LES World IP Day - Top Licensing Mistakes - Emily Bayton, Lewis Roca Rothgerber LLP


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World Intellectual Property talk by LRR Law Partner Emily Bayton

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  • Welcome to World IP Day. I want to thank everyone for joining me, and especially for LES and Traklight for asking me to speak today. I’m going to spend today talking about some common licensing issues/considerations inherent in every licensing deal involving intellectual property and some commonly overlooked issues.
  • I’ll start with what appears to be the obvious – when licensing your intellectual property you need to consider what assets (IP) you’re licensing. Seems obvious, but perhaps it’s not as obvious as it seems and it’s incredibly important to not only know and understand the entire scope of the intangible assets being licensed, but you have to understand the nuances between the different types of intellectual property being licensed because it has an impact on the deal itself. Let’s talk about some important distinctions:Patent rights – rights are statutory (make, have made, use, sell, offer to sell, import, there are also rights beyond statutory rights, such as to make improvements, practice methods – WHAT rights are you licensing? Beyond that, have you as LICENSOR secured all rights that you need to grant license? Conversely, as a LICENSEE do you have assurances that LICENSOR is giving you all rights you need to do exactly what you need to do, OR is there any obligation on you to secure additional rights before you can move forward. Other important patent considerations including considering that patent rights (like trademark rights) are territorial – U.S. grants rights in U.S., but outside of U.S., separate rights need to be secured. So what is the geographic scope of the grant? You also need to consider if a patent right is being licensed, are there joint inventors – under patent law there is no duty to account, so EACH joint owner has the right to make, use, sell the patent invention, including by licensing, to others without the consent and duty to account profits to the other joint owners. Trademarks – Like patents, rights are territorial, therefore the rights do not extend outside of U.S. unless rights separately obtained. Most jurisdictions outside of U.S. are FIRST TO FILE systems as opposed to FIRST TO USE, so unless you’ve filed and ultimately secure a registration, you do not have rights in a foreign jurisdiction. Also, important in the context of TM licensing is the notion of a NAKED LICENSE – could result in abandonment/unenforceable rights.
  • It may seem straightforward that you need to spell out the scope of the grant, but if not handled with care and forethought, the grant section can result in a license that is more than unsatisfactory to one or both parties. The EXACT grant language should be specified. Grant includes:-Exactly what IP is being licensed (we discussed on the last slide understanding the nature of the IP and exactly what rights of the IP are being licensed).-TYPE of grant –
  • As LICENSOR, do you want LICENSEE to be able to sublicense to third-parties? Perhaps you do in situations where it will increase product distribution or use of IP and could GENERATE MONEY, but carefully consider what sublicense rights you want to grant:OPEN SUBLICENSE – allows licensee to sublicense rights it has been granted by LICENSOR to any third-party., which includes your COMPETITORS. Consider whether you want to retain approval rights over who can obtain a sublicense. Or limit to only parties in privity with licensee because you are comfortable with licensee and want to maintain the relationship through licensee and its SUBSIDIARY, AFFILIATED COMPANIES, etc. Or limit the NUMBER OF sublicenses. ASSIGNMENT NOTES:Absolute prohibition on assignment may not be an effective business solutions. Options:Require consent, which may not be unreasonably withheld or delayed;Require consent, except for assignment to subs or affiliates or purchaser of substantially all of licensee’s business and assets;No consent, except as to certain parties or class of partiesShould reflect realistic need of parties.
  • The next issues we’re going to discuss is Failing to Properly Address Litigation Rights in the license. When we talk about litigation rights, we are referring to who has the right or obligation to sue for infringement of the intellectual property covered by the license. Often you will see this NOT addressed, or not properly fleshed out in an agreement.
  • ROYALTIES are based on any measure tied to the product’s sales. AUDIT AND REPORTING RIGHTS: Rights are incredibly valuable o that it is clear that licensor is being paid due amounts (quarterly, annually, other periods; if licensor receiving consideration for sublicenses, need to build in report and auditing rights for sublicensees – require licensee to provide names/addresses and requirement that sublicense agreement spells out audit rights); what are your inspection rights (during business hours, at specified times, who can audit, who pays for audit – audit to be paid by licensor unless underpayment reaches certain threshold)
  • As Licensee you need assurances through the representations and warranties that the LICENSOR owns everything it purports to own – and has obtained all rights necessary to grant the license granted under the agreement.Validity – you need to determine during the negotiation of the license who is bearing the risk of validity. Competing interests:-LICENSOR wants to limit exposure in cases where it may not know with any level of certainty that licensed rights are valid. -LICENSEE does not want to pay for rights that are invalid. LIMITATIONS can help:Knowledge limitation: LICENSOR has no knowledge of any prior art…that would render the licensed patent invalid or unenforceable. Notice limitation: LICENSOR has received no notice alleging that the licensed IP is invalid. NON-INFRINGEMENT REP: Generally most heavily negotiated rep/warranty, depending on type of IP being licensed. Challenge is to allocate risk in a manner that is realistic and reasonable based on the transaction.-Who’s in the best position to have knowledge of the risk? -Can you limit the risk (jurisdiction? Type of product? Only covers licensed use?)-Does the consideration paid account for assumption of the risk?KNOWLEDGE LIMITATION (To The best of Licensor’s knowledge…) TERRITORY LIMITAITON
  • LES World IP Day - Top Licensing Mistakes - Emily Bayton, Lewis Roca Rothgerber LLP

    1. 1. Common Licensing Mistakes Emily Bayton World IP Day LES Arizona Chapter Monday, April 28, 2014
    2. 2. Failing to Consider the Intangible Assets Being Licensed Type of IP Considerations Patents, patent applications and know-how Licensee may need rights to other patents to practice the invention; rights are territorial; joint inventor considerations – no duty to account; what about any improvements made and/or patented during the term of the license? Trademarks Rights are territorial; quality control considerations Copyrights/Software Work for hire trap (employee-created v. contractor-created); joint authors – duty to account by joint authors; what rights are being licensed – copy, distribute, perform, display, create derivative works or all of the above) Rights of Publicity State law governs; what rights are being licensed – name, image, likeness, voice; post mortem rights Trade Secrets State law governs; duty to implement reasonable measures to protect secrecy of trade secret; confidentiality provisions
    3. 3. Failing to Define the Grant • Parties – Who’s allowed to exercise rights? • Subject matter – What IP is being licensed? • Rights – What is licensee allowed to do with IP? • Territory – Where can rights be exercised? • Exclusivity – Are rights, exclusive, sole, non- exclusive or a hybrid? • Term – How long can rights be exercised? • Restrictions – Are rights assignment/sublicensable? Restrictions on licensor?
    4. 4. Failing to Define the Grant (cont.) • Problems with the license grant can include: – Failure to spell out terms of grant – Improper grant language – Over-granting/under-granting
    5. 5. Failing to Define the Grant Exclusivity can be broken down by different categories: – Territory (state, regional or country basis) – Product type – Distribution channels (e.g., exclusivity for wholesale sales or distributions via the Internet; certain stores or customers) Type of Grant Description Exclusive Exclusive license grants the rights to the licensee to the exclusion of all others, including the licensor; an exclusive licensee has the contractual right to exclude all others from its particular area of exclusivity Sole Sole license grants rights only to licensee, but NOT to the exclusion of the licensor; sole license prevents the licensor from granting other licenses but do not prevent licensor itself from using the licensed rights Non-exclusive Non-exclusive license grants rights to the licensee, but does not preclude licensor from granting similar licenses to others. Hybrid Exclusive for a period of X years; non-exclusive thereafter
    6. 6. Failing to Define the Grant (cont.) • Other Considerations: – Is the grant sublicensable? • Open sublicense rights; limited to only parties in privity with licensee; only affiliates of the licensee; only a specified number of third parties; only parties preapproved by the licensor • Essential protections for licensor if grant is sublicensable: – Notice of sublicense grant – Specify terms that must be included in sublicense – or include form sublicense agreement in license and language that sublicense must be “substantially the same terms and in the same form as attached form sublicense agreement” – Ability to audit sublicensee – Notice if licensee becomes aware that sublicense has breached sublicense agreement – Right to enforce sublicense – Is the license assignable? • Typical presumption that a contract may be assigned by either party unless there is an express prohibition on assignment • If prohibiting assignment, does it cover all situations (asset transfer, reorganization, merger, transfer by operation of law)? • Particularly important for start ups – need to consider business need for having the right and ability to assign the license.
    7. 7. Failing to Define the Grant (cont.) • Failure to consider future expansion of use (different product lines; different social media outlets) • Licensee may wish to seek to address future expansion of the license through the following: •Requires the licensor to give the licensee the opportunity to match any proposed terms that the licensor may receive from a third party for licensing the licensed trademarks for the specified uses. Right of First Refusal •Requires the licensor to negotiate in good faith with the licensee before offering to license the licensed trademarks to third parties for the specified use. The licensor then typically may not offer to third parties more favorable terms than those it offered to the licensee. Right of First Negotiation
    8. 8. Failing to Address Enforcement and Litigation Rights • Enforcement/Litigation Rights – IP rights can be diminished or lost by failure to enforce rights against third-party infringers. – Licensor typically retains enforcement rights in licensed IP, it’s not always the case and rights and obligations should be spelled out in license. • Key Questions: – If IP is infringed by a third party, how such infringement will be handled (who will notify; who will file suit; who is in charge of suit; costs borne by licensor or licensee or divided)? – If there is a recovery for infringement, how that will be divided between licensor and licensee? – Right to settle – by licensor or licensee; by licensor only with consent of licensee; by licensee only with consent of licensor?
    9. 9. Failing to Address Termination Rights and Restrictions • Termination rights: What if the license isn’t working? Do you have an out? • Potential Termination triggers: – By Licensor (at specified time; upon breach (right to cure v. no right to cure); failing to meet minimal sales; at any time; licensee challenges the IP or licensor’s ownership of the IP; other) – By Licensee (at any time upon X days of written notice; at a specified time; only upon payment of penalty of X dollars; upon breach (right to cure v. no right to cure) – General events triggering termination (upon expiration of IP; upon a finding of invalidity of IP (by court, by PTO); upon bankruptcy of either party)
    10. 10. Failing to Address Post-Termination Rights and Restrictions • Parties should address: – Process for licensee to stop or phase out use of licensed rights; removal of trademarks and other licensed IP – Allocation of IP rights (revert back to licensor; does licensee retain any rights?) – Phase out of use – Return of confidential information – Treatment of inventory or materials bearing IP (return to licensor; destruction within X days) – Cancellation of any licenses recorded in foreign jurisdictions • Survival: – Important that some rights and obligations continue beyond termination of license (e.g., payment of remaining royalties, indemnification and limitations of liability, confidentiality obligation, restrictive or non-competition covenants) • Consider downstream effect of termination – Do sublicenses terminate?
    11. 11. Failing to Consider Ways to Structure the Deal • As Licensor, what do you want out the license? (revenue, access to data, build brand by entering new market or territory where otherwise don’t have resources, exposure) • As Licensee, what do you need from the licensee? (access to certain technology, brand recognition) • Ways to structure the deal: – Royalty free – Royalty (percentage of profits; of gross sales; of net sales; specific amount; per unit price; others) – Single lump sum payment – Milestone payments (what they are and amount owed) • Other considerations for the deal structure: – Minimum payments for licensee – Tax obligations – Report and audit rights
    12. 12. Failing to Impose Duty of Diligence on Licensee • Diligence is concept that the exclusive licensee will do all it can to operate under the license so that the licensor reaps the monetary benefit of the licensee. If this is NOT addressed, the licensee can sit on technology and preclude others from commercializing the IP. • Diligence is usually covered by license in the ABSENCE of minimum royalty requirement. – Best efforts to… – Reasonable best efforts to… – Agreement to produce or sell certain number of units – Agreement to invest a specified amount – Not to refuse reasonable requests for sublicense • What are penalties for lack of diligence – License converted to nonexclusive – Termination
    13. 13. Failing to Include Proper Representatives and Warranties • Common mistakes: – Failing to include proper reps and warranties. – Relying on boiler plate provisions without consideration for deal and IP being licensed. – Taking an unreasonable position on reps and warranties and allocation of risk.
    14. 14. Failing to Include Proper Representatives and Warranties • Licensor owns the IP being licensed (or has obtained all rights necessary) to grant the licenses granted in the license. Ownership • The IP being licensed is valid and enforceable. Validity • The IP does not infringement on any third-party rights, and licensee’s use as provided for under the agreement will not infringe on the rights of any third party. Non-infringement
    15. 15. Failing to Include Proper Representatives and Warranties • Licensor guarantees factual accuracy of any information it provides regarding the IP (can be important in copyright context). Factual Accuracy • Parties have the authority and ability to enter into the license and perform the obligations under the license. Authority
    16. 16. Failing to Address License Recordation Obligations • Certain jurisdictions have mandatory recording requirements for IP licenses. • In other jurisdictions, recording is optional, but provides licensor with additional benefits: – Ability to transfer royalties out of that country. – Enforce the license against third parties. – Claim costs in proceedings for infringement that occurred before the license was registered. • Build recordation obligation in license discussing: – Who bears burden to record? – Licensee’s obligations (i.e., assist in providing licensor with information necessary to record license).