Warranties in a licence agreement

warrantThe most popular search term on this blog in 2022 has been “warranties in a license agreement”. Looking back over previous years, the search terms have seemed rather random. In 2021, the most popular search term was “short word for agreement”. That one has IP Draughts stumped: deal?

The blog has discussed warranties before, but there is always room for new thinking.

Meaning. What do we mean by warrant/warranties? IP Draught can think of at least 5 different meanings that he has encountered in a contractual setting:

  1. A promise in a contract that a fact is true, eg “Licensor owns the Licensed Patent”.
  2. Any promise in a contract, eg “Licensor will notify Licensee if Licensor receives a claim of infringement.”
  3. A lesser obligation in a contract, breach of which may result in a claim for damages, but not the right to terminate the contract. By contrast, breach of a (promissory) condition would result in a right to terminate the contract. This is a traditional distinction under English law.
  4. A manufacturer’s guarantee to a consumer, eg to repair or replace a washing machine if it breaks down in the first year after purchase.
  5. A kind of share option offered by a company.

In the context of “warranties in a license agreement”, the most likely meaning is “a contractual promise that a fact is true”.

Types of factual warranties. Within this category, there are different sub-types, including:

  • general “boilerplate” promises, eg that each party has the power to enter into the agreement. These have become more popular in English law contracts in recent years, probably through the influence of US template agreements. IP Draughts thinks these clauses typically do no harm, but are unlikely to be important in a contract between two English corporations.
  • promises given by a licensee. In IP Draughts’ experience the licensee typically gives fewer warranties than the licensor. The main example that comes to mind is that his template licence agreement includes a warranty by the licensee that it is not developing or commercialising a product that would compete with licensed products, ie products sold under the licence granted by the licence agreement.
  • promises given by a licensor on IP issues.
  • promises given by a licensor on other issues, eg as to having obtained regulatory approval for a drug, or that it is is entitled to disclose personal data to the licensee.

The remainder of this article focuses on factual statements made by a licensor in relation to IP.

Implied warranties and disclaimers. As a further preliminary, it is important to consider the law of the contract, and whether IP warranties might be implied into the licence agreement. English law tends to imply terms into contracts only when strictly necessary. Perhaps an English court would imply a term that the licensor owns the licensed IP, which may be thought a fairly fundamental point. Other countries’ courts might imply many more terms.

Best practice, in IP Draughts’ view, is to spell out the warranties in detail, and also to have clauses that make clear that there are no warranties other than those set out in the written agreement. Since he first started to develop a template licence agreement in the late 1980s, he has included both a general entire agreement/disclaimer of implied terms clause and a non-exhaustive list of warranties that are not being given, eg that licensed products made and sold under the agreement do not infringe third party rights, are safe, fit for purpose etc. While it may be unlikely that these terms would be implied under English law, particularly if there is a general disclaimer of implied warranties, these terms may be thought useful for two reasons:

  1. To try to avoid any commercial misunderstandings, and
  2. To deal with the situation where, though an English law template is used, the parties negotiate a different law and jurisdiction in the agreement, and more is implied into contracts in such a jurisdiction.

Variety of IP warranties. In IP Draughts’ experience, there tends to be a correlation between the extent of licensor IP warranties and the value of the licence agreement. Agreements that are signed when a product is close to market or large payments are being made to the licensor tend to have more aggressive warranties than early stage, low value licences. There is also a difference in practice between different commercial sectors. Most notably, IP Draughts sees non-infringement warranties in some software licence agreements that would be very rare in biotech licence agreements.

An example of a light touch set of licensor warranties in a patent licence agreement might be:

The IP Company warrants that:

(a) it is the registered proprietor of, or applicant for, the Patents and has caused all its employees who are named as inventors on such Patents to execute such assignments of the Patents as may be necessary to pass all of their right, title, and interest in and to the Patents to the IP Company[; and]

(b) it has not done[, and shall not do nor agree to do during the continuation of this Agreement,] any of the following things if to do so would be inconsistent with the exercise by the Licensee of the rights granted to it under this Agreement, namely:

(i) grant or agree to grant any rights in the Patents in the Field in the Territory; or

(ii) assign, mortgage, pledge, charge, or otherwise transfer any of the Patents in the Field in the Territory or any of its rights or obligations under this Agreement.

A more pro-licensee set of warranties would be far more extensive. Perhaps the most extreme example of this, which IP Draughts includes as an optional clause in his template licence agreement, is the following warranty:

The IP Company warrants that:

…All statements contained in any applications for the registration of the Patents were true and correct as of the date of such applications; [for the purposes hereof, “statements” shall be limited to those statements which, if not true and correct, would invalidate any issued Patents, preclude the issue of any Patents or limit or otherwise reduce the scope of any claim made under any Patents]

IP Draughts encountered this warranty in the negotiation of a late-stage pharmaceutical patent licence agreement. It was drafted by an in-house, US patent attorney at the licensee. IP Draughts’ client, the licensor, was not in a strong bargaining position. The wording in square brackets was negotiated in to the warranty by IP Draughts after detailed discussion of the licensee’s concerns when asking for the warranty.

 

5 Comments

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5 responses to “Warranties in a licence agreement

  1. vrkoven

    Aren’t some of your warranty examples actually representations (e.g. statements about past or current facts)? In any case, whether something is properly characterized as a warranty or representation is a legal conclusion not really appropriate to draw in a contract. That’s why Ken Adams prefers we not use such terms and instead use the bland “states” as the intro to the thing that could be a representation, warranty, promise, or whatever (personally I prefer the term “affirms” as having more gravitas). His compromise position for those who would require smelling salts were the words “representations and warranties” omitted from the contract is to use them as the heading of the section containing them, and then the substitute verb to introduce the thing being represented or warranted.

    • This may be (but I’m guessing is not) a difference between English and US laws. In my view, any statement of fact in a contract is a warranty (using conventional language, but I don’t mind if you or Ken wants to say states or affirms). Adding in the word representation is legal engineering to try to give an option to claim damages based on tort rules AND SHOULD BE REJECTED BY THE COURTS AS NONSENSE. The English courts have done so in relation to dual claims in negligence and contract for lawyers’ default, but not yet on reps v warrants.

  2. t2000

    Warranties can’t always compensate for patent “mistakes”, so licensee/assignee due diligence is essential.

    I would always oppose warranties related to patent validity (something this blog has also cautioned against I believe, if I’ve been paying attention), and I would be wary of approving “All statements contained in any applications for the registration of the Patents were true and correct as of the date of such applications”. A statement may reasonably have been considered to be true, but subsequently turns out not to be in light of expert opinion. “To the best of my knowledge…” being a preferred precursor.

    The bracketed caveat is helpful but “would” is an arguable position unless the patent has actually being invalidated or restricted in scope. It’s possible in a contract dispute for the English court to decide the statements would negatively impact a US patent (duty of candour a big deal) without invalidation proceedings ever taking place. This is the current situation with Otsuka v GW Pharma where the latter wants to avoid the English court finding their joint US patent validly covers their product, making royalties due to Otsuka.

    I’d be more amenable if the warranty only applied in the event of actual invalidation, justified by the fact the licensee benefits from the existence of the patent while it is extant. However, the effects of invalidation would be covered elsewhere.

    I was interested in the issue regarding the law of the contract and the potential for implied warranties, with the jurisdiction often being that of whoever provided their template, no consideration given to its implications. Service providers also happily warrant the results/product of their work do not infringe 3rd party rights, even though (i) they have no idea if that may be the case and (ii) they are working directly on the “product” of the client, who should know themselves. Reading and understanding an agreement before signing always helpful.

    • Thanks for your thoughtful comments. On making the warranty about statements knowledge based, I’m confident we would have asked for this, but it was rejected. Interesting idea to limit the warranty to the situation where the patent has in fact been invalidated, though in reflection if it isn’t invalidated could one establish any loss from the (theoretical) breach? In any event, we didn’t have you on the negotiating team to argue for that point!

      • t2000

        Maybe there is a loss if the patent demise is foreseeable to the extent the licensed project would have to be halted such that resources have been wasted. It would have to be a significant untruth to be certain enough the patent would fall to halt a project, making it something the licensor may well have clear (provable) knowledge of.

        A company’s own patents would be subject to the same risk, so nothing special about an in-licensed patent in that respect. Due diligence, amongst other issues, should pick up false statements regarding data or failings regarding information disclosure statements (US – a common issue).

        I completely understand where the licensee is coming from, especially if it is for a big deal with significant future investment on the back of the patent. IP considerations in UK companies (e.g. biotech research) are not “taken as seriously as they should be”. Often, IP problems (fixable or otherwise) are readily identified leading to a need to dig further to find what other nasties are lurking beneath.

        A well-trimmed hedge and tended-for rose bushes are a sign of a well-kept house.

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