External Confidential Presentation Template

Vision
Speed
Performance
What the In-House Generalist and the Business
Lawyer Need to Know about Licensing
By: Larry Schroepfer
Schroepfer Technology Law
© Larry Schroepfer 2014
Introduction
• Larry Schroepfer, Principal
Schroepfer Technology Law
– 35 Years Total Experience (yikes!)
– In-House Generalist Experience
– Diverse Career Path Lead to In-House Jobs Focusing on
Licensing and Technology Transactions
• AMP/Tyco Electronics, BTG, InterDigital
– Established Solo Practice Concentrating on Licensing and
other Intellectual Property and Technology Transactions
• I’m a Deal Junkie
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There’s Licensing……
• And then There’s Licensing……
– And then There’s Licensing……
• And then There’s Licensing…….
– (You Get the Idea)
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There’s Licensing……
• Types of Licenses
– Patent Licenses (“Stick” Licenses)
– Technology Transfer (Knowhow, Trade Secret) Licenses
(“Carrot” Licenses)
– Copyright Licenses
– Trademark/Trade Name Licenses
– End-User Software Licenses
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Presentation Focus
• Focus will be:
– Patent Licenses
– Technology Transfer Licenses
• Focus from standpoint of Licensee, not Licensor
– Assumption: Attorneys who regularly work in licensing
from Licensor perspective are not “Generalists”
• Assume we’re dealing with nonexclusive license
– Same considerations apply to exclusive license, but
exclusivity adds significant and complicated issues
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A Few Words About the “Other” Licenses
• Copyright Licenses
– Works of Authorship
– Tangible Expression of an Idea, not the Idea Itself
– Copyrighted material (principally software) may be
included in Technology License, and will address in that
context
• Trademark/Trade Name Licenses
– Beware of Naked Licenses!
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A Few Words About the “Other” Licenses
• End User Software Licenses
– Commercial, off-the-shelf software to be used internally in
conduct of Licensee’s business
• Think Oracle, MS Office Suite, Worksite, etc.
– Fact that commercial, End-User Software is “Licensed”
rather than “Sold” is a Bit of a fluke based on nature of
software
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Patent License
• What it is:
– Payment for past sins
– Agreement to go forth and sin no more
• What it isn’t:
– Grant of right to Practice Product or Service covered by
the claims of the Licensed Patent free from third party
patent infringement claims.
• A Patent License does not confer “Freedom to Operate”
• Think of milk and chocolate milk
• If you ask for representation or warranty covering freedom to
operate, you’re only telegraphing your inexperience
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Do you Really Need to Take the License?
• Does your product clearly fall within each and every
element of one or more of the Patent Claims?
– For our purposes, the claims of the patent are all that
really matter.
– If any element of the claim isn’t met, you don’t infringe
• This can be highly technical analysis
• (But note: contributory infringement or inducement – beyond
scope of this presentation)
• Is the patent valid?
– From a generalist lawyer point of view, it’s almost
shocking how little deference is paid to an issued patent
– The majority of litigated patents are found invalid!
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Do you Really Need to Take the License?
• Will the licensor really sue?
– Cost of patent litigation is obscene
• (But this cuts both ways)
– Is the licensor willing to risk a finding of invalidity?
• A counterclaim for invalidity will always be made
• So any time a patent is “put in play”, the licensor risks a finding of
invalidity
• An invalidity finding would put the licensor’s existing licenses and its
licensing program at risk.
– Do you have any patents you can assert against the Licensor?
• “I’ll see your patent and raise you a patent”
• Mutual Assured Destruction
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Patent License: Most Important Threshold Issue
• Correctly Define the “Licensed Product”
– Most common definition: Any product or service that is
covered by the claims of the defined “Licensed Patents”
• What happens if the Licensor (or its Affiliate) own other
patents that cover the product?
• What happens if the Licensor (or its Affiliate) subsequently
acquire other patents that cover the product?
– What you really want is to continue selling whatever it is
that’s infringing the Licensor’s or its Affiliates’ patents
• You want to make them go away and never come back.
• Which means you need to clearly focus on “Licensed Product”
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Patent License: Most Important Threshold Issue
• Correctly Define the “Licensed Product”
– Start with the product or device you’re selling
• May be very general (e.g., inkjet printers)
• May be limited to specific products listed in exhibit
– If very specific, think about product improvements,
extensions, next-generation products
• You don’t want to “freeze” your current product generation for
the sake of taking the license
• Expansive Licensed Product definition versus Licensor
Rep/Warranty
– You don’t want a contractual rep, you want a clear grant
of intellectual property rights
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Patent License: Next Threshold Issue
• Correctly Define the “Licensed Patents”
– All patents that the Licensor and its Affiliates own or have the
right to license, existing or later acquired, the claims of which
cover the Licensed Products (as you’ve just defined them).
– However, don’t stop there:
• What if the patents being asserted cover other products that you
sell, or develop or acquire in the future?
• You should get a “clean” license to the asserted patents, and all
other patents in the same “Patent Family”, which includes:
– Pending applications
– Foreign counterparts
– Continuations, continuations-in-part, divisionals, reissues (essentially
any patent claiming common priority)
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Patent License: Third Threshold Issue
• Scope of the license grant
– Grant under the Licensed Patents to make, have made,
use, sell, import Licensed Products
• Make sure you have all of the above, especially the “have
made” grant
– Territory Restrictions
• Separate Territory Restrictions for Making versus Selling?
– “Field of Use” Restrictions
• What is a Field of Use?
• May be Overlap between “Field of Use” and Definition of
“Licensed Products”
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Patent Licenses: Final Threshold Issue
• Royalties
– If possible, royalties should be calculated on a per-unit
basis, or other measurable factor such as throughput
• Per-unit basis is by far the cleanest and easiest to account for
sales of licensed products going forward
– If royalty is to be based on the value of licensee’s sales, it
should always be based on top-line selling price, minus
only specific deductions for shipping, insurance, etc.
(usually defined as “Net Selling Price”)
• A royalty based on “Net Profit”, “Gross Margin”, or anything
below top-line Gross Revenue minus itemized deductions is
an accountant’s nightmare and a lawsuit waiting to happen.
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Patent Licenses: Final Threshold Issue
• Royalties
– Need to establish a “Royalty Base” if licensee
incorporates licensed products as components into higher
value-added products
• Is it 3% of the connector, 3% of the electronic system, or 3%
of the Mercedes-Benz?
– Agreement will invariably include an audit clause
• Require outside auditor if licensor is a competitor
• Who bears cost of audit usually depends upon audit findings
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Threshold Issues
• If you have these things right:
–
–
–
–
Licensed Patents definition
Licensed Products definition
Scope of the license grant
Clear definition of royalty structure
You’re 80%+ of the way home free
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Patent Licenses: Some other Pointers
• The Licensor should represent and warrant that it
owns and/or has the right to license the Licensed
Patents.
– Just about the only warranty you will get
– Disclaimer of other reps/warranties (express or implied) is
standard
• The licensor will expect indemnification from Licensee
for product liability-type claims (death, personal injury,
property damage)
– No need for any broader indemnification, but licensor will
try to obtain one
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Patent Licenses: Some other Pointers
• Licensee should have the right to transfer or assign
the license in connection with sale of the business to
which license relates
– Failure to include this right can lead to serious problems
and potentially need to “pay ransom” if you want to sell
the company or business unit.
• Think about whether you may need the right to
sublicense
– Difference between sublicensing and exercising right to
have made
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Patent Licenses: Some other Pointers
• Beware of Licensor “Affiliates”, especially if the
Licensor is a “Non-Practicing Entity”
• Don’t pay for what the Licensor doesn’t own
– Look at geographic scope of Licensor’s patents
– Royalty obligations should terminate on a country-bycountry basis when patents expire
• Beware the “tax gross-up” clause
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Patent Licenses: Some Nice-To-Haves
• Most Favored Licensee
– “Nice work if you can get It”
– But it’s worth some bargaining chips anyway
• Licensor Duty to enforce Licensed Patents against
other infringers (i.e., your competitors)
– Ditto the above
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Patent Licenses
• Questions/comments before we move on?
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Technology Transfer License
• What it is:
– Transfer to licensee of some form of technical information
or knowhow that will create tangible and measurable
economic value to the licensee.
• Unlike patent licenses, Licensee’s ability to practice the
licensed technology is paramount.
• Licensee thinks of a technology license as acquiring a
“product” or “component”
• To the Licensee, a technology transfer license is similar to a
product purchase agreement
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Technology Transfer License
• What it is not (at least primarily):
– A grant of legal rights
• Extent to which technology is patented is of secondary
importance, and sometimes virtually no importance at all
• However, to the extent that there are legally-recognized
intellectual property rights (including patents and copyrights),
the Licensee expects to obtain grant under those legal rights
• Hence a Technology License can be a “hybrid” between a
grant of rights and a purchase of a product
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What Form does “Technology” take?
• In legal terms, non-patented and non-copyrighted
technology is protectable as a “trade secret”
• However: Implication of the term “trade secrets” is too
narrow
• “Licensed Technology” may take the form of:
–
–
–
–
–
–
Designs (e.g., circuit designs)
Processes (e.g., polymer manufacturing)
Formulations and biologic “material”
Drug development data (clinical or preclinical results)
Software algorithms and code
Information and anything else that creates value that is not in
the public domain
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Similarities with Patent Licenses
• Entire definition structure
– Licensed Products, Net Selling Price, Licensed
Technology, royalties and royalty structure, etc.
• Structure and scope of the license grant
– Territory, Field of Use, etc.
– Sublicensing rights
• Transferability of the license
– Probably more important than in straight patent licensing
• Most of the issues and contractual provisions
discussed above
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Key Differences From Patent License
• Key differences from Patent License all involve
licensee need to practice the licensed technology:
– Inclusion of structured technology transfer, maintenance
and support processes
– Scope of Licensor’s representations and warranties
– Licensor indemnification against third-party patent
infringement claims
– Rights to Improvements
– Ownership and rights to “jointly” developed intellectual
property (developed during the tech transfer process)
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Technology Transfer and Support
• Complex technology transfer requires significant
“hand-holding”
– Agreement should include a Statement of Work or similar
document as an exhibit
– Pin down the Licensor on exactly what it will do and when
(technology transfer projects always overrun timeframe)
• Agreement or Statement of Work should include
acceptance tests and test procedures, as well as
specific, quantifiable acceptance criteria.
• Agreement exhibit should also list all “Deliverables” to
be provided and all licensor training obligations
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Technology Transfer and Support
• Payments should be structured based on specific
technology transfer events
– Provision of Deliverables, completion of training, fulfillment of
acceptance criteria
– Always hold back final payment (at least 10%) until technology
transfer and training are completed, all acceptance criteria
fulfilled, and licensee has successfully replicated the
technology
• Think about post-acceptance maintenance and support
– Include multi-year maintenance/support contract with
predefined cost and payments
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Licensor Representations and Warranties
• Minimum required warranty: Licensed Technology
conforms to the Documentation and Deliverables
(which is why it’s important to include document list)
– This warranty should not be a problem for the licensor,
since licensor defines the Documentation in the first place
• Documentation and technology to be transferred are
sufficient to enable someone skilled in the art to
successfully produce the Licensed Products and/or
practice the Licensed Technology
• Licensed Technology is the same technology that
Licensor itself uses (if applicable)
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Licensor Patent Indemnification
• Possibly biggest difference between patent licensing
and technology transfer licensing
• Tech transfer license as “hybrid” between grant of
rights and purchase of a product
• In product sales, indemnification is the norm
• UCC implied warranty
• Indemnification is consistent with entire value
proposition of technology transfer licensing
• What good is the technology to Licensee if Licensee can’t
practice it??
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Patent Indemnification: Licensor Considerations
• Huge financial undertaking
– Cost of patent litigation
• Financial risk is disproportionate to amount of license
fees and royalties received
– Royalties are small percentage of licensed product value
and therefore potential damages claim
• Licensor does not control Licensee’s implementation
of licensed technology
• Licensor’s own business can be put at risk
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Patent Indemnification
• Most common compromise provision is financial “cap”
on indemnification liability
– Can be tied to amounts paid under the license agreement
– Can be an arbitrary agreed-upon number
• Geographical limitation to US.
– Practically speaking, US is where lion’s share of risk
resides from financial perspective
• Limit to only patents, not other forms of IP
– But arguably licensor should be even more accountable
for copyright or trademark infringement or trade secret
misappropriation
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Patent Indemnification
• Conditions to licensor obligation
– Prompt notice of claim, licensor control of defense,
licensee duty to cooperate
• Exclusions to indemnification obligation
– Combinations, modifications, elements of licensee design
• Sole and exclusive remedy for infringement
– Obtain license, redesign, or terminate license and refund
agreed amount
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Improvements
• Issue is each party’s rights to improvements that the other
party makes to the technology “downstream” after tech
transfer process is completed
• Toughest issue of them all in technology transfer licensing
– Licensor believes value of its downstream improvements not
factored into license price
– Licensee knows that subsequent licensor improvements could
diminish value or even obsolete licensed technology
– Licensor wants licensee’s improvements to prevent licensee
“leapfrogging”
– Licensee wants to keep its own improvements since it incurred
the cost and should keep value and competitive advantage
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Improvements
• Toughest issue of them all in technology licensing
– Difficulty in defining what’s an “improvement” and what’s
a development by either party that’s “something new”,
even though it may be based upon or related to the
licensed technology
• Most “Improvement” definitions are just a string of vague
words like “changes, modifications, enhancements,
developments, revisions, updates, adaptations” etc.
– Uncertainty about technical and market evolution
• Neither party completely understands what it might be “giving
up” by granting the other an improvements license
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Improvements
• Make improvements rights reciprocal
– Keeps both parties “honest” if required to give whatever
grant they get
• Limit to only patented improvements
– At least provides freedom to operate
– But technology licenses aren’t about patents, they’re
about technology, so doesn’t really solve the problem
• Provide inventing party with limited period of
exclusivity to practice the improvement
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Improvements
• Set time limit after which improvements no longer
automatically licensed
– Reduces risk of technical uncertainty if short-term roadmap is
somewhat visible
• Separately deal with right to practice other party’s
improvements versus right to sublicense them
• Create “pool” of best practices developed by licensor,
licensee and all other licensees
• Provide each party with option to license the other’s
improvements upon financial terms to be negotiated
– Essentially defers problem, but may be only option if a party is
particularly sensitive on improvements issue
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Ownership and rights to “jointly” developed IP
• Rights to technology (and intellectual property rights in
it) developed as part of tech transfer process
– Tech transfers process almost always include some
element of “development” by both parties
– Developments may or may not be truly “joint” under either
patent or copyright law
• How to allocate ownership and rights to these
developments?
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Ownership and rights to “jointly” developed IP
• “Patent Law Punt”
– What’s mine is mine, what’s yours is yours, what’s truly
joint (in patent law sense) is joint
– Contractually easy, but doesn’t address right to use and
right to license the technology itself
• Ownership isn’t as important as rights
– So patent law punt doesn’t really solve the problem
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Ownership and rights to “jointly” developed IP
• Allocate rights based on nature of the development,
rather than inventorship
– If development relates to underlying technology, licensor
owns; if development relates to licensee’s application of
the technology, licensee owns
• Approach more in line with assigning rights where most value
resides
• But: definitions of each party’s “technology” get tricky
• Still need to determine non-owner’s rights to the developed
technology and IP
• May also need to include licenses to background IP
necessary to practice the development
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Other points about “jointly” developed IP rights
• Allocate responsibility for patenting and enforcing true
joint Intellectual Property
– Include specific provisions in the license for patent
application, prosecution, maintenance, assertion
responsibility and cost
• Consider (and provide for) possibility of maintaining
invention as trade secret
– Frequently not addressed
– Could be very important if development relates to process
technology or if third party infringement is difficult to
establish
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Questions/comments?
Thank you!
Larry Schroepfer
Schroepfer Technology Law
[email protected]
www.schroepfertechlaw.com
blog:www.licensing-lawyer.com
Copyright © 2014 Larry Schroepfer
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