Overview
Patent licenses are one of the primary tools for commercializing patent rights. When well drafted, a license agreement can be the source of substantial income for the licensor and tremendous business opportunity for the licensee. When poorly drafted, it can be the source of significant confusion and angst.
Treatises have been written about patent licensing, and these few pages cannot begin to address all of the issues and scenarios that a company may encounter during the licensing process. This QuickCounsel touches on those issues that are fundamental to most patent licenses and should at least be considered in the context of a patent license negotiation.
The Grant Clause
The grant clause is the keystone of any patent license. It outlines precisely what rights the licensor is granting to the licensee under the agreement and, if well drafted, also clarifies which rights are not being granted.
The rights granted under the patent statutes are the rights to exclude others from "making," "using," "offering for sale," "selling" and "importing" the patented invention. See 35 U.S.C. §154(1). Note that the patentee's right is a negative one - the right to exclude others from participating in those activities.
The "have made" right, which refers to a licensee's right to engage a third party to manufacture a licensed product on the licensee's behalf, is not one of the exclusionary rights enumerated in the patent statute. However, the Federal Circuit recently confirmed that, unless specifically stated otherwise in the grant clause, the right to "make, use and sell" a licensed product also includes the implied right to have those licensed products made by a third party. See Corebrace LLC v. Star Seismic LLC, Case No. 2008-1502 (Fed. Cir. 2009).
A grant clause must be a "present" one. The concept of a "present" grant is fairly simple - grant the rights now, don't promise or agree to grant them at some point in the future. In practical terms, this means a license should contain present, in the moment, grant language. A combination of the two is okay (e.g., "Licensor agrees to grant and hereby does grant"), but simply a promise to grant a license - with nothing further - is not sufficient.
Exclusivity
The broadest type of exclusive license grants a licensee the right to make, use, sell, offer to sell, and import the licensed product, or utilize the licensed process, in all relevant territories in all fields of use. This type of all-encompassing exclusive license is akin to an assignment.
There are variations on the all-encompassing exclusive that are still considered exclusive licenses, such a limiting to a particular field of use or a particular geographic region. When drafting an exclusive license, it is important to clarify the exact nature of the exclusivity.
A license can also be "co-exclusive" between the patentee and licensee, wherein the patentee grants the licensee exclusive rights with respect to everyone except the patentee. The grant clause should specify whether the license is exclusive to the licensee, or whether the patentee and the licensee will be in a co-exclusive relationship. The phrases "except as to licensor" and "even as to licensor" can be inserted into the grant clause to clarify the patentee's rights.
As an international practice tip, countries outside the US tend to be less receptive to limited exclusive licenses than the United States. Given the differing viewpoints among countries, an international patent license agreement should be reviewed by counsel in the primary jurisdictions in which that agreement will be effective, so that any potential land mines can be detected and corrected before the agreement is signed.
A non-exclusive license is a right granted to more than one licensee to practice a particular invention. There are generally no limitations on to the number of non-exclusive licenses that can be granted, aside from market conditions and the terms of the particular license that may effectively limit further licensing efforts (e.g., most favored licensee provisions).
Whether a non-exclusive or exclusive (or limited exclusive) license is appropriate in any given circumstance depends on a variety of concerns from both the licensor's and the licensee's perspective. Compromises can take the form of limited exclusive licenses, "best efforts" clauses requiring minimum performance standards, due diligence requirements and escape provisions that allow a licensor to terminate the exclusive license - or convert it to a non-exclusive one - if certain commercialization milestones or diligence requirements are not met.
Sublicenses
By definition, a sublicensee's rights must depend on the rights granted in the underlying license agreement. A patent sublicense agreement must therefore be consistent with the terms of the underlying license agreement, comply with the terms of the underlying agreement and incorporate relevant pieces of the underlying agreement. One way to simplify the exercise is to make sure that the underlying agreement addresses in detail how the parties intend to handle sublicensing. Several basic questions can help guide the parties' discussion.
- Is Sublicensing Permissible? If not, that should be clear in the language of the license agreement. Note that if a non-exclusive patent license is silent about transferability, courts will typically hold that it cannot be sublicensed.
- Is Approval Required? Approval provisions vary depending on the complexity of the agreement, the type of license actually granted, the value of the technology being licensed and the compensation structure under the original license agreement. Choose an approval structure that makes sense in light of the parties' business deal and draft the approval provision accordingly.
- What Rights May be Sublicensed? The "sublicensable" rights should be clearly articulated in the license agreement and in the grant language of the sublicense agreement.
- How Will the Patentee be Compensated? The formula under which the patentee will be compensated for the sublicense should be clearly explained in the original license agreement. Total compensation paid by the sublicensee to the licensee, not just royalty payments, should be considered.
- How Long May the Sublicense Remain in Effect? The term of the sublicense should also be clearly articulated. As a general rule, the term of a sublicense should be no greater than the term of the underlying license agreement - so it is often a good idea to make it co-terminus with the underlying agreement. This should be specifically stated in the license agreement and repeated in the sublicense agreement. In addition, both parties to the sublicense will typically want termination mechanisms, just in case things don't transpire as planned.
Joint Ownership
The general rule in the United States is that joint patent owners each have an undivided, equal interest in the patent rights. See 35 U.S.C. § 262. Each joint owner therefore has the right to fully exploit the patented invention - including the right to grant licenses under those patent rights to third parties - without the consent of the other joint owner and without accounting to the other joint owner for any share of the profits. And, since each joint owner has the right to commercialize the patent rights and allow others to do so, no joint owner has the ability to grant an exclusive license, assign or otherwise transfer its rights under the patent to a third party without the other's consent. See, e.g., Ethicon Inc. v. U.S. Surgical Corp., Case No. 97-1269 (Fed. Cir. 1998).
Other countries may take a different view of joint ownership and the responsibilities joint owners owe to each other, such as giving the other joint owner veto power over license grants (e.g., Canada and most European countries).
As a result, the parties should carefully assess any patent that may be subject to joint ownership constraints, determine what rights the potential licensor has, and draft the license agreement accordingly. Further, if a joint owner wishes to grant an exclusive license under the patent, that joint owner should first obtain the express, written consent of the other joint owner.
Joint patent ownership also has an effect on enforceability. All owners of a patent must join as plaintiffs in a suit to enforce a jointly-owned patent. That means they must all agree to move forward with the enforcement effort. The only exception is if a joint owner has contractually waived its right to consent to the suit. To actually have teeth, a waiver agreement should explicitly prevent the waiving party from entering into a license agreement (or even license negotiations or settlement discussions) with a third party infringer, without the other owner's consent. Absent such a prohibition, the waiving party could theoretically grant a license to a third party infringer against whom the other owner is considering filing suit, giving the third party infringer protected status as a newfound licensee. And, the waiving party would have no duty to the other owner to account for any licensing revenues it receives from the former infringer. See Schering Corp. v. Roussel-UCLAF SA, Case No. 96-1246 (Fed. Cir. 1997).
The waiving party may not agree to this type of restriction because it essentially gives the other owner the power to make all decisions concerning litigation and settlement. Such a restriction will, however, prevent the waiving party from sabotaging the other's litigation plans and, more importantly, its ability to recover revenue from a third party infringer.
As a final comment, joint patent owners are generally free to change their respective rights by written agreement. However, such an agreement may not be binding on a third party unless that third party has prior notice of the agreement. It should therefore be recorded in the appropriate patent offices.
Hybrid Licenses
In the intellectual property licensing context, a hybrid license involves not only patent rights, but also "something more" - some additional bundle of rights that a licensee desires to make sure that it can fully utilize the patent rights.
A fundamental tenet of patent law is that a patentee cannot collect royalties for an expired or invalid patent. Doing so constitutes patent misuse. If the royalty structure does not change when the licensed patents expire, the patentee may be trying to extend its monopoly in an unauthorized way. Although hybrid licenses are becoming increasingly popular in the United States, patent misuse concerns make them tricky beasts. A few drafting suggestions follow.
- Draft separate license agreements, or separate license grants, for the patent rights and for the remaining rights included in the hybrid bundle. In some cases, two separate agreements can be drafted – one that covers the patent rights and one that covers the remaining rights. Similarly, both types of rights can be included in the same agreement but conveyed in separate license grants which are, in turn, tied to separate royalty provisions.
- Tie the term of the hybrid license to the term of the patent rights included in the hybrid bundle. Another strategy is to focus on the term of the hybrid license. Consider tying the term of the hybrid license to the term of the last-to-expire of the patents included in the hybrid bundle. The royalty obligations for all of the licensed rights will then terminate at the same time, avoiding any misuse concerns.
- Apportion the royalties between the patent rights and the remaining rights. In some cases, arguably the stickiest ones, the term of the hybrid license may extend beyond the term of the last-to-expire of the patent rights. One approach in this situation is to expressly state in the agreement what portion of the royalty is attributable to the patent rights and what portion is attributable to the other rights being licensed. If that type of allocation is not possible, the agreement should at least provide for a decreased royalty once the patent rights are no longer in effect.
- Provide for a large upfront payment and lower downstream royalties to capitalize on the value of the patent rights. The licensor may also consider asking for a larger, non-refundable, upfront payment and a lower downstream royalty. By doing so, the patentee capitalizes on the value of the patent assets at the time the agreement is executed. Royalties should still scale down once the relevant patent rights expire.
Development Agreements
Parties often bring pre-existing intellectual property into the relationship ("Pre-existing IP" or "Background IP"), which may serve as the backdrop for the development effort or may be required in order to conduct the contemplated research. By its nature, Pre-existing IP remains the property of the party that brings it forward. Consequently, if the development effort is related to the Pre-existing IP, each party should clearly articulate what its Pre-existing IP bucket contains, so there is no confusion down the road about which party brought what to the table.
Sometimes a party independently creates or develops intellectual property during the term of the development agreement, which is outside the scope of the development effort ("Independent IP" or "Sideground IP"). Whether certain intellectual property is properly categorized as Independent IP can be the source of debate and disagreement. However, once properly categorized, Independent IP is typically owned by the party that develops it. Because Independent IP is unrelated to the subject matter of the development, no licenses are generally required.
The parties may also develop certain intellectual property as a result of their development efforts ("Developed IP" or "Foreground IP"). Developed IP presents the most challenges because it is the piece of the value proposition to which both parties typically want rights. Each party would no doubt prefer to be the sole owner of the Developed IP. However, one-sided ownership is an aberration, and typically only occurs when one party has significant leverage over the other. Much more common is an "ownership follows inventorship" formula. If one party is the sole inventor of certain Developed IP, that party is the sole owner of that Developed IP. If both parties have a hand in the development and inventive effort, then the Developed IP is jointly owned by the parties. In view of that, development agreements in which joint development (and, hence, joint ownership) is contemplated may contain language granting one of the parties a right of first refusal to exclusively license the other party's interest in the jointly-owned Developed IP. A royalty or other payment is usually associated with this type of arrangement, but the benefits of controlling all rights in the patent properties usually outweigh the cons of the payment obligations.
In some cases, the parties may try to allocate ownership of jointly-owned Developed IP based on the actual subject matter that is developed. As a practical matter, drafting a provision that properly allocates ownership of the Developed IP according to subject matter can be a challenge. The key is to decide before any research or development begins what ownership and license rights each party will have in the Developed IP.
Conclusion
This QuickCounsel provides a short overview of issues that should be considered in the context of a patent license negotiation. A well-drafted patent license addresses as many of these foreseeable issues as possible, and tries to anticipate what problems and concerns may arise over the course of the parties' business relationship.
Additional Resources
This article is adapted from ACC InfoPak: "Best Practices For Intellectual Property Licensing: Addressing The Rights Granted and Assets Covered In Patent, Copyright, Trade Secret, And Trademark Licenses" (August 2013).
