Critical Mistakes to Avoid in
Intellectual Property Licensing
November 19, 2013
Joshua Rawson
Thomas Rayski
© 2013 Dechert LLP
Failing To Secure All Necessary Patent
Rights in the License Grant
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Nov. 19, 2013
Critical Mistakes to Avoid in Intellectual Property Licensing
All of the Rights
• Patent License
– Statutory rights: make, have made, use, sell, offer to
sell, import
– Other: have sold, export, practice methods, make
improvements
• Copyright license
• Statutory rights: reproduce, make derivative works, distribute,
display, perform
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Critical Mistakes to Avoid in Intellectual Property Licensing
Effect of Failing to Specify Rights
•
•
Have made
–
Have made rights are inherent in a grant of a nonexclusive license to make in the
absence of manifest contrary intent. CoreBrace v Star
–
If Licensor wants to exclude have made, must do so expressly
–
Sublicense rights and have made rights are different
Sell
–
•
Use
–
4
Probably includes have sold; does not include right to make; unclear whether includes
right to offer for sale
Meaning highly case specific. Some general principles:
Nov. 19, 2013
•
More than mere possession
•
Not promotional activities (e.g. display device for promotional purposes)
•
Right to make or sell may imply certain uses necessary for those rights
•
Use right may be needed for demonstration or testing of a device and for research and development
Critical Mistakes to Avoid in Intellectual Property Licensing
The Everlasting and
Ever-expanding License Grant
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Nov. 19, 2013
Critical Mistakes to Avoid in Intellectual Property Licensing
Scope of the License Grant
During the Term, LICENSOR for itself and its Associated Companies,
grants to LICENSEE and its Associated Companies, non-exclusive,
world-wide licenses under all patents and patent applications owned
or controlled by LICENSOR and its Associated Companies during the
Term, to make, use and sell and distribute Licensed Products covered
by such patents and patent applications, and to practice any method
claimed in said patents and patent applications.
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•
Term: life of the Licensed Patents
•
Licensed Patents: all present and future patents in the specified field
•
Associated Companies includes all parents, subsidiaries and affiliates
•
License carried declining royalty for 10 years, thereafter royalty free
•
Under mirror cross license provision, any patents relevant to the field that
LICENSEE or its affiliates might obtain in the future were licensed to LICENSOR
and its affiliates
Nov. 19, 2013
Critical Mistakes to Avoid in Intellectual Property Licensing
Practice Pointers: Scope of Grant
• Affiliates
– Consider both licensor’s and licensee’s
– After-acquired affiliates
– Divested affiliates
• Licensed patents
– Temporal limitations
– After-acquired patents
– Divested patents
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Critical Mistakes to Avoid in Intellectual Property Licensing
Licensee Fails to Secure Adequate
Rights to Enforce IP Against Third
Party Infringers
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Critical Mistakes to Avoid in Intellectual Property Licensing
Why Be Concerned About Standing
• A concern for both licensor and licensee
• What is at stake
– Loss of ownership
– Dismissal of patent action for lack of standing; rule is
that lack of standing at commencement of suit cannot
be cured
– Loss of ability to claim lost profits or show irreparable
harm for an injunction
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Nov. 19, 2013
Critical Mistakes to Avoid in Intellectual Property Licensing
Hierarchy of Rights for Patent Standing
Patentee/
Assignee
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Exclusive Licensee
WITH
“All Substantial
Rights”
Co-Owners
Exclusive Licensee
WITHOUT
“All Substantial
Rights”
Constitutional
standing to sue
in its own name
Constitutional
standing to sue
in its own name
Single co-owner
lacks
constitutional
standing to sue
Constitutional
standing to
claim damages
but cannot sue
alone
Must join
exclusive licensee
with ASR to
satisfy prudential
standing
No requirement
to join patentee
Both owners must
join suit
Must join patentee to
satisfy prudential
standing
Nov. 19, 2013
Critical Mistakes to Avoid in Intellectual Property Licensing
Non-Exclusive
Licensee
NO Constitutional
standing to sue
No right to sue even
if patentee joins suit
Exclusive Licensee Lacks Standing
• Exclusive licensee without all substantial rights
– Court assesses total bundle of rights
– Most critical rights: exclusive rights to make/use/sell; right to
enforce and right to grant licenses
• Examples of Exclusive Licensees without ASR
– HTC v Apple
– Exclusive licensee for limited field. Assymetrx
– Licensee granted exclusive license, but at any time licensor had
right to convert license to non-exclusive. Pfizer v Teva
– Patentee holds first right to sue; or holds secondary right to sue
and can prevent exclusive licensee from granting license
• Solution in many cases: obligate licensor to join suit
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Nov. 19, 2013
Critical Mistakes to Avoid in Intellectual Property Licensing
No Party Has Standing to Sue
• Licensee is granted exclusive rights to use but no
rights to enforce; licensor (or another licensee)
holds exclusive rights to enforce but no rights to
use. Morrow; Primatek
• Patentee grants to licensee the “sole and
exclusive right, exclusive even as to the patentee”
to enforce patent against Company Fairchild v
Power Integrations
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Nov. 19, 2013
Critical Mistakes to Avoid in Intellectual Property Licensing
No Party Has Right to Collect Lost Profits
Damages / Obtain Injunctive Relief
• Under inter-affiliate license agreement, operating
affiliate that earns profits was granted a non-exclusive
license -- although all affiliates are joined as plaintiffs,
no party has standing to claim lost profits. PolyAmerica v GSE; Mars v Coin Acceptors
• Operating affiliate has no express license - court infers
it is a non-exclusive licensee. Spine Solutions v
Medtronic
• Patentee does not sell product; exclusive licensee
does not join suit; patentee has no standing to seek
injunctive relief. Voda v Cordis
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Nov. 19, 2013
Critical Mistakes to Avoid in Intellectual Property Licensing
License Exhausts all IP Rights
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Nov. 19, 2013
Critical Mistakes to Avoid in Intellectual Property Licensing
Exhaustion of Patent Rights
• Basic principle: authorized unconditional sale of product exhausts
patents rights embodied in product
– Sale by authorized licensee also exhausts the patent
• Recent jurisprudence tending to broaden scope of exhaustion /
implied license
– Patented methods can be exhausted
– Express reservations re patents practiced by downstream customers not
sufficient to prevent exhaustion. Quanta v. LG Electronics
– Covenant not to sue treated like license for purposes of exhaustion
– Despite express reservation, licensee has implied license to licensor’s
later-issued patents that are necessary to practice licensed patents,
including continuation and reissues. Transcore v. ETC; Intel v.
Negotiated Data Solutions
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Nov. 19, 2013
Critical Mistakes to Avoid in Intellectual Property Licensing
Exhaustion Challenges
• Unresolved Issues
– Does license grant which encompasses indirect infringement
exhaust patent?
– Are there any contractual approaches that can limit
downstream exhaustion?
– Can label licenses and post-sale restrictions be used to
limit exhaustion?
– Does sale of product ex-U.S. exhaust U.S. patent rights?
• Current trends
– Thinly-sliced licensing arrangements, with upstream and
downstream royalties
– Covenant to sue last
– Increased focus on bailments
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Nov. 19, 2013
Critical Mistakes to Avoid in Intellectual Property Licensing
Limiting Transfer by Licensee of an
IP License
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Nov. 19, 2013
Critical Mistakes to Avoid in Intellectual Property Licensing
Goals of Parties
• Licensee - wants license to be broad enough to
allow growth of business and future corporate
transactions
• Licensor – Limit third parties / competitors from gaining rights to
licensed IP
– Royalty arrangement may be suitable for current
licensee, but insufficient for future acquirer
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Nov. 19, 2013
Critical Mistakes to Avoid in Intellectual Property Licensing
Sample Anti-Assignment Clauses
CASE 1
Licensor hereby grants to Licensee a non-exclusive and
nontransferable license . . .
CASE 2
Neither this Agreement nor any of the rights, interests or
obligations under this Agreement shall be assigned, in whole
or in part, by operation of law or otherwise by any of the
parties without the prior written consent of the other parties . . .
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Nov. 19, 2013
Critical Mistakes to Avoid in Intellectual Property Licensing
Rules of Construction For
IP Agreements
• Typical presumption that a contract may be assigned by either
party unless there is an express prohibition on assignment;
therefore courts tend in general to read anti-assignment clauses
narrowly
• For IP licenses:
– Per Federal Circuit, assignment of IP license is a federal law issue,
although construction of the words of the contract may be governed
by state law
– Courts apply presumption that IP license is not-assignable absent
express intent to the contrary; Unarco v. Kelley (patent license); SQL
v. Oracle (copyright license)
– Court may read anti-assignment clause relatively more broadly
– Court may construe anti-assignment intent where it finds adverse
impact to licensor (e.g., transfer of IP to competitor)
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Nov. 19, 2013
Critical Mistakes to Avoid in Intellectual Property Licensing
Drafting the Anti-Assignment Clause
• Does prohibition on assignment cover all scenarios?
– Asset transfer
– Reorganization
– Forward merger or reverse triangular merger
– Transfer by operation of law
– Stock sale
• Courts are divided; recommendations:
– Need for clarity; specify whether particular situations covered or
excluded
– Prohibition on assignment by operation of law, precludes mergers?
– Opt for change of control provision
– Insure that granting clause has consistent language
• “non-assignable” or “non-transferable”
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Nov. 19, 2013
Critical Mistakes to Avoid in Intellectual Property Licensing
Drafting the Anti-Assignment Clause
• Critical issue: right to assign versus authority to
assign:
– include statement that assignment in violation of
provision is null and void
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Nov. 19, 2013
Critical Mistakes to Avoid in Intellectual Property Licensing
Transfer by Licensor
• Transfer of license agreement
– Silence is not presumed to mean that licensor will be
precluded from assigning
– Licensor should resist mutuality
• Transfer of IP
– Typical rules is that assignee of IP will take subject to any preexisting licenses
• But is assignee bound by all terms of the agreement? (e.g., support,
enforcement, arbitration clause)
– If a “covenant not to sue” is granted instead of license, include
provision requiring an assignee of the subject IP takes subject
to the covenant; otherwise, risk that the assignee will not be
restricted from suing
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Nov. 19, 2013
Critical Mistakes to Avoid in Intellectual Property Licensing
Addressing Treatment of
Sublicensee Post-term
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Nov. 19, 2013
Critical Mistakes to Avoid in Intellectual Property Licensing
Granting Sublicense Rights
• If right to sublicense is not expressly granted,
probably not implied in a non-exclusive license but
not certain; even more unclear whether this right
is to be implied in an exclusive license
• Differ from have made rights – extension of
licensee’s grant; therefore a prohibition on
sublicensing should not be read as a prohibition
on have made rights. Cyrix v Intel
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Nov. 19, 2013
Critical Mistakes to Avoid in Intellectual Property Licensing
Source of Potential Risks
• Essential protections for a Licensor of IP
– Notice of sublicense grant
– “Substantially the same terms” is too vague, specify important terms to
be included
– Ability to audit
– Licensee remains responsible - even if sublicense is terminated?
– Notice if sublicensee breaches
– Right to enforce sublicense: assign or third party beneficiary
• Termination of sublicense when license terminates
– Sublicensees in certain foreign jurisdictions may not be terminated even
if the head license is terminated
– A licensee will want survival of sublicense if head license terminates
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Nov. 19, 2013
Critical Mistakes to Avoid in Intellectual Property Licensing
Failing to Adequately Address
Effect of Termination
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Nov. 19, 2013
Critical Mistakes to Avoid in Intellectual Property Licensing
Post-Termination Rights
and Restrictions
• Different reasons for termination may merit differing treatment
• Parties should agree to at least the following:
– Orderly process for cessation of license rights; removal of trademarks
– Allocation of IP rights
– Continuing need for license to background IP?
– Use of IP during wind-down/transition
– Return/retaining confidential information
– Treatment of inventory
• Avoid agreeing to restrictions that put a party in a worse position
than third parties
– e.g., a clause providing that a party cannot sell any products that were
included in the terminated license
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Nov. 19, 2013
Critical Mistakes to Avoid in Intellectual Property Licensing
Post-Termination Rights and Restrictions
•
Different reasons for termination may merit differing treatment
•
Parties should agree to at least the following:
•
•
Orderly process for cessation of license rights; removal of
trademarks
•
Allocation of IP rights
•
Continuing need for license to background IP?
•
Use of IP during wind-down/transition
•
Return/retaining confidential information
•
Treatment of inventory
Avoid agreeing to restrictions that put a party in a worse position than
third parties
•
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Nov. 19, 2013
e.g., a clause providing that a party cannot sell any products that
were included in the terminated license
Critical Mistakes to Avoid in Intellectual Property Licensing
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Nov. 19, 2013
Critical Mistakes to Avoid in Intellectual Property Licensing