Negotiating fair and reasonable licence terms

The recent case of Unwired Planet International Ltd v Huawei Technologies Co Ltd & Anor continues to provide much food for thought. This blog has previously commented on the poor drafting of the licence terms that the parties settled, and which the court declared to be “fair, reasonable and non-discriminatory”, or FRAND.

The more that IP Draughts thinks about the case, the more he comes to realise that this is really a case about contract negotiations that have got stuck, and where the parties want to reach agreement. Because the patents to be licensed were “standards-essential patents”, or SEPs, the parties were able to ask the court to settle the terms of their licence agreement. A by-product of the case being about SEPs is that the court had to decide on questions of the rules of standards-setting bodies, and competition laws, and conduct in litigation. These aspects of the dispute took up a lot of time and money, and led to some ground-breaking judicial comments. But the heart of the case was about what terms were reasonable in a patent licence agreement.

IP Draughts is writing an article about the transactional aspects of the case, which has so far reached about 8,000 words. He hopes to get it published by a legal journal in the next few months.

Looking at the case in this way enables you to broaden its application beyond the arcane world of SEPs and FRAND, which many IP lawyers don’t get involved with, as it tends to be something that large corporations do, in specific industry sectors such as telecommunications.

In IP Draughts’ world, perhaps the most obvious analogy is the terms of “access rights” to IP that parties to a Horizon 2020 research consortium are supposed to grant one another. The grant terms of the European Commission for this and similar research programmes include a great deal of detail on the IP licences that the collaborating parties are required to grant one another and external parties.

Consider, for example, the following terms, taken from the Multi-Beneficiary General Model Grant Agreement (Version 4.0 27 February 2017):

25.3 Access rights for other beneficiaries, for exploiting their own results
The beneficiaries must give each other access — under fair and reasonable conditions — to background needed for exploiting their own results, unless the beneficiary that holds the background has — before acceding to the Agreement — informed the other beneficiaries that access to its background is subject to legal restrictions or limits, including those imposed by the rights of third parties (including personnel).

‘Fair and reasonable conditions’ means appropriate conditions, including possible financial terms or royalty-free conditions, taking into account the specific circumstances of the request for access, for example the actual or potential value of the results or background to which access is requested and/or the scope, duration or other characteristics of the exploitation envisaged.

26.2 Joint ownership by several beneficiaries
Two or more beneficiaries own results jointly if:
(a) they have jointly generated them and
(b) it is not possible to:
(i) establish the respective contribution of each beneficiary, or
(ii) separate them for the purpose of applying for, obtaining or maintaining their protection (see Article 27).
The joint owners must agree (in writing) on the allocation and terms of exercise of their joint ownership (‘joint ownership agreement’), to ensure compliance with their obligations under this Agreement.

Unless otherwise agreed in the joint ownership agreement, each joint owner may grant non-exclusive licences to third parties to exploit jointly-owned results (without any right to sub-license), if the other joint owners are given:
(a) at least 45 days advance notice and
(b) fair and reasonable compensation.

31.3 Access rights for other beneficiaries, for exploiting their own results
The beneficiaries must give each other — under fair and reasonable conditions (see Article 25.3) — access to results needed for exploiting their own results.

 31.4 Access rights of affiliated entities
Unless agreed otherwise in the consortium agreement, access to results must also be given — under fair and reasonable conditions (Article 25.3) — to affiliated entities established in an EU Member State or associated country, if this is needed for those entities to exploit the results generated by the beneficiaries to which they are affiliated.

[Emphasis added.]

These are not necessarily the only situations in which parties must grant licences to background or foreground IP, but they are the main ones that IP Draughts found on a quick search of the model terms linked above. Nowadays there are multiple versions of the model terms for different research programmes.

There is, as far as IP Draughts is aware, little or no jurisprudence on what amounts to fair and reasonable conditions, or fair and reasonable compensation, in the context of EU-funded research programmes (though he is happy to be corrected).

Of course, in most cases parties simply agree terms without the need for judicial guidance. This is true for SEPs and for IP arising from EU-funded research programmes. In both cases, licensing has been happening for decades. But in case the parties decide to go to court over whether they have been fair and reasonable, the Unwired Planet case provides useful guidance that could be applied by analogy to the above-quoted EU terms.

As part of the article that he is writing, IP Draughts has come up with a 10-point plan for drafting and negotiating fair and reasonable (and non-discriminatory) licence terms, based on Mr Justice Birss’s judgment in the Unwired Planet case. The points may not be particularly clear without the surrounding, detailed commentary, but they are reproduced here for what they are worth. In its current draft form, the 10 points are as follows:

  1. Work with technical and patent attorney colleagues to identify or define the patents that are to be licensed. This may not be an easy task, particularly in the case of SEPs, where the list of SEPs may change during the lifetime of the licence.
  2. Unless the parties agree otherwise, ensure that the terms of the licence agreement comply with the detailed rules of the standards-setting body, or the European Commission’s terms of funding, as applicable.
  3. When drafting and negotiating the licence agreement, always take a reasonable position that can withstand scrutiny by a court.
  4. When negotiating the licence, don’t assert that any term is a ‘deal breaker’ (i.e. that it must be included in the licence agreement) unless you are certain that a court would regard that term as fair and reasonable.
  5. During litigation, it may be in each party’s interests to come up with complex models and criteria to justify a particular set of royalty rates, and the judge may echo this complexity in his judgment. But when it comes to drafting a licence agreement, try to agree royalty terms that are as simple as possible, as this will reduce the likelihood of further dispute over their application.
  6. Try to agree as many of the licence terms as possible, and ask the court only to decide major issues of principle.
  7. Where you agree terms without needing the intervention of the court, it is likely, but not inevitable, that the court will agree with your assessment that the agreed terms are fair and reasonable (and non-discriminatory).
  8. Except for points that are likely to be considered by the court as raising FRAND issues, the parties should draft and negotiate the licence agreement in the same way as any other patent licence agreement.
  9. Start your licence negotiations with a template licence agreement that has been drafted (a) in a clear, modern style, and (b) to be suitable for use under the law and jurisdiction of the contract. Don’t use a US template for an English law agreement.
  10. Involve a contract drafting specialist in your negotiating team, preferably one who has experience of drafting patent licence agreements.

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Filed under Legal Updates, Licensing

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