Rights<br />Patent is a Right to Exclude<br />Make, Use, Sell, Offer for Sale, Import<br />May license each separately<br />Transfer of Right to Exclude is an Assignment<br />Waiver of Right to Exclude is a License<br />4<br />
  5. 5. Assignment or LicenseSubstance over Form <br />Contract terms, not title, controls<br />Exclusive license may be an assignment<br />“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. <br />Assignment may be found despite conditions subsequent<br />Payment of royalties<br />Best efforts<br />Other conditions outside control of assignor<br />5<br />
  6. 6. Assignment or LicenseWhy is it important?<br />Tax Liability<br />License – ordinary income<br />Assignment – capital gains and depreciation<br />Transfer of all substantial rights is assignment for tax purposes<br />Standing to Sue for Infringement<br />Patent owner or exclusive licensee alone or joining licensor<br />“all substantial rights” standard is different for tax and standing to sue for infringement<br />Very 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) <br />6<br />
  7. 7. Agreements to Assign<br />Applies to any arrangement in which Inventions are expected<br />Consulting Contracts, development agreements<br />Employment contracts; don’t rely on implied right to own<br />Agreement to assign vs. present assignment <br />Equitable title vs. Legal title<br />Equitable remedies vs. Damages<br />Assignment of Right, Title, and Interest does not convey right to sue for past infringement; must be separately granted<br />7<br />
  8. 8. Joint Ownership <br />General rule in US - an owner may license without permission from or accounting to other owner(s)<br />Contract provisions will control<br />May grant immunity from suit by other owner<br />Need not share license royalties<br />May not grant exclusive license but may grant exclusive right to that owner’s interest<br />All Owners Needed for Suit<br />Owners may not be compelled unless in a contract<br />8<br />
  9. 9. Primary Types of Negotiated Licenses<br />Express Licenses<br />Exclusive Licenses<br />Nonexclusive Licenses<br />Covenant not to sue<br />Field of Use Licenses<br />Cross Licenses<br />Grantback Licenses <br />Sublicenses<br />9<br />
  10. 10. Express Licenses<br />Written or oral<br />Written contract<br />Exchange of correspondence<br />Oral if terms provable<br />Partial performance<br />Acceptance of payment<br />10<br />
  11. 11. Exclusive Licenses <br />May be an Assignment - rare<br />Agreement not to grant further licenses<br />May be preexisting nonexclusive licenses<br />Agreement not to practice under patent<br />Reservation of right<br />May be limited in time, territory, and field<br />Exclusive Licensee may sue for infringement<br />Can compel joinder of Licensor<br />Though implied, it is advisable to specify terms such as control of litigation, sharing of costs and recovery<br />11<br />
  12. 12. Exclusive Licenses (cont.)<br />Implied Obligation to Exploit<br />“Best Efforts” or “Due Diligence” provisions can be vague<br />Advisable to expressly agree on what constituted best efforts or due diligence<br />Alternatively, set minimum annual royalties with termination or conversion to nonexclusive license<br />Disclaimer of obligation possible but may bring the “consideration” in question <br />12<br />
  13. 13. Possible concerns associated with Exclusive Licenses <br />If total value of agreement is over $50M it may be an Asset Transfer requiring Hart-Scott-Rodino Filing<br />Possible Antitrust Consequences - fact specific; inconsistent enforcement<br />Exclusive rights are “assets” and their acquisition in certain circumstances can violate Section 7 of Clayton Act (a holding company used to promote monopoly)<br />Failure to grant sublicensing rights may imply or expressly require illicit interaction between licensee and licensor in granting or withholding further licenses<br />Exclusive licenses for particular fields can be evidence of illegal allocation and segregation of those fields<br />13<br />
  14. 14. Nonexclusive Licenses <br />Simply a promise not to sue for patent infringement<br />Licensee gets no protection from unlicensed competition<br />Absent contract provision for abating third party infringement <br />Licensor may grant other licenses<br />Nonexclusive licensee may seek most favored licensee protection (often difficult to arrive at terms, contentious)<br />14<br />
  15. 15. Covenant Not to Sue <br />A personal promise – not a transferable license <br />May not run with patent only particular identified product (patent may cover multiple products)<br />Likely considered to cover covenantee and its customers if covenantor knew covenantee will continue making and selling patented products<br />Advisable that agreement granting covenant not to sue expressly address scope<br />Patentee reserves right to sue covenantee’s customers<br />Patent-based scope vs. product-based scope<br />15<br />
  16. 16. Field of Use License<br />Where a patented invention has different uses, such uses may be separately licensed<br />Can maximize the use of the technology and thereby revenue <br />Practice outside of licensed field is an infringement<br />Divisions can be by, e.g., market, size, uses, applications<br />The key is the definition of the field<br />May be exclusive or nonexclusive<br />May have antitrust consequences (intentional restraint of normal competition)<br />16<br />
  17. 17. Cross License<br />Parties exchange technologies<br />Blocking patent(s)<br />Can be patents on different technologies<br />“Consideration” may be more than the license (e.g., money, litigation settlement)<br />May have antitrust consequences<br />Parties agree to consult before granting further licenses<br />Patent 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 decades<br />17<br />
  18. 18. Grantback Licenses<br />A license directed to “improvements,” which are typically defined as inventions made by the licensee that cannot be practiced without infringing the licensed patent(s)<br />“Consideration” in the license agreement includes the grantback<br />Can be exclusive, nonexclusive, limited to field, etc.<br />18<br />
  19. 19. Sublicenses<br />Structure: Patent Owner -> Licensee -> Sublicensee<br />Purpose: to allow for broad dissemination of technology<br />Different from “have made” right, which is implied unless expressly restricted; right to sell typically includes “have sold” unless expressly addressed<br />Unless specified in license agreement, a licensee is generally not responsible for actions of the sublicensee<br />19<br />
  20. 20. Sublicenses (cont.)<br />Authority to grant sublicenses<br />The right to grant sublicenses must be expressly set for in license agreement<br />Scope of licensee’s authority to grant sublicenses is determined by the terms of the license agreement<br />Sublicense cannot be less restrictive than license (e.g., can’t have a lower royalty rate or to a larger territory)<br />Advisable to specify terms for sublicenses in license agreement (e.g., can sublicensees grant sublicenses, up-front payments, minimum payments, etc.)<br />Advisable to require that licensee notify licensor of sublicensees to avoid accidental suits<br />20<br />
  21. 21. Sublicenses (cont.)<br />An authorized sublicense is, in effect, an agreement between the licensor and the sublicensee<br />Unless specified otherwise, a sublicense usually continues despite early termination of the license agreement; sublicensee will then render payments and other obligations to the licensor<br />Caution: sublicensing involves agency law<br />Possibility for revocation of authority to grant sublicenses; possible protection from revocability if licensee obtains a property interest in the patent<br />Licensor 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 license<br />21<br />
  22. 22. Parts of a License Agreement<br />Preamble – identifies the parties and usually the effective date<br />Recitals – described background relationship of the parties<br />Definitions – probably the most difficult and time consuming portion of an agreement to negotiate and draft; <br />Avoids ambiguity from inaccurate repetition; where parties use different words it is presumed different meanings were intended<br />Aids in achieving conciseness and clarity<br />Specify omissions and inclusions<br />Special meanings to terms<br />Caution – avoid circularity in definitions<br />22<br />
  23. 23. Definitions (cont.)<br />Licensed Patents <br />Identify specific existing patents and applications<br />Consider 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 included<br />Inventions made for a specified period of time<br />Licensed Products<br />May serve to limit scope of license if defined as less than scope of patents; field of use may also serve this purpose <br />23<br />
  24. 24. Grant Clause – licensor grants to licensee<br />Agrees to grant for future (e.g., an option agreement<br />Subsidiaries, affiliates, controlled companies - usually addressed in definitions<br />Consider change of control clauses (e.g., licensed subsidiary could retain license after it is sold).<br />Consider whether performance obligations must be met by each individual subsidiary<br />24<br />
  25. 25. Grant Clause (cont.)<br />Can include combinations of exclusive, nonexclusive, field of use, grantbacks, cross licenses, etc.<br />Expressly include right to grant sublicenses<br />Under what<br />Licensed patents<br />Know-how, technical information<br />To do what<br />Make, use, sell, offer for sale, import, export, otherwise dispose of, etc.<br />Should expressly exclude implied rights to “have made” or “have sold”, if intended<br />25<br />
  26. 26. Grant Clause (cont.)<br />Geographic scope – U.S., its territories, and possessions, other specified countries, worldwide; can be defined as “Licensed Territory”<br />Term of the Grant – unless agreed otherwise the term of the grant is usually presumed to be for the life of the patents.<br />Reservations – explicit provisions inconsistent with license grant such as licensor reserving right to practice patent when granting an exclusive license or prior licenses<br />26<br />
  27. 27. Money – usually the most significant part of the “consideration” <br />Sum certain payments — paid-up license, pay over time, or a combination<br />Milestone payments — can be milestones for both parties (e.g., licensee reaching a development stage or licensor having a patent issue)<br />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 combination<br />Reimbursement of patent prosecution costs<br />27<br />
  28. 28. Royalties <br />Arrive at a Royalty Base then a Royalty Rate<br />Ideally royalty base should (a) relate directly to the licensee’s use of the licensed rights and (b) be amenable to reliable accounting and auditing<br />Thus, it will vary with the licensed technology.<br />Consider patent claim scope<br />Products to be sold<br />Processes to be used<br />Base 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 concerns<br />28<br />
  29. 29. Royalties (cont.)<br />Examples for a royalty base when licensed process or product is not sold<br />Volume of raw material used (often appropriate for process license) or production volume (often used where product is intermediate or subcomponent)<br />Not inflation sensitive, without escalation provision<br />Example of royalty base when licensed process or product is sold<br />Net or gross sales price often used<br />Records routinely kept<br />Directly related to use of technology<br />Automatically adjusts for inflation and competition<br />29<br />
  30. 30. Royalties (cont.)<br />“Reach-through” license – tie royalties to sales of identified products not manufactured directly through use of patented product or method<br />Typically used for biotech technologies where use is difficult to police (e.g., research tools)<br />Can be beneficial to both parties<br />Allows licensees to use technology and defer payments until use yields commercial results<br />Allows licensors to have potential for enhanced royalty income based on larger payoff from sales of downstream products rather than certain, but smaller, upfront fees<br />Can result in royalty payments being made after patent expiration; not patent misuse if structured properly <br />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 sale<br />30<br />
  31. 31. Royalties (cont.)<br />Other factors that may impact royalty base and royalty rates<br />Different levels of value added may affect royalty base and royalty rate<br />Sales to Related Companies / non-arms length transactions<br />Other dispositions – leases, given away, use by licensee<br />Patent applications vs. issued patents, trade secrets<br />31<br />
  32. 32. Royalties as Incentives<br />Minimum annual royalties – to maintain license or exclusivity<br />Advance minimum royalty payments<br />Possibly increasing over time to encourage effort<br />Variable Royalties<br />Typically rate is inverse to production volume<br />Vary royalty rate with profit margin; if competition decreases prices, royalty rate is automatically decreased but if efficiency increases both parties earn more<br />32<br />
  33. 33. Royalty Reporting & Accounting<br />Licensee is usually expressly required to keep sufficient records to determine the royalties due licensor<br />Licensor usually has right to audit records of licensee, normally at licensor’s expense unless discrepancy exceeds a threshold<br />The content of reports is negotiable but should be specified along with reporting period(s) and timing of payments <br />Post-termination report is typical<br />33<br />
  34. 34. Indemnification from torts <br />Primarily for limiting the liability of licensor for damages arising from sale or use of licensed products and processes <br />Typically includes duty to defend and indemnify<br />Licensee may be required to maintain liability insurance listing licensor as additional named insured<br />34<br />
  35. 35. Representations & Warranties<br />Usual for Licensors<br />Power to grant license<br />No inconsistent actions have been nor will be taken<br />Title to patent<br />Licensor will not practice under the patent, if exclusive license with no reservation<br />Disclaim (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.<br />35<br />
  36. 36. Succession or Assignment of Rights and Obligations<br />Determine whether one or both of the parties can assign their rights and obligations under the agreement to third parties and to what extent<br />Advisable to require assignee to expressly agree to be bound to the terms of the agreement<br />Ability to assign allows for flexibility in spinning off, mergers, sale of relevant business assets, etc.<br />Assignment to competitors can be a concern<br />36<br />
  37. 37. Bankruptcy<br />Treatment of license agreements provided for in bankruptcy code<br />A license agreement is an asset of a licensee<br />A clause terminating a license upon filing for bankruptcy is not illegal but may not be enforceable; could be helpful if bankruptcy petition is rejected<br />Most licenses are considered “executory contracts” and may be rejected or assigned by bankruptcy trustee<br />Consider requiring notice of acts that may signal impending bankruptcy (e.g., pledging of assets or making late payments) or obtaining a security interest in license<br />37<br />
  38. 38. Abating Infringement by Third Party<br />Nonexclusive licensee may be harmed by a tolerated infringer – absent contract provisions, no right to bring suit<br />Exclusive licensee may bring suit and join licensor<br />Licensor agrees to abate infringement<br />Establish criteria – how much infringement, how much proof of infringement, notice<br />Other conditions – possibly limit to one suit at a time<br />Possible remedies for Licensor’s failure to abate<br />Termination, suspension or reduction of royalties, licensee having right to sue in name of licensor<br />38<br />
  39. 39. Term and Termination<br />Absent specified term it is typically presumed to be for life of patents<br />Termination on “Material Breach” <br />Usually notice and cure provisions<br />Acts considered to be material may be defined<br />Termination without cause – usually only appropriate for nonexclusive licensees<br />Termination for failing to pay minimum annual amounts<br />Termination because of financial problems<br />39<br />
  40. 40. Term and Termination (cont.)<br />Specify effects of termination<br />Accrued royalties, reporting, auditing<br />Disposition of existing products<br />Confidentiality<br />Sublicenses<br />Right to use know-how/trade secrets<br />40<br />
  41. 41. Dispute Resolution<br />Alternative Dispute Resolution – arbitration, mediation<br />Choice of law, specify rules, panel size and qualifications, location, language, time limits, etc.<br />Court proceedings even if ADR is applicable to compel arbitration or appealing an award<br />Jurisdiction, venue, choice of law<br />International choices of law – US courts likely to enforce<br />41<br />
  42. 42. Challenges to Validity of Licensed Patents by Licensee<br />Public 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 validity<br />Cannot enforce a promise not to challenge<br />But may be able to terminate in the event of a challenge<br />MedImmune – 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) <br />42<br />
  43. 43. Other Provisions<br />Patent marking – required for licensor to recover damages; recent case law may result in a trend of increased false marking lawsuits based on expired patents<br />Force majeure – excuses performance prevented by cause outside of control of party<br />Severability – any provision held to be illegal is severed from the agreement so long as it does not go to the heart of the agreement <br />Amendment – usually required to be in writing and agreed to by both parties<br />Waiver – waiving a breach does not waive subsequent breaches<br />Integration – this is the entire agreement and supersedes all other prior agreements or understandings<br />Government approvals – for example, U.S. export control, USDA, etc.<br />43<br />
  44. 44. Conclusion<br />The 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. <br />Therefore, consult an attorney to obtain legal advice for your particular situation.<br />Disclaimer: This presentation is intended for information only and should not be considered legal advice.<br />44<br />