Intellectual Property Licensing Assessment / Strategy

Licensing an invention requires an evaluation of the patents to be licensed including determining the validity and scope of such patents and determining their potential value. An appropriate business plan should be implemented to implement the licensing strategy ranging from a simple nonexclusive license agreement to a more complex joint venture.  An evaluation of the patent requires a thorough review of the products that the patent covers, assessing the validity and scope of the patents to be licensed, and identification of potential infringers.

A patent owner that sells or exclusively licenses a patent may reserve some rights to make, use or sell the transferred invention.  Since no such rights are implied in an unequivocally exclusive license grant, they 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.

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:

• the validity or scope of any licensed patent under the agreement.
• 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.
• that licensor shall file any patent application, secure any patent or maintain any patent in force.
• to prosecute actions or suits against third parties for infringement.
• to furnish any manufacturing or technical information required by licensee.
• to confer the right to use in advertising, publicity or otherwise any trademark or trade name of the licensor.
• to grant rights with respect to supportive products under the agreement to foreign countries.
• 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 can 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.

Consideration should be given to including a carefully drafted arbitration provision in the license agreement.  Such arbitration clause should 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 enacted 35 U.S.C. §294 to make clear 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.