Category Archives: Licensing

Issue spotting in IP agreements

ip manAnother year has gone by. Last week we had the fourth annual outing of the UCL 5-day course, IP Transactions: Law and Practice. This year’s students came from City and specialist law firms, well-known companies, government departments and public bodies, and universities in the UK and overseas.

Several students made favourable comments to IP Draughts on the high quality of the teachers and the practical content of the talks. Thanks are due to our volunteer speakers from Anderson Law, Ashurst, Baker & McKenzie, Bristows, Bird & Bird, Eversheds, Farrer, Hill Dickinson, Linklaters, Nabarro, Olswang, Pennington Manches, Pinsent Masons, Taylor Wessing, and other organisations. You are giving your time and expertise to help train the next generation of specialist IP lawyers, and your efforts are appreciated.

The course provides insights into legal and practice issues that are relevant to IP transactions across different market sectors, including M&A, life sciences, IT, media, universities, and finance transactions. As well as covering core topics such as the law affecting IP ownership, assignment and licensing, we explore some of the wider legal issues that IP lawyers need to be aware of, including competition law, tax, insolvency, charges and dispute resolution.

red flagNo-one can be expert in all of these areas, but you can be aware of when an issue needs to be explored further, and when specialist advice should be sought. When reviewing an IP agreement, you should be able to spot these issues. They should sound a warning bell, or raise a red flag, in your mind.

Does the draft agreement contain provisions about insolvency that may not be legally effective (eg a reversion of IP), or terms that breach EU competition laws (eg an assignment of licensee improvements), or payment terms that address tax issues in an unfavourable way to your client (eg grossing up of witholding tax), or terms that are unlikely to be acceptable to a university (eg an absolute ban on publications)? None of these examples concerns intellectual property law, but they are part of the larger category of commercial laws that affect IP transactions. Having at least a basic awareness of them is part of the legal toolkit of the transactional IP lawyer.

mastersHopefully, this course will continue for many years to come. In addition, IP Draughts is planning to create another course on IP transactions, this time for LLM students. This is a more difficult category of people to teach a subject of this kind, as LLM students tend to have very little experience of practice. The teaching style and content need to be tailored. If you are an IP practitioner and are interested in helping to design and teach on a future LLM module, to be run by UCL Faculty of Laws from 2017 or 2018, please let Mark know on msa@andlaw.eu or 01865 858 878.

 

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March-in to glory

marchesIn January this year, over 50 US Congressmen wrote to Sylvia Burwell, the US Secretary of Health and Human Services, asking her to consider using so-called government march-in rights as a way of reducing the price of pharmaceutical drugs. In February, Secretary Burwell is reported to have responded positively to this suggestion, or at least not dismissed it out of hand.

The rights in question arise under the Bayh-Dole Act 1980. Other aspects of this Act have been discussed on this blog here. The relevant sub-sections of the Act (35 USC 203) read as follows:

(a) With respect to any subject invention in which a small business firm or nonprofit organization has acquired title under this chapter, the Federal agency under whose funding agreement the subject invention was made shall have the right, in accordance with such procedures as are provided in regulations promulgated hereunder to require the contractor, an assignee or exclusive licensee of a subject invention to grant a nonexclusive, partially exclusive, or exclusive license in any field of use to a responsible applicant or applicants, upon terms that are reasonable under the circumstances, and if the contractor, assignee, or exclusive licensee refuses such request, to grant such a license itself, if the Federal agency determines that such—

(1) action is necessary because the contractor or assignee has not taken, or is not expected to take within a reasonable time, effective steps to achieve practical application of the subject invention in such field of use;
(2) action is necessary to alleviate health or safety needs which are not reasonably satisfied by the contractor, assignee, or their licensees;
(3) action is necessary to meet requirements for public use specified by Federal regulations and such requirements are not reasonably satisfied by the contractor, assignee, or licensees; or
(4) action is necessary because the agreement required by section 204 has not been obtained or waived or because a licensee of the exclusive right to use or sell any subject invention in the United States is in breach of its agreement obtained pursuant to section 204.
The Congressmen’s letter proposed that action should be taken under sub-section (a)(2), quoted above. It seems that these march-in rights are rarely used, and that the US government has previously refused to use them as a general means of applying pressure on drug prices, regarding this as a subject that would require primary legislation.
This is consistent with what IP Draughts has previously been told by US lawyers, eg when doing due diligence on a company that had entered into an IP licence agreement that included a clause that specifically referred to these march-in rights. In the past, he has been told that many companies consider the risk of a US government march-in to be theoretical rather than real. Whether this is still a common understanding in light of Secretary Burwell’s recent comments is less clear.
IP Draughts has noticed a rash of march-in rights recently. A kind-of-march-in-right features in national patent laws. For example, section 22 of the UK Patents Act 1977 allows the government to step in if a patent application contains information that might be prejudicial to the defence of the realm. The section enables compensation to be paid to the applicant in certain circumstances.
There is no direct equivalent to the Bayh-Dole provisions in UK law, but the standard contract terms of several UK government departments contain analogous provisions. IP Draughts sees these terms in research collaboration agreements to which a government department is a party, or where a government department has funded research done by others.
onionsFor example, such terms exist in certain research funding conditions of the UK Department of Health. An example sometimes used is that if there were a major outbreak of influenza, this might be a national emergency. If private companies were not able to meet the demand for drugs to treat the condition, the government might need to make very urgent arrangements to do so.
IP Draughts has also seen such terms in UK Department of Defence contracts. For example, Defcon 705, which is an often-used contract term on intellectual property rights, includes several provisions that could be viewed as march-in rights.
These and other provisions have the potential to devalue the IP assets of private companies and other organisations. If the government can march-in and license the IP to someone else, the rights of an IP owner or exclusive licensee may be prejudiced. But is this risk real, or are the government’s rights more honoured in the breach than the observance?
So far, it seems that march-in rights are rarely used. They probably fall into the category of very small risk of a major event. Plenty of other risks fall into that category. IP Draughts wonders whether it is possible to insure against this risk at a reasonable price; he hasn’t heard of any such insurance.

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When are IP licences implied?

implicitKoncise Drafter is on a roll. Not kontent with spearing the drafters of patent licence agreements (see previous article in this blog), he has turned his attention to patent-licence-deniers – the drafters of contracts for the sale of goods who include a term stating that no licence is to be implied. Ken Adams’ latest blog article dismisses as worthless ‘rote boilerplate’ any contract term along the following lines:

Except as expressly set forth in this Agreement, neither Party grants any license under its intellectual property rights to the other Party.

flavrKen says that he expects patent lawyers to hurl rotten tomatoes at him to express disapproval of his comments. This shows true ignorance. Patent lawyers don’t have rotten tomatoes. They have genetically-engineered tomatoes that stay at a perfect level of ripeness for an extended period, as in the case of the Flavr-Savr tomato.

Discussion of this subject can confuse two, distinct subjects:

  • Licence-denying terms in contracts for the sale of goods.
  • Licence-denying terms in licence agreements.

Clauses in licence agreements that limit the scope of the licence, eg by denying the existence of any licence other than the one explicitly granted, seem unobjectionable. In any event, they are a subject for another day. Ken’s article seems to be mostly or exclusively about the former subject. Within that subject, there are two themes:

  1. Not being sued by the seller of the goods for infringement of the seller’s patents. This theme might be addressed by the seller expressly or impliedly granting a licence to the buyer, or alternatively disclaiming such a licence. Ken’s comments focus on this theme.
  2. Not being sued by a third party for infringement of the third party’s patents, when using the goods that have been purchased from the seller. This theme might be addressed by the seller expressly or impliedly warranting that the buyer won’t be sued for infringement by a third party, or by indemnifying the buyer against third party claims, or alternatively by disclaiming such a warranty.

Within these themes there are two discussion points:

  • Are any such terms implied as a matter of applicable law?
  • Is the court that has jurisdiction to hear disputes over the contract likely to decide that those implied terms are effectively removed from the contractual relationship by a contract term that is expressed in general terms and denies that the contract contains any implied terms?

Ken’s blog article focuses on the position under US laws and he concludes that a general ‘no implied terms’ clause ‘isn’t worth the space it occupies in a contract’. Note that this isn’t saying that the clause is 100% worthless. Rather, it is saying that for most contracts, the clause should be omitted.

Patent lawyers are used to seeing research materials being sold with a limited use or ‘label’ licence that allows the purchaser to perform certain research activities with the materials, but does not allow commercialisation of the materials. For example, see this one. This is very much a special case and not particularly relevant to the vast majority of contracts for the sale of goods. Nevertheless it illustrates contract drafters, particularly but not only in the USA, attempting to sell goods without the unrestricted licence that might otherwise be implied as a matter of national law.

What terms are implied, in the absence of special contract terms, may vary from country to country, but there seems to be a common theme that the purchaser should not be sued for IP infringement.

Sale of goods legislation seems to focus more on point 2 above than on point 1; in other words, third party IP. For example, see article 2-312(3) of the Uniform Commercial Code,  article 42 of the United Nations Convention on Contracts for the International Sale of Goods, and section 12(2)(b) of the (English) Sale of Goods Act 1979 (and associated case law, eg the Nissly case).

exhaustedPoint 1 above seems to be less explicitly addressed in sale of  goods legislation. Perhaps the drafters of that legislation felt it went without saying that a seller should not able to prevent the buyer from using the goods by suing him for IP infringement. This gap has, in any event, been filled with case law, where courts have applied principles such as exhaustion of rights (as in the English case of BL v Armstrong, on the right of a buyer of a car to buy spare parts from someone other than the car’s manufacturer; or in an EU context, see here) or the first sale doctrine.

Some of the case law in this complex field focuses on implied licences as well as, or instead of, legal principles such as exhaustion of rights. See, for example, the US Supreme Court case of Quanta, discussed here.

In IP Draughts’ view, a generic clause denying the granting of any implied licences seems counter-intuitive. He can understand attempts to limit the licence that is granted to some specific use that is contemplated by the parties (eg in-house research use). But denying all licences indicates that, if the seller has any relevant IP, no rights are being granted under that IP to the buyer to use the product being sold, and the seller is reserving the right to sue the buyer for any use the buyer makes of the goods. How could this be sensible?

IP Draughts agrees with Ken’s objections to the use of rote boilerplate in this area, though he doesn’t recall seeing an all-encompassing disclaimer of licences of the kind quote above. The only way in which he can make sense of this type of clause, and the commentary that Ken quotes, is that it must be used in some other context than contracts for the sale of goods. If used in standard terms for the sale of goods, it seems to make no sense at all.

 

 

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Licence grant wording: take care over the details

Ken demonstrates the ancient art of invisible cat's cradle

Ken demonstrates the ancient art of cat’s cradle, conceptually, and without the wool

IP Draughts’ favourite commentator on contract drafting issues, Ken Adams, has written an article, Granting Language in Patent License Agreements: An Analysis of Usages. The article has recently been published by Landslide, the magazine of the American Bar Association’s Section of Intellectual Property Law.

It is always interesting to read Ken’s views, particularly when his accompanying blog article issues a challenge to IP lawyers, expressed in Donnesque terms:

IP guys, you are not an island: it’s best to base your contract usages on general guidelines for clear and modern contract prose.

IP Draughts agrees with the sentiment, and with much of what Ken says in the article. That is not entirely surprising: he saw a draft of the article and commented on it. There are, though, a few more IP factors to take into account before reaching any conclusions on the drafting points that Ken identifies – factors that might only be known by an IP specialist.

Cutting to the chase, the article provides “before and after” versions of a typical licence grant clause, the latter being Ken’s approved version. Here is the “before” version:

Subject to the terms and conditions of this agreement, Acme hereby grants to the Licensee, and the Licensee hereby accepts, an exclusive royalty-bearing license under the Patent Rights, with the right to grant sublicenses, in the Field of Use, in the Territory, to make, have made, import, use, have used, offer for sale, sell, and have sold Licensed Products.

And here is the “after” version:

Acme hereby grants the Licensee an exclusive, royalty-bearing (in accordance with section 4.5) license (with the right to sublicense) under the Patent Rights in the Field of Use to make, have made, use, offer for sale, sell, and import Licensed Products in the Territory.

As John Donne nearly said: Every IP lawyer is a piece of the continent, A part of the main. If a clod be washed away by the sea, Europe is the less.

As John Donne nearly said: Every IP lawyer is a piece of the continent,
A part of the main.
If a clod be washed away by the sea,
Europe is the less.

IP Draughts mostly agrees with the latter version, though he would probably make any right to sublicense subject to conditions, which would be set out in a separate clause or section. A cross-reference to that other clause would be appropriate. He would probably not bother to state here that the licence is royalty-bearing, as this means no more than that a contractual payment is due, which can be set out in a separate clause without a cross-reference in the grant clause.

Ken identifies a number of usages in conventional licence grant clauses that are either redundant or sub-optimal. IP Draughts’ brief summary of Ken’s comments, and his response to those comments, follow:

  1. Use the verb grants not licenses. Agreed.
  2. Refer to a licence not a right. Agreed.
  3. Use the expression hereby grants. Agreed.
  4. Don’t say ‘grants and agrees to grant’; the latter is redundant even in the case of future IP. Agreed in the case of licences. There may be some value in the case of assignment, in view of the differing national rules (and different rules for different types of IP within a jurisdiction) on the legal effect of an assignment of future IP. For a discussion of some US issues, see here.
  5. No need to ‘accept’ the licence. Agreed under English law. The advice from the Dutch contributor to our loose-leaf work on biotech transactions was that it was necessary to state that an assignee of IP, or a distributor of products, accepted the IP or appointment, and similar principles are likely to apply to licences. Bearing in mind that many IP licences are international, it may be safer to include some words of acceptance.
  6. Grant a licence, not a ‘covenant not to sue’ or an ‘immunity from suit’. Agreed. For a discussion of covenants not to sue and their usage, see here.
  7. Explain exclusive, sole, etc. Ken makes some subtle points about US drafting practice (eg phrases such as “exclusive, even as to the licensor”) but in the end, his “after” version simply says “exclusive”. IP Draughts’ view is that sophisticated parties are likely to be clear on the meaning of exclusive, but sole and semi-exclusive should be defined. And that if the EU territory is being divided, it would be prudent to be clear on whether sale outside the territory is permitted, and to ensure that whatever is agreed is aligned with EU competition law.
  8. Perpetual, irrevocable. As Ken notes, these terms are not synonyms. A licence could be perpetual, subject to right of early termination. Irrevocable is probably okay as a term in a short licence (if that is what is intended) but ideally the licence would make clear that no form of early termination by the licensor (whether or not properly characterised as revocation) is allowed.
  9. Assignable. IP Draughts shares Ken’s reservations about using the word “assignable” or similar in the long list of adjectives that precede the word “licence”. Instead, address this issue more precisely in separate clauses dealing with assignment and (less commonly) change of control. You may also want to address the question of whether the licensor is permitted to assign the IP that is being licensed, and the consequences for the licence of doing so. Typically, the default position under national patent laws is that a licence registered with the patent office is binding on a future owner, but what is less clear is whether the contract under which the licence was originally granted has any continuing effect. These matters should be addressed explicitly in the licence agreement.
  10. Sublicensing. IP Draughts agrees that the licence should address whether sublicensing is permitted. This is typically a matter for national patent law and the “default” position (ie if not addressed in the contract) varies between jurisdictions. However, if sublicensing is to be permitted, it is usually subject to conditions, eg as to duration, consistency of terms, etc, and those terms should be stated. IP Draughts’ preference is state these things in a separate clause an omit the word “sublicensable” in the grant clause.
  11. Worldwide. IP Draughts understands that, logically, it may be wrong to say a licence is worldwide if the IP is not registered in every country of the world, and of course one should be careful about giving warranties in unpatented territories. Nevertheless, licences are often expressed to be worldwide and usually this will not cause major problems of interpretation.
  12. Royalty-bearing or royalty-free; fully paid-up. IP Draughts can see a point in stating that no payments are to be due (if that is the case) and that a phrase such as “fully paid-up and royalty-free”, while rather jargon-ridden, may the simplest legal shorthand to express the point. He can see no point in stating that a licence is royalty-bearing in the long list of adjectives before the word “licence”. Just have a separate clause dealing with royalties.
  13. Limited licence. IP Draughts agrees that it is unnecessary to say that a licence is limited. The only concern that he identifies with this simple advice is that, particularly for US parties, the Universal Copyright Convention (to which most countries of the world are not parties, preferring the Berne Convention) has, or used to have, a concept of limited licences, which explains why copyright statements referred to limited licences as well as, or instead of, using the phrase “all rights reserved”. Although he is not a US lawyer, he understands that the provisions of this Convention may have been modified in recent years, making these references redundant. No doubt readers who are US lawyers can enlighten us!
  14. Licence to do what? IP Draughts agrees that the licence should state which otherwise-infringing acts the licensee is permitted to do, eg make, use and sell products. He was interested to see Ken’s explanation of why, in light of US law, licence agreements sometimes include a reference to “export”. IP Draughts has found this word problematic in past transactions and usually tries to avoid it.
  15. Subject to the terms of this Agreement. IP Draughts agrees that this expression is probably unnecessary in the grant clause, particularly if a separate termination clause makes clear that on any termination of the agreement, the licence automatically terminates. However, some lawyers clearly have a concern that the licence, once granted, may exist independently of the agreement under which it was granted, as a form of property right. For this reason, IP Draughts has tended to include this phrase, though he is now having second thoughts about its usefulness.

 

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