When are IP licences implied?

Koncise Drafter is on a roll. Not kontent with spearing the drafters of patent licence agreements (see previous article in this blog), he has turned his attention to patent-licence-deniers – the drafters of contracts for the sale of goods who include a term stating that no licence is to be implied. Ken Adams’ latest blog article dismisses as worthless ‘rote boilerplate’ any contract term along the following lines:

Except as expressly set forth in this Agreement, neither Party grants any license under its intellectual property rights to the other Party.

Ken says that he expects patent lawyers to hurl rotten tomatoes at him to express disapproval of his comments. This shows true ignorance. Patent lawyers don’t have rotten tomatoes. They have genetically-engineered tomatoes that stay at a perfect level of ripeness for an extended period, as in the case of the Flavr-Savr tomato.

Discussion of this subject can confuse two, distinct subjects:

• Licence-denying terms in contracts for the sale of goods.
• Licence-denying terms in licence agreements.

Clauses in licence agreements that limit the scope of the licence, eg by denying the existence of any licence other than the one explicitly granted, seem unobjectionable. In any event, they are a subject for another day. Ken’s article seems to be mostly or exclusively about the former subject. Within that subject, there are two themes:

1. Not being sued by the seller of the goods for infringement of the seller’s patents. This theme might be addressed by the seller expressly or impliedly granting a licence to the buyer, or alternatively disclaiming such a licence. Ken’s comments focus on this theme.
2. Not being sued by a third party for infringement of the third party’s patents, when using the goods that have been purchased from the seller. This theme might be addressed by the seller expressly or impliedly warranting that the buyer won’t be sued for infringement by a third party, or by indemnifying the buyer against third party claims, or alternatively by disclaiming such a warranty.

Within these themes there are two discussion points:

• Are any such terms implied as a matter of applicable law?
• Is the court that has jurisdiction to hear disputes over the contract likely to decide that those implied terms are effectively removed from the contractual relationship by a contract term that is expressed in general terms and denies that the contract contains any implied terms?

Ken’s blog article focuses on the position under US laws and he concludes that a general ‘no implied terms’ clause ‘isn’t worth the space it occupies in a contract’. Note that this isn’t saying that the clause is 100% worthless. Rather, it is saying that for most contracts, the clause should be omitted.

Patent lawyers are used to seeing research materials being sold with a limited use or ‘label’ licence that allows the purchaser to perform certain research activities with the materials, but does not allow commercialisation of the materials. For example, see this one. This is very much a special case and not particularly relevant to the vast majority of contracts for the sale of goods. Nevertheless it illustrates contract drafters, particularly but not only in the USA, attempting to sell goods without the unrestricted licence that might otherwise be implied as a matter of national law.

What terms are implied, in the absence of special contract terms, may vary from country to country, but there seems to be a common theme that the purchaser should not be sued for IP infringement.

Sale of goods legislation seems to focus more on point 2 above than on point 1; in other words, third party IP. For example, see article 2-312(3) of the Uniform Commercial Code,  article 42 of the United Nations Convention on Contracts for the International Sale of Goods, and section 12(2)(b) of the (English) Sale of Goods Act 1979 (and associated case law, eg the Nissly case).

Point 1 above seems to be less explicitly addressed in sale of  goods legislation. Perhaps the drafters of that legislation felt it went without saying that a seller should not able to prevent the buyer from using the goods by suing him for IP infringement. This gap has, in any event, been filled with case law, where courts have applied principles such as exhaustion of rights (as in the English case of BL v Armstrong, on the right of a buyer of a car to buy spare parts from someone other than the car’s manufacturer; or in an EU context, see here) or the first sale doctrine.

Some of the case law in this complex field focuses on implied licences as well as, or instead of, legal principles such as exhaustion of rights. See, for example, the US Supreme Court case of Quanta, discussed here.

In IP Draughts’ view, a generic clause denying the granting of any implied licences seems counter-intuitive. He can understand attempts to limit the licence that is granted to some specific use that is contemplated by the parties (eg in-house research use). But denying all licences indicates that, if the seller has any relevant IP, no rights are being granted under that IP to the buyer to use the product being sold, and the seller is reserving the right to sue the buyer for any use the buyer makes of the goods. How could this be sensible?

IP Draughts agrees with Ken’s objections to the use of rote boilerplate in this area, though he doesn’t recall seeing an all-encompassing disclaimer of licences of the kind quote above. The only way in which he can make sense of this type of clause, and the commentary that Ken quotes, is that it must be used in some other context than contracts for the sale of goods. If used in standard terms for the sale of goods, it seems to make no sense at all.