April 2011 - Business Law & Order - Mark G. Malven


Published on

This is the much anticipated sequel to SPARK’s smash hit IP–1 session last Fall. In this installment, we have assembled a star-studded cast of IP experts to discuss the ins and outs of licensing intellectual property (IP), as well as a “best practices” approach to avoiding the dreaded “cease & desist” letter from a competitor. Matt Bell from the UofM Tech Transfer Office will talk about the many opportunities that exist for entrepreneurs to acquire cutting edge technology from universities, and to engage university researchers to solve specific technical problems. Attorney Mark G. Malven will cover IP licensing for entrepreneurs. Attorney Richard (Rick) Hoffmann will share ways that startups and emerging businesses can reduce the risk of infringing third-party IP rights.

Published in: Technology, Business
  • Be the first to comment

April 2011 - Business Law & Order - Mark G. Malven

  1. 1. IP Licensing Issues for Small and Emerging Businesses Ann Arbor Spark: Business Law & Order Series April 18, 2011 Mark G. Malven California | Illinois | Michigan | Texas | Washington, D.C. www.dykema.com
  2. 2. Agenda Overview of IP licensing Common, avoidable mistakes • Financial matters • Legal terms 2
  3. 3. Intellectual Property Licensing A grant of certain rights from one party (the licensor) to another (the licensee) IP rights also critical in joint ventures and alliances Be rigorous in your approach • Watch out for sloppy thinking / language • Get good counsel, and do it early • Overarching goals are to maximize value and to prevent surprises 3
  4. 4.  Need to understand the differences between assignments and licenses Labels not determinative Assignment • Must be in writing • Entire right, title and interest (or undivided part of same for JO) • Cannot be done by Field of Use • Limitations on recipient can be problematic – OK: License back – Not OK: enforcement rights, step in rights, usage or transfer limitations 4
  5. 5.  Exclusive License • Express or implied promise that others will be excluded – good to make explicit – i.e. statement licensor will not license 3rd parties • Can be limited by geography, field of use, time • Exclusive as to licensor? – Silence is somewhat ambiguous – Need to be explicit • Critical Tip for Licensor: Must have measurable performance requirements for exclusive licensees – “commercially reasonable efforts” not enough! 5
  6. 6.  Non-Exclusive License • Freedom from infringement suit • Personal to licensee – non-transferable unless clearly stated otherwise • Encumbers IP Covenant Not to Sue • Similar to above, but • Personal from “licensor” – Does not encumber IP – Need to consider transfer issues 6
  7. 7. Technology vs. IntellectualProperty Not the same thing Technology • Tangibles and intangibles = Stuff Intellectual Property = Legal Rights • 4 kinds - patents, copyrights, trade secrets and trademarks • Registrations of, applications for, and priority rights based on the foregoing 7
  8. 8.  Technology License vs. IP License? Pure Technology License – appropriate for a finished product • “I license you to use my equipment” • Includes an implied license to use the necessary IP of licensor Pure IP License – appropriate if no tech transfer • “I license you to make and sell widgets covered by U.S. Patent 1,234,567” Often you will have a combination 8
  9. 9.  Agreements need to be specific • What is licensed (IP type, technology, and what rights) – Patent: make, use, sell, offer for sale, import – Copyright: copy, create derivative works, distribute, etc. – Trade Secret: use – Trademark: use • Ownership/exclusivity • Licensed Field • Territory • Transferability • License Term 9
  10. 10. Avoidable Mistake #1 – PayAttention to the Royalty Base! “Net Sales” vs. Net Profit vs. Fixed $ Per Unit Net Profit generally a bad idea – harder to determine, and subject to disputes Parties frequently obsess over the royalty rate and pay too little attention to the size of the royalty base. Even a low royalty percentage, multiplied against a large royalty base, can still be a lot of $$ 10
  11. 11.  The smart licensor (and/or its lawyer) will have an agreement that addresses: • Bundling/package sales • Payments in kind • Related party sales • Promotional giveaways • Loss leaders • Demos/samples/internal use Possible ways to address the above: • Fixed $ per unit • Pro rata allocations, based on list prices • Royalty as % of total price • % Royalty with floor $ per unit 11
  12. 12. Avoidable Mistake #2 – OtherPayment Problems  Currency/Tax Issues  Need to specify recordkeeping and reporting requirements: • Quantities made and sold • Returns • Bundling/package sales • Payments in kind • Related party sales • Promotional giveaways • [See Royalty issues above] • Reports should be certified 12
  13. 13.  Audit rights – think these through Licensors: • Don’t forget interest on late or non- payment • Escalating consequences for repeated Licensee failures to pay MFN: Most Favored Licensee clauses • Generally a bad idea • Overbroad = trouble • Carefully circumscribe – field/ territory/notice and timeframe • Limit to substantially similar terms • Special circumstances – affiliates, settlements, cross-licenses 13
  14. 14. Avoidable Mistake #3 – JointOwnership of Developed IP A common “solution” that is, in fact, a “problem” Leads to significant unintended consequences How created (under US law) • Patent: any contributor to a patent claim owns a pro rata undivided interest in whole patent – even a 1% contributor will be a joint owner with full rights to use/grant licenses • Copyright: contributor to “joint work” • By agreement 14
  15. 15. THE PROBLEMS: What did the parties really intend? • Actions to maintain value of the IP? • Who will file applications, sue infringers? • Who decides whether to keep as trade secrets or publish pursuant to a patent application? – Trade secret value generally destroyed by disclosure Different results for (a) different IP types, and (b) different countries • Joint owners in different countries have different expectations 15
  16. 16. Example Problem #1: U.S. patent law Exploitation (which includes granting non- exclusive licenses): • Each joint owner can exploit without permission of others • No duty to share proceeds • Problem: race to offer best deal Enforcement: • All owners must join suit • Problem: race to agree not to sue (e.g. grant a license) 16
  17. 17.  Bottom Line: Each joint owner at the mercy of the others because easy to license (and reap the proceeds), but hard to sue infringers to protect the IP 17
  18. 18. Example problem #2: Differing treatment underU.S. law for patents and copyrights Each joint owner can fully exploit (including the right to grant non-exclusive licenses): • Patents: without permission or sharing of the proceeds • Copyrights: without permission, but with a duty to share proceeds How do you treat products that have both patent and copyright, such as software? 18
  19. 19. Example #3: Differing treatment among U.S.,U.K and Japan Patents – Right to Exploit By Co-owner By License to 3rd PartyU.K. No Permission Need Permission [Similar to U.S.] [Different from U.S.]Japan No Permission Need Permission [Similar to U.S.] [Different from U.S.] Copyrights – Right to Exploit By Co-owner By License to 3rd PartyU.K. Need Permission Need Permission [Different from U.S.] [Different from U.S.]Japan Need Permission, cannot Need Permission, cannot be unreasonably withheld be unreasonably withheld [Middle ground between [Middle ground between U.S. and U.K.] U.S. and U.K.] 19
  20. 20. Alternatives to Joint Ownership: Parties create a separate JV entity that owns the developed IP • Entity licenses parties and 3d parties • Management/ownership structures would govern • Good for complicated deals Ownership allocated to one party and licensed to other • Good for complicated deals • Can be cleanest (i.e. best) solution 20
  21. 21.  Allocate ownership item by item in accordance with specified criteria • Need fair/ unambiguous criteria Address structural issues early! 21
  22. 22. Avoidable Mistake #4 –Prosecution Issues Licenses frequently involve technology developments at a time when patents have not yet issued Common to include rights to applications and patents that issue from them Unless/until an application becomes a patent - no legal right of exclusion For pending/future applications • Who picks the countries and controls prosecution? • Does the other party participate in the process? • Who pays for it? • Step-in rights? 22
  23. 23. Avoidable Mistake #5 –Enforcement Issues  Generally 2 big issues • Control • Standing 23
  24. 24.  Control – often overlooked, or have inconsistent enforcement provisions • Who decides whether or not to sue? (e.g., a first shot, chance to step in?) • Who pays for the litigation? • If licensee pays, can it recoup/offset costs from royalty payments? • If licensee wins, who gets the $$$? • Are royalties paid on the award? • If licensee sues, can it name licensor? Who pays licensors costs? • If licensee sues, does licensor participate in litigation? • Must licensor consent to a settlement? 24
  25. 25.  Standing to sue – follows grant type • Patents – generally: – patentee (35 USC 281), – successors in title (35 USC 100(d)), – exclusive licensees (Ortho) • Exclusive licensee – needs “all substantial rights”; commonly joins patent owner • Non-exclusive – no standing to sue • Copyright – less joinder problems – need an exclusive right (any) 25
  26. 26. Avoidable Mistake #6 – Changeof Control Need to plan for mergers, acquisitions, etc. Non-exclusive patent and copyright licenses are by default non-transferable (under federal common law) • Contrast with generally free transferability of non-IP agreements • Very different treatment of assignability issues in merger context Exclusive licenses – some variation in the courts 26
  27. 27. Avoidable Mistake #7 – BankruptcyMatters Basic concepts • Ipso facto clauses are unenforceable because trustee can reject or assume any executory contract • Reject – terminate license – Usually when licensor bankrupt – Done to increase the value of the IP asset prior to sale • Assume – keep or assign – Usually when licensee bankrupt – May be transferred to 3d party for value 27
  28. 28.  Exception protecting licensors: • Trustee may not assume/assign when non-bankruptcy law excuses accepting another’s performance • Non-exclusive patent and copyright licenses are personal and therefore licensor need not accept performance from other than original licensee (Courts are split re exclusive licenses) • Unless agreement indicates parties clearly intended to permit assignment Licensor: draft to emphasize personal nature (and prevent assignment by licensee) Licensee: generally wants to permit assignment 28
  29. 29.  Section 365(n) of U.S. Bankruptcy Code (An exception protecting licensees) • If trustee terminates, licensee has choice of: – Treating as breach and seeking damages – Continuing to use (existing) IP and continuing to pay royalties Important limitations re Section 365(n) • Does not apply to trademarks • Does not apply to non-U.S. IP • Licensee will not have right to support, future developments, etc. 29
  30. 30. Thank You (Speaker biography follows) 30
  31. 31. Speaker Biography - Mark G. Malvenwww.dykema.com/bio/markmalven.htm Mr. Malven is the Leader of our Technology Transactions Practice and is known for his skill in the negotiation of technology transactions and the representation of technology-based businesses. He has many years experience acting as the outside general counsel and trusted strategic advisor for organizations in a variety of industries, with a particular focus on information technology, biotechnology, entertainment and manufacturing. He serves as Chair of the Information Technology Law Section of the State Bar of Michigan and is recognized as a Michigan Super Lawyer by the publishers of Law & Politics. He has handled hundreds of strategic technology transactions involving development, consulting, sponsored university research, manufacturing, licensing, distribution, value-added reseller, private-label, content licensing, e-commerce, acquisition, and joint venture relationships. Mr. Malven was one of the primary negotiators for two of the largest outsourcing transactions of their kind ever undertaken, involving billions of dollars in services. Mr. Malvens business and finance law experience includes representing both businesses and investors in enterprise formation, venture capital and other private financing, public financing, acquisitions and divestitures, and strategic alliances. Mr. Malven also has first-hand experience as an entrepreneur. He served as Vice President of Business Development and General Counsel for a dotcom startup and subsequently founded and managed his own law firm. He has guided emerging technology and Internet companies through the early stages of business plan creation, multiple rounds of venture and other funding, customer acquisition, joint venture and partnering arrangements. Mr. Malven was an engineer at Chrysler Motors before attending law school and is also a licensed patent attorney. 31
  32. 32. Representative projects Mr. Malven has handled include: • One of two lead negotiators for one of the largest-ever outsourcing relationships, on behalf of a large multinational, that will involve more than $10 billion in revenue over the course of the relationship. • One of three lead negotiators for the $1.2 billion, "whole of government" IT outsourcing to be done by a state government. This effort was the first of its kind. Leader of the teams responsible for development and negotiation of the Statement of Work (the detailed description of the services and deliverables to be provided) and Service Levels (the specific performance requirements), among others. • Represented a BPO pioneer in creating the commercial agreements for its outsourced document processing, print-and-mail and data archiving services. • Represented customers in BPO sourcing transactions for human resources, finance and accounting, customer service, call center, online learning, and other business processes. • Negotiated a joint venture/licensing arrangement with a major Tier 1 Supplier for the development and sale of advanced automotive components. Sales of several billion dollars are expected over the course of the relationship. • Negotiated agreements to provide National Health Portal for Government of Singapore. • Prepared comprehensive domain name strategy for large multinational company with thousands of registered domains. • Negotiated substantial sponsored research relationships between technology-based companies and leading universities. • Represented large companies and government entities in multi-million dollar acquisitions of IT systems and/or services. • Represented companies and investors in venture capital and other private equity transactions ranging in size from $500k to $15 million. • Represented buyers and sellers of businesses in a variety of industries, with purchase prices ranging from $400k to $100 million. • Represented commercial lenders in secured loan transactions ranging in amount from $5 million to $100 million. • Key member of team that took Gustafson v. Alloyd, a case brought under the Securities Act of 1933, to a 5-4 victory in the United States Supreme Court. • Invented a patentable structure that significantly increased the duration of an automobiles deceleration pulse, thereby improving crashworthiness. 32