Category Archives: Intellectual Property

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internationally, is whether it is appropriate to require a licensee of IP to pay royalties after the IP has expired, been revoked, or otherwise ceased to exist.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  • the UK Patents Act 1977, which included a provision in section 45, since repealed, that: “Any contract for the supply of a patented product or licence to work a patented invention, or contract relating to any such supply or licence, may at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?

 

 

 

2 Comments

Filed under Contract drafting, Intellectual Property, Legal Updates, Licensing

Do no evil …drafting

Four_wise_monkeysEarlier this week, Google invited us to sell them our patents. In their words, “the Patent Purchase Promotion is an experimental marketplace for patents that’s simple, easy to use, and fast.”

Apparently, selling your patents (but only your US patents) to Google will ensure that the patents don’t end up in the hands of “patent trolls”. All transactions are to be handled in a standardised way, using a Patent Purchase Agreement whose terms can be found here. In FAQs that accompany the promotion, Google declares:

…we aren’t going to negotiate with anyone. You set the price, we set the terms, and if things work out, we get you paid by the end of summer.”

Others have commented on whether you should take Google up on their offer, eg see this article: Google Says Trust Us and Sell Us Your Patents. (IP Draughts has just mis-typed this in a Google search, and found some web pages on the subject “Google Says Trust Us and Sell Us Your Parents”, which is quite a different promotional opportunity.)

Google asks us to remember that:

…this program is an experiment (think of it like a 20 percent project for Google’s patent lawyers)

And they emphasise that:

There’s some fine print that you absolutely want to make sure you fully understand before participating, and we encourage [you] to speak with an attorney.

So, what does this attorney think of the fine print?

The drafting of the Patent Purchase Agreement is so “experimental” as to make IP Draughts suspect that the promotion is not serious. It shows signs of being a rush job, performed by incompetent staff. Let’s be slightly charitable and say that the patent department didn’t have time to involve the legal department in the drafting. IP Draughts suggests a new research project for Google’s “patent lawyers”: learn how to draft contracts. Note to IP Draughts’ staff: if you ever draft something as terrible as this document, you won’t have a future with the firm. Yes, it really is that bad. Let’s take a few examples. Each one on its own might not be a sacking offence, but cumulatively they amount to gross misconduct.

  • the missing “not”

Agreement NonTransferable. The Seller may assign or otherwise transfer this Agreement, or any rights or obligations under this Agreement, to any third party without the prior written consent of Google.

  • the missing sentence

Governing Law; Venue/Jurisdiction. This Agreement will be interpreted, construed, and enforced in all respects in accordance with the laws of the State of California, without reference to its choice of law principles to the contrary. Seller irrevocably consents to the jurisdiction and venue of the courts identified in the preceding sentence in connection with any action, suit, proceeding, or claim arising under or by reason of this Agreement.

  • cutting and pasting text from another document. Badly. Eg section 5.1, which refers to the “Delivery Date”, or section 5.2 which refers to the “Closing” and the “Closing Date”. In all of these cases, IP Draughts suspects that the defined term “Effective Date” may have been what the drafter intended to use, if he had taken the time to clean up the draft.
  • double definitions, and confusion over whether the defined term should be “Seller’s Patent” (section 1.1) or “Seller’s Patent(s)” (section 2). This mental confusion results in some horrible phrases, such as “any of the Seller’s Patent”.
  • misuse of defined terms, eg section 6.6, which should refer to “Seller’s Patent” not “the Patents”
  • turgid or error-strewn drafting, eg:

…necessary or desirable for effecting completely the consummation of the transactions contemplated hereby

…represents and warrants to Google as follows that as of the Effective Date and as of Closing

  • use of the future-perfect tense (for goodness sake) and multiple verb pile-up:

Upon the Effective Date, Seller …shall have caused its Affiliates to sell, assign, transfer and convey to Google …

  • incorrect cross-references, eg section 7.2 cross-refers to section 3.4, which doesn’t exist.

The above examples focus on mistakes and the very worst kind of drafting. The document also contains plenty of examples of drafting that IP Draughts considers to be unacceptable, but not quite as bad as in the bullet points above. In the following examples, the point that (most) concerns IP Draughts is highlighted in bold text:

restrictions and encumbrances including without limitation any pledge, charge [etc] …or other restrictions and encumbrances (collectively, “Restrictions and Encumbrances”)

The Seller’s Patent has never been found invalid …

NEGLIGENCE (WHETHER ACTIVE, PASSIVE OR IMPUTED) … FOR COVER OR FOR ANY INCIDENTAL…

And there are plenty more.

There are also points of substance in the agreement that should concern any seller. Some of these indicate half-baked thinking on the part of the drafters, including the ridiculously elaborate warranty in section 6.3 which provides that, in respect of any licenses that the seller has previously granted under the patent:

…each such license is nontransferable (except solely in the context of acquisition of the respective licensee and in that case, the scope of each such license or rights in the Patents is limited to the activities of the licensee prior to the acquisition)

Or the provision that the seller can inform its existing licensees that it has sold the patent “provided that the Seller shall not identify Google”.

In its FAQs and other documents describing the promotion, Google emphasises “simplifying the process”, “better experiences for sellers”, “removing complications”, and “keeping it simple”. Yet the core document of the transaction fails to live up to these ambitions. This just doesn’t make sense. IP Draughts’ conclusion is that Google isn’t serious about this exercise, and that it has been dreamt up as a PR stunt on short notice. Either that, or Google’s competent contract drafter(s) didn’t get the memo.

 

Leave a comment

Filed under Contract drafting, Intellectual Property

Stallone praises London IP Crime Unit

expendables3Celebrity endorsements are nothing new. Mr Pettifog is fond of telling us all that his Great Uncle, Adolphus Pettifog, earned ten guineas for providing a quotation to the Carbolic Smoke Ball Company, which read “I found the Carbolic Smoke Ball most efficacious for treating my piles”.  Thus, the first public proof of the Pettifog family’s skill at blowing smoke… But enough of that.

In IP Draughts’ copy of The Times this weekend, a report that Hollywood legend Sylvester Stallone has thanked the UK’s Intellectual Property Crime Unit for arresting a Yorkshireman on suspicion of leaking Stallone’s latest cinematic oeuvre, Expendables 3, to internet streaming sites. Sly is reported to have said:

I’d like to thank the Police Intellectual Property Crime Unit at the City of London Police for working with US Homeland Security Investigations to apprehend the suspect. It is important to protect the rights of creatives around the world.

city of london policeIP Draughts applauds Mr Stallone for his comments. For those of you who are not au fait with the IP Crime Unit, it was set up in 2013 with funding from the UK Intellectual Property Office. Its 20-strong team of detectives, analysts and researchers forms part of the City of London Police, a small police force that should not be confused with the Metropolitan Police.

Although not reported by The Times, it appears from the Crime Unit’s website that its very own Detective Inspector Mike Dodge also commented on this successful operation. He said:

Today’s operation demonstrates the international remit of the Police Intellectual Property Crime Unit (PIPCU). PIPCU has a remit to protect the UK’s creative industries but we are also committed to ensuring the UK is not a safe haven for criminals seeking to attack international businesses from our shores.

…PIPCU is coming down hard on criminals exploiting intellectual property for their own financial gain and today’s action should serve as a warning to online pirates.

As a Lancastrian by birth, it would be very wrong of IP Draughts to make comments about the piratical tendencies of Yorkshiremen, particularly after the Law Society was good enough to pay for his recent diversity training. So, let’s just leave it at that.

IP Draughts wonders whether the UK IPO might capitalise on the goodwill shown by Mr Stallone, and ask him to encourage his fellow stars in Expendables 3 to support the UK IPO’s activities by starring in films with an IP theme? Could Mr Schwarzenegger be persuaded to star in a new film, The Trollenator, in which he plays a ruthless non-practising entity from a future world?  Or could Mel Gibson be enticed to play the role of a heroic trade mark attorney living in a distopian world, in Mad Marks?

 

1 Comment

Filed under Humour, Intellectual Property, News

Who practises IP in the UK?

IP lawyers have their own niche, and defend it with zeal

IP lawyers have their own niche, and defend it with zeal

Intellectual property is thought of as a niche subject within the broad category of commercial laws. Yet an increasing number of people, both in the UK and internationally, make it their profession to advise and assist clients on IP matters.

To assist us to understand the make-up of the IP professions, IP Draughts has done some simple research using public registers, including those of the Law Society of England and Wales, IPReg (the regulator for patent attorneys and trade mark attorneys), the IP Bar Association, and the UK Intellectual Property Office’s register of IP business advisers. Some of the results are surprising.

 

law societyBy far the largest number of IP lawyers practising in the UK are within the solicitors’ profession. According to the Find a Solicitor website of the Law Society of England and Wales:

9,466 solicitors practise IP law, of whom 3,901 are in private practice (in 1,618 firms), and the rest work in industry, government and other settings. (A further 390 solicitors practise IP law in Scotland, according to the Law Society of Scotland’s Find a Solicitor search engine.)

ipregThe next highest number practise as patent or trade mark attorneys. According to  the handy spreadsheet provided by IPReg, last updated in December 2014:

1,984 individual patent or trade mark attorneys offer services to the public. (A separate list from IPReg suggests that they work in approximate 220 firms.)

barAccording to the IP Bar Association list, updated in January 2014:

128 barristers practise IP from 30 chambers. (Well, places of practice might be more accurate, as the latter list, although mostly sets of barristers’ chambers, includes a firm of patent attorneys, a firm of solicitors and a Japanese law firm.)

ipoThe UK Intellectual Property Office maintains a list of people who have “completed the accredited IP Master Class” for business advisers and are therefore considered competent to offer IP Health Checks to businesses. (Thankfully, the IPO seems to be no longer listing people who claim adherence to a misguided British Standard for IP advisers.) According to the current list:

56 individuals have completed the IP master class. The relevant part of the IPO website includes the following statement “Many business advisors understand the importance of IP within a business. Reach your potential with this CPD certified quality IP advisor training for business professionals.”

The last of these lists might be viewed as a list of unregulated, but IPO sponsored, IP business advisers, unless they are regulated by one of the other bodies mentioned above.

There is, inevitably, some overlap between the above lists. Nevertheless, they provide an interesting snapshot of who is practising in the field of intellectual property in the United Kingdom.

Leave a comment

Filed under Intellectual Property, Legal practice