Business of IP Conference Series/Tech Council of Maryland: Technology Licensing Fundamentals

Presented by

Stephen Candelmo

Arent Fox LLP

Washington, DC | New York, NY | Los Angeles, CA March 27, 2008

TECHNOLOGY LICENSING FUNDAMENTALS

Agenda

1. Fundamental Issues 2. Common Mistakes to Avoid

TECHNOLOGY LICENSING FUNDAMENTALS

Industry Overview

How big is the technology licensing industry? • No exact numbers, but can be estimated through a variety of sources.• Of the 332,000 patents applied for in 2006, 179,280 patents were issued.• 5% of those granted patents (which will be licensed or cross licensed)

represents approximately 9,000 licensing transactions.• In 2002, the IRS reported that U.S. corporations claimed approximately $115

billion in royalty income. • Technology licensing transactions likely represented more than $70 billion in value when you back-out

printed and broadcast copyrights, trademarks and other non-technology royalty transactions.

Intangible assets and their value is growing significantly

TECHNOLOGY LICENSING FUNDAMENTALS 4

Technology Licensing Fundamentals

What is a License?

“License” means the legal permission to use a specific intellectual property right of another in connection with agreed purpose and duration.

TECHNOLOGY LICENSING FUNDAMENTALS

• Intellectual Property Rights• Patents• Software• Know-How• Designs• Data• Trade-Secrets

Subject Matter

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TECHNOLOGY LICENSING FUNDAMENTALS

• Fundamental Licensing Issues

• Why?• Who?• What?• Where?• How?• When?• How Much?

Technology Licensing Fundamentals

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TECHNOLOGY LICENSING FUNDAMENTALS

• Why are you licensing?• Essential to business model (licensor’s primary

business model)• Collaborative relationships• Need for additional resources for development or

marketing/distribution• Optimal asset utilization

Technology Licensing Fundamentals

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TECHNOLOGY LICENSING FUNDAMENTALS

• Who are you licensing to?• Single User• Affiliates• Sublicensing rights• Exclusivity• Assignability/transferability

Technology Licensing Fundamentals

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TECHNOLOGY LICENSING FUNDAMENTALS

• What are you licensing?• Nature of intellectual property rights being licensed• Current versions/future versions• Back-licenses• Co-development

Technology Licensing Fundamentals

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TECHNOLOGY LICENSING FUNDAMENTALS

• Where is the license applicable?• Will there be a geographic scope to the license• Will there be a scope as to certain markets or

products• If the license is to be used internationally, will the

technology be subject to U.S. export laws or other foreign laws

Technology Licensing Fundamentals

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TECHNOLOGY LICENSING FUNDAMENTALS

License Grant Language

1. Grant of License. During the Term, Licensor hereby grants to Licensee an exclusive, worldwide, unlimited, royalty based, perpetual (with the unlimited right to sublicense through multiple tiers (“Sublicenses”)) right and license (the “License”) to use, copy, make use, offer, sell, distribute, modify and otherwise commercially exploit the Software in conjunction with the Licensee’s business activities with any and all federal, state, or local governmental authorities (the “Exclusive Category”). During the Term, Licensor and his affiliates (including their respective successors and assigns) shall not, directly or indirectly, permit, authorize, assign, transfer, convey, license, distribute or grant any rights to the Software or any rights that would conflict with the License granted herein to any third party for use within the Exclusive Category. Furthermore, during the Term, Licensor and his affiliates (including their respective successors and assigns) shall not use, offer, market, sell, license or distribute the Software for their own respective personal or commercial benefit for use within the Exclusive Category. Licensee may modify, make improvements, and create derivative works based upon the Software , and the parties hereby agree that Licensee shall be the exclusive owner of any such modifications, improvements and/or derivative works and the intellectual property rights related thereto. Licensee hereby acknowledges and agrees that he shall not grant any Sublicenses that provides for any rights not authorized or that exceed the rights granted herein pursuant to the License.

TECHNOLOGY LICENSING FUNDAMENTALS

• How will the licensee use the license?• Depends on nature of intellectual property right granted

pursuant to the license• Field of Use: For example: patents: make, have made,

use, offer to sell, sell and import• Limitations: derivative works, sublicensing rights,

improvements• Non-competition restrictions• IP enforcement: Will licensee have the ability to enforce

the underlying IP in certain markets? Who will bear costs?• IP prosecution:

-Patent applications? Who will bear costs?

Technology Licensing Fundamentals

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TECHNOLOGY LICENSING FUNDAMENTALS

Enforcement Language

Control of Actions. Licensor shall promptly advise Licensee if it becomes aware of any infringement of the Patent or Technology by any other Person or any matter which comes to its attention which may affect the prosecution or maintenance of the Patent. The parties hereby acknowledge and agree that Licensor shall have sole control over any action that it may choose to file to enforce its rights under the Patent or to the Technology. Licensee shall reasonably cooperate with Licensor, at Licensor’s expense, in the investigation of any apparent infringement by others, and agrees to cooperate with and assist Licensor, at Licensor’s expense, in any such legal action or proceedings for the purpose of enforcing Licensor’s rights under the Patent or to the Technology. In the event that a declaratory judgment action alleging invalidity of the Patent shall be brought against Licensee, Licensor, at its sole option, shall have the right to intervene and take over the sole defense of the action at its own expense.

TECHNOLOGY LICENSING FUNDAMENTALS

• When (or for how long) is the license applicable?• Under what circumstances will the license terminate• In exclusive relationships, under what circumstances

would the license become non-exclusive-Tied to economic measures or passing of time

• Residual rights after termination

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TECHNOLOGY LICENSING FUNDAMENTALS

Term and Termination Language

Term. This License Agreement shall remain in full force and effect from the date first written above in perpetuity unless terminated earlier in accordance with this License Agreement. (the “Term”). If Licensee materially breaches his payment obligations under this License Agreement, the Licensor may terminate this License Agreement by giving Licensee written notice of default ("Notice of Default") that specifies in reasonable detail the nature of the alleged material breach. Licensee shall have a sixty (60) day grace period after his receipt of the Notice of Default ("Grace Period") to correct or cure the material payment breach specified therein. If the breach by Licensee is not corrected within the Grace Period, Licensor shall be entitled to terminate this License Agreement immediately upon written notice.

TECHNOLOGY LICENSING FUNDAMENTALS

• How will licensor be compensated?• Royalty Structures: on what basis (unit of measurement)

-For example, gross revenues, net revenues, net income

• Initial licensing fees• Flat fees• Caps• Valuation Issues

-What is the industry practice?-Nature of product?-Anticipated profit?-Scope and duration of license?

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TECHNOLOGY LICENSING FUNDAMENTALS

License Fee Language

2. License Fee. Licensee shall pay Licensor within sixty (60) days after the end of each calendar year a royalty fee of 3% of Net Sales of the Software (“Royalty Payment”); provided however, the maximum aggregate amount of Royalty Payments paid by Licensee pursuant to this License Agreement shall not exceed $2,000,000. For purposes of clarification, the parties hereby acknowledge and agree that once Licensee has paid Licensor Royalty Payments in the aggregate amount of $2,000,000, Licensee shall have no obligation to Licensee to pay any further Royalty Payments. Licensor acknowledges and agrees that the Royalty Payments shall constitute full consideration for the License, and no additional royalty fees or license fees of any kind shall be due at any time in the future. For purposes of this License Agreement, “Net Sales” means the gross sales actually received by Licensee during the applicable calendar year in connection with the sale or licensing of the Software to Licensee’s customers or sublicensees less any discounts or refunds in connection with such sales or licenses.

TECHNOLOGY LICENSING FUNDAMENTALS

• Licensing Pitfalls to Avoid?• Improper license grant or field of use• Improper or unclear royalty structure• Absence of auditing rights on royalty arrangements• Lack of risk allocation for infringement liabilities• Lack of change of control or assignability restrictions• Collaborative efforts that do not address ownership of future IP

(absence of grant-back licenses)• Improper identity of licensees (sublicensing rights and affiliates)• Who controls rights to sue infringers• Failure to address international considerations

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TECHNOLOGY LICENSING FUNDAMENTALS

A Few Last Words

“We've arranged a civilization in which most crucial elements profoundly depend on science and technology.”

-Carl Sagan

I knew that a country without a patent office and good patent laws was just a crab, and couldn't travel any way but sideways or backways.

-Mark Twain"A Connecticut Yankee in King Arthur's Court"

Everything that can be invented, has been invented.”-Charles H. Duell, Commissioner, U.S. Office of Patents, 1899.

TECHNOLOGY LICENSING FUNDAMENTALS

Stephen CandelmoPH: 202-828-3468Candelmo.stephen@arentfox.com

Arent Fox LLP1050 Connecticut Ave., N.W.Washington, DC 20036

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