Structuring the Patent License Grant

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Advanced Patent Licensing 2019
Structuring the Patent License Grant
September 13, 2019
Kent Richardson
Partner
Contact Information:
+1 (650) 967-6555
info@richardsonoliver.com
Gratefully acknowledge the work of Burch Harper in producing the original set of slides
for this class

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A Patent License Agreement – You Are Here
Attorney-Client Privileged & Confidential 2
Rambus license to NVIDIA, 2010. https://www.sec.gov/Archives/edgar/data/1045810/000104581010000045/rambuspatentlicense.htm
License
Grant

Subject to the terms of this Agreement and
conditioned upon ABC’s timely receipt of the Payment,
ABC, on behalf of itself and its subsidiaries, hereby grants to
XYZ and its subsidiaries, a license under ABC’s Patents
to make, use, sell, offer for sale, and import Licensed Products
during the term of this Agreement.
Anatomy of a “Simple” Patent License Grant
License
Conditions
Licensor
Licensee
Licensed
Patents
Licensed
Products
Licensed
Activities
License Term

Patent License Grant Impacts Which Parts of the Agreement?
Rambus license to NVIDIA, 2010. https://www.sec.gov/Archives/edgar/data/1045810/000104581010000045/rambuspatentlicense.htm
License
Conditions

Topics Covered for Each Element of the Grant
Definitions of the term
Want licensees/licensors want
How to reach resolution
Practitioners notes

“Licensor” Definition: What the Licensee Wants
°The licensee signatory may seek a license from the licensor signatory and all of the
members of its corporate family (“affiliates”)
°“. . . ABC, on behalf of itself and its affiliates, . . .”
°By doing so, the licensee signatory is attempting to ensure that it will not infringe an
Affiliate’s patents after entering into the license agreement
Parent
(Affiliate)
ABC
(Signatory)
Subsidiary
(Affiliate)
Sibling
(Affiliate)
XYZ
(Licensee)

“Licensor” Definition: What the Licensor Wants
°In turn, the licensor signatory may insist that it cannot encumber the patents of any
future parent and siblings that it may gain via M&A
°It may insist that the license be granted only on behalf of itself and its subsidiaries
Parent
(Affiliate)
Sibling
(Affiliate)
ABC
(Signatory)
Subsidiary
(Affiliate)
XYZ
(Licensee)

“Licensor” Definition: Possible Resolutions
°Typical solutions
°The Licensor includes entities that are affiliates of the licensor signatory as of the
execution date of the agreement
°The Licensor includes subsidiaries of the licensor signatory, and the licensor signatory
warrants that it is the ultimate parent
°Implications
°Provide certainty to both parties
°But may expose the Licensee to infringement accusations by the future parent and
siblings of the licensor signatory

“Licensor” Definition: Practitioner’s Note
°Ideally, each licensor entity should be bound directly as a signatory to the agreement
°If not, the licensor signatory should be obligated to ensure, by contract or by corporate
control, the compliance of all other licensor entities (e.g., bound to terms of license
grant)

“Licensee” Definition: What the Parties Want
°What the Licensee Wants: The licensee signatory may seek a license for itself and all of
its affiliates, including future subsidiaries, parents, and siblings
°What the Licensor Wants: The licensor signatory may be reluctant to forego future
licensing opportunities by licensing currently unaffiliated entities

“Licensee” Definition: Possible Resolution
°Possible resolutions (each based on payment structure):
°A running per unit royalty may naturally scale with the number of licensee entities
°A fixed royalty may be scaled with appropriate adjustments (see Fees and Royalties
below)
°A fixed fee may be scaled with additional payments (see Fees and Royalties below)

“Licensee” Definition: Practitioner’s Note
°Ideally, each licensee entity should be bound directly by the agreement as a signatory
°Otherwise, the licensee signatory should be obligated to ensure, by contract or by
corporate control, the compliance of all other licensee entities (e.g., reporting,
confidentiality)

“Licensed Patents” Definition: What the Parties Want
°What the Licensee Wants: A license under all patents owned or controlled by the
Licensor (“Portfolio License”)
°Provides comfort to Licensee that Licensor is not withholding patents for purpose of
asserting infringement in the future
°What the Licensor Wants: A license under only specifically identified patents.
°Exposes Licensee to potential infringement of patents not on the list

“Licensed Patents” Definition: Possible Resolution
°A license under all patents that are owned or controlled by the Licensor within a
defined period of time (“Capture Period”)
°Patents licensed under separate agreements between Licensor and Licensee may be
carved out of the license

Licensed Activities: What the Licensee Wants
°A license to perform all activities:
°Scope of Possible Licensable Activities. The scope of activities that may be licensed
are dictated by the applicable statutes and case law
°35 USC §271: “makes, uses, offers to sell, . . . sells . . . or imports”
°CAFC: A grant of a right to “make, use, and sell” inherently includes a right to “have
made”
°SCOTUS: “The authorized sale of an article . . . prevents the patent holder from
invoking patent law to control postsale use of the article”

Licensed Activities: What the Licensor Wants
°The Licensor may be willing to grant a license to perform only a subset of possible
activities
°Any rights not granted should be expressly excluded to mitigate the possibility that
the courts may later determine that such excluded rights are inherent
°For example, if Licensor plans to create and maintain an ecosystem of licensees via
privity of contract. (This can be tough)
°“. . . a license to . . . sell Licensed Products solely to other licensees of Licensor . . .”
Licensor
Licensee 1
Licensee 2 Licensee 3
license
agreement
sale of
Licensed
Product

LicensedActivities:ANoteonAuthorizedSalesandPatentExhaustion
°Licensor’s patent rights in a Licensed Product is exhausted upon its first authorized sale
by the Licensee
°As a result:
°In order to mitigate channel conflicts and potential accusations of patent misuse due
to “double-dipping”, the Licensor should grant its licenses and monetize its patents at
a single point in the distribution channel (e.g., component manufacturers, system-
level components, OEMs, distributors, retail companies)
°If Licensor desires to license its patents at multiple points in the distribution channel,
it should have patents claiming separate inventions that are patentably distinct and
that are separately directed at each such point
°Licensing patents at multiple channel points may pose Quanta challenges if the
licensed patents “substantially embody” one another

“Licensed Products” Definition: What the Parties Want
°What the Licensee Wants: The Licensee may want a license to make, sell, . . . any and all products, including:
°Otherwise unlicensed products that it purchases from others
°Products that it makes on behalf of others
°What the Licensor Wants: Neither, probably
°Licensing the sale of purchased, but otherwise unlicensed, products:
°Will, upon their sale by Licensee, exhaust the Licensor’s patent rights in such products
°May incentivize the Licensee to “launder” products by charging unlicensed entities a fee to purchase
and sell back unlicensed products, thus “cleaning” them
°Licensing the making of products on behalf of others:
°May result in the exhaustion of the Licensor’s patent rights in such products
°May incentivize the Licensee to become a patent “foundry” by charging unlicensed entities a fee to
make and sell otherwise unlicensed products

“Licensed Products” Definition: Possible Resolutions
°Limit the scope of Licensed Products to those designed and/or trademarked by
Licensee
°Address Licensee’s concerns about products it resells and products it makes for
others by a covenant-to-sue-last

License Term: Life of Patents
°License terminates upon the expiration of the last to expire of the licensed patents
°If the payments are structured as a running or fixed royalty, a life-of -patents term
will provide Licensor with comfort of a guaranteed long-term revenue stream
°Provides Licensee with comfort that the parties will not need to renegotiate a license
with respect to the licensed patents
°Licensor must carefully select the scope of the Licensed Patents in order to avoid
forfeiting further licensing opportunities with the Licensee

License Term: Term License
°License terminates on a fixed date or after a specified capture period (e.g., five years)
°Cliff or Guillotine License: All licenses terminate upon expiration of the term.
°Opportunity for parties to re-negotiate financial and other terms of license on a
periodic basis
°Requires frequent negotiations for renewals
°Paid-Up License: A subset of licenses survive expiration of the term
°Often combined with a capture period for licensed patents so that licensee does not
receive a perpetual and royalty-free license to all of licensor’s future patents.

License Conditions: What the Parties Want
°What the Licensee Wants: The Licensee may want an unconditional and irrevocable
license
°What the Licensor Wants:
Payment: “. . . expressly conditioned upon Licensee’s timely receipt of the Initial
Payment, …”
Compliance: “Expressly conditioned upon Licensee’s timely compliance with the
terms and conditions of this Agreement, …”

Fees and Royalties: Typical Structures; Fixed Fees
Typical Payment Structures:
Fixed Payments (e.g., one-time payment)
Fixed Royalties (e.g., fixed quarterly payment)
Running Per Unit Royalties
Fixed Payments/Fixed Royalties:
Each party bears the risk of over/under payment due to the potential increase or decrease of projected sales of Licensed
Products
Licensor may prefer a fixed payment as total or partial consideration in order to mitigate the consequences of a
“Medimmune” challenge by the Licensee
Licensor may insist on additional payments for each relevant acquisition made by the Licensee

Fees and Royalties: Per Unit Running Royalties
°In order to avoid future disputes, royalties should be based on sales of proxy products,
not sales of Licensed Products
°Typically calculated as a percentage of ASP of proxy products, where ASP is defined
as gross sales minus Licensee’s costs of selling the proxy product (e.g., usual trade
discounts, taxes, transportation costs, costs of returns)
°Licensor may insist that licensee signatory pays on behalf of entire Licensee (“one
throat to choke”)
°Licensor may also insist on audit rights to verify Licensee’s compliance
°Licensor may insist that internal and other non-arms-length sales be included in
royalties, typically by using arms-length-sales price

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