How should a FRAND licence agreement be drafted?

The English High Court, in the form of the excellent and youthful Mr Justice Birss, has recently conducted multiple, linked trials in a patent dispute between Unwired Planet and Huawei Technologies. The dispute partly concerns the licensing of the patents on FRAND terms.

The most recent hearing in the case of Unwired Planet International Ltd v Huawei Technologies Co Ltd & Anor [2017] EWHC 1304 (Pat) (07 June 2017) was concerned with deciding remedies following the main, non-technical trial referred to below. Attached to the judgment (at the link above) was a copy of the licence agreement that the parties were to execute.

It is a detailed agreement and runs to over 9,000 words. This article takes a look at the agreement and considers whether its terms are well drafted.

First, some background. This huge case was divided up into 5 technical trials and 1 non-technical trial; the non-technical trial was reported earlier this year and addressed the FRAND issues in detail.  In the words of the judge at that trial:

This judgment arises from the non-technical trial and relates to the patents which are or are said to be Standards Essential Patents or SEPs.  Part of the process of standardisation involves holders of patents which are essential to an international telecommunications standard declaring them as essential to the relevant standards body.  In this case that body is the European Telecommunications Standards Institute (ETSI).  The ETSI IPR Policy requires that a patentee declaring patents as essential to a standard commits to licensing those patents on FRAND terms.  FRAND stands for Fair Reasonable And Non-Discriminatory.  The judgment mostly concerns FRAND.

In other words, Unwired Planet had declared certain of its patents to be essential to certain international telecoms standards. In making that declaration to the relevant standards body, ETSI, Unwired Planet had undertaken to license the patents to anyone who asked, on FRAND terms.

The case is of great interest to the patent community because it is the first time (or the first significant time?) that a court has considered in detail what FRAND terms are.

The latest hearing was to decide what remedies to award, including injunctions and damages. It seems that the parties had agreed the detailed terms of the licence agreement after the non-technical trial and that it was agreed by the parties that the terms reflected Mr Justice Birss’s decisions in that trial.

Thus, the drafting of the licence agreement (as distinct from the principles it should follow) was down to the litigating parties, and not the judge. But anyone who negotiates a future FRAND licence agreement is likely to look to this case, and to the terms of this agreement, when structuring, drafting and negotiating their agreement. It could set a precedent for years to come. So, how does it stack up as an example of patent licence drafting?

It is certainly not the worst example of drafting that IP Draughts has seen. By comparison with the Google licence agreement, it is a model of professionalism. But it shows some signs of being bolted together at speed, perhaps by patent litigators rather than contract drafting specialists. IP Draughts’ first impression is that most of it seems workmanlike but old-fashioned. Some of the drafting belongs in a museum. IP Draughts would not recommend that future drafters use it as a template licence agreement.

It is quite possible that its lack of polish will never matter in the deal for which it was drafted. There may not be a dispute in which the drafting is scrutinised closely. Many contract disputes concern the facts rather than the drafting. And there are big, potential issues on the horizon in this case, that may be more more likely to result in a dispute than whether the drafting is clear and accurate. For example, what happens in 3 years’ time, when the current term of the licence agreement expires? Will the parties be back in court re-running their patent dispute, or will they quietly agree a new licence agreement?

Much of the drafting looks like something IP Draughts saw in IP law firms 30 years ago. In other words, a fair amount of IP expertise has gone into the document, but not much contract drafting skill. This article will focus on some obvious drafting points that jumped out at him when he read through the document.

The document is almost certainly based on a conventionally-drafted US template, though the agreement is stated to be made under English law and subject to the non-exclusive jurisdiction of the English High Court. That is not a great start. There are plenty of English templates for patent licence agreements that would have provided a better starting point. The agreement also includes English-sounding drafting, no doubt introduced by the parties’ English solicitors during the negotiations. Generally, the document looks like it is the product of multiple drafters, with no-one taking overall drafting control to ensure consistency. Examples of inconsistency include:

  • Misspelling (some of the time) of “principal” as “principle” – a common error among IP lawyers in IP Draughts’ experience.
  • The definitions mostly start with “means” but part way through the list they morph into “shall mean”.
  • We mostly have “sections” but in a couple of places we have “clauses”.
  • Numbers are mostly given in the format “two (2)”, but in several places this convention is not followed.
  • Section 5 is almost a caricature of inconsistent drafting. Section 5.2 refers to a “Third Party independent auditor”. Section 5.3, referring to the same person, calls him “the auditor” (fair enough) but Section 5.4 calls him “the Third Party auditor” and Section 5.5 calls him “any independent auditor”. It would have been much better to use consistent names throughout.

Other drafting is consistent but bad.

  • In 2017 we shouldn’t need to use old-fashioned, lawyerly words like “herein” and “hereinafter” in contracts.
  • In Section 4.11 “Licensor acknowledges and agrees to provide its business registration certificate to Licensee as required by mandatory Chinese law.” The drafter would have benefitted here (as in so many other places) from following Ken Adams’ categories of contract language. Why is this drafted as an acknowledgement and not a simple obligation, introduced by the word “shall”?
  • Section 6.4 states “All licenses and rights granted hereunder shall be terminated” but fails to include any lead-in language to clarify that this provision is a consequence of termination of the agreement.
  • In Section 7.2 we have an obligation to exercise “commercially reasonable best efforts”. IP Draughts hopes, deep in his heart, that this phrase was not proposed by any English solicitor who worked on the negotiation of the agreement.

Some of the terms are well thought through. IP Draughts was pleased to see a definition of “Have Made” that clarified that the manufacturer had to sell the products to the licensee, rather than third parties. In other words the have-made right shouldn’t be used as a disguised form of sub-licence. IP Draughts may make use of that definition, or something similar, in future.

In fact, many of the IP-related terms show signs of thoughtful care on the principles, if not the drafting. For example, IP Draughts was interested to see Section 2.5, which reads:

There may be countries in which Licensee and/or its Affiliates may have, as a consequence of this Agreement, rights against infringers of the Licensed Patents. Licensee hereby waives, and shall procure the waiver from its Affiliates, of any such right Licensee or any Affiliate may have by reason of any Third Party’s infringement of any such Licensed Patents.

Other aspects of the agreement seem strange, but IP Draughts doesn’t feel he has enough information about the deal to know whether they are creative, binding solutions or mistakes. For example in several places the licences are stated to bind the “respective predecessors, successors and assigns” of a party. IP Draughts criticises the use of the archaic “assigns” rather than “assignees”, but the rest is merely puzzling – how can a party bind a predecessor in title?

Overall, IP Draughts is left with a sense of a missed opportunity. He is quite prepared to believe that the parties and their lawyers are skilled and astute as IP litigators and negotiators, and that they take pride in the quality of their work. It is such a shame that they don’t appear to have recognised the need for the drafting of the agreement to be managed with the same level of skill and care as they applied to their own disciplines.

 

 

4 Comments

Filed under Licensing

4 responses to “How should a FRAND licence agreement be drafted?

  1. Expressed with your usual gentle trenchancy.

    I’ve been testing a theory that all contract virtues fall into four categories (accuracy, clarity, concision, and — your contribution — coherence), each with its corresponding vice (inaccuracy, unclarity, verbosity, and incoherence) by seeing whether your observations fit the scheme.

    Old-fashioned: outside the scheme, or perhaps an umbrella term for specific vices that would fit the scheme.

    Lacking polish: outside the scheme, or perhaps under ‘incoherence’.

    U.S. template: outside the scheme, perhaps an umbrella term for specific vices that would fit the scheme? ‘Drafted under a pertinent misapprehension of the applicable legal background’ fits nowhere in the fourfold scheme. New category needed?

    Patchwork U.S.-English usages: incoherence.

    No overall drafter: Not itself a vice, but leads to incoherence.

    Misspelling: incoherence.

    Inconsistencies (means vs. shall mean, sections vs. clauses, number format variations, auditor naming variations): incoherence.

    Lawyerly words (‘herein’): incoherence. They can also be relatively unclear if greater clarity is possible: ‘in sections 10 and 27’.

    ‘Acknowledges and agrees to’: unclarity (does this mean ‘shall’, ie the Licensor is taking on a duty, or something more or different?) and verbosity, unless the drafter really means to express two distinct ideas.

    Omission of clarifying introductory information: unclarity (easy one!).

    ‘Commercially reasonable best efforts’: unclarity and verbosity.

    Ken Adams would say, I think, that the four-word phrase means ‘reasonable efforts’, so use ‘reasonable efforts’. No need to specify ‘commercially’ reasonable efforts because reasonableness implies ‘in the circumstances’, which here would be commerce.

    If vague words like ‘endeavors’ or ‘efforts’ always exclude ‘unreasonable’ efforts (greater or less or other than reasonable in the circumstances), one wonders why specifying ‘reasonable’ efforts isn’t an example of verbosity. An argument might be ‘tradition’, but that would come oddly from advocates of ‘Clear Modern’.

    Thanks for the helpful work. If you keep solicitors from using the agreement as a template, kudos to you.

    • Thanks, m. I’ll take gentle trenchancy as a compliment and not an oxymoron! Better that than strident emptiness?
      I suspect some of my criticisms (vaguely grouped as traditional or US) would come in your clarity category.

  2. Agreed, Mark. It would be interesting to get some (measured) comments from the people who negotiated the agreement, but I suspect that client confidentiality may prevent them from doing so.

  3. Very measured comments! The drafting looked pretty horrible to me (and the status of the agreement makes it all the more disappointing). But you are right. We don’t know the full circumstances, and it’s easy to criticise.

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