Category Archives: Licensing

Royalty-stacking, blog-stacking

IP Draughts first posted the article linked below four years ago, when he was in Australia, and he reblogged it two years ago. It is worth posting again, as the subject – royalty-stacking clauses in licence agreements – is evergreen.

If you are now ready for that lecture on the architecture of Melbourne bungalows, do let IP Draughts know…

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Implied terms in licensing: items 21-30

This is the third in a series of articles that proposes a set of standard terms for IP licensing as part of a commercial code. When IP Draughts started this exercise, he tried to track the sequence of clauses in the UK Sale of Goods Act 1979 (SGA).

Now that we are in the middle of the SGA, IP Draughts is finding it more difficult to follow the SGA’s sequence of provisions. Contracts for the sale of goods raise some significantly different issues to IP licensing.

Once the exercise is complete, he will review the entirety and may well restructure it. But for now, let’s see where we get to. As before, this is not a finely-honed set of proposed terms. It is just a rough first draft for discussion. Following a suggestion on an earlier list, it is assumed that somewhere else in the code is a general statement that the parties can agree different terms in their licence agreement.

  1. Improvements and new IP. There is no implied term in a licence agreement that the licensor will communicate to the licensee any improvements to the [subject-matter of the licence agreement] made after the date of the licence agreement. Nor is there any implied obligation to license any new IP created by the licensor in respect of such improvements.
  2. Dealing with infringers. (1) In an exclusive licence agreement, at the request and cost of the licensee, the licensor shall take, or permit the licensee to take, reasonable action against third party infringers of the licensed IP. Where the exclusive licence is limited by field, such action may only be taken in agreement with the licensor and its licensees outside the field. After deduction of all legal costs, any damages or monies paid in settlement of infringing activities in the licensee’s field will be for the licensee’s account and will be subject to any royalty or other obligations to the licensor as if the damages or settlement payment were the sales revenue of the licensee. (2) In a non-exclusive licence agreement, the licensor has no obligations to take action against infringers and has no responsibility for any losses suffered by the licensee as a result of such infringement.
  3. Activities by purchasers from licensee. (1) Where a licensee supplies to third parties (“purchasers”) goods or services under an IP licence, whether by way of sale, gift or other permitted transaction, the licensor may not bring action against purchasers or their successor in title (direct or indirect) of those goods or services for infringement of the licensed IP arising from the [legitimate] use of those goods or services. (2) Where any goods and services described in sub-section (1) are sold subject to an express contractual restriction on their use, the provisions of sub-section (1) do not prevent the licensor from bringing action for infringement against anyone who is bound by such a restriction in respect of use that breaches the restriction.
  4. Independence; third party claims. Where a licensee develops, markets, sells or supplies products or services under a licence, or conducts other activities under a licence, the licensee acts on his own account and not as an agent, representative or partner of the licensor. Accordingly, the licensee must indemnify the licensor in respect of any claims against the licensor by a customer or other person that concern the licensee’s use of the licensed IP, except to the extent (if any) that the claim arises from a breach by the licensor of a term (express or implied) of the licence, or arises from a contractual indemnity given by the licensor to the licensee.
  5. Good faith. The parties to a licence agreement are under a general duty to act honestly and in good faith in their dealings with one another. The duty of good faith does not imply any prohibition on a party developing or commercialising goods, services or intellectual property that compete with the licensed IP or with goods or services supplied under the IP licence.
  6. Assignment of licence agreement. (1) The licensor may not assign the licensed IP to a third party except on terms that the assignee agrees to be bound by the licence agreement and perform all of the obligations on the licensor under the licence agreement, including passing on these obligations to its successor in title to the licensed IP. (2) A licence agreement is personal to the licensee, and accordingly the licensee may not assign or transfer any of its rights or obligations under the licence agreement.
  7. Subcontracting. A party to a licence agreement may subcontract the performance of any or all of its obligations under the licence agreement, provided that such party remains liable to the other party for that performance. Subcontracting may not, however, be used as a disguised way of sublicensing or assigning a party’s rights or obligations in breach of any express or implied terms of the licence agreement.
  8. Sublicensing. A licensee does not have any implied right to grant sub-licences under the licensed IP. But this provision does not affect the rights of a purchaser as described in [section 23] of this code.
  9. Duration and termination of licence. There is an implied term in a licence agreement that, unless the licence agreement states when it will expire, an IP licence may be terminated [by the licensee] [by either party] on reasonable notice. This implied term does not affect any express rights of termination stated in the licence agreement such as for breach or insolvency.
  10. Consequences of termination. Upon termination of a licence agreement, all licences provided for in the licence agreement automatically terminate.

No doubt some of these terms will be thought controversial. IP Draughts is interested to hear readers’ thoughts.

More to follow…

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New laws on trade mark licensing

Hidden by the noise over Brexit and IP, the UK has recently introduced secondary legislation that substantially amends UK trade mark law. The Trade Mark Regulations 2018 came into effect on 14 January 2019. The Regulations are intended to implement EU Directive 2015/2436. Sections 2-33 of the Regulations revise the Trade Marks Act 1994. Later sections revise UK trade mark practice rules.

Many of the changes are technical and of interest mainly to those involved in the details of applying for or litigating UK-registered trade marks. But buried among these changes are a few revisions to the law concerning the assignment and licensing of trade marks, which should be of interest to readers of this blog. See in particular sections 14 to 17.

Implied term on trade marks in sale of business agreements

This article will focus on two of those changes, namely sections 14 and 16. The first is of interest to M&A lawyers. Section 14 reads as follows:

14. In section 24 [of the Trade Marks Act 1994] after subsection (1) insert—

“(1A) A contractual obligation to transfer a business is to be taken to include an obligation to transfer any registered trade mark, except where there is agreement to the contrary or it is clear in all the circumstances that this presumption should not apply.”.

This is presumably intended to apply where the sale of business agreement doesn’t specifically provide that the selling business’s trade marks are included in the sale. If the issue is covered in the agreement, why would one need a statutory provision?

The above provision is designed to comply with Article 22 of the EU Directive, which reads as follows:

A transfer of the whole of the undertaking shall include the transfer of the trade mark except where there is agreement to the contrary or circumstances clearly dictate otherwise. This provision shall apply to the contractual obligation to transfer the undertaking.

Students of legislative drafting have, in the above two extracts, an interesting example of the different drafting styles in the EU and the UK.

IP Draughts has reservations about automatically (i.e. by statute rather than as a matter of interpretation for the judge in the individual case) implying terms into contracts that the parties may not have addressed their minds to. Sometimes, the implied term will reflect what they intended. Other times, it will not. He is aware, for example, that many commercial practitioners don’t realise that transferring property “with full title guarantee” or “with limited title guarantee” automatically introduces the implied warranties and terms respectively described in section 1 of the Law of Property (Miscellaneous Provisions) Act 1994. It can be alarming to discover that a few, innocuous-sounding words in a contract automatically introduce paragraphs of contractual obligation.

Thankfully, there are relatively few instances of “magic words” in commercial contracts made under English law, that have a meaning required by statute. There are more words that have accretions of case law attached, such as “best endeavours”.

In this case, the implied term is introduced into English law to comply with an EU Directive. IP Draughts is conscious that most countries of the EU have a version of civil law, rather than common law. Civil law seems to be more willing than the common law to imply terms into contracts, so perhaps the new law mentioned above will not cause any surprise or consternation among IP Draughts’ continental European readers. He would be interested to hear from them about this point.

Some limited explanations for the changes described in this article appear in the EU Trade Marks Directive to which the UK Regulations relate. For example, Recital (34) of the Directive reads:

For reasons of coherence and in order to facilitate the commercial exploitation of trade marks in the Union, the rules applicable to trade marks as objects of property should be aligned to the extent appropriate with those already in place for EU trade marks, and should include rules on assignment and transfer, licensing, rights in rem and levy of execution.
To IP Draughts, this is not a persuasive statement. If it is appropriate to align EU rules on assignment and licensing, there is much larger task to be performed than tinkering with a small and almost random selection of transaction-related provisions as this Directive does (specifically in Articles 22-25). Some of the transaction-related terms that could usefully be addressed in EU legisation are discussed in the two articles on this blog that immediately precede this article – a series that will be continued in the coming weeks.
Licensor’s right to sue licensee for trade mark infringement
The second topic that has attracted IP Draughts’ attention in the UK Regulations concerns the interplay of contractual rights and trade mark rights. Anyone advising on a dispute between a licensor and licensee should be interested in this provision. Section 16 reads as follows:

In section 28 [of the Trade Marks Act 1994] after subsection (4) insert—

“(5) The proprietor of a registered trade mark may invoke the rights conferred by that trade mark against a licensee who contravenes any provision in the licence with regard to—

(a) its duration,

(b) the form covered by the registration in which the trade mark may be used,

(c) the scope of the goods or services for which the licence is granted,

(d) the territory in which the trade mark may be affixed, or

(e) the quality of the goods manufactured or of the services provided by the licensee.”.

This wording tracks very closely Article 25(2) of the EU Directive, so it is not worth reproducing the latter wording here.

If he has understood correctly, this wording is clarifying that activities by the licensee that fall outside the permission granted by the licence may be both:

  1. A breach of contract (i.e. of the terms of the licence agreement); and
  2. An infringement of the licensor’s trade mark.

It is not clear to IP Draughts why this wording is needed, as a matter of English law, though he sees the merit of stating the position explicitly in English law if it is to be harmonised throughout the EU. Isn’t it obvious that, if a licensee does something that is not permitted by the licence, he could be infringing the trade mark and therefore could be sued for infringement by the licensor?

Well, not according to some legal theories. IP Draughts has seen this point raised by US practitioners but not by English IP lawyers. For example, on a quick Google search, he found the following statement by a US lawyer:

[I]f the license agreement is limited in scope and the licensee acts outside the scope, then the licensor can bring an action for infringement. To prevail, the licensor must establish that the license terms are limitations on the scope of the license, rather than independent contractual covenants, and that the licensee’s actions exceed the scope of the license.

Courts have held that where the licensee has been granted an exclusive license, unlicensed use of the IP is merely a breach of contract. The underlying rationale stems from the understanding that an exclusive license transfers ownership of the IP rights. The licensee is incapable of infringing an interest in IP that he owns.

To IP Draughts’ European mind, the second paragraph quoted above relates to a quirk of US copyright law, that treats an exclusive licence as if it were an assignment. He will avert his eyes from this peculiar idea, and move quickly on.

The first paragraph quote above may have more universal interest. The idea is that if you grant someone a licence, the licence as a matter of property law covers all fields. Any restriction on the field of the licence is a contractual restriction only, i.e. it doesn’t affect the unlimited scope in property law. Therefore if you want to sue your licensee for acting outside the field permitted by the licence agreement, your only remedy is for breach of contract. You can’t sue for infringement.

This is not a concept that IP Draughts has come across in domestic English law, though it has surfaced in EU competition law. Several decades ago, he took a course on competition law, taught by Professor Valentine Korah of UCL. Although much of what he was taught failed to stick in his head, he does remember coming across a theory very similar to that mentioned above. In the words of Professor Korah’s yellow book on EEC Competition Law and Practice (4th edition, 1990, page 174):

The [competition directorate of the European] Commission has gone further and considers that a licence limited territorially is an unrestricted licence, subject to a contractual ban on exploiting outside the territory, which is unlikely to merit exemption [from what is now Article 101 of the EU Treaty].

The commentary around this quotation suggests that Professor Korah didn’t think much of this approach by the Commission, which seems to have been a convenient way of enabling the Commission to challenge territorial restrictions in an anti-competitive contract without challenging IP laws per se. But it is interesting that it was part of the Commission’s thinking. Others, more familiar with EU competition law than IP Draughts, may be able to comment on whether this theory remains part of the Commission’s armoury.

In any event, section 16 / Article 25, quoted above, seems to be clarifying that as a matter of English and EU law, you can sue your licensee for trade mark infringement.

At least that is what IP Draughts assumes is being said by the above provisions. He has not come across any definitive explanation of these provisions or why they were introduced, so he may be barking up the wrong tree. If any reader can point him to a source that confirms (or otherwise) his understanding, he would be grateful.

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Implied terms in IP licensing: items 11-20

This article continues a series on the terms that might be included in a commercial code for IP licensing. As explained further in the previous article, the following list is merely for discussion. It tracks the sections of the UK Sale of Goods Act 1979.

  1. Status of warranties. Unless otherwise stated in the IP licence agreement, no warranties (express or implied, and whether described as warranties, conditions, terms or otherwise) in an IP licence agreement are so fundamental that their breach entitles the non-warranting party to treat the contract as repudiated. [This does not affect a party’s right to terminate an IP licence agreement in accordance with its terms.]
  2. Implied warranties. Unless otherwise stated in the IP licence agreement, the following warranties are implied for the duration of the licence provided for in the IP licence agreement: (1) that the licensor owns or otherwise has the necessary rights in the IP to grant the licence; (2) the IP is free from any charge or encumbrance not disclosed to or known by the licensee at the time the IP licence agreement is made; and (3) the licensor will not breing any action against the licensee for infringement of any IP other than the licensed IP (“non-licensed IP”) that would be infringed by the making, use or sale of any products or services made under [and contemplated by] the licence. But nothing in this code prevents a licensor from exploiting, itself or through other licensees, any non-licensed IP.
  3. Rights of a purchaser. The licensor will not bring any action against any purchaser of products or services made under the licence, or against any successor in title of such a purchaser:  (1) for infringement of the licensed IP; or (2) for infringement of any other IP owned or controlled by the licensor [and existing at the date of the IP licence agreement]. The provision of sub-section (2) will apply unless the licence agreement expressly draws attention to the existence of other IP that is not licensed under the IP licence agreement.
  4. No warranty about third party IP. Unless otherwise stated in the IP licence agreement, the licensor gives no warranty as to existence or validity of any third party IP that might be infringed by the making, use or sale of any products or services under the licence.
  5. No warranty about third party activities. There is no implied term in a licence agreement that (1) either party to it is required to take action against third party infringers of the licensed IP; or (2) either party’s obligations under the licence agreement are affected by the presence of third party infringers in the territory and field of the licence.
  6. No implied obligation to exploit. There is no implied term in a licence agreement that the licensee is required to use its best endeavours to exploit the licence or to refrain from exploiting any other IP that is not the subject of the licence.
  7. No warranties about licensee’s products or services. Unless otherwise stated in the IP licence agreement, neither the licensor nor the licensee gives any implied warranty in an IP licence agreement: (1) as to the quality, fitness for purpose, or performance of any product made by the licensee under the licence; (2) as to the quality, care or skill with which services are provided by the licensee under the licence; or (3) as to the safety, legality, compliance with regulations or other characteristics of any such products or services.
  8. Nature of a licence. Except as may be otherwise expressly provided by applicable IP laws, a licence of IP is a contractual right or permission to use IP within the scope, territory [and other parameters] of the licence. Accordingly: (1) a licence does not create or transfer to the licensee any proprietary right, title or interest in the IP, whether under the laws of personal property, trusts, [mention civil law concepts?] or otherwise; and (2) the grant of a licence does not prevent the licensor from suing the licensee for IP infringement in respect of activities by the licensee that fall outside the scope, territory [or other parameters] of the licence.
  9. When the licence takes effect. Unless otherwise stated in the IP licence agreement, the licence takes effect on the date on which the IP licence agreement is signed by both the licensor and the licensee or, if they sign on different dates, the date of the last such signature.
  10. Successors in title. Unless otherwise stated in the IP licence agreement, a licence agreement is binding on any person who derives title to the licensed IP directly or indirectly from the licensor, whether by assignment, operation of law or otherwise, other than a bona fide purchaser of the IP who has no notice, express or implied, of the licence agreement at the time of purchase. For this purpose, registration of the IP licence agreement with a [recognised IP office] will be treated as express or implied notice of its existence and terms.

Sections 11-20 cover a lot of ground. Arguments could be made for different provisions, but the general theme is to avoid having to write terms into the licence agreement to address issues that are unclear under national law or vary between national laws (e.g. whether either party has an obligation to sue infringers).

More instalments of this series will follow in the coming weeks.



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