Category Archives: Licensing

Are universities difficult to negotiate with?

difficultThere is a strand of opinion among companies that deal with universities, that the latter (and in particular their technology transfer departments) overvalue their technology; that they are difficult to negotiate with; and that contractual discussions take for ever.

IP Draughts discussed this point earlier this week with a poacher-turned-gamekeeper, who used to work in a university TT department, and now works for a company that in-licenses IP from universities. As this person freely admitted, it was difficult for a university to trust complaints of this kind, when made by a company in the course of negotiations, particularly if, in the next breath, the company demands very wide commercialisation rights that could be viewed as a “land grab”. The company in that situation is not an objective witness.

And yet the accusations persist. They are not just made in the heat of negotiations. They feature in national reports on university technology transfer. They are usually anecdotal rather than being based on solid, statistically-valid data. By repetition, the comments acquire a reputation for accuracy, and an impression of objective truth. But how much substance is there in them?

common mythAt one level, it hardly matters whether the accusation has any universal truth, or is just a convenient whinge to lower a university’s commercial expectations. The fact is that the rumour has taken hold in some quarters, and needs to be recognised and addressed. And universities are sometimes their own worst enemies: no matter how good their intentions, a lack of resource in TT offices, and the oddities of the university decision-making process, can conspire to make contract negotiations less commercially-focussed than they would be in a business environment.

Bad impressions can be countered in a number of ways: by providing data to demonstrate that the accusation is false; by acting in a way that is designed to give a positive impression; and by employing the dark arts of public relations. The most productive of these alternatives is to demonstrate that you are easy to deal with. But easiness comes in different forms. An easy manner may help the flow of commercial discussions. Easiness about the substance – the commercial terms on offer – may be appreciated by the licensee, but is it in the university’s best interests? Is there a danger that eagerness-to-please on deal terms may result in the university not getting market value for its valuable IP? Might this be a breach of charity laws? In a European context, could it amount to an unlawful State Aid under EU laws?

easy skankingThis blog has commented before on an initiative that started at the University of Glasgow, and has since been copied by an increasing number of universities, particularly in the UK and Australia. The initiative is called Easy Access IP, and it is designed to make the process of negotiating technology licences with industry as painless and simple as possible. Typically, the licence is free of upfront payments and is either royalty-free or requires the payment of a small royalty on commercialisation. A simple, one-page licence agreement is used, that doesn’t require negotiation.

Advocates of the initiative point to the non-licensing benefits that can result from offering licences on easy-access terms, including PR/reputational, supporting local industry, and demonstrating industrial “impact”. In some cases, easy-access licensing results in increased funding of university research. Cynics may suggest that technology tends to be offered on easy-access terms after it has languished on the shelf for several years, unable to attract buyers on full commercial terms.

easyThe initiative has been running now for about 5 years, and it is a good time to take stock of what it has been achieved. Various organisations in the university sector have clubbed together to commission a study by independent consultants on whether Easy Access IP has been successful. The study has resulted in a report, and the report was published earlier this week. It is worth a read.

Among the points that IP Draughts took from the report (and in his own words):

  1. Small data. Most of the universities that claim to offer easy-access licences only do so with a small minority of their available technologies (perhaps 10%). Licensing on easy-access terms has been on a relatively small scale. The majority of easy-access licences have been granted by just two universities: Glasgow, where the initiative was born, under the management of Kevin Cullen; and New South Wales, where Kevin now works.
  2. Soft benefits. There are soft benefits in offering easy-access licences. It demonstrates that you care about being seen to be easy to deal with, and counters the lazy impression that all university support departments are bureaucratic and negative in their approach.
  3. Not the main issue. Offering easy-access terms does not make a huge difference to the time it takes to get university technology out into the community. In reality, the negotiation of commercial licence terms is not a slow or difficult process, when compared with other factors, such as the difficulty of marketing university technology and finding licensees. It is easy to blame the lawyers but they are not really the problem.
  4. Uptake by SMEs. The main recipients of easy-access licences are small businesses located near the university. For them, any contractual terms are difficult, because they don’t have much experience of negotiating them, nor much of a budget for obtaining legal advice. A non-trivial proportion of those local-business licensees are start-ups formed by the academic who created the technology. In other words, easy-access licensing is sometimes used as a way of letting the academic commercialise the technology.
  5. No thanks. Large companies tend not to like easy-access licence terms, because they have their own template licence agreements that they prefer to work with. These are usually more complex than the one-pager that the university offers. Similarly, investors in spin-out companies are not willing to accept the simplified terms of an easy-access licence, and want to include detailed warranties and other provisions to address legal risk.
  6. Gotcha. At one level, offering easy-access licence terms could be viewed as calling industry’s bluff. You think we are difficult, and we understand that and want to help – here are some very easy terms. Oh, you don’t want easy terms after all? You actually want detailed and complex terms, you just want us to be amenable to those terms.
  7. Where’s my money? Some other stakeholders dislike easy-access terms. Where university research has been funded by an external agency such as a funding charity, the funder may consider it important to see a financial return from its funding. Offering free licences doesn’t achieve this objective. Similarly, some academic inventors dislike easy-access terms, for the same reason – they want to generate a financial return from industry’s use of their technology.
  8. Yeah, whatever. Another important stakeholder is the university itself. The technology transfer manager may be a convert to the new religion of easy access licensing, but is the university finance director still following the old theology where TT offices are expected to maximise the financial return from IP commercialisation? Are TT staff still incentivised to maximise income, eg through bonus arrangements? Easy access programmes work best where senior management actively supports the idea of easy-access licensing. In some universities it is difficult to get senior management support for, or interest in, any aspect of technology transfer activities.

Dear reader, what are your thoughts on easy-access licensing? Is it a really important initiative, or a minor diversion? Is it a nice idea, like the Lambert Agreements, that hasn’t really achieved what its advocates hoped?

Finally, a drafting point. At the end of the report is an example of an easy-access licence agreement. Is IP Draughts alone in thinking that the drafting of this agreement is terrible? Perhaps the author wanted to avoid having the agreement written in a “legal” style that might be offputting to some readers. But surely we can do better than this example, which is poorly written by any standard.

 

 

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Filed under Intellectual Property, Legal practice, Licensing, News

Software licensing: it ain’t necessarily so…

porgyIt ain’t necessarily so
The t’ings dat yo’ li’ble
To read in de Bible,
It ain’t necessarily so.*

The theme of today’s sermon is the commercial supply of software, and the contracts that are used for such supply.
Typically, such contracts provide for a licence to use the licensor’s intellectual property. As a result, software licensing is commonly thought of as a type of IP or technology licence. However, in IP Draughts’ view, there are flaws in this approach. Many software supply agreements are closer, conceptually, to a sale of goods than to an IP licence.
Grant
In many technology licence agreements, the licence grant is at the heart of the agreement, often placed “front and centre” in clause 2. Much thought is given to defining the intellectual property that is to be licensed, the types of licensed product that may be made and sold under the licence, and any field and territory restrictions.
By contrast, the software licence agreement will often not get into the question of what IP is being licensed. This omission would be extraordinary in most technology licensing, but in software licensing it is regarded as normal – the customer doesn’t care what IP is being licensed, as long as it won’t be blocked off from using the software in accordance with the terms permitted by the agreement. This is because what the customer is really buying is a product; the IP licence is secondary.
Supply of product
In many commercial software supply agreements, the heart of the agreement is the supply of a product, and associated terms, including specification, warranties, delivery, acceptance, and ongoing support. The agreement will usually include licence terms, but they tend to be ancillary to the main commercial provisions. Because software is an electronic product, which can be reproduced virtually without additional cost, a supplier will usually wish to place limits on the use that can be made of the software. The price charged for the software may be based on the extent of use that the customer is permitted to have under the contract. A convenient contractual mechanism for setting these limits is to grant a limited IP licence.
A distinction should be made between supply of software to an end user (under an end-user licence) and supply of software to a business that will distribute copies of the software, or incorporate it into another product for supply to an end user. The recipient under either type of agreement will typically be permitted to use the software under written licence terms which set limits on the permitted use.

Implied and express terms

The use of a licence mechanism in software supply is understandable, for several reasons. It provides a way of limiting the use that the customer can make of the software, which enables the supplier to maintain some control over reproduction of the software and to establish robust pricing models. Perhaps it points the courts away from the idea that software should be treated as the sale of goods, which might have unfortunate consequences for the supplier, including:
  1. The application of laws on “exhaustion of rights” and “non-derogation from grant” – but over time these areas of law are encroaching on software supply – eg see the UsedSoft case.
  2. The incorporation of implied warranties into the contract, eg in the UK warranties of title and quiet enjoyment under the Sale of Goods Act 1979.  Similar warranties can be found in some other jurisdictions, eg countries that have incorporated the UN Convention on the International Sale of Goods into their national law.

As previously mentioned on this blog (see last link above), the implied warranty of quiet enjoyment has been held to have been breached if a purchase of goods is sued by a third party for IP infringement. It might be argued that industry practice deals with this issue explicitly, so that it is not necessary to get into academic discussions about whether software is goods for the purposes of sale of goods legislation. The issue is dealt with explicitly in software licence agreements that include (as many do) either a warranty of non-infringement of third party IP, and/or an indemnity against liability arising from such infringement.

The practice of including such warranties and indemnities is much less commonly encountered in technology licensing, particularly in the case of early-stage technology licensing. This contrasting practice reflects, in IP Draughts’ view, the reality that software supply is very close to a supply of goods and not very close to a licence of technology.

 

Competition law

A little over ten years ago, there was much fanfare over the inclusion of software copyright licensing in the 2004 EU Technology Transfer Block Exemption Regulation. Previous versions of the regulation (they tend to be replaced and updated every 10 years or so) had focussed only on patent and know-how licensing.  Ten years later, the European Commission has had second thoughts, and the 2014 version of the regulation, and associated guidelines, clarify that most software licensing should be considered under the block exemption regulation for distribution of goods. Rhetorical question: could this be because software supply is much closer to the sale of goods than it is to technology licensing?

 

Convenience of lawyers?

A possible reason why software supply is thought of as an IP transaction lies in the organisation of law firms. Complex, technology-related contracts are often dealt with by a specialist department of the law firm, sometimes called an IP and IT department, or a TMT department, or similar.

IP Draughts' father bought one of these in 1979, and IP Draughts programmed it to perform invoicing and payroll functions.

IP Draughts’ father bought one of these in 1979, but applications software wasn’t available. IP Draughts programmed it to perform invoicing and payroll functions, saving the programs onto cassette tapes.

Software supply agreements have only been around since the 1980s, and when they first appeared it was understandable that lawyers and their clients struggled to fit the facts of software supply into a conventional commercial law category. Established law and practice in relation to the sale of goods didn’t quite fit the new technologies. 30 years on, we should be more confident about treating commercial software supply as a variant on the sale of goods.

 

*Written by Ira Gershwin, from Porgy & Bess

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Who dreamt up the idea that licensees must own their improvements?

bonkersIt’s bonkers.

According to the European Commission’s Competition Directorate (DG COMP), which sets competition (antitrust) policy for the European Union (EU), so-called grant-back clauses are potentially anti-competitive (and therefore illegal) in IP licence agreements.

What is a grant-back clause?

What is a grant-back clause? It is a clause in a licence agreement that states that, if the licensee makes any improvements to the licensed technology, the licensee is required to license or assign the intellectual property in those improvements to the licensor.

In many of the licence agreements that IP Draughts encounters, a grant-back clause would be considered normal and uncontroversial by both licensor and licensee. Consider the example of a made in chinatechnology in the consumer electronics field. The licensor is a small start-up business that has lovingly developed this technology over several years, from its origin as the bright idea of an electronics student to the point of bringing to market a commercial product. It doesn’t have the resources or experience to make and sell the product on a large scale, and it appoints an exclusive licensee for the EU territory who has experience of selling consumer electronics, and who will manufacture and sell the product. Or, to be accurate, the licensee will arrange manufacture by a sub-contractor in China.

In a recent transaction between EU-based parties, in which IP Draughts was involved, the parties discussed whether the product might need to be modified by the licensee so as to make it better from a technical or marketing perspective. During this conversation, the licensee commented, without prompting, that “of course” the licensor would own these modifications and would be free to use them after the agreement came to an end. This ownership position would be achieved by including a grant-back clause in the licence agreement.

no brainerSimple, you might think. If the licensee is willing to accept a grant-back clause, how could it possibly be anti-competitive?

Perhaps it wouldn’t, but it would be a brave lawyer who would advise that there was no risk of a breach of Article 101 of the Treaty on the Functioning of the European Union. Let’s consider why this might be.

DG COMP’s view of grant-back clauses

Stating the EU legal position on grant-back clauses accurately requires a host of qualifications, which are tedious but necessary. In the opinion of DG COMP, certain kinds of grant-back clauses, namely assignments-back and exclusive licences-back of licensee improvements, but not non-exclusive licences-back, are potentially anti-competitive. And this only applies if the agreement is sufficiently significant to affect trade between member states of the EU and is therefore subject to Article 101 of the TFEU.

So, you can drive a coach and horses through the qualifications, and the issue goes away, particularly if the licensee is willing to accept the grant-back clause? Not really. Let’s consider the issues in turn.

  1. Does the agreement affect trade between member states, so that it is subject to the Article 101 regime? The case law does not suggest that an exclusive licence agreement covering multiple territories in the EU would fall outside the EU antitrust regime.
  2. Does DG COMP’s opinion matter; surely what counts is whether there is a law prohibiting grant-back clauses? Unfortunately, Article 101 is expressed in rather general terms, and it is necessary to look at case law and practice to understand which clauses – other than the obvious no-nos such as price fixing clauses – would fall foul of Article 101. A significant part of that exercise is looking at what DG COMP considers to be in breach of Article 101.
  3. Surely if the parties have specifically agreed to a term, it can’t be anti-competitive? Unfortunately, this argument is flawed. By definition, parties who have entered into an anti-competitive agreement have agreed the offending terms. There is no principle, as far as IP Draughts is aware, in the jurisprudence, that says that if a licensee volunteers the suggestion of anti-competitive term, that makes it alright.

ice breakerIt is open to parties to undertake their own economic and legal analysis of the market, their position within the market, the effect of the term, etc, and conclude that a term is not anti-competitive. However, this may not cut any ice with the court or DG COMP, if the matter comes to be investigated or litigated. There are so many judgment calls in competition theory – what is the relevant market, how open is the market, etc, etc – that it is difficult to predict how another economist or lawyer would view the matter.

In any case, most parties don’t have the budget or stomach for undertaking an analysis of this kind. Instead, many parties prefer to fit their agreement within one or both of the Technology Transfer Block Exemption Regulation (TTBER) or DG COMP’s Guidelines on Technology Transfer Agreements.

So, what do these documents say about grant-back clauses? First, the Guidelines, which include the following text:

An obligation to grant the licensor an exclusive licence to improvements of the licensed technology or to assign such improvements to the licensor is likely to reduce the licensee’s incentive to innovate since it hinders the licensee in exploiting the improvements, including by way of licensing to third parties.

The application of Article 5(1)(a) [of the TTBER] does not depend on whether or not the licensor pays consideration in return for acquiring the improvement or for obtaining an exclusive licence. However, the existence and level of such consideration may be a relevant factor in the context of an individual assessment under Article 101. When grant backs are made against consideration it is less likely that the obligation creates a disincentive for the licensee to innovate. In the assessment of exclusive grant backs outside the scope of the block exemption the market position of the licensor on the technology market is also a relevant factor. The stronger the position of the licensor, the more likely it is that exclusive grant back obligations will have restrictive effects on competition in innovation. The stronger the position of the licensor’s technology the more important it is that the licensee can become an important source of innovation and future competition. The negative impact of grant back obligations can also be increased in case of parallel networks of licence agreements containing such obligations. When available technologies are controlled by a limited number of licensors that impose exclusive grant back obligations on licensees, the risk of anti-competitive effects is greater than where there are a number of technologies only some of which are licensed on exclusive grant back terms.

Thus, DG COMP’s position on this issue is nuanced, and the risk of a breach may be lower if the licensor pays a market price for the grant-back. For this reason, many licence agreements that IP Draughts sees include an option to acquire rights for market value, rather than a free and automatic grant-back. Judging whether the licensor’s technology has a strong market position may be a more complex issue to resolve.

The above text refers to Article 5(1)(a) of the Technology Transfer Block Exemption Regulation, which reads as follows:

The exemption provided for in Article 2 [ie the block exemption] shall not apply to any of the following obligations contained in technology transfer agreements:

(a) any direct or indirect obligation on the licensee to grant an exclusive licence or to assign rights, in whole or in part, to the licensor or to a third party designated by the licensor in respect of its own improvements to, or its own new applications of, the licensed technology;

greyThis is part of what used to be called the grey list, ie terms which fall outside the block exemption but which are not so bad as to be included in the list of “hardcore” clauses (formerly known as the black list).

Over to you, readers. What would you do in the negotiations described above? Would you include in the licence agreement an obligation to assign back improvements automatically and without further payment? Or an option to acquire the improvements for market value? Or none of the above?

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A fresh look at indemnities

have a goFollowing last week’s post about indemnities, IP Draughts has had a go at drafting an indemnity clause from first principles, without ‘cutting and pasting’ any traditional indemnity language. His attempt can be found here.

Some points to note:

  1. The core parts of the indemnity are in clauses 1.1 and 1.2. These clauses simply use the term “indemnify” and avoid wording such as “hold harmless and defend”. Instead, the scope of the indemnity is explained in later clauses.
  2. The indemnities are designed to place responsibility on a licensee of intellectual property to indemnify the licensor, except where the liability arises from the licensor’s breach of contractual warranties (in which case the licensor indemnifies the licensee). For example, the indemnity under clause 1.1 would operate if the licensee sells a defective licensed product, his customer is injured and the customer brings a claim against the licensor.
  3. The defined term “Commercialising Entities” broadens the reach of the indemnity beyond that of many indemnities, and IP Draughts is in two minds about this aspect. It might be argued that, as the indemnity covers claims made against the licensee by third parties, it is unnecessary to spell out who those third parties might be, eg by referring to ebaythe indemnity covering use of a licensed product by people far down the supply chain, eg the child of someone who buys a licensed product on eBay from the licensee’s customer. However, an alternative view is that if the indemnity is intended to cover all liabilities that may arise from the use of the product, it is best to be explicit about this aspect. IP Draughts would be interested to hear readers’ views.
  4. The most ‘novel’ aspect of this indemnity clause is probably clause 1.4, which seeks to address questions of interpretation that have probably been the subject of reported cases, as can be seen from the case references in Contractual Indemnities by Wayne Courtney, an excellent book that was reviewed in last week’s blog posting.
  5. Clauses 1.5 and 1.6 address points that are sometimes covered in detailed indemnity clauses. IP Draughts is grateful to his friend and former colleague, Matthew Warren of Bristows, for sending him a very detailed indemnity clause after reading last week’s blog posting, which provided a convenient shortcut to drafting these terms. IP Draughts has filleted most of the ideas from Matthew’s clause but used simpler, and probably less watertight, language. Some points have been omitted, eg an obligation of confidentiality on the indemnifier with respect information learnt from the beneficiary. This point might be covered in a separate confidentiality clause of the agreement. Similarly, if it is intended to give officers and employees personal rights to enforce the indemnity, a separate ‘third party rights’ clause should make this point clear.

Clearly, there is a great deal of detail in the attached wording, even with the simplified wording that IP Draughts has used, and in several cases there are choices to be made by the drafter, eg whether to include an obligation to mitigate losses under clause 1.5(c). There are, no doubt, other points of interpretation and litigation practice that could be addressed.

What do you think of the clause?

 

 

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