Volunteer speakers – a big thank you!

Take a bow...

Take a bow…

Our 5-day course, Intellectual Property Transactions: Law and Practice, has now been running for 3 years at UCL, and we hope it will be a long-term fixture. Designed for newly-qualified UK IP lawyers, it has also attracted lawyers and patent attorneys from all over the world, including the USA, Japan, Costa Rica and Brazil.

The success of the course is based largely on the quality and commitment of its volunteer speakers. We would like to thank them all for preparing high-quality materials and delivering stimulating lectures and workshops, as confirmed by the excellent feedback that this course gets every year from its students.

The course is led by Mark Anderson of Anderson Law and UCL, and by Professor Sir Robin Jacob of UCL. Special mention should be made of the following people, who lead teams from their firms giving an extended programme of talks:

Mark Lubbock from Ashursts, whose team runs a half-day session on IP aspects of M&A transactions
Nigel Jones from Linklaters, whose team runs a half-day session on IP as security
John Enser from Olswang, whose team runs a half-day session on media transactions

Other firms including Bristows and Pennington Manches provide similar levels of support, spread among several speakers. The speakers and workshop facilitators at the 2015 outing of the course were:

1. Mark Anderson of Anderson Law
2. Chris Bates of Ashurst
3. Christine Bendall of PharView
4. Kathy Berry of Linklaters
5. Michelle Blunt of Baker & McKenzie
6. Stephen Brett of Anderson Law
7. Simon Bullock of Ashurst
8. Toby Crick of Bristows
9. Sam de Silva of Pennington Manches
10. John Enser of Olswang
11. Michael Fealy QC
12. Louise Fullwood of Pinsent Mason
13. John Hull of Farrers
14. Robin Jacob of UCL
15. Nigel Jones of Linklaters
16. Tomos Jones of Olswang
17. Mark Lubbock of Ashurst
18. Leigh Martin of Clarion
19. Christoph Rieken of Ashurst
20. Judith Schallnau of WIPO
21. Chris Shelley of Pennington Manches
22. Paul Sidle of Linklaters
23. Sally Shorthose of Bird & Bird
24. Jeff Skinner of London Business School
25. Adrian Toutoungi of Eversheds
26. Joanne Vengadesan of Pennington Manches
27. Patricia Wade of Ashurst
gold star28. Philip Wareham of Hill Dickinson
29. Matthew Warren of Bristows
30. Tim Worden of Taylor Wessing
31. Cerys Wyn Davies of Pinsent Mason

A big thank you to all of you!

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Post-expiry royalties: what’s the problem?

weirdThere are some weird terms in US licence agreements. Let’s leave aside the general peculiarities of US contract wording. Examples such as “indemnify, hold harmless and defend”, “represents, warrants and undertakes”, “successors and assigns”, and a host of other excrescences, appear in many types of commercial agreement and not just IP licences. Instead, let’s focus on wording that deals with the duration of royalties in licence agreements. This issue came into sharp focus last week, with the decision of the US Supreme Court in the case of Kimble v Marvel Entertainment, LLC.

More on that case later. The general issue, in the US and internationally, is whether it is appropriate to require a licensee of IP to pay royalties after the IP has expired, been revoked, or otherwise ceased to exist. A generation or two ago, there seemed to be a consensus among legislators and the courts that it was not appropriate. This attitude could be seen, for example, in:

  • the US Supreme Court case of Brulotte v Thys Co, a 1964 decision that was discussed and followed in the Kimble case linked above. In Brulotte, the court decided that a contractual obligation to pay patent royalties after the patents had expired was “unlawful per se“.
  • the UK Patents Act 1977, which included a provision in section 45, since repealed, that: “Any contract for the supply of a patented product or licence to work a patented invention, or contract relating to any such supply or licence, may at any time after the patent or all the patents by which the product or invention was protected at the time of the making of the contract or granting of the licence has or have ceased to be in force, and notwithstanding anything to the contrary in the contract or licence or in any other contract, be determined, to the extent (and only to the extent) that the contract or licence relates to the product or invention, by either party on giving three months’ notice in writing to the other party.”
  • the 1984 EC Block Exemption Regulation for patent and know-how licences, which black-listed a provision whereby: “the licensee is charged royalties on products which are not entirely or partially patented …without prejudice to arrangements whereby, in order to facilitate payment, the royalty payments for the use of a licensed invention are spread over a period extending beyond the life of the licensed patents …” Recital 22 to the Regulation clarified that this spreading of payments referred to “spreading payments in respect of previous use of the licensed invention” – ie use during the period when the patents were in force.

A possible solution to this issue is to grant a mixed patent and know-how licence, in which royalties can be charged for use of know-how in circumstances where there are no patents, eg because they have expired or not been applied for in a particular country.

While this solution may work in many countries, there has clearly been a strand of opinion that, in the USA, a more nuanced approach to royalty terms is required. It seems to be thought by some that the licence agreement should state separate royalty rates for use of patents and for use of know-how. Presumably this makes it easier to show that there is no disguised patent royalty after the patents have expired. This approach is consistent with a comment from Kagan J in the Kimble case. She said:

That means, for example, that a license involving both a patent and a trade secret can set a 5% royalty during the patent period (as compensation for the two combined) and a 4% royalty afterward (as payment for the trade secret alone).

IP Draughts has seen some very strange royalty terms that try to finess this issue, eg providing separately for X% for use of patents and another royalty of X% for use of know-how, but stating that for as long as both patents and know-how protect the product, only the patent royalty applies. After the patent expires, only the know-how royalty of X% applies. Hey presto, X% applies both before and after the patent expires! IP Draughts has severe doubts about the effectiveness of this type of legal engineering.

More conventional, in IPDraughts experience, is a clause that sets the royalty at X% and reduces it to 50% of X in any country where there is no valid patent.

Ley lines

Ley lines

IP Draughts’ impression is that economists and competition (or in the USA, antitrust) authorities are no longer as concerned about post-expiry royalties as they once were. For example, the European Commission’s 2014 Guidelines on Technology Transfer Agreements state, at paragraph 187:

Notwithstanding the fact that the block exemption [for technology transfer agreements] only applies as long as the technology rights are valid and in force, the parties can normally agree to extend royalty obligations beyond the period of validity of the licensed intellectual property rights without falling foul of Article 101(1) of the Treaty. Once these rights expire, third parties can legally exploit the technology in question and compete with the parties to the agreement. Such actual and potential competition will normally be sufficient to ensure that the obligation in question does not have appreciable anti-competitive effects.

Kimble

In Kimble, the parties had settled patent litigation on terms that the inventor, Kimble, assigned a patent to Marvel in return for royalties. The parties set no end-date for the payment of royalties. Some years later, Marvel “stumbled across Brulotte” and sought and obtained a declaratory judgment that it could cease paying royalties at the end of the patent term. On appeal, the Supreme Court upheld the award of the declaratory judgment. In passing, one wonders how such a defective settlement agreement could have been drafted. Presumably the parties were advised in their patent litigation and settlement negotiations by lawyers who held themselves out as specialists in US patent law.

The majority of the justices in Kimble appeared to recognise that the current thinking of economists (and therefore antitrust authorities) does not object to post-expiry royalties. As the majority judgment put it:

A broad scholarly consensus supports Kimble’s view of the competitive effects of post-expiration royalties, and we see no error in that shared analysis.”

However, that consensus was irrelevant, according to the majority, as the issue before them was one of interpreting statutory patent law, and not antitrust law. The Supreme Court was bound by the principle of stare decisis to follow the decision in Brulotte. If the case had been properly considered as an antitrust case, they might well have been prepared to decide Kimble differently.

IP Draughts found this part of the Kimble decision surprising. Though he has no expertise in US laws, he had always understood the general issue, at least as it is understood in the UK and Europe, to be one of competition (antitrust) law.

The 3 minority justices in Kimble also saw things differently. They commented that the earlier Brulotte case “was an antitrust decision masquerading as a patent case”.

stare decisisGood old stare decisis. IP Draughts remembers being taught about the English version of the rule in his first term as an undergraduate law student, in 1979. Courts are sometimes bound by earlier court decisions on points of law. The English rule is not so constraining as the US one, it seems. The UK House of Lords (now the UK Supreme Court) simply announced in 1966 that it would no longer consider itself bound by its previous decisions.

IP Draughts is left feeling perplexed by the decision in Kimble. It is concerned only with a narrow point on the duration of patent royalties. But on that narrow point, US licensing practice and to some extent (because of the strong, international influence of the US) non-US licensing practice, is frozen in time by the opinions and decisions of an earlier generation of US judges. It matters not whether the decision is based on statutory interpretation or antitrust laws, the practical effect is the same.

Practitioners advising on licence agreements that have a US element to them must consider carefully how the royalty duration is expressed. Many of IP Draughts’ licence agreements provide for royalties to be paid, on a country-by-country basis, for the longer of (a) the duration of the licensed patents, or (b) in the case of know-how, for a period (often 10 years) from the first commercial sale of licensed products. At first glance, this would appear to address the issue. What is troubling IP Draughts is whether the agreement needs to go further, in light of this US case law, and have separate royalty rates for patents and for know-how, as some US templates for patent licence agreements seem to prefer. Readers – do you think this is necessary?

 

 

 

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Drafting standard terms – a thankless task?

tsncsOne of the many tasks that a commercial lawyer is asked to perform, is to draft or revise standard “terms and conditions”.

Definitions

As an aside, the expression “terms and conditions” (or the shorter “ts and cs”) is probably best avoided in a legal setting. The phrase has become part of business jargon, where it is shorthand for standard contractual provisions, such as those which a business seeks to apply to its sales or purchases. As with some other business jargon (eg “due diligence” or “partner”), commercial usage has become a little detached from the original legal meaning.

In traditional English law usage, a condition (sometimes known as a promissory condition, to distinguish it from a contingent condition, such as a condition precedent) is an essential term of a contract, breach of which entitled the other party to terminate the contract. By contrast, a warranty, or term, of the contract, is sometimes understood as a less important provision, breach of which entitled the other party to claim damages but not terminate the contract.

In IP Draughts’ view, this traditional distinction (which is used, for example in the UK Sale of Goods Act 1979) has outlived its usefulness in modern contract drafting practice. Most modern contracts specifically address when a party can terminate for the other party’s breach.

Using the expression “terms and conditions” as a commercial shorthand for standard contract provisions is unlikely to cause legal problems in most situations, but IP Draughts prefers to avoid using legal terminology in this way.

Drafting the blighters

blightOccasionally, IP Draughts is instructed to draft, or update, a client’s standard contract terms. He is currently working on a project to draft standard terms for use by a medical research charity when funding research at universities. Although he has been doing similar work for about 30 years, he still finds it a difficult task to do well and efficiently.

Part of the problem lies in getting clear instructions from the client. They sometimes have a vague idea that they would like their terms to be updated or checked by a lawyer. But they are not intimately aware of why each of the present terms has been included. Sometimes, a term is so “bespoke” that it wouldn’t have occurred to IP Draughts to include it, if it were not already present. No-one in the client organisation knows why it is there. But who is to take responsibility for deleting it from the new standard terms? IP Draughts may have to spend time in discussing its potential implications, the risks associated with deleting it, and so on. This might not be a good use of an expensive lawyer’s time.

A further issue is how to price the task. Should allowance be made for the discussions referred to above? This might result in a price that is difficult for the client to accept.

Who should be doing the drafting? IP Draughts is aware that in many firms, reviewing standard terms is a task for a trainee or junior solicitor. This has the advantage of a low hourly rate, but how good is the review going to be? It is likely to be a desk-based review rather than one that considers the commercial needs of the business.

tell me whyIn the project on which IP Draughts is currently working, he quoted with explicit assumptions, namely that the client wanted simple, standard terms that IP Draughts would base on one of his templates, and that he could ignore the client’s existing terms which are rather detailed and complex. However, the senior executive who agreed the price and the assumptions is not the same person as the manager who has operational responsibility for agreeing terms with universities. The manager, understandably, wants to understand why IP Draughts’ terms are different to those she is used to working with. This has resulted in many hours being spent in discussing the existing terms and the implications of removing the protection given by those terms. IP Draughts’ budget for this project has turned out to be too small.

There is no major deal in the offing, as there would be when drafting a contract for a transaction. So, there is no commercial context in which to assess the value of a lawyer’s contribution. It is human nature that clients tend to undervalue the lawyer’s contribution in drafting standard terms.

IP Draughts doesn’t have an answer to this conundrum. Do readers have any suggestions?

 

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Tripping over 1,000 subscribers

1000IP Draughts is delighted to announce that this blog now officially has 1,000 subscribers, in addition to readers who are informed of postings via LinkedIn and some other sites.

Here are some more, useless statistics:

  • the blog has been running for a little over 4 years
  • there is no paid advertising
  • the site is within a gnat’s crotchet of 300,000 “hits” (page views)
  • it contains just under 400 articles
  • it has nearly 600 published comments
  • traffic is currently running at around 10,000 page views per month
  • in 2012 we won an American Bar Association award, as a member of its Blawg100 (the only site outside North America to receive this award)
  • the most popular article on the blog is about damages not being an adequate remedy in confidentiality agreements. This article has been viewed nearly 18,000 times and continues to be very popular.
  • sockThe countries with the most readers are the US and the UK; these countries have very similar numbers of page views. Next, but some way behind, come Australia, Canada, India and Singapore, and then a selection of European countries.

As ever, we are keen to hear from readers. Please tell us what you like and don’t like about the site.

Thank you for your continued support.

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