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Basics Of Licensing IP
Basics Of Licensing IP
Basics Of Licensing IP
Basics Of Licensing IP
Basics Of Licensing IP
Basics Of Licensing IP
Basics Of Licensing IP
Basics Of Licensing IP
Basics Of Licensing IP
Basics Of Licensing IP
Basics Of Licensing IP
Basics Of Licensing IP
Basics Of Licensing IP
Basics Of Licensing IP
Basics Of Licensing IP
Basics Of Licensing IP
Basics Of Licensing IP
Basics Of Licensing IP
Basics Of Licensing IP
Basics Of Licensing IP
Basics Of Licensing IP
Basics Of Licensing IP
Basics Of Licensing IP
Basics Of Licensing IP
Basics Of Licensing IP
Basics Of Licensing IP
Basics Of Licensing IP
Basics Of Licensing IP
Basics Of Licensing IP
Basics Of Licensing IP
Basics Of Licensing IP
Basics Of Licensing IP
Basics Of Licensing IP
Basics Of Licensing IP
Basics Of Licensing IP
Basics Of Licensing IP
Basics Of Licensing IP
Basics Of Licensing IP
Basics Of Licensing IP
Basics Of Licensing IP
Basics Of Licensing IP
Basics Of Licensing IP
Basics Of Licensing IP
Basics Of Licensing IP
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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

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

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