Category Archives: Licensing

Common pitfalls in IP licensing

Neither the sports car nor the young people were in evidence yesterday.

Killashee House Hotel, a good location for an episode of the Avengers (the 1960s version)

IP Draughts spent yesterday on a day-trip to Dublin. To be more accurate, he attended a conference at the Killashee House Hotel in Naas, County Kildare, an hour’s drive from the airport.

He was there as an invited speaker at the Knowledge Transfer Ireland (KTI) conference on Licensing Intellectual Property: Strategies and Pitfalls.

By way of background, IP Draughts and his colleagues at Anderson Law have recently completed a writing project for Enterprise Ireland, an Irish Government agency. The fruits of that

Deirdre Kilroy in the tropical part of Ireland

Deirdre Kilroy; Ireland’s tropical rainforest can be seen in the background

project can be found on the KTI website. They consist of a large set of template agreements and commentary for use by Irish universities and industry. They form part of a public policy initiative of the Irish Government, set out in a document called Putting Public Research to Work for Ireland. Support on Irish law aspects of the project was provided by Deirdre Kilroy and her team at LK Shields, an Irish law firm.

The materials were commissioned by KTI’s Director, Alison Campbell OBE, PhD, who is well-known in the UK knowledge transfer community. Alison also organised and led the conference.

Alison Campbell is doing something funny with Richard Bruton T.D. Ireland's Minister for Jobs, Enterprise & Innovation

Alison Campbell doing something funny with Richard Bruton T.D. Ireland’s Minister for Jobs, Enterprise & Innovation

The conference brought together about 160 specialists in technology transfer. It seemed as though most of the Irish KT community was present in the room, as well as representatives from Irish companies, both large and small.

IP Draughts spoke on the subject of common pitfalls in IP licensing. He described, in a suitably anonymised way, some of the problems that he had encountered in licensing deals between universities and industry, and how they might be avoided or resolved. His examples included the following:

  1. Wrong type of transaction. Why assigning IP to a company, rather than licensing it, can cause difficulties, particularly if there are ongoing financial obligations such as royalties, and if the IP owner goes into liquidation and sells on the IP to a company that declines to pay the royalty. And why granting exclusive licences to several companies in different fields can cause problems if the fields are too close to one another. KT professionals should apply common sense to field definitions and not rely too heavily on academics telling them that field A is clearly different from field B.
  2. Mismatch of expectations. How companies and universities sometimes approach licensing transactions with a completely different set of expectations and assumptions. Companies sometimes assume that a licensing deal involves them “buying” an asset that they will be free to exploit as they see fit, and expect the asset to be “clean”, eg free from IP infringement, and the seller to take some legal responsibility for the asset that they are selling. Whereas a university may assume that it is granting limited rights to a company to enable the fruits of academic research to be put into the public arena, and that it is entirely proper for the university as a public body to avoid all risks and costs associated with the grant of those rights, while at the same time retaining some legal controls to ensure that the IP is commercialised in an appropriate way. How communication of objectives at the outset may reduce the scope for misunderstanding and frustration.
  3. Wrong mindset for negotiating deal. How both universities and companies can get reputations for being “difficult” and IP Draughts’ experience of the same concerns being expressed by both industry and universities. The importance of professional negotiations, and the need for training for academics, and perhaps senior management of universities, in how to conduct themselves in negotiations. Not allowing back-channels of communication between the company and academic, and through the academic to the university’s senior management, that undermine the work of the KT professionals. How to steer a middle ground between saying no to everything (which inexperienced negotiators sometimes do) and saying yes to everything (which senior management and academics sometimes press the negotiator to do, through lack of understanding of the issues).
  4. Locked into a long-term, loveless relationship. How parties sometimes shun discussion of how they will “divorce” at the time of negotiating their agreement, and why it is important to have a “prenup”. In particular, why it is important to have clear performance and reporting obligations, termination rights for non-performance, a mechanism for resolving disputes over performance, and clear set of obligations on termination.  Also, why it is important to handle “exit” negotiations with a licensee in a professional manner to avoid delays and loss of patent life and secure appropriate compensation for early termination.




Leave a comment

Filed under Intellectual Property, Licensing

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.


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?





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




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.
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


Filed under Licensing