Source: http://www.oblon.com/publications/licensing-patents-and-trade-secrets/
Timestamp: 2017-10-20 05:12:36
Document Index: 106687702

Matched Legal Cases: ['§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§294', '§294', '§1', '§102', '§280', '§261', '§552', '§552', '§101']

Jun 2000 – Presented at the American Conference Institute's Licensing Intellectual Property Conference, Chicago, Illinois June 5-7, 2000
James D. Hamilton, Esq. *
William E. Beaumont, Esq. **
Opinions expressed in this article are solely those of the authors and are not attributable to Oblon, Spivak, McClelland, Maier & Neustadt, P.C.
§1.01 Determining What Rights Are Licensable
[1] When to Consider Licensing Patent Rights
[2] When to Consider Licensing Trade Secrets
[3] When to Consider Licensing Both
§1.02 Types of Licenses
[1] Exclusive, Nonexclusive and Other Variations
[2] License vs. Assignment
§1.03 Determining Compensation
§1.04 What Rights Should the Licensor Retain?
§1.05 Transferability of Rights
§1.06 Warranties and Indemnification
§1.07 Term and Termination
§1.08 Confidentiality and the Preservation of Confidentiality
§1.09 Arbitration Provisions
§1.10 Special Considerations in Licensing Pharmaceutical and Biotechnological Innovations
[1] Defining What is to be Licensed: Supplementing §1.01
[2] Confidentiality: Supplementing §1.08
[3] Determining the Value of Pharmaceutical and Biotechnological Innovations
[4] Existing Versus To-Be-Developed Technology
A determination of what intellectual property rights can and should be licensed requires an initial recognition as to what rights are protectable as patents and what information, if not patentable, qualifies as a trade secret. A patent is a limited monopoly granted by the United States government for an invention and is granted for a limited period of time as permitted under Article 1 of the United States Constitution[1]. Patents comprise a legal monopoly granted to the inventor, licensee or assignee of the invention and includes a limited legal right to exclude others from making, using or selling that which has been patented for the duration of a patent. Patents are only granted after an examination of a patent application and a comparison of the same with already existing prior art. Statutory bars to patentability can occur, however, and may arise from specified events wherein the invention has been dedicated to the public. For example, the public use or sale of an invention in the United States is a bar if such takes place more than one year prior to the date of the application for a patent in the United States.[2]
Licensing an invention requires the initial steps of evaluating the patent or patents to be licensed including determining the validity and scope of such patents and determining the potential value of the patents to be licensed. Once these steps have been completed, it is then possible to implement the strategy selected by adopting an appropriate business plan or revenue model, ranging from a simple nonexclusive license agreement to a much more complicated joint venture. Once that procedure has been followed, it is possible to determine the specific type of license to be granted, be it exclusive or nonexclusive, a simple paid-up license, a right-to-use agreement and a determination as to whether a technology research and development agreement is needed in consideration of improvements to the patented technology that may later be developed by the licensor or licensee.
An evaluation of the patent requires a thorough review of the same to determine what systems, methods or products the patent covers and to determine whether industry has already adopted the technology covered by the patent or could use the patented technology to develop and commercialize new products or services. Once this step has been concluded, it can result in a list of potentially valuable patents which will be helpful in identifying those companies which have potential use of the patented technology.
Assessing the validity and scope of the patents to be licensed is the next logical step and is of great importance insofar as it permits an early determination as to whether the project of licensing the patent is likely worth pursuing on the basis of the strength of the patent and the likelihood that, if asserted against others, the validity thereof could be successfully defended. Once this step has been completed, one can then proceed with attempting to identify potentially infringers of the patent.
A useful tool in accomplishing this is for a licensor to monitor the issuance of subsequent patents and to particularly note if any of such issued patent cites the licensor's patent in the list of references published on the title page of each patent, as shown below:
It is for this reason that in-house counsel or their outside counsel and consultants should conduct timely checks of the records of the U.S. Patent Office. This can now be by on-line searching of issued patents at the Web site of the U.S. Patent Office at http://www.uspto.gov/web/menu/pats.html . A close analysis of subsequently issued patents helps identify those companies who might have developed and patented improvements over the earlier issued patent of a licensor and which, upon closer review, may actually reveal the need for a license from the licensor to use the improved technology described or claimed in the subsequently patented improvements. Insofar as an improvement patent can be developed over patented technology, presuming the improvements made to the same are novel, the U.S. Patent Office will in fact issue improvement patents even though making, using or selling a product covered by such improvement patent may require a license or assignment from the owner of the rights of an earlier issued patent. In other words, the earlier issued patent can constitute a dominant patent with respect to later issued patents or improvements for the same technology. The listing the dominant patent as one of the references cited in the prosecution of the improvement patent can therefore alert the patent owner or licensor of the dominant patent as to the fact that improvement patent relates to technology so closely related as to have been cited by the U.S. Patent Office as a relevant reference.
Once the foregoing steps have been completed, it would be advantageous to draft a business plan for the purpose of clarifying the overall strategy of the licensing procedure to be adopted, the potential advantages and disadvantages from the same, concluding with an indication of a potential economic returns on the basis of the initial investigation conducted and the evaluation of the enforceability of the patents owned. Appropriate steps can then be taken to contact potential licensees for the purpose of making them aware of the availability of the license under the patents or by advertising in journals and the company's brochures and Web site that the patent owner is willing to license or assign the rights to the patented technology. In those situations in which it is readily apparent that a competitor is infringing, consideration can be given to the forwarding of a cease and desist letter for the purpose of bringing this matter to the attention of the infringer while specifying the identity of the infringing product as well as providing the infringer with a copy of the patent or patents being infringed so as to serve as proper notice of infringement.
The licensing of know-how has gained in significance with respect to both domestic and foreign technical assistance situations. The Uniform Trade Secrets Act (UTSA)[3] has defined a trade secret as follows:
"Trade secret" is information, including a formula, pattern, compilation, program, device, method, technique or process, that:
As with patent licensing, trade secret licensing has distinct advantages and disadvantages. The advantages include the ability to leverage business resources. Hence, by adding licensee's resources for a particular business operation to its own operation, a licensor can enter markets that it otherwise would not have hoped to serve. This is particularly true for a small firms and start-up companies who do not have sufficient personnel to utilize a trade secret nationwide, or more particularly worldwide markets. Upon granting others the right to market and distribute products which include the company's trade secrets, it is possible to enter geographic or product markets otherwise unreachable. As a result, a company can more readily enter certain markets otherwise closed to it and can increase market penetration through complimentary products. The licensing of such trade secrets may also make valuable the licensable patents of such company and can make them more readily licensable to those who desire the trade secret information of the patent owner. The net result of the foregoing is that additional revenue can be derived from patents or trade secrets that are otherwise kept in-house and not licensed to others. There is also a possibility that by making such trade secrets available for use, an opportunity will present itself with respect to cross-licensing of trade secrets for patents of other companies that might be useful to the owner of the patent. Through negotiations, this can also permit one to have access to improvements in the technology, even if generated by companies other than that which held the patent. The foregoing also serves to enhance the trade secrets and trade name of a company licensing the trade secrets and can also permit the owner of the trade secret to select business partners and form valuable alliances within their industry or to branch out to other industries seeking their trade secret information.
It must of course be recognized that certain disadvantages can result when licensing trade secrets. First and certainly foremost is the loss of exclusive control over the trade secret information. While confidentiality of the trade secret information is typically one of the conditions under which the trade secret information is passed to a licensee, if such trade secret information is not properly monitored, marked and otherwise kept secret by the licensee, there is a clear potential for loss of said trade secret information to third parties. Licensing of the trade secret information also can serve to establish a competitor with respect to commercialization of the trade secret information and can result in greater public recognition of the licensee as compared with the licensor.
It goes without saying that licensing of both patents and trade secrets is often necessary to fully exploit the generation of revenue from both the patents and the trade secrets, since the licensee is often interested in both in order to make certain that the license will generate the maximum benefit to the licensee. This is readily understandable when one considers the fact that, oftentimes, valuable trade secret information is not included in a patent granted and that there is a certain amount of know-how, show-how and other types of information available only based upon the frequent consultation with the inventors or other knowledgeable individuals of the licensed and patented technology. It is for this reason that licensees often request that, in addition to a patent license, a license is requested from licensor regarding the trade secrets or know-how of the inventors or those knowledgeable in utilizing the licensed technology so as to make certain that patented technology is properly used and that such obtains its full potential for the licensee. In other words, technical complications often arise when an apparatus or method licensed under a patent is attempted to be used by a licensee. The licensee would benefit from knowing under a trade license agreement what experimentation had been done in the past and what had been found to be the most advantageous structure or method to use, even though precise details of the same were not explained in the patent application resulting in the patent. In view of this, licensees often recognize that the trade secret information regarding a patented invention can save a significant amount of trial and error and set-up time to maximize the commercial benefits of the patented technology.
In view of the foregoing, it is often beneficial to the licensor to suggest that a license agreement incorporate both patent and trade secret rights, so as to thus constitute a hybrid agreement, or to alternatively separately license the trade secrets and to make available the nonpatented information within the knowledge of the owner of the patent and its employees who have become familiar with the use of the patented technology. Thus, consulting fees can result and the relationship between the licensor and licensee can be further strengthened by the cooperation between the two. Further future cooperation can result in improvements being developed by the licensor or licensee and, under the proper circumstances, additional license agreements with respect to such improvements can be negotiated to the mutual benefit of both parties. Of course, on the contrary, such relationship may become less desirable over a period of time since it may strengthen the licensee as a possible competitor. This may also be the situation where a license is granted only in settlement of a suit by the licensee such as in an action to invalidate the licensor's patent or in any situation in which licensing is done reluctantly, or where the situation is such that the degree of future cooperation between the licensor and licensee is unknown or is unpredictable at the time the license for the patent is initially granted. Under such circumstances, if the situation changes subsequent to granting of the license for the patent alone, the licensor can always later grant a license for the associated trade secrets.
Intellectual property licenses are contracts which are interpreted and construed under the law of contracts and are interpreted in substantially the same way as any other contract. In patent licenses, the patented grant gives the owner the right to exclude others from the enjoyment of the patented subject matter and thus, the license serves as an understanding on the part of the patent owner not to assert his right to exclude others against the licensee, if and when the licensee practices the invention. In the field of patents, a license is typically either an exclusive license or a nonexclusive license. An exclusive license includes a requirement on the part of the licensor not to enter into any similar agreement with any other party, or to assert the right to use the patent on its own behalf. To remedy patent infringement, a civil action in a federal court is permitted under the patent law.[4] To the extent that licenses are involved, reliance upon U.S. patent law is not the exclusive remedy since the agreement may provide further specific additional remedies such as a liquidated damages provision or a right to terminate the agreement due to default. However, it is to be understood that if the licensee terminates the agreement and is subsequently threatened with an infringement suit, the licensee has the opportunity to file a declaratory judgment action for obtaining a judgment with respect to the invalidity of the patent.
While exclusive and nonexclusive patent licenses are the most commonly known in use, other types of licenses are found in the field of intellectual property. These include a sole license, a shop right, a label license and a franchise license. In addition, oral licenses, electronic licenses, implied licenses, compulsory licenses in foreign countries, and licenses which arise by the sale of a patented or unpatented article or by estoppel exist. Additionally, computer software, shrink wrap licenses and click wrap licenses have now come into existence, and compulsory licenses exist in some countries and require licensing of local industries if patent protection is granted, in addition to judicially imposed licenses. Trademark and copyright licenses also are of great importance as well as multimedia licenses.
An exclusive license precludes licensor from granting other licenses and the grant of such license bars the licensor from practicing the invention unless the licensor has specifically reserved the right to do so. If the licensor retains the right to practice the licensed subject matter, such licenses are often referred to as a "sole license".
A nonexclusive license is, in effect, an agreement by the licensor not to sue the licensee for infringement of the intellectual property rights being transferred. Such nonexclusive license is also normally not transferable by assignment to any other party by the licensee and, unless otherwise expressly provided for in the agreement, a nonexclusive licensor may practice the invention or authorize others to do so on behalf of the licensee. The nonexclusive licensor may freely license others, or may tolerate infringers. As a general rule, the nonexclusive licensee does not have the right to sue for infringement whereas if an exclusive license is granted to the licensee, this would typically be permitted, as provided for in the agreement.
A label license is a license which can be granted under either patented or unpatented products. These label licenses typically require labeling of the patent number on patent products.[5] For unpatented products used in a patented process, the label indicates that the process for use of the product as claimed in an identified patent.
A franchise license differs from a normal patent license in that the bundle of rights transferred directly affects the image of the franchisor and the degree of control imposed by the transferor is correspondingly greater. A franchise license allows for the expansion of business through independent franchise operations and is a significant recent event in U.S. business.
An express license is a contract whose terms have been stated with specificity and which usually appears in a written agreement. However a license can be an oral license. Oral licenses may, however, be void or unenforceable if they violate the Statute of Fraud provision of the jurisdiction in which the contract is made. Disputes of this type arise more frequently in connection with oral (parol) licenses which are not to be performed within one year. The existence of terms of an oral license must be proven in court by a preponderance of evidence.
Electronic licenses have evolved as a result of the impact of computer technology which has provided easy access of e-mail and the Internet. The result is the establishment of a new type of contract which often appears on a computer screen and invites acceptance by clicking on the acceptance symbol on the computer screen. As with oral licenses, these electronic contracts may create problems under a state's Statute of Frauds law. This area of contract law is presently evolving and raises complex issues which have not yet been addressed by many states. However, the Virginia General Assembly enacted a law of this type on March 14, 2000.[6]
Implied licenses can result from the conduct of parties where no written agreement has been signed. A license to make, use or sell patented invention can arise by implication from the acts of the patentee or one acting for the patentee. It is also possible for a patentee to allege that the conduct of an infringer was such as to imply acceptance of a license. However, the existence of an implied license ultimately is determinable based upon the intention of the parties and the scope of such license depends on the circumstances surrounding the creation of such license. A determination as to whether a license will be implied depends on whether the patent owner under the circumstances is estopped from asserting infringement. An implied license can arise from the sale of a patented or unpatented article. In particular, the authorized sale of an article, patented or unpatented, whose sole use is in the practice of a patented combination, process, etc. authorizes, absent negotiations, an implied license under the patent which covers the sole use. The implied license, however, will only last for the life of the component.[7]
An implied license may also result by estoppel. Conduct by the owner of the patent which induces the person who uses the invention to place himself or herself in a situation where they must suffer injury, unless such right to practice the invention is conceded, will be regarded as implying such right.[8] Whether the activities of the patent owner comprise a gratuitous license, or one for a reasonable royalty, will depend upon the specific circumstances under which the license arises.
An implied license can also result from an implied negative covenant appearing in an agreement. More particularly, where a license is drafted so that the granting clause is not coextensive with the full scope of the patent (i.e., quantity, field of use or territorial restrictions), if the activities of the licensee exceeds the grant, the question arises as to whether the licensee has breached an implied covenant not to invade the nongranted part of the patent. Some courts have held that there is such an implied negative covenant but other courts have chosen not to do this.
In addition to the above-noted definition of an exclusive license as meaning that the licensor will grant no future licenses, unless it retains a sole license, an exclusive license also normally defines whether the licensee is entitled to file suit for infringement of the patent license or to require the licensor to do this upon proper notification. The granting of an exclusive license normally also involves certain other terms and conditions, the most important of which is often the ability of the licensor to obtain a higher royalty than would otherwise be necessary for a nonexclusive license. This recognizes the fact that, unless the licensor has obtained a sole license, the licensee will be the sole source of revenue under the patent. It is for this reason that certain additional terms and conditions, such as a best efforts clause[9], is often found in exclusive license agreements so as to make certain that the licensee exercises its best efforts to commercialize the invention. As a result, if an acceptable exclusive licensee can be determined, it may be beneficial to sign such an agreement if this provision is included. However, the terms of the agreement should be such that if best efforts are not demonstrable or if certain thresholds of performance are not met, the licensor should retain the ability to terminate the agreement due to the default of the licensee and seek either a better exclusive licensee or to proceed with the granting of multiple nonexclusive licenses.
Nonexclusive licenses permit the licensor to grant further licenses, as desired, and thus a nonexclusive license is normally considered as being a mere agreement by licensor not to sue the licensee for infringement in exchange for a lower royalty than would otherwise be obtainable under an exclusive license. The licensor can freely license others, or may tolerate infringers with the result being that, should either event occur, the licensee's rights are not violated in any way. The general rule is that a nonexclusive licensee does not have the right to sue for infringement and cannot assign its right to others without written permission from the licensor.
A cross-license normally results where, for example, both parties of a prospective license agreement have patent rights which the other party wishes to acquire. Upon cross-licensing, each party to the agreement may operate without being charged with infringement of the patent rights of the other. Depending upon the value of the patents rights involved, an agreement of this type may be concluded by exchange of a license and a cross-license may, if needed, be accompanied by payment of royalties. However, in some instances, no payment of royalties would be needed such as, for example, where it is anticipated that the value to each of the parties to the agreement will be substantially equal. Cross-licenses frequently arise for the purpose of unblocking technology of each party so that each can produce the same without the threat of litigation. A potential drawback in cross-licensing, however, is the fact that such may violate U.S. antitrust laws. While cross-licensing alone presents no inherent legal difficulties, a potential problem arises if the effect of the cross-license effects competition such as aggregation of patents in the same field, often resulting in the legality of the agreement being questioned. However, unrestricted cross-licenses have, in general, been approved by the courts[10]. A high percentage of cross-licenses have, however, been judicially challenged under the Sherman Antitrust Act, especially where an adverse effect on competition results.
A license is generally recognized as having the legal effect of waiving a right to sue or prosecute the licensee for conduct that, absent the license, would be actionable. Thus, a patent license is a waiver by the patent owner of its right to exclude the licensee from making, using, selling, offering for sale or importing the claimed invention. The term "assignment" is one that normally implies as defined in Black's Law Dictionary as a transfer or making over to another of the whole of any property, real or personal, in possession or an action, or of any estate or right therein[11]. In patent terminology, however, the meaning of assignment has been given a special and lasting meaning in the Supreme Court decision of Waterman v. MacKenzie[12].
The distinction between a license and an assignment is primarily of importance in the field of taxation and in the determination of which party has standing to sue for infringement of a licensed patent. As a general rule, payments made for an assignment of a patent must be capitalized by the assignee and may be taxed as capital gains to the assignor. Royalties paid under a license, however, are deductible business expenses of the licensee and comprise ordinary income for the licensor. With respect to standing to sue for infringement, the Federal Circuit has held that determination between assignment and license requires the court to determine the intention of the parties and examine the substance of what was granted[13]. In summary, a patent right may be transferred by assignment or license, an assignment comprises a transfer of the right to exclude others from making, using or selling, and a license comprises a waiver of that right. As can be readily understood, the transfer of the right to sue for infringement is an important aspect of an assignment.
It is to be further understood that an assignment may be defined as a transfer in writing of (a) the whole patent, including the exclusive right to make, use and sell the invention throughout the United States; (b) an undivided share of that exclusive right; or (c) an exclusive right under the patent within and throughout a specified part of the United States[14]. Assignments having full legal effect are required to be in writing and recorded in the U.S. Patent Office[15]. Oral assignments and unrecorded written assignments convey only equitable title inter partes[16].
The primary significance of the determination whether a particular transfer constitutes an assignment or license is focused on the ability to bring suit for patent infringement[17]. An assignment (or an exclusive license in many cases) gives the transferee the right to sue for infringement, since title to the whole or an undivided part of the patent is deemed to have passed[18].
[1] Royalties
A great deal has been written concerning the paramount issue of proper determination of compensation for licensing or assignment of patent rights, including a determination as to the royalty base (i.e., unit of measurement on which a royalty is payable) and the royalty rate. The royalty rate is the formula by which compensation is paid to the owner or licensor of the patent rights. In determining the proper setting of royalty rates, complicated mathematical analyses have been proposed which typically require extensive data concerning the commercial activities of perspective licensees but which usually provide insufficient marketplace considerations. While the assignee or licensee wishes to maximize the compensation derived from the royalties, the following factors are relevant to this determination:
(1) the strength of the patent.
(2) the availability of competing technology.
(3) the cost of developing the invention and obtaining protection of the same.
(4) the savings or profit to be realized.
(5) the cost of bringing suit for infringement.
(6) type of license being granted by including the availability of grant backs, production against unlicenced infringement, exclusivity, etc.)
(7) negotiating costs.
(8) the desirability of establishing a relationship with the licensee and the possibility of obtaining cross licenses with respect to patents assigned to the licensee.
(9) the investment required by the licensee.
(10) the desirability of licensing the patent on a worldwide basis to the licensee.
The royalty rate actually paid takes its meaning from the royalty base adopted. The unit of measurement which constitutes the base must therefore must be established with a reasonable degree of certainty and royalty rate can therefore be charged based on actual operations under the licensed patent claims. The most common royalty base is the sales volume of the patented component. Such has a number of favorable features including the fact that the computation is the simplest, the disclosure of sales volume is least harmful to the licensee's business secrets, the licensee is obligated to pay only when it has market the embodiment of the licensed patent and the sale volume basis is the least capable of manipulation to the licensor's disadvantage. Such base is also flexible since the effect of inflation is automatically factored into the royalties. While the royalty base in a straightforward patent license is commonly related to production by the licensee within the claims of the patent, the base may also comprise the total sales volume of the licensee whether or not the article falls within the scope of the patents. However, adoption of this formula must suit the convenience of both parties, for if the record shows that it was unilaterally insisted upon by the patentee, a patent misuse defense may be successfully raised[19].
A general guideline expressed by experienced negotiators is that one-quarter to one-third of the anticipated profit from the use of the invention is usually an appropriate royalty[20]. While the above-noted guidelines typically apply in a willing licensor-willing licensee situation, where evidence has shown that the patentee was basically unwilling to license, a court will tend to apply an award of lost profits of the licensor in arriving at appropriate royalty determination[21]. It is also significant to note that the Court of Appeals for the Federal Circuit, when setting a royalty for infringement of the patented product, has in the past applied an "entire market value" rule. More particularly, it has been including in the royalty base, unpatented materials, the sales of which are carried along by sale of the patented component[22].
§1.04 What Rights Should Licensor Retain?
It is not unusual for a patent owner that sells or exclusively licenses a patent to reserve for itself some rights to make, use or sell the transferred invention. Since no such rights are implied in an unequivocally exclusive license grant, they therefore must be properly expressed in the agreement to have effect. For example, the license grant and the agreement may indicate that a reverse nonexclusive license to the licensor is granted and that the licensor may use, sell, offer for sale and import licensed products. This type of grant would be helpful, for example, where the licensor wishes to maintain activity in the marketing field in which the licensed products under the patent were licensed. In a nonexclusive license situation, it would not normally be implied that, since the license is a nonexclusive license, the licensor wishes to retain the rights to grant other nonexclusive licenses and retains the right to make, use and sell licensed products under the licensed patents for itself. In an exclusive license situation, the licensor could reserve a sole license to have similar rights.
A provision is typically used in a license agreement which states that the license shall enure to the benefit of and be binding on the successors, assigns or other legal representatives of the parties. It is to be noted, however, that use of language of this type is uncertain in terms of its effect and could perhaps be in conflict with other provisions of the agreement that attempt to specify the assignability or lack of assignability of the license granted and the rights pertaining thereto. While the transferability of rights is not normally implied from nor usually provided for in a nonexclusive license, such can be included in an exclusive license agreement where agreeable to the licensor. However, especially if other provisions such as a best efforts clause is provided for in the exclusive license agreement, the licensor will need be cautious with regard to granting the right of assignability without written authorization of the licensor since an entirely new party to the agreement can otherwise later be substituted by the exclusive licensee to the detriment of the licensor. Therefore, it is incumbent upon the licensor to normally reserve the right to deny assignability of the exclusive license unless prior written approval of the licensor has been obtained by the exclusive licensee.
It is understandable that certain representations may normally be considered to be implicit and any license agreement such as, for example, representations by the licensor that it has the power to extend the license right and that the licensor has not taken and will not take any action harmful to such rights. There are situations, however, where controversies may arise or uncertainties exist regarding these matters and it can therefore become important to the licensee that representations of this kind be expressly confirmed by the agreement itself. Rights and obligations which may or may not be implied, depending upon the agreement, include, for example, an offer to confirm a coexisting license under an earlier issued, dominant patent of the licensor or an intention to extend sales-permitted licenses under foreign patents that correspond to the licensed U.S. patent. Where extension of such rights is not intended by the licensor, it would be prudent for the licensor to make this clear in appropriate provisions of the agreement. The licensee may be interest, for example, in the granting of future rights concerning inventions of the employees of the licensor and therefore language to this effect may be necessary in the agreement. It is also ordinarily prudent for a licensor to specifically negate implied warranties or clarify whether a warranty exists with regard to the following:
(1) the validity or scope of any licensed patent under the agreement.
(2) that anything made, used, sold or otherwise disposed of under the license granted in the agreement will be free from infringement of patents of third parties.
(3) that licensor shall file any patent application, secure any patent or maintain any patent in force.
(4) to prosecute actions or suits against third parties for infringement.
(5) to furnish any manufacturing or technical information required by licensee.
(6) to confer the right to use in advertising, publicity or otherwise any trademark or trade name of the licensor.
(7) to grant rights with respect to supportive products under the agreement to foreign countries.
(8) to grant any other patent to licensor other than the licensed patent, regardless of whether other such patents are dominant of or subordinate to the licensed patent.
With respect to the question of indemnification by the licensor, it is noted that only in very specific situations should a licensor of patent rights alone undertake to indemnify the licensee against the possibility that activities conducted under the license may infringe patents or other rights of third parties. The reason for this is that the licensor would rarely be in a position to foresee the specific nature of the licensee's future activities and to then properly evaluate the potential for risk and extending indemnity. Indemnification by a licensor is, however, more commonly found in agreements that transfer the right to use trade secrets and know-how. In such situation, the licensor may wish to assume the defense of any suit brought against the licensee such as that based upon infringement or wrongful use of the licensed invention. However, a licensor may wish to limit liability to out-of-pocket cost in the defense of any such suit and, moreover, the requirement to pay damages awarded in any such suit can be limited to the amounts therefor paid to licensor by licensee under the agreement, if such is mutually agreeable to the parties to the agreement. In the event that the licensor wishes to protect against strict liability with respect to parties dealing with the licensee, the licensor may require the licensee to hold license or harmless against all liabilities, demands, damages, expenses or losses arising (a) out of the use by licensee or its transferees of inventors licensed or information furnished under the agreement (b) out of any use, sale or other disposition by licensee or its transferees of products made by use of the inventions or information covered under the agreement.
To avoid uncertainty in the agreement with respect to when such shall terminate, it is typically advantageous for the parties to specify that the agreement shall run to the end of the life of the last to expire of the licensed patents and shall thereupon terminate. The foregoing language is often beneficial to utilize in a situation involving multiple patents. It is to be noted, however, that termination may be necessary when events other than the expiration of the last to expire patents occurs. For example, the licensor may wish to have the agreement terminate due to a breach or default of licensee under the agreement, the bankruptcy of the licensee, the failure of licensee to supply required documentation, the failure of licensee to pay royalties accrued, the failure of licensee to maintain records required for determination of royalties owed and due and the occurrence of any other event of significance to licensor that has been expressly defined in the license agreement. Correspondingly, the licensee may wish to be able to terminate the agreement in the event of bankruptcy of the licensor, the failure of licensor to provide the support required under the agreement or other conditions of importance to the licensee.
Termination of the agreement an also occur by enforcement of a force majeure clause which permits termination of the agreement that protects each party against the possibility of its being unable to perform under the agreement for reasons beyond its control. A clause of this type usually lists the various natural and man made disasters, the occurrence of which may excuse performance by such party. An example of a clause of this type is as follows:
Either party shall be responsible or liable to the other party for nonperformance or delay in performance of any terms or conditions of this agreement except with respect to acts or occurrences beyond the control of the nonperforming or delayed party, including, but not limited to, acts of God, acts of government, wars, riots, strikes and other labor disputes, shortages of labor or materials, fires and floods, provided the nonperforming or delayed party provides to the other party with written notice of the existence of and the reason for such nonperformance or delay within thirty days of such acts or occurrences.
With respect to the issue of confidential information or trade secrets which are transferred under a license agreement and which rely solely upon confidentially maintain their value, it is necessary to consider including a confidentiality provision in the license agreement. Since the transfer of know-how, support documents and other unpatentable explanations valuable information often occurs under license agreements, a provision with respect to maintaining the confidentiality of such items and, to the extent possible, the proper labeling of such items as being confidential, is important so as to make certain that this information is not inadvertently transferred to third parties who are not subject to provisions on the agreement and are not otherwise informed of the confidentiality of such information. With respect to written documentation so transferred, proper labeling of the same, proper maintenance of the files to whom the information has been disclosed and related issues should be considered and be properly addressed in the license agreement.
In view of the need to maintain cordial relationships between the licensor and licensee during the life of the agreement, consideration should be given to including a carefully drafted arbitration provision in the license agreement. Care in drafting of this clause is needed, however, so as to make certain that any disputes which arise are resolved equitably and reliably in an expedited manner to help maintain a good relationship between the licensor and licensee. Arbitration is a means of resolving a conflict but it is often difficult to know in advance whether every controversy that may arise under the license agreement will require arbitration. An example of an arbitration provision would be one requiring any controversy or claim to be settled by arbitration in accordance with the Patent Rules of the American Arbitration Association, and that judgment on the award rendered by the arbitrators may be entered in any court having jurisdiction. The licensor and licensee have the power to specify that arbitration shall be conducted before a preselected arbitrator of their choice, with or without reference to selected applicable rules of the American Arbitration Association or another established body. Congress, by enacting 35 U.S.C. §294, has determined that arbitration of patent validity and infringement issues are in the public interest and are enforceable. As a result, arbitration decisions of this type are binding on the parties.
The voluntary arbitration provisions of 35 U.S.C. §294 are as follows:
(b) Arbitration of such disputes, awards by arbitrators, and confirmation of awards shall be governed by Title 9, United States Code, to the extent such title is not inconsistent with this section. In any such arbitration proceeding, the defenses provided for under Section 282 of this title shall be considered by the arbitrator if raised by any party to the proceeding.
Where the agreement between two parties whose place of business is located in the United States, the American Arbitration Association is often called upon to arbitrate dispute. Such organization has regional offices in various parts of the United States. When the agreement in question deals with foreign licensing or is between nations of different countries, the parties may prefer that arbitration be submitted to the International Chamber of Commerce.
An example of an arbitration provision is as follows:
A. Any controversy or dispute arising out of or in connection with this agreement, its interpretation, performance, or termination, excluding validity or enforceability of License Patents if the parties are unable to resolve within ninety (90) days after written notice by one party of the other of the existence of such controversy or dispute, shall be submitted to arbitration. The dispute or controversy shall be finally settled by arbitration in accordance with the rules of the American Arbitration Association. Such arbitration shall take place in English in Chicago, Illinois, before a single arbitrator appointed by the American Arbitration Association. The arbitrator shall apply the laws of the State of Illinois and shall render a written decision with the reasons therefor within one (1) year from the date the matter is submitted to arbitration.
B. Licensee should not be relieved of its obligation to make payments to the licensor required by the terms of this agreement during the arbitration proceeding and licensor is permitted to apply for and obtain from a court a temporary restraining order and/or preliminary injunctive relief pending the outcome of the arbitration.
C. The decision of the arbitrator shall be binding and conclusive on the parties and they shall comply with such decision in good faith. Each party submits itself to the jurisdiction of the courts of the State of Illinois, but only for the entry of judgment with respect to the decision of the arbitrator hereunder, including injunctive relief if appropriate to render effective the arbitrator's decision. Notwithstanding the foregoing, judgment on the award by the arbitrator may be entered in any court of the State of Illinois or any court having jurisdiction. If judicial enforcement or review of the arbitrator's decision is sought, the prevailing party shall be entitled to its costs and reasonable attorney fees in addition to any amount of recovery ordered by the court.
It is noted that arbitration has the advantage of providing a relatively expedient resolution of a dispute. However, arbitration to recognize this having certain drawbacks, including a less detailed discovery procedure than that afforded by litigation which permits depositions, interrogatories and the mandated presentation of documents necessary to assist the judge in making an appropriate decision. Discovery is much more limited in arbitration and sometimes leads to resolution of the matter without access to all documents and other evidence that might otherwise be necessary. In addition, in selecting arbitrary, it is often advisable for each party to select one of three arbitrators chosen to arbitrate the dispute, with the two arbitrators chosen selecting the third arbitrator. This permits a panel of arbitrators to make the decision and is often found to be more satisfactory to the parties involved in the arbitration.
While the preceding discussion is generally applicable to all technologies, pharmaceutical and biotechnological innovations present special considerations. For purposes of discussion some distinction has been made between these two categories of innovation, however, as a practical matter there is considerable overlap. For example, many pharmaceutical products are now produced by biotechnological processes.
A) Pharmaceutical Innovations
Pharmaceutical innovations often entail not only pharmacologically active chemical compounds and compositions containing the same, but also related enabling or supplemental technologies, such as methods of production and drug delivery components. Thus, it is crucial, at the outset, to determine which of these aspects is to be licensed and which is to be retained.
Whether to retain or "out license" technology will depend on, at least, two important factors. First, the owner of the technology must decide whether it has the necessary expertise to market the same. For example, small biotechnology companies have traditionally relied upon large pharmaceutical companies to obtain FDA regulatory approval for marketing drugs, and then to market the product. Second, the owner must determine whether it is preferable to retain ownership as a part of a manufacturing strategy (increasingly global), or whether it should "out license" the technology provided that the costs of doing so are not unreasonable and the commercial interests of the owner are not adversely effected.
Furthermore, it is also important to initially determine whether trade secret or patent protection is most suitable for each innovative aspect. Generally, subject matter susceptible to reverse engineering, such as chemical compounds, or pharmaceutical compositions are patented. Alternatively, if there is a low probability of independent development, trade secret protection may be more valuable if the subject matter can be maintained in secrecy indefinitely. A method of production is an example of such an innovation as it can be practiced in secret, and cannot be elucidated by reverse engineering of the product produced therefrom.
Of course, it is possible that patent protection may not be available. For example, while a product made by a microrganism may be a valuable commercial product, it may be that the organism producing the product is not patentable. Moreover, if the projected commercial life of a product is only one to several years or where disclosure in a patent would readily allow others to design around the patent, trade secrecy may be more appropriate.
Finally, primary reliance upon patent protection may be advisable as a matter of policy in order to attract and maintain scientific talent by providing assurance that research results may be published.
B) Biotechnological Innovations
Biotechnological innovations are different from all other types of innovations since reproducible organisms are involved. Thus, the transfer of rights may entail not only intellectual property rights, such as patent or trade secret rights, but also personal property rights in physical objects, such as organisms, cell lines, gene constructs, plasmids, or expression vectors. It is important to determine and define exactly what is to be transferred and to recognize that the licensee may end up retaining possession of the "means of production" after termination of the license. Thus, it is essential that the license agreement clearly define the scope of the rights transferred as well as the licensee's obligations at termination. See §1.07.
Licensing of pharmaceutical and biotechnological innovations usually entails transfer of valuable know how in addition to either patented and/or trade secret proprietary materials. Thus, it is imperative that the license's ability to transfer any materials and/or information to a third party for any use whatsoever be strictly defined as the situation warrants.
One area of particular difficulty arises where a preliminary assessment of value by the prospective licensee is required prior to reaching a final decision on whether to license technology. There is a risk that exposure to the licensor's secrets may taint the licensee if the licensee ultimately decides against a licensee and to develop the product itself.
Moreover, where trade secrets are involved, particular care must be exercised to ensure that trade secret rights are not forfeited by inadvertent release. For example, in Defiance Button Machine Co. v. Metal Products Corp.[23], plaintiff maintained a confidential customer list on a computer which was then sold to defendant. Although plaintiff maintained the floppy disk backup of the list in a locked room, the list was not erased prior to delivery of the computer to the defendant. The defendant was found free of any liability when a former employee of the plaintiff was later hired to copy the customer list using source books and file names readily available for use. The court found that by failing to erase the computer memory, and in failing to protect the source books having file names, plaintiff had failed to take adequate security precautions to protect its trade secret customer list.
The rationale of Defiance can be extended to a variety of situations in biotechnology. For example, might apply to any situation where a company allows visitors to take literature or other sample objects which might be contaminated with a proprietary microrganism culture. This problem could be avoided, for example, by keeping unauthorized personnel well away from fermentation areas, and by using strenuous disinfecting measures to minimize the change of accidental contamination.
Biotechnological innovations are different from other types of innovations particularly in the ease with which trade secrets can be forfeited. For example, the sale of Coca-Cola©® to the public is not considered to constitute forfeiture of the trade secrecy of the composition. In contrast, in Yoder Bros. Inc. v. California-Florida Plant Corp.,[24] the Fifth Circuit held that irrespective of whether the genetic composition of a new plant sport[25] was protectable as a trade secret, the secret was irrevocably lost upon release of the sport to the public. The reason for this distinction is that mere possession of the new plant not only confers possession of the genetic composition therefor but also the means of reproduction.
Finally, the Freedom of Information Act[26] (FOIA) presents a particular challenge to any commercial entity required to submit information to a federal agency in attempting to preserve trade secrets.[27] The FOIA mandates prompt release of all executive agency records and documents upon request unless the requested information falls within one of nine specific exemptions.[28] Section 552(b)(4) provides an exemption for trade secrets or confidential commercial or financial information. However, there are several reasons why the balance between confidentiality and the public "need to know" is unsatisfactory.
First, the vast majority of FOIA requests come directly from domestic and foreign competition or indirectly through intermediaries. Thus, the FOIA, although designed to promote "open government", has been used, instead, to reallocate commercial information among private parties.[29]
Second, in Chrysler v. Brown,[30] the Supreme Court held that the FOIA is purely a disclosure statute and affords no private right of action to enjoin agency disclosure. Moreover, the Court noted that the FOIA protects the submitter's interest in confidentiality only to the extent that this interest is recognized and endorsed by the reviewing agency.
Third, in the aftermath of Chrysler, courts have held that all FOIA exceptions are permissive and not mandatory. That is, even if a particular exception appears to apply, an agency may proceed with its discretionary decision as to whether to disclose the requested information.
Finally, the regulation of biotechnological subject matter is partitioned among several federal agencies, such as the Food and Drug Administration (FDA) for drugs, food additives and medical devices;[31] the Environmental Protection Agency (EPA) for chemicals, pesticides and pollutants; and from the Occupational Safety and Health Act (OSHA), which regulates workplace safety, including laboratories and production facilities. Each agency has its own regulations regarding trade secret exception from disclosure. Prudence would seem to require periodic agency "policing" to ensure that material "exempt" from disclosure not be inadvertently retained in documents for subsequent release by an agency.
The risk of success is a fundamental consideration in ascertaining the investment value of pharmaceutical products. The following product risk table is reproduced from Licensing Economics Review[32]:
Pharmaceutical Product Risk*
*attributed to Shearson Lehman Hutton.
This article further suggests that a discount rate of 70% may be appropriate at the Pre-IND development stage, whereas at the NDA level of development a discount rate of only 20% may be appropriate. This is consistent with high rates of return demanded by investors when investing in the early stages of drug development. Generally, pharmaceutical licensees demand exclusive licenses to assure an adequate return on investment.[33]
Biotechnological innovations present further important distinctions in various fields of use as between, for example, diagnostic and therapeutic use. In particular, monoclonal antibodies may be used in either diagnostic or therapeutic applications. Generally, therapeutic royalty rates run slightly higher than diagnostic royalty rates with exclusive rates in each category being higher than non-exclusive rates.[34]
[4] Existing Verses To-Be-Developed Technology
Particularly with pharmaceutical and biotechnological innovations, it is important to define whether the licensee is being granted rights to future inventions within the scope of the licensed technology. Rights to future innovations may either be granted to the licensee or back to or retained by the licensor, however, it is important that any license agreement require that the licensor's proprietary information be held confidential. This does not include, however, information in possession of the licensee prior to the license agreement or information already in the public domain through no fault of the licensee.
While the inclusion or noninclusion of future developments in a grant of rights to the licensee depends upon the objectives of the parties, a precise definition of "improvement" is essential as well as the time span over which any such improvements occur. It has been suggested as prudent that both technical and legal definitions of "improvement" be included in any license agreement.[35]
For example, any or all of the following technical or functional definitions might be used to define "improvement":
(1) Anything that performs the same function as the specifically licensed invention in a better or more economical way;
(2) Any beneficial modification of a component (or material) useful in the licensed invention; or
(3) Anything that performs functions similar to those of the licensed invention as described in a licensed patent and infringes the claims of the licensed patent (or some one of the licensed patents, if there are several).[36]
Additionally, the following positive as well as negative legal definitions may also be used in the interest of clarity:
"Improvement", as used in this agreement, means any modification of a licensed [device, process or compound] described in a licensed patent, provided such modification, if unlicensed, would infringe one or more claims of the licensed patents.
"Improvement" does not mean developments in respect to [devices, processes or compounds] useful in practicing the inventions of the licensed patents, but which do not themselves infringe the licensed claims of the licensed patents.[37]
Where rights to future developments are intended to be granted to the licensee, licensee may consider the following language in any agreement as a source of assurance of good faith on the part of the licensor:
Licensor will throughout the term of this agreement, as far as it is reasonably practicable for it to do so, cause its employees who are employed to do research, development or offer inventive work to disclose to it inventions within the scope of this agreement and to assign to it rights in such inventions such that licensee shall receive, by virtue of this agreement, the licenses agreed to be granted to it, it being understood that if due care and diligence are used, any inadvertent failure to comply with this section of the agreement shall not constitute a breach of the agreement.[38]
Finally, it is conceivable that the licensed patent or patents are, themselves, directed to improvements. The question which then arises is whether the licensor intends to license the relevant dominant patent or patents. This intent should be made clear and the agreement should explicitly state whether such rights are withheld or granted by the owner.
Bankruptcy is an additional topic of particular concern with license agreements[39] wherein at least one party is a small "start up" company, such as a biotechnology company.[40] Although a detailed discussion is beyond the scope of this paper, the implication for parties licensing biotechnology is worthy of note. A problem arises for a party licensing technology from a small biotechnology company ("SBC") which has filed, or is likely to file, for bankruptcy. For example, supposing a large drug company (LDC) licenses and uses patented DNA technology from SBC for diagnostic test kits. If SBC files for bankruptcy, it may reject the license agreement.
Under Section 365 (n) of the Bankruptcy Code of 1988,[41] LDC may, at its option, elect to either "retain its rights" and continue to pay royalties, or treat the executed contract as terminated. This requires however (i) a license of intellectual property, and (ii) that the license agreement be an executory contract.[42]
In order to position itself to benefit from section 365(n), LDC must expressly provide in the license agreement, by definition, that the licensed property is "intellectual property" and that the license agreement is subject to section 365 of the Bankruptcy Code. Further, since rejection of the license by SBC permits SBC to avoid any continuing contractual objections (while allowing LDC to use the licensed property), LDC should specify in the license agreement those payments related to use of the licensed property, and those related to ancillary contractual obligations refused by SBC. This avoids payment by LDC for services refused by SBC.
Generally, it is advisable for the licensee to ensure that the license agreement specify in detail the nature and extent of the continuing obligations of both parties through the term of the contract. If bankruptcy occurs, this detail will increase the chance that the contract will be characterized as executory, and, thus, subject to section 365(n) of the Bankruptcy Code.- - -UAA.[43]
* Mr. Hamilton is a partner in the Electrical-Mechanical Department of Oblon, Spivak, McClelland, Maier & Neustadt, P.C. of Arlington, VA. and is a member of the Licensing Executives Society.
** Mr. Beaumont is a partner in the Chemical Department of Oblon, Spivak, McClelland, Maier & Neustadt, P.C., specializing in chemical and biotechnical inventions, and PCT practice and holds an LLM in Patent and Trade Regulation Law.
[1] As codified by Title 35 - Patents and Title 37 - Code of Federal Regulations - Patents, Trademarks & Copyrights.
[2] 35 U.S.C. §102 - Conditions for patentability; invalidity and loss of right to patent.
(e) the invention was described in a patent granted on an application for patent by another filed in the United States before the invention thereof by the applicant for patent, or on an international application by another who has fulfilled the requirements of paragraphs (1), (2), and (4) of section 371(c) of this title before the invention thereof by applicant for patent, or
[3] 14 ULA (Supp. 1987), Commissioned by the Material Conference of Commissioners on Uniform State Laws, the USTA was recommended for all states in 1979 and approved by the American Bar Association in 1980.
[4] 35 U.S.C. §280.
[5] e.g., "The product invoiced herewith, and the process for making such product, are claimed in U.S. Patent No. 5,008,105."
[6] The Uniform Computer Information Transactions Act (UCITA).
[7] Carborundum Company v. Molten Metal Equipment Innovations, 72 F.3d. 872, 37 USPQ2d 1169 (Fed. Cir. 1995).
[8] DeForest Radio Telephone & Telegraph Co. v. Radio Corp. of Am., 9 F.2d 150 (D. Del. 1925), aff'd 20 F.2d 598 (3d Cir. 1927).
[9] e.g., "Licensee shall use all best effort to commercialize the licensed product and meet a minimum amount sales of 1,000 units of the licensed product per annum."
[10] Standard Oil Company v. United States, 283 US 163, 9 USPQ 6 (1931).
[11] Black's Law Dictionary, 119 (6th ed. 1990).
[12] 138 US 252 (1891).
[13] Vaupel Textilmaschinen KG v. Meccanica Euro Italia spa., 944 F.2d 870 (Fed. Cir. 1991).
[14] Waterman v. MacKenzie, supra.
[15] 35 U.S.C. §261.
[16] F.A.R. Liquidating Corp. v. McGranery, 110 F. Supp. 580, 96 USPQ 302 (D. Del. 1953).
[17] Waterman v. MacKenzie. supra.
[18] Kenyon v. Automatic Instrument Co., 63 F. Supp. 591 (W.D. Mic. 1945) rev'd on other grounds, 160 F.2d 878 (6th Cir. 1947).
[19] Zenith Radio v. Hazeltine, 161 USPQ 577 (US Sup. Ct. 1969).
[20] See, for example, Tights, Inc. v. Kayser-Roth, 442 F. Supp. 159, 196 USPQ 750 (M.D.N.C. 1977). See also Hanson v. Alpine Ski Area, 718 F.2d 1075, 219 USPQ 79 (Fed. Cir. 1983); W.L. Gore & Assoc. v. International Medical Prosthetics, 16 USPQ2d 1241 (D. Ariz. 1990).
[21] Panduit Corp. v. Stahlin, 575 F.2d 1152, 197 USPQ 726 (6th Cir. 1978).
[22] Paper Converting Machine v. Magna-Graphics Corp., 745 F.2d 11, 223 USPQ 591 (Fed. Cir. 1984).
[23] 759 F. 2d 1053 (2nd Cir. 1985).
[24] 537 F.2d 1347 (5th Cir. 1976).
[25] A sport is a new plant species which appears as a result of a mutation in the parent genome.
[26] 5 USC §552 et seq.
[27] FOIA also presents a challenge to patentees inasmuch as documents available under the Act are likely to constitute a "printed publication" under either 35 USC 102(a) or (b). See AIPLA Quart. Jour., Vol. 27, No. 1 "The Freedom of Information Act: Another Pond For Prior Art Fishing Expeditions" (Winter 1999).
[28] 5 USC §552(b)(1)-(9).
[29] See "The Freedom of Nonfree Information: An Economical Proposal for Government Disclosure of Privately Submitted Commercial Information, 32 Stanford Law Review 339 (1980).
[30] 441 U.S. 281 (1979).
[31] Including monoclonel antibodies in in vitro tests.
[32] "Commercialization of Biomedical Technology", June 1991.
[33] Licensing Economic Review, "Pharmaceutical Licenses are Exclusive", Sept. 1997.
[34] Licensing Economics Review, "Recent Licensing Transaction", Sept. 1990.
[35] See "Drafting Patent License Agreements", Mayers and Brunswold (Second Edition, BNA Books).
[36] Id. at pp. 68-69.
[37] Id. at pp. 69-70.
[39] For a thorough discussion of the problem of bankruptcy in licensing, see Intellectual Property Today, "Bankruptcy Filings and IP Licenses", Vol. 7, No. 4 (April 2000).
[40] This is of particular concern at present due to the large divergence of private capital to so-called retail and B2B "dot.com" companies, leaving many small biotechnological start ups thinly capitalized.
[41] 11 USC §101 et seq.
[42] Section 365(n)(1)(A) and (B). The term "executing contract" means that as of the date of bankruptcy filing, both parties have unfulfilled contractual obligations.
[43] UAA, along with UAG and UGA, are "stop codons" and a responsible for the termination of protein synthesis. See Introduction to Recombinant DNA, by Emery (Wiley).