InfoPAK Best Practices for Intellectual Property Licensing ... · The Grant Clause ... Music ......

By in-house counsel, for in-house counsel.®

Association of Corporate Counsel 1025 Connecticut Avenue, NW, Suite 200

Washington, DC 20036 USA tel +1 202.293.4103, fax +1 202.293.4701

www.acc.com

By in-house counsel, for in-house counsel.®

Association of Corporate Counsel 1025 Connecticut Avenue, NW, Suite 200

Washington, DC 20036 USA tel +1 202.293.4103, fax +1 202.293.4701

www.acc.com

InfoPAKSM

Best Practices for Intellectual Property Licensing: Addressing the Rights Granted and Assets Covered in Patent, Copyright, Trade Secret, and Trademark Licenses

Sponsored by:


Copyright © 2013 Kilpatrick Townsend & Stockton LLP & Association of Corporate Counsel

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August 2013

Provided by the Association of Corporate Counsel 1025 Connecticut Avenue, NW, Suite 200 Washington, DC 20036 USA tel +1 202.293.4103 fax +1 202.293.4107 www.acc.com

This InfoPAK is not a comprehensive analysis of Intellectual Property licensing, but rather, it is a discussion of the best practices and recent developments in intellectual property licensing. The core of this InfoPAK touches on issues that are fundamental to the granting of rights, as well as the assets covered by most intellectual property licenses.

The information in this InfoPAK should not be construed as legal advice or legal opinion on specific facts, and should not be considered representative of the views of Kilpatrick Townsend & Stockton LLP or of ACC or any of their lawyers, unless so stated. Further, this InfoPAK is not intended as a definitive statement on the subject. Rather, it is intended to serve as a tool for readers, providing practical information to the in-house practitioner. This material was compiled by Kilpatrick Townsend & Stockton LLP. For more information on Kilpatrick Townsend & Stockton LLP, visit their web site at www.KiltpatrickTownsend.com or see the “About the Author” section of this document.

For more ACC InfoPAKs, please visit http://www.acc.com/infopaks

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Contents

I. Introduction ....................................................................................................................................... 7

II. Patent Licenses .................................................................................................................................. 8

A. The Grant Clause .................................................................................................................................................. 8

1. The Buzz Words .................................................................................................................................. 8

2. “Have Made” Rights ............................................................................................................................ 9

3. The Here and Now .......................................................................................................................... 10

B. Exclusivity ............................................................................................................................................................. 10

1. Exclusive Licenses ............................................................................................................................. 10

2. Non-Exclusive Licenses ................................................................................................................... 12

3. Exclusivity and Standing ................................................................................................................... 12

C. Government-Funded Research ........................................................................................................................ 13

D. Sublicenses ............................................................................................................................................................ 14

1. Is Sublicensing Permissible? ............................................................................................................ 15

2. Is Approval Required? ...................................................................................................................... 15

3. What Rights May be Sublicensed? ................................................................................................. 17

4. How Will the Patentee be Compensated? ................................................................................. 17

5. How Long May the Sublicense Remain in Effect? ...................................................................... 17

E. Joint Ownership .................................................................................................................................................. 18

1. The Rights of Joint Owners ............................................................................................................ 18

2. Patent-Infringement Suits ................................................................................................................ 19

3. Joint Patent-Owner Agreements .................................................................................................. 20

F. Hybrid Licenses ................................................................................................................................................... 20

1. Reasons for Hybrid Licenses .......................................................................................................... 20

2. Royalties .............................................................................................................................................. 21

G. Development Agreements ................................................................................................................................ 22

1. Pre-Existing IP .................................................................................................................................... 22

2. Independent IP ................................................................................................................................... 23

3. Developed IP ..................................................................................................................................... 23

H. Bankruptcy and Patent Licenses ...................................................................................................................... 24



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1. Rights in Bankruptcy ........................................................................................................................ 24

2. Non-US Debtors in Bankruptcy .................................................................................................... 25

3. Licensees in Bankruptcy .................................................................................................................. 25

III. Copyright Licenses .......................................................................................................................... 26

A. The License Grant .............................................................................................................................................. 26

1. Purpose of the License .................................................................................................................... 26

2. Identification of Licensed Work(s) ............................................................................................... 26

3. Scope of License Grant ................................................................................................................... 26

4. Exclusive vs. Non-Exclusive Licenses ........................................................................................... 27

5. Modification and Derivative Works ............................................................................................. 28

6. Licensed Media .................................................................................................................................. 29

7. Moral Rights ....................................................................................................................................... 29

8. Payment .............................................................................................................................................. 30

9. Condition vs. Covenant .................................................................................................................. 30

10. License vs. Sale .................................................................................................................................. 30

11. Copyright Notice .............................................................................................................................. 31

B. Parties to the License and Third-Party Beneficiaries .................................................................................. 31

1. Defining the Licensor ....................................................................................................................... 32

2. Defining the Licensee ....................................................................................................................... 33

3. Sublicensing ........................................................................................................................................ 33

4. Assignability ........................................................................................................................................ 34

5. Ownership of Derivative Works .................................................................................................. 34

6. Joint Ownership ................................................................................................................................ 35

7. Independent Contractors ............................................................................................................... 35

C. Duration and Timing of Performance ............................................................................................................ 36

1. Term .................................................................................................................................................... 36

2. Termination ....................................................................................................................................... 37

D. Territory, Law, and Forum ............................................................................................................................... 38

1. Territory ............................................................................................................................................. 38

2. Choice of Law ................................................................................................................................... 38


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3. Choice of Forum ............................................................................................................................... 38

E. General Considerations .................................................................................................................................... 39

1. Bankruptcy ......................................................................................................................................... 39

2. Injunctive Relief ................................................................................................................................. 40

3. Warranties and Indemnification .................................................................................................... 40

F. Medium-Specific Considerations ..................................................................................................................... 41

1. Software .............................................................................................................................................. 41

2. Music .................................................................................................................................................... 42

3. Journals and Newsletters ................................................................................................................ 42

IV. Trade Secret Licenses .................................................................................................................... 43

A. Trade Secret Law: The Uniform Trade Secret Act States vs. Common-Law States .......................... 43

1. The UTSA and Misappropriation .................................................................................................. 43

2. The Common-Law States: New York and Texas ..................................................................... 44

B. Confidentiality and Royalty Obligations ........................................................................................................ 45

1. Confidentiality Obligations ............................................................................................................. 45

2. Royalty Obligations .......................................................................................................................... 46

C. Additional Considerations ................................................................................................................................ 47

1. Sublicensing ........................................................................................................................................ 47

2. Assignability ........................................................................................................................................ 47

3. Territory/Field of Use (FOU) Restrictions ................................................................................. 48

D. Jurisdictional Issues ............................................................................................................................................. 48

1. Joint Ownership ................................................................................................................................ 48

2. Enforcement Rights .......................................................................................................................... 48

3. Bankruptcy ......................................................................................................................................... 49

V. Trademark Licenses ........................................................................................................................ 49

A. Statutory and Common-Law Principles Governing What Constitutes a License ............................... 49

1. Canons of Contract Law ................................................................................................................ 49

2. Standing to Sue in Federal Court and Bring Administrative Actions ................................... 50

3. Licensing Formalities ........................................................................................................................ 50

4. Ensure the Agreement is a License Agreement ........................................................................ 51



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5. The Franchise Surprise .................................................................................................................... 54

B. A Licensing Model to Maximize Benefits for Both Parties ........................................................................ 55

1. The Grant Considerations ............................................................................................................. 56

2. Territory ............................................................................................................................................. 59

3. Quality Assurance and Controls ................................................................................................... 64

4. Indemnification .................................................................................................................................. 69

5. Enforcement ....................................................................................................................................... 70

6. Termination Rights ........................................................................................................................... 71

7. Sell-Off Periods ................................................................................................................................. 71

8. Implications of Bankruptcy ............................................................................................................. 72

9. Remedies for Default or Breach ................................................................................................... 74

VI. Conclusion ........................................................................................................................................ 75

VII. About Kilpatrick Townsend & Stockton LLP and the Authors .................................................. 76

A. Kilpatrick Townsend & Stockton LLP ............................................................................................................ 76

B. Authors ................................................................................................................................................................. 76

VIII. Additional Resources ...................................................................................................................... 77

A. ACC Docket ............................................................................................................................................................ 77

B. Forms & Policies .................................................................................................................................................. 77

C. Program Materials ............................................................................................................................................... 77

D. Articles .................................................................................................................................................................. 77

E. ACC QuickCounsel ........................................................................................................................................... 77

F. ACC InfoPAK ...................................................................................................................................................... 78

IX. Endnotes ........................................................................................................................................... 79


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I. Introduction Intellectual property (“IP”) licenses are enormous revenue generators for licensors and licensees alike. They are quintessential capitalism—compensation in exchange for the right to perform certain activities, assume a certain degree of risk, and pursue increasing profits. More than many of the drivers of capitalism, intellectual property licensing persists even when times are tough. For example, despite the recent economic downturn, the top 125 trademark licensors worldwide in 2011 accounted for more than $192 billion in sales of licensed merchandise.1 Looking at one industry, revenues from products featuring sports trademarks exceeded $18.5 billion in the United States in 2012, with colleges and universities generating approximately $4.6 billion, Major League Baseball making $5 billion, and the National Football League realizing $3.25 billion in revenues from such sales.2

The strength of global licensing is due in part to the rise of large intellectual property owners.3 Substantial volumes of licensing activity are also sustained by historically large unitary intellectual property owners, such as educational and research institutions4 in the patent context, or brand owners such as Disney in the trademark and copyright context. For instance, Disney, the largest trademark licensor worldwide, acquired Marvel Entertainment in 2008,5 and together they generated $37.5 billion in retail sales in 2012.6 Similar strong, well-known individual intellectual property owners, such as Chrysler Group, Stanley Black & Decker, and Warner Bros., clock in billions of dollars in licensing revenues each year.7

These examples show that well-drafted license agreements can be sources of substantial income for licensors and tremendous business opportunities for licensees. As valuable as licenses are, when they are improperly, unclearly, or inadequately drafted—or when a licensing relationship sours—they can lead to expensive litigation or, worse, extraordinary liability. Given that the stakes are so high for parties to these agreements, attorneys should take great care not only to understand and aptly memorialize the parties’ objectives but also appreciate the potential pitfalls licenses can contain, and work diligently to safeguard their clients from such risks. A well-drafted license agreement anticipates and addresses as many foreseeable issues as possible—with respect to the unique intellectual property at issue as well as the legal hurdles the parties may encounter in effectuating their agreement across the duration and geographic scope of their relationship. Practitioners with an understanding of the best practices, an appreciation for recent developments in intellectual property licensing, and a clear notion of international licensing implications will be in the best position to maximize their client’s revenue potential and goodwill through licensing.

The critical issues in particular licensing relationships often are idiosyncratic and depend on a range of factors unique to the parties’ relationship, the intellectual property being licensed, the commercial value of that property, and the anticipated term and scope of the agreement. Treatises have been written about licensing. This article cannot possibly exhaust the issues and scenarios one may encounter during the licensing process. What follows, therefore, is a discussion of the best practices and recent developments in intellectual property licensing in an attempt to touch on issues that are fundamental to the granting of rights, as well as the assets covered by most intellectual property licenses.



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II. Patent Licenses In contrast to other kinds of intellectual property licenses, a patent license is a “freedom from suit”—a veritable “get out of jail” card in the “game of patent monopoly.” It is a promise from a patent owner to a licensee that the licensee may perform certain activities under a patent without fear that the licensor will bring suit. Patent licenses are one of the primary tools for commercializing patent rights.

A. The Grant Clause The grant clause is the keystone of any patent license. It outlines precisely what rights the licensor is granting to the licensee under the agreement and (where well-drafted) also clarifies which rights are not being granted. A patent holder can only grant to a third party those rights that the holder has. Consequently, a patent holder typically picks and chooses which rights it will grant to a particular licensee.

1. The Buzz Words

Federal patent statutes define the rights held by a patentee as follows:

Every patent shall contain … a grant to the patentee … of the right to exclude others from making, using, offering for sale, or selling the invention throughout the United States or importing the invention into the United States, and, if the invention is a process, of the right to exclude others from using, offering for sale or selling throughout the United States, or importing into the United States, products made by that process ….8

The “buzz words” are “making,” “using,” “offering for sale,” “selling,” and “importing.” Note that the patentee’s right is a right to exclude others from participating in those activities. A patent is therefore an exclusionary—or a negative—right.

By granting a license to a third party to practice one or more of the enumerated activities, a patentee is telling the licensee that the licensee is no longer excluded from that activity, provided that it complies with the terms of the license agreement. Because this double-negative nature of a patent license can be confusing, a patent license is often simply viewed as a positive right—a right to do something that the licensee could not otherwise legally do.

A patentee may allow a particular licensee to perform one or all of the activities that would otherwise be within the scope of the patent exclusionary rights. The parties should therefore determine what type of commercialization efforts the licensee will be undertaking, and then draft the grant language accordingly. A sample simple, non-exclusive license grant follows.


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LICENSOR hereby grants to COMPANY a non-exclusive, non-transferable, non-assignable license under the Patent Rights to make, use, import, sell, and offer to sell the Licensed Products in the Territory.

There is no need to stray from the terms make, use, import, sell, and offer to sell. Those are the only rights available under the patent laws; trying to embellish them so as not to “miss something” will have no legal effect. On the contrary, it may result in confusion down the road, when a third party who is unfamiliar with the original transaction may be tasked with trying to figure out what the parties to the agreement actually intended.

2. “Have Made” Rights

If there is an exception to the “don’t include superfluous rights in the patent grant clause” rule, then the “have made” right falls in that category. A licensee may not always have the financial resources, facilities, equipment, or skill to make a particular licensed product on a commercial scale. It may therefore need the help of a third-party manufacturer. The “have made” right refers to a licensee’s right to engage a third party to manufacture a licensed product on the licensee’s behalf.

This “have made” right is not one of the exclusionary rights enumerated in the patent statute. However, the Federal Circuit recently confirmed that, unless specifically stated otherwise in the grant clause, the right to “make, use and sell” a licensed product also includes the implied right to have those licensed products made by a third party.9

Despite the Federal Circuit’s holding, some companies do still prefer to include the clarifying “have made” language in the litany of rights in the grant clause. For example:

LICENSOR hereby grants to COMPANY a non-exclusive, non-transferable, non-assignable license under the Patent Rights to make, have made, use, import, sell, and offer to sell the Licensed Products in the Territory.

Some companies also prefer to include more-detailed manufacturing provisions, such as the following:

The Parties agree that the rights in this Section xx shall include the right to have made, or otherwise provide for the manufacture, assembly, and subassembly of, the Licensed Products by a third party.

In some cases, the licensor may not want third parties to make or manufacture licensed products for the licensee. In those situations, language along the following lines may be used:

LICENSOR hereby grants to COMPANY a non-exclusive, non-transferable, non-assignable license under the Patent Rights to make (but not have made), use, import, sell, and offer to



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sell the Licensed Products in the Territory. The Parties agree that the rights in this Section xx shall not include the right to have made, or otherwise provide for the manufacture, assembly, or subassembly of, the Licensed Products by a third party.

Given the uncertainty that has historically surrounded the “have made” issue, it is understandable that licensing parties still resort to clarifying “have made” language. Is it necessary to do so? No. Is it harmful? Absolutely not.

That said, if the patentee does not want to grant the licensee the right to have licensed products made by a third party, then that should be clearly stated in the agreement. Likewise, if the patentee wants to limit the “have made” rights to a particular third-party manufacturer, then that should clearly be stated as well. Absent an express prohibition or limitation, unrestricted “have made” rights will be implied.

3. The Here and Now

The concept of a “present” grant is a fairly simple one —grant the rights now, rather than promising or agreeing to grant them at some point in the future. A “promise to grant” conveys nothing; it simply suggests that a second agreement actually granting the rights will subsequently be executed. In most licensing scenarios, that is clearly not the parties’ intent. Rather, they intend to convey the license rights at the moment the license agreement is made effective.

In practical terms, this means a license should contain present, in-the-moment grant language:

“Licensor grants” or “Licensor hereby grants”

NOT

“Licensor agrees to grant” or “Licensor shall grant”

A combination of the two is acceptable (e.g., “Licensor agrees to grant and hereby does grant”), but simply a promise to grant a license, with nothing further, is not sufficient.

B. Exclusivity A license can be either exclusive or non-exclusive. Although the terms seem fairly black and white, license grants themselves often tend towards gray.

1. Exclusive Licenses

At its core, exclusivity is a numbers issue. It indicates how many licensees may exercise the rights being granted.


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An exclusive license is exactly what its name suggests—exclusive to a particular licensee at least with respect to one or more components. The broadest type of exclusive license grants a licensee the right to make, use, sell, offer to sell, and import the licensed product, or utilize the licensed process, in all relevant territories in all fields of use. This type of all-encompassing exclusive license is akin to an assignment.

There are variations on the all-encompassing exclusive that are still considered exclusive licenses. For example, a patentee may opt to grant one company an exclusive license to operate in a particular field of use, and grant another company the exclusive right to operate in a different field of use. Both are still considered exclusive licenses, but are limited in their exclusivity.

LICENSOR grants to COMPANY an exclusive, non-transferable, non-assignable license under the Patent Rights to (i) make and have made the Licensed Products in the Territory for use exclusively in the Automobile Industry, (ii) use the Licensed Products in the Territory exclusively in the Automobile Industry, (iii) import the Licensed Products into the Territory for use exclusively in the Automobile Industry, and (iv) sell, offer to sell, and distribute the Licensed Products in the Territory for use exclusively in the Automobile Industry.

“Automobile Industry” means the business of building, selling, and distributing motor vehicles designed for operation on roadways.

The same is true for territorial restraints. A patentee may grant one company exclusive rights in a geographic region (e.g., North America) and grant another company exclusive rights in another region (e.g., the European Union). Both are still considered exclusive, but are limited in the geographic scope of their exclusivity.

When drafting an exclusive license, it is important to clarify the exact nature of the exclusivity. It is an all-encompassing exclusive license? Is it limited to a particular field of use? Is it limited to a particular geographic region? Such measures should be specifically stated in the grant clause.

A license can also be “co-exclusive” between the patentee and licensee. In a co-exclusive situation, the patentee grants the licensee exclusive rights with respect to everyone except the patentee. The patentee therefore retains the rights to practice, and exclude others from practicing, the patented invention. This is sometimes referred to as a “sole” license.

The grant clause should specify whether the license is exclusive to the licensee, or whether the patentee and the licensee will be in a co-exclusive relationship. The phrases “except as to licensor” and “even as to licensor” can be inserted into the grant clause to clarify the patentee’s rights. For example:

Co-Exclusive License Rights. LICENSOR hereby grants to COMPANY an exclusive (except as to LICENSOR), worldwide license under the Patent Rights to make, use, import, sell, and offer to sell the Licensed Products … Since the license rights granted to COMPANY under this Section xx are exclusive except as to LICENSOR, LICENSOR may continue to exercise all of its rights in the Patent Rights, including without limitation the same rights granted to COMPANY under this Section xx.



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OR

True Exclusive Rights. LICENSOR hereby grants to COMPANY an exclusive (even as to LICENSOR), worldwide license under the Patent Rights to make, use, import, sell, and offer to sell the Licensed Products in the Territory …

Countries outside the United States tend to be less receptive to limited exclusive licenses than the United States. In Europe, for example, certain territorial and field-of-use restrictions may not be enforceable if their effect is to restrict competition in the common market. In China, field-of-use restrictions that are viewed as limitations on distribution channels or the export market may be unenforceable. Given the differing viewpoints, an international patent-license agreement should be reviewed by counsel in the primary jurisdictions in which that agreement will be effective so that any potential “landmines” can be detected and corrected before the agreement is signed.

2. Non-Exclusive Licenses

A non-exclusive license is a right granted to more than one licensee to practice a particular invention. There is generally no limit to the number of non-exclusive licenses that can be granted, aside from market conditions and the terms of the particular license that may effectively limit further licensing efforts (e.g., most-favored-licensee provisions).

Whether a non-exclusive or exclusive (or limited exclusive) license is appropriate in any given circumstance depends on a variety of concerns from both the licensor’s and the licensee’s perspective. A prospective licensee in a new technology space may want the licensor to commit to an exclusive license before the prospective licensee is willing to commit the resources and time necessary to commercialize the product. A licensor, on the other hand, may be concerned about putting all of its proverbial licensing “eggs in one basket” —and the possibility that the licensee either won’t be successful in its commercialization efforts or could intentionally “bury” or “shelve” the licensed technology rather than commercializing it. Compromises can take the form of limited exclusive licenses, “best efforts” clauses requiring minimum performance standards, due-diligence requirements, and escape provisions that allow a licensor to terminate the exclusive license—or convert it to a non-exclusive one—if certain commercialization milestones or diligence requirements are not met.

The goal is to strike a fair balance that addresses the needs of both parties, so that both walk away from the table feeling good about the relationship. A license relationship that gets off to a rough start almost never recovers.

3. Exclusivity and Standing

A common misconception is that an exclusive license automatically confers on the licensee standing to sue for infringement of the licensed patent. However, not all types of exclusivity are equal, and not all confer standing to sue. The key question is whether the licensee has an exclusionary right created by the Patent Act that allows that licensee to exclude the specific infringer (not all third parties) from performing the infringing activity.10


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Some cases are fairly clear-cut. For example, an all-encompassing exclusive license—essentially an assignment without the actual transfer of ownership—is sufficient to give the licensee standing to sue. Territorial exclusivity is likewise generally sufficient to confer standing in the jurisdiction in which the license pertains.

The analysis is more difficult when a patent owner licenses some, but not all, of its patent rights to the “exclusive licensee.” In those cases, the court must determine if the licensee possesses enough rights to warrant its involvement in the suit. Ultimately, the analysis is a party-by-party, case-specific one, and the answer may differ depending on who the alleged infringer is and what exclusionary rights the licensee has with respect to that infringer. A licensee may have standing to sue some third parties, but not others.11

Given the potential uncertainty involved with this type of party-by-party analysis, the patent owner and prospective licensee should discuss the issue of standing upfront, and make sure that the license agreement specifically addresses any enforcement rights to which they have agreed.

C. Government-Funded Research It is not unusual for scientific research to be funded, at least in part, with federal grants. Federal funding is fairly common in the academic sector and with some early-stage companies, particularly in the chemical or biotechnology fields. In exchange for its funding contributions, the government is entitled to certain statutory rights.

First, the government may require the owner of a patented invention that results from federally funded research to obtain a promise from a prospective exclusive licensee that “any products embodying the subject invention or produced through the use of the subject invention” will be manufactured substantially in the United States.12 The rationale is that government funded research should benefit the US manufacturing industry.

Second , the government retains a non-exclusive, irrevocable, paid-up license to practice the invention or to have it practiced on behalf of the United States. The government may therefore engage a third party to manufacture or produce products for the government that would otherwise infringe the patent rights.13

Third, the government has the right, under certain select circumstances, to “march in” and require the patentee to grant a license in any field to a “responsible applicant or applicants.” 14 For example, the government can step in if adequate steps have not been taken to commercialize the invention, or if the patent holder’s licensee has not made reasonable efforts to comply with the domestic manufacture requirement. Public health or safety concerns can also be catalysts.

Provisions requiring a licensee to recognize and comply with the government’s rights are not unusual. For example:

Licensee’s Compliance with Government Rights Statutes. COMPANY agrees that it will comply with all rights, obligations, and limitations of United States Code, Title 35, Chapter 18, and all related implementing regulations, for each invention claimed in a patent or patent application included in the Patent Rights which was invented, in whole or in part,



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using federal funding.

Further, the parties can specifically note in an exclusive-license grant that the exclusivity is subject to any rights held by the government.

Government Rights Language in Grant Clause. LICENSOR hereby grants to COMPANY an exclusive (even as to LICENSOR) worldwide license under the Patent Rights to make, have made, use, import, sell, and offer to sell the Licensed Products in the Territory … subject only to the royalty-free, non-exclusive license rights of the United States Government …

Some would argue that the government’s march-in rights are more of a theoretical concern than an actual one. To date, no federal agency has enforced its march-in rights. However, in several instances, petitions have been filed with the National Institutes of Health (“NIH”) asking the NIH to exercise its march-in rights. Although the NIH has declined in each case thus far, it is reasonable to conclude that the NIH will ultimately take action when the appropriate fact scenario presents itself.

It is important not to overlook the government’s rights. The patent holder of a federally funded invention should disclose to its prospective licensee the fact that the invention being licensed was the result of government funding. Likewise, a prospective licensee should ask in the course of its due diligence whether any invention to be licensed was the result of any government-funded research. Once the government’s rights are on the table, the parties can decide how they would like to contractually address them.

An exclusive license that is subject to the government’s march-in rights is not truly exclusive; it is “exclusive except ….” If the government’s interest is not disclosed and the licensee later finds out that the government has an interest—or, worse yet, is exercising its rights and cutting into the licensee’s supposedly exclusive rights—it is too late. The damage has been done. Raising and addressing the government’s rights at the outset will prevent potentially significant issues down the road should the government opt to exercise its rights.

This discussion focuses on the rights of the US government with respect to federally funded inventions. Some other countries impose similar restrictions on inventions funded by their governments (e.g., Canada and the European Union). The nature and extent of those restrictions varies from jurisdiction to jurisdiction. Consequently, if the development of an invention was funded in whole or in part by a foreign government, then it is important to seek the advice of counsel in that county to determine what rights, if any, that government may exercise in the invention.

D. Sublicenses “It’s just a simple sublicense.” Those may be the five most painfully inaccurate words that a patent-licensing attorney hears. Very few—if any—simple patent sublicenses exist. In fact, because a sublicense is a “vertical” transfer of rights from a licensee down to a sublicensee, a patent


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sublicense is often a more-complicated beast than the original license agreement on which it is based.

By definition, the sublicensee’s rights must depend on the rights granted in the underlying license agreement. The sublicense agreement must therefore be consistent with the terms of the underlying license agreement, comply with the terms of the underlying agreement, and incorporate relevant pieces of the underlying agreement. This can be a challenging puzzle.

One way to simplify the exercise is to make sure that the underlying agreement addresses in detail how the parties intend to handle sublicensing. Several basic questions can help guide the parties’ discussion.

1. Is Sublicensing Permissible?

The first question is whether the licensee will be permitted to grant sublicenses at all. If not, that should be clear in the language of the license agreement.

No Sublicensing (In License Grant). LICENSOR hereby grants to COMPANY a non-exclusive, non-transferable license, without the right to grant sublicenses, under the Patent Rights to make, have made, use, import, sell, and offer to sell the Licensed Products in the Territory.

OR

No Sublicensing (Separate Provision). Nothing in this Agreement shall be construed to grant COMPANY the right to sublicense or otherwise transfer to any other person or entity any of the license rights granted in Section xx above.

If a non-exclusive patent license is silent regarding transferability, then courts will typically hold that it cannot be sublicensed. It is advisable to avoid the uncertainly altogether and specifically indicate whether the license rights can be sublicensed.

2. Is Approval Required?

Under what circumstances is sublicensing permitted? Is the patentee’s approval necessary? If so, what does that approval process entail?

Approval provisions vary depending on the complexity of the agreement, the type of license actually granted, the value of the technology licensed, and the compensation structure under the original license agreement. They can be fairly simple or relatively detailed. A few examples follow.



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Right to Sublicense without Licensor’s Approval. The licenses granted in Section xx include the right to grant sublicenses to third parties, subject to the terms and conditions of this Agreement. COMPANY shall provide to LICENSOR prompt written notice of each such sublicense, as well as a copy of each such sublicense.

OR

Right to Sublicense with Licensor’s Approval. Subject to the restrictions in this Section xx, COMPANY shall have the right to sublicense the license rights granted under Section xx. It shall be within LICENSOR’s sole discretion to approve, or not approve, the grant of a sublicense to each of COMPANY’s prospective sublicensees. LICENSOR shall also have the right to review and approve the terms of all sublicenses, which shall be at least as restrictive as the terms of this Agreement.

OR

Right to Sublicense with Licensor’s Approval. The license rights granted to COMPANY under Section xx shall include the right to grant sublicenses, subject to the following restrictions:

(i) Before any sublicense granted under Section xx may take effect, COMPANY must give LICENSOR notice of the sublicensee’s identity and of the material terms of the sublicense. It shall be within LICENSOR’s sole discretion to determine whether a term is material. All sublicenses granted under this Agreement shall, at a minimum, incorporate all material terms of this Agreement including without limitation the terms of Sections xx, xx, xx, and xx. LICENSOR shall have thirty (30) days from the date of receipt of COMPANY’s notice to either approve of, or object to, the sublicensee and/or the material terms of the sublicense, which approval or objection shall be in writing. LICENSOR’s approval shall not be unreasonably withheld. If LICENSOR does not object during the thirty (30) day period, the identity of the sublicensee and the terms of the sublicense shall be deemed acceptable.

(ii) Sublicense royalties shall be calculated as provided in Section xx.

OR

Right to Sublicense with Licensor’s Approval. The license rights granted to COMPANY under Section xx shall include the right to grant sublicenses, subject to the following restrictions:

(i) Before any sublicense granted under Section xx may take effect, COMPANY must give LICENSOR notice of the sublicensee’s identity and of the material terms of the sublicense. LICENSOR shall have thirty (30) days from the date of COMPANY’s notice to object in writing to the sublicense based upon LICENSOR’s reasonable concern that the LICENSOR’S Confidential Information will not be adequately safeguarded in connection with the sublicense. If LICENSOR does not object during


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the thirty (30) day period, the sublicense shall be effective the first day immediately following the expiration of the thirty (30) day period.

(ii) All sublicenses granted hereunder shall be conveyed in sublicense agreements in substantially the form of Exhibit xx to this Agreement.

Choose an approval structure that makes sense in light of the parties’ business deal, and draft the approval provision accordingly.

3. What Rights May be Sublicensed?

May a licensee sublicense all of the license rights it received under the original agreement? What about a subset of those rights? The “sublicensable” rights should be clearly articulated in the license agreement and in the grant language of the sublicense agreement. Vague language can result in seemingly “permissible” behavior by a sublicensee that far exceeds the scope of what the patentee intended.

4. How Will the Patentee be Compensated?

What type of compensation will the sublicensee owe the licensee as consideration for the rights granted under the sublicense? What compensation will the licensee, in turn, owe the patentee for the rights granted to the sublicensee?

The formula under which the patentee will be compensated for the sublicense should be clearly explained in the original license agreement. Total compensation paid by the sublicensee to the licensee—not just royalty payments—should be considered. As a general rule, half of any lump-sum payments as well as a fair portion of any royalties—whether that portion be 25 percent, 50 percent, or some other percentage—are typically considered fair compensation to the licensor.

Sublicense Royalty Allocation. The Parties further agree that they will each be entitled to fifty percent (50%) of all license fees, up-front payments, royalties, and other compensation, regardless of the form of such compensation, received by COMPANY as consideration for or as a result of each such sublicense.

Remember, the patentee is the party that owns the rights being sublicensed, so fair compensation to the patentee for those rights is appropriate to keep the balance in check.

5. How Long May the Sublicense Remain in Effect?

The term of the sublicense should also be clearly articulated. As a general rule, the term of a sublicense should be no greater than the term of the underlying license agreement, so it is often a good idea to make it coterminus with the underlying agreement. This should be specifically stated in the license agreement, then repeated in the sublicense agreement.15



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In addition, both parties to the sublicense will typically want termination mechanisms just in case things don’t transpire as planned. The parties should consider what types of conditions would justify or necessitate termination of the sublicense, and what happens in the event either party exercises its termination rights.

Clarity at the outset will help prevent uncertainty and curtail rogue behavior down the road, when the sublicensing opportunity actually comes to fruition.

E. Joint Ownership Joint ownership can be one of the most counter-intuitive concepts in patent law. Joint ownership implies that a patent is owned by more than one party. The exclusive rights conferred by a patent are therefore not exclusive at all; they must be shared.

Joint ownership is certainly not ideal from the perspective of a company that would prefer exclusive rights to exploit certain patents. However, joint ownership is often the default—a “necessary evil” —because neither owner is willing to give up its interest in jointly developed properties.

1. The Rights of Joint Owners

Joint patent owners each have an undivided, equal interest in the patent rights. As noted in the patent statutes:

In the absence of any agreement to the contrary, each of the joint owners of a patent may make, use, offer to sell, or sell the patented invention within the United States, or import the patented invention into the United States without the consent of and without accounting to the other owners.16

Each joint owner therefore has the right to fully exploit the patented invention, without the consent of the other joint owner and without accounting to the other joint owner for any share of the profits. This could mean that an inventor who contributes very little to a collaborative effort is entitled to the same rights as another inventor who contributes substantial resources and inventive effort to the collaboration. The fact is that patent law does not distinguish between a 90%-10% split in inventive effort and a 50%-50% split. Joint inventors are joint owners, and each is entitled to an equal, undivided interest in the patent.

This is particularly important in the patent licensing context. Not only does each joint owner have an undivided interest in the patent rights, but each also has the right to grant licenses under those rights to third parties—again, without needing the permission of or accounting to the other joint owner. Because each joint owner has the right to commercialize the patent rights and allow others to do so, no joint owner has the ability to grant an exclusive license under the patent without the other’s consent. Each is at the mercy of the other.17


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Some countries take a different view of joint ownership and the responsibilities joint owners owe to each other. In Canada, for example, a joint owner cannot separately license a jointly owned Canadian patent without the approval of the other joint owner. Likewise, in most European countries, a joint owner of a patent cannot grant a license to a third party without the consent of the other joint owner. The other joint owner effectively has veto power.

Note that in the United States, a joint owner may also assign or otherwise transfer its rights in a particular patent to a third party without the other owner’s consent. As a result, the original joint owner may find itself in a co-ownership situation with a competitor or other party with whom it has no desire to own a patent.

Recognizing this issue, other jurisdictions have taken different views. In France, for example, a joint owner who wishes to sell its interest in a joint patent to a third party must first offer its interest to the other joint owner. This balance prevents the type of uneasy joint-ownership relationship than can result when a joint owner’s rights are freely assignable.

In many ways, the international community has done a better job of addressing the realities of joint patent ownership than has the United States. However, the “take home” message is not that companies should flee the United States for “greener joint-ownership pastures.” Rather, the parties should carefully assess any patent that may be subject to joint-ownership constraints, determine what rights the potential licensor has, and draft the license agreement accordingly. Further, if a joint owner wishes to grant an exclusive license under the patent, then that joint owner should first obtain the express, written consent of the other joint owner. With cooperation and planning, the risks and potential pitfalls of joint ownership can be successfully managed.

2. Patent-Infringement Suits

Joint-patent ownership also has an effect on enforceability. All owners of a patent must join as plaintiffs in a suit to enforce a jointly owned patent. That means they must all agree to move forward with the enforcement effort. The only exception is if a joint owner has contractually waived its right to consent to the suit.

To be enforceable, such a waiver agreement should explicitly prevent the waiving party from entering into a license agreement (or even license negotiations or settlement discussions) with a third-party infringer without the other owner’s consent. Absent such a prohibition, the waiving party theoretically could grant a license to a third-party infringer against whom the other owner is considering filing suit. That license agreement would give the third-party infringer protected status as a newfound licensee, thereby precluding the other owner’s suit. And the waiving party would have no duty to the other owner to account for any licensing revenues it receives from the former infringer.18

The waiving party may not agree to this type of restriction because it essentially gives the other owner the power to make all decisions concerning litigation and settlement. Such a restriction will, however, prevent the waiving party from sabotaging the other’s litigation plans—and, more importantly, its ability to recover revenue from a third-party infringer.

A joint owner that has waived its right to consent to a lawsuit no longer has the power to prevent the other owner from filing suit. Because all owners of a patent must typically join as plaintiffs in



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an action to enforce that patent, however, a court may join the waiving party as an involuntary plaintiff.

3. Joint Patent-Owner Agreements

Joint patent owners are generally free to change their respective rights by written agreement. However, such an agreement may not be binding on a third party unless that third party has prior notice of the agreement. It should therefore be recorded in the appropriate patent offices.

F. Hybrid Licenses The term “hybrid” refers to something of mixed origin or composition. In the IP licensing context, a hybrid license involves not only patent rights, but also “something more” —some additional bundle of rights that a licensee desires to make sure that it can fully use the rights. That “something more” often takes the form of trade secrets or know-how, but it may also include unpatented technology, technical information, and data.

Sometimes, the additional property being licensed can be fairly articulately defined, for example a proprietary, unpatented process that has been memorialized in writing; data which has been captured in some sort of concrete form; or a confidential customer list. Sometimes it is not so easy to itemize or articulate the property in question; the licensee just knows that it wants access to “whatever is there.”

1. Reasons for Hybrid Licenses

A legitimate question is why the parties would want to go the hybrid license route. Why convolute what would otherwise be a clear-cut patent license by adding uncertainties?

Their popularity is due, at least in part, to the somewhat symbiotic relationship between patent rights and the other rights being licensed. A licensee may want a hybrid license to make sure that it has the entire complement of rights that it needs to fully commercialize the patent rights. Although patent rights are often rooted in initial research and findings, subsequent development work often occurs to determine how best to commercialize the invention covered by those patent rights. The trade secrets, know-how, and data resulting from the further research and development efforts often are critical to the successful and streamlined commercialization of the invention.

A licensee that wants to commercialize a patented invention is no doubt interested in any information or insight the patentee may have that could help streamline the commercialization effort. This applies to a licensee that is new in the space and is not sure what may be required in order to commercialize the technology, or to a licensee with significant experience in the field that knows exactly what additional effort and resources will be required. In either case, the licensee wants to take advantage of whatever additional work the patentee has already done.

A patentee may be willing to enter into a hybrid license arrangement for financial reasons. Extra value means extra compensation. Indeed, if the patentee’s patent rights themselves seem a bit shaky or have a relatively short time remaining before expiration, then the patentee may want to add something more—some other “royalty hook” —to the rights being granted. If the royalties


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cover use not only of those patent rights, but also a broader bucket of technology, then the licensor may still have a basis for collecting some form of royalty payment should any of the licensed patent rights be invalidated or expire before the term of the agreement expires.

2. Royalties

A fundamental tenet of patent law is that a patentee cannot collect royalties for an expired or invalid patent. Doing so constitutes patent misuse. Given that, the value of a hybrid license should logically decrease after the patent rights covered by that license expire. Fewer rights should equate to less compensation. If the royalty structure does not change when the licensed patents expire, then the patentee may be trying to extend its monopoly in an unauthorized way.

Although hybrid licenses are becoming increasingly popular in the United States, patent misuse concerns make them tricky beasts. How the hybrid license is drafted and how the compensation under the license is structured are therefore important considerations. A few drafting suggestions follow.

■ Draft separate license agreements or grants for the patent rights and for the remaining rights included in the hybrid bundle. In some cases, two separate agreements can be drafted—one that covers the patent rights, and one that covers the remaining rights. This route avoids the patent misuse issue altogether. Similarly, both types of rights can be included in the same agreement but conveyed in separate license grants which are, in turn, tied to separate royalty provisions.

■ Tie the term of the hybrid license to the term of the patent rights included in the hybrid bundle. Another strategy is to focus on the term of the hybrid license. The term of a patent license is typically tied to the term of the patent that is last to expire. Consider tying the term of the hybrid license to the term of the last-to-expire of the patents included in the hybrid bundle. The royalty obligations for all of the licensed rights will then terminate at the same time, avoiding any misuse concerns.

■ Apportion the royalties between the patent rights and the remaining rights. In some cases (arguably the stickiest ones) the term of the hybrid license may extend beyond the term of the last-to-expire of the patent rights. In those situations, it is important to draft the royalty provisions in a manner that avoids allegations of patent misuse. One approach is to expressly state in the agreement what portion of the royalty is attributable to the patent rights, and what portion is attributable to the other rights being licensed. A separate royalty provision for each (as mentioned) is an attorney’s dream. If that type of allocation is not possible, then the agreement should at least provide for a decreased royalty once the patent rights are no longer in effect. If less is being licensed, then less compensation should be due. Another strategy is to tie the royalty strictly to the non-patent piece of the hybrid bundle. The result is a royalty-free license for the patent rights. Although theoretically appealing, this type of approach may impact the patentee’s future licensing and enforcement efforts—particularly in those situations in which determination of a reasonable royalty is involved. This approach is therefore less than ideal.

■ Provide for a large upfront payment and lower downstream royalties to capitalize on the value of the patent rights. The licensor may also consider asking for a larger, non-



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refundable upfront payment and a lower downstream royalty. By doing so, the patentee capitalizes on the value of the patent assets at the time the agreement is executed. Royalties should still scale down once the relevant patent rights expire. However, the financial impact of that scale-down to the patentee will be less if the patentee collects a sizeable upfront payment.

A little common sense can go a long way when drafting a hybrid license. Fairness dictates. Think about what is being licensed and how a court would view the compensation structure for those license rights. Does it look fair? Can it be rationally explained and supported? If so, it will probably withstand a challenge.

G. Development Agreements Development agreements raise interesting patent ownership and licensing issues because of their entrepreneurial bent. The goal is to be inventive—to develop something new, something different, something of value.

In the development context, various types of intellectual property are often at play: (i) pre-existing intellectual property that each party brings into the relationship; (ii) intellectual property that is developed during the term of the agreement by one of the parties but is outside the scope of the parties’ arrangement; and (ii) intellectual property that is developed as a result of the relationship. Each is addressed below.

1. Pre-Existing IP

Little development is conducted in a vacuum. Parties often bring pre-existing intellectual property into the relationship (“Pre-Existing IP” or “Background IP”), which may serve as the backdrop for the development effort or may be required in order to conduct the contemplated research. Pre-Existing IP remains the property of the party that brings it forward. Ownership does not change during development effort, nor does the collaborator acquire any rights to the Pre-Existing IP through the collaboration. Consequently, if the development effort is related to the Pre-Existing IP, then each party should clearly articulate what its Pre-Existing IP bucket contains, so there is no confusion down the road about which party brought what to the table.

Pre-Existing IP can come into play in the licensing context. For example, one party may need to use the other’s Pre-Existing IP in order to conduct the research activities with which it is tasked under the development agreement. The owning party may therefore grant the other party a non-exclusive license to do so.

Similarly, one party may need rights in the other party’s Pre-Existing IP in order to use or commercialize new developments that result from the parties’ cooperative effort (“Developed IP,” as will be discussed). That must also be accounted for in the agreement. The language can take various forms depending on what the Pre-Existing IP encompasses.

The more clearly, accurately, and comprehensively the parties can define their Pre-Existing IP and articulate any license rights being granted under that Pre-Existing IP, the fewer problems the


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parties will encounter down the road when the development begins and the Pre-Existing IP is actually used.

2. Independent IP

Sometimes a party independently creates or develops IP during the term of the development agreement, which is outside the scope of the development effort (“Independent IP” or “Sideground IP”). Whether certain IP is properly categorized as Independent IP can be the source of debate and disagreement. Once properly categorized, Independent IP is typically owned by the party that develops it.

Because Independent IP is unrelated to the subject matter of the development, no licenses are typically required. The property is essentially “hands off.” Whoever develops it owns it, and the other party has no ownership or license rights in it.

3. Developed IP

The parties may also develop certain IP as a result of their development efforts. Developed IP (or “Foreground IP”) presents many challenges because it is the meat of the development effort—the piece of the value proposition to which both parties typically want rights. Although each party would no doubt prefer to be the sole owner of the Developed IP, one-sided ownership is an aberration, and typically only occurs when one party has significant leverage over the other. Much more common is an “ownership follows inventorship” formula. If one party is the sole inventor of certain Developed IP, then that party is the sole owner of that Developed IP. If both parties have a hand in the development and inventive effort, then the Developed IP is jointly owned by the parties.

Development agreements in which joint development (and hence joint ownership) is contemplated may contain language granting one of the parties a right of first refusal to exclusively license the other party’s interest in the jointly owned Developed IP. A royalty or other payment is usually associated with this type of arrangement, but the benefits of controlling all rights in the patent properties usually outweigh the disadvantages of the payment obligations.

In some cases, the parties may try to allocate ownership of jointly owned Developed IP based on the actual subject matter that is developed. For example, if the Developed IP relates primarily to Party A’s lead clinical candidate, then Party A is the owner. If the Developed IP relates primarily to Party B’s lead clinical candidate, then Party B owns it. As a practical matter, drafting a provision that properly allocates ownership of the Developed IP according to subject matter can be a challenge. More challenging, however, is trying to parse the actual Developed IP into the ownership buckets defined by the contractual language. Even collaborators with the best of intentions can have difficulty with this type of subject-matter parsing, particularly if the Developed IP in question appears to have significant promise or commercial value.

Different fact situations dictate different ownership scenarios in the development context; no one-size-fits-all agreement exists. The key is to decide, before any research or development begins, what ownership and license rights each party will have in the Developed IP. Maybe joint ownership makes sense; maybe it does not. Maybe a right of first refusal makes sense; maybe it does not.



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Patent issues relating to the Developed IP should also be considered. Which party will be primarily responsible for prosecution and maintenance of any patent rights resulting from the Developed IP? Who will pay the patent prosecution and maintenance costs? Which party will have the ultimate authority to decide where patent applications are filed and what subject matter they cover? What happens if one of the parties decides to step out of the process because it is no longer interested in pursuing or protecting certain patent rights? Establishing the ground rules before any research or development begins will help prevent disputes down the road.

H. Bankruptcy and Patent Licenses The past fifteen years have brought two significant downturns to the U.S. economy. The dot.com crisis of the late 1990s severely impacted the then-exploding Internet industry. Fortunes gained on paper were lost in the blink of an eye. Just as the economy seemed to be back on solid footing, the United States found itself in the midst of a global mortgage crisis in the late 2000s. Businesses were shuttered, homes were lost, and retirement accounts evaporated.

In times of economic distress, businesses often resort to bankruptcy. Until recently, however, bankruptcy was viewed as a back-burner issue in the licensing field. It was typically “handled” using cursory “Party A may terminate this Agreement in the event Party B becomes insolvent or declares bankruptcy” language—with no significant thought about what that language meant, or whether it was even enforceable.

One of the lessons that the licensing community learned through the economic ups and downs was that bankruptcy does not just happen to “the other guy.” It is therefore important for both the licensor and licensees to understand what rights they may have—and may not have—when bankruptcy rears its head.

1. Rights in Bankruptcy

Under the U.S. Bankruptcy Code, a trustee in bankruptcy (or debtor in possession) is entitled to assume or reject an “executory contract.” An executory contract is a contract under which both parties still have remaining performance obligations. IP licenses are considered executory contracts under the Bankruptcy Code.19

Section 365(n) gives a licensor in bankruptcy the option of assuming or rejecting an IP license. Generally, the licensor can assume a license if it agrees to meet certain criteria, such as curing its defaults under the agreement. A licensee is not usually concerned if the licensor in bankruptcy assumes the license, as long as the licensor can continue to perform its obligations under the agreement.

A much bigger threat is the licensor’s possible rejection of the license—effectively terminating it—particularly if the licensed technology is a critical part of the licensee’s business. Section 365(n) addresses this issue by providing special protections to licensees. If the licensor rejects the intellectual property license, then the licensee may either treat the license as terminated or retain its rights under the license agreement (including exclusivity provisions).20 In return, the licensee must continue to make any required royalty payments due under the agreement. The licensee also can retain rights under any agreement supplementary to the license, such as a technology agreement.


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The effect of this protection is that the licensee cannot simply be cut off because the licensor has found itself in bankruptcy. Rather, the licensee can continue to exercise its rights and move forward with its business, largely unaffected by the licensor’s financial condition.

2. Non-US Debtors in Bankruptcy

In an interesting twist, the US Bankruptcy Court for the Eastern District of Virginia recently held that the protections of §365(n) apply not only to a US licensee of a US debtor, but also to a US licensee of a non-US debtor, even if those protections are not available under the law of the debtor’s home country.21

The debtor in that case was a German semiconductor manufacturer that had filed for bankruptcy in Germany. The debtor had a sizeable US patent portfolio and many non-exclusive US licensees that held royalty-free, non-exclusive licenses under the patents as part of various cross-licensing, joint development, and other business arrangements.

The bankruptcy administrator found the non-exclusive licenses unfavorable to the debtor, and sought to terminate them and then re-license the patents under new royalty-bearing agreements. The administrator’s strategy was permitted under German bankruptcy law; the US licensees, however, argued that the protections of §365(n) should apply to them as US licensees, and that they should be able to retain their rights under their royalty-free, non-exclusive licenses. The bankruptcy court ultimately agreed.

The fact that the US licensees had made substantial investments in their US research and manufacturing facilities and would suffer substantially if their licenses were revoked was certainly a factor in the court’s decision. There also seems to be a sense of US protectionism involved—i.e., if a non-US company avails itself of the US patent system, obtains US patents, and then licenses those patents to a US licensee, then the US bankruptcy system will protect the US licensee should the non-US licensor find itself in bankruptcy in its home country. It will be interesting to see how this doctrine evolves.

3. Licensees in Bankruptcy

The Bankruptcy Code is not as favorable toward licensees who file for bankruptcy as it is toward bankrupt licensors. Section 365(c)(1) of the Bankruptcy Code contains an exception to the general rule that executory contracts can be assumed and assigned to third parties. The exception applies when “applicable law” precludes such an assignment absent consent of the non-debtor party. What constitutes “applicable law” varies from jurisdiction to jurisdiction. It is generally difficult, however, for a licensee to assume a non-exclusive IP license and assign it to a third party. This seems equitable, because a licensee who has fallen on difficult financial times should not be able to improve its financial position by assigning its license rights to a third party and collecting some sort of compensation for that transfer. Moreover, a licensor who had no hand in creating the licensee’s poor financial condition should not be prevented from determining who its licensees will be.

This section was intended to give a general overview of bankruptcy concepts as they relate to intellectual property licenses. The application of bankruptcy law to specific licenses or actual fact situations can be complicated. Licensors and licensees alike should therefore consult with



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bankruptcy counsel about what types of license provisions are advisable and will give them the most protection in the event bankruptcy is anticipated or is at play.

III. Copyright Licenses

A. The License Grant The first questions that should be resolved in connection with drafting any copyright license are what rights will be granted and under what conditions will they be granted.

1. Purpose of the License

A license typically includes recitals or “whereas” clauses that generally describe the purposes and subject matter of the agreement. These clauses can aid a court in interpreting the agreement consistent with the parties’ intent if a dispute arises over an ambiguity in the agreement.

2. Identification of Licensed Work(s)

A license should identify the copyrighted works subject to the license with as much specificity as possible to avoid future disputes. Where at all possible, the parties should attach a copy of the work(s) to the license as an exhibit.

3. Scope of License Grant

The Copyright Act grants copyright holders five exclusive rights: (1) reproduction; (2) distribution; (3) public display; (4) public performance; and (5) creation of derivative works.22 A licensee should ensure that each right potentially implicated by the use is included in the license grant. Failing to account for each of the Section 106 rights can result in a license grant this is narrower than what the licensee might have intended.

Certain types of licenses may incorporate additional terms that have special meaning in a particular industry. For example, the right to “publish” is a common term used in the book industry. Licenses also frequently include the catch-all right to “use” the work for the purposes defined in the agreement, which can be interpreted to include the rights necessary to make the intended use.23 Depending on the nature of the license, the licensor may want to resist ambiguous terms such as “use” because such terms may expand the granted rights beyond the licensor’s expectations.

The following sample provision provides an example of a broad license grant:

Licensor grants to Licensee the non-exclusive right to reproduce, distribute, transmit, adapt, publicly display, publish, republish, create derivative works based upon, and otherwise use


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the Licensed Content for any and all purposes.

Careful attention should be paid to combined patent and copyright license grants. The statutory rights are different (as noted elsewhere), and a copyright right (e.g., to “reproduce” the work) may mean something very different in patent law.

A copyright license also typically will address whether the licensed parties have any obligation to exercise the rights granted in the license. This is especially important where the parties intend for the licensor to receive royalty compensation based on the licensee exercising the rights.

The following is a sample provision:

Nothing herein obligates Licensee to exercise the rights and privileges granted in this License.

The licensor typically will reserve any rights not explicitly granted in the agreement, as follows:

Licensor reserves all rights not specifically granted in this License.

4. Exclusive vs. Non-Exclusive Licenses

There are significant consequences to the distinction between exclusive and non-exclusive copyright licenses. First, there is the obvious: non-exclusive licenses permit the licensor to license the work to other parties for the same use. With an exclusive license, the licensor cannot. In some cases, depending on the language of the license, the licensor may even be precluded from using the work.24

The distinction between exclusive and non-exclusive licenses also has important implications for standing. Only a “legal or beneficial owner of an exclusive right under a copyright is entitled . . . to institute an action for any infringement . . . .”25 A non-exclusive license does not confer standing. Conversely, an exclusive license is equivalent to transferring ownership. As a result, an exclusive licensee becomes the “legal” holder of the exclusive rights granted in the license, and has standing to sue third parties for infringing these rights. If an exclusive license is granted in return for ongoing royalty payments, then the licensor may also retain the ability to sue third-party infringers as a “beneficial” holder of the copyright.26 It is important to keep these considerations in mind when drafting a copyright license.

In addition to addressing standing, it also is advisable to specify in the agreement how the parties will handle infringement litigation against third parties. The provision, at a minimum, should address:

■ The parties’ duty to notify the other party of infringements;

■ Which party will control any enforcement efforts and the settlement of any claims;



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■ Whether either party is obligated to enforce the copyright rights; and

■ Whether the parties have a duty to cooperate.

For example, a non-exclusive licensee may be required to notify the licensor of any third-party infringement, and the licensor often will retain sole discretion to pursue infringement claims at its own expense. An exclusive licensor and licensee may share responsibilities for pursuing infringements because they both have a significant stake in the outcome.

The following sample provision addresses the parties’ respective roles in the event of an infringement:

Licensee shall promptly notify Licensor of any infringements of the Licensed Content of which it becomes aware. As between Licensor and Licensee, Licensor shall have the sole right to determine whether or not any legal action shall be taken on account of any such infringements, and Licensor shall have the right to control litigation and settlement, at its own expense. In the event that Licensor elects to pursue litigation for infringement of the Licensed Content, Licensor may require Licensee to join in such lawsuit. Licensor shall be entitled to all monies received as a result of such action, including but not limited to all settlement proceeds, actual damages, profits, and attorneys’ fees.

5. Modification and Derivative Works

The Copyright Act provides copyright holders with the exclusive right to create derivative works. A derivative work must add sufficient original material to the underlying work to constitute a new work. If a copyright license does not provide the right to create derivative works, then the licensee could be liable to the licensor for copyright infringement if it creates an unauthorized derivative. Although it is generally advisable to refer to the right to create derivative works explicitly, it is not always necessary.27 For example, if the licensee has bargained for the right to create a movie based on a book, the context of the license will make clear that the right to create a derivative work is included.

Not all modifications to the work, however, are sufficiently original to warrant protection as a new work. Thus, a licensor should also include contractual prohibitions on modifying the work if that is important to the licensor. For example, a photographer may impose cropping restrictions in a license for a photograph. Even in the absence of a copyright claim, an unauthorized modification could give rise to a breach-of-contract claim.

The following is a sample cropping provision:

The Licensed Content may be cropped provided that the artistic integrity of the Licensed Content is maintained.


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6. Licensed Media

Copyright licenses often need to address new mediums and new technology that could have a dramatic effect on the interpretation of the license. In an attempt to account for the unknown, licensees will often insist that the license is for “all media now known or hereafter developed” (or similar language). With respect to licenses involving broad license grants, the licensor may have no objection to including this language. On the other hand, if the license grant is narrowly circumscribed, then the licensor may have concerns about future markets that cannot be adequately addressed in advance.

For example, in Boosey & Hawkes Music Publishers, Ltd. v. Walt Disney Company,28 the issue was whether a 1938 license granting Disney the right to include a Stravinsky composition in the movie Fantasia for theater exhibition was broad enough to allow Disney to distribute the movie in video format. The Second Circuit interpreted the license to include these rights, even though this technology clearly did not exist at the time the license was drafted.29 On the other hand, in Random House, Inc. v. Rosetta Books LLC,30 the issue was whether the standard book contracts previously used by Random House (and other major book publishers) included the rights to electronic books (“ebooks”). The court held that the right to “print, publish and sell the work in book form” did not include the right to publish ebooks.31 The book authors thus preserved the ability to negotiate a higher royalty rate for ebooks.

7. Moral Rights

Many foreign jurisdictions provide authors with “moral” rights (or “droit moral”) in addition to the traditional “economic” rights to use and authorize others to use the copyrighted work. The most common moral rights are the following:

■ The right of attribution;

■ The right of integrity;

■ The right of first publication;

■ The right of withdrawal; and

■ The right of reputation.

In most countries, moral rights cannot be transferred but they often can be waived. And even if they cannot be waived, a properly drafted agreement could give rise to a breach of contract if an author attempted to assert a moral rights claim against a licensee after it has waived these rights in the license.

The U.S. Copyright Act only provides limited moral rights—a right of attribution and right of integrity—and only to visual artists under the Visual Artists Rights Act (“VARA”).32 Rights under VARA cannot be transferred but can be waived “if the author expressly agrees to such waiver in a written instrument.”33

The following is a sample provision waiving a moral rights claim under US law:



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Licensor hereby waives any moral rights or any similar law in any country of the world and agrees not to institute, support, maintain, or permit any action or lawsuit on the ground that any use of the Licensed Content pursuant to this License in any way constitutes an infringement of its moral rights.

8. Payment

The payment terms in copyright licenses vary widely depending on the type of license (e.g., the payment terms of a music publishing agreement will look very different than those of a software license). The prevailing industry rates for different types of copyright licenses and the different accounting mechanisms employed in those licenses are subjects beyond the scope of this InfoPAK.

One issue that should always be considered, however, is whether there is sufficient consideration to form a binding agreement. Monetary payments clearly can provide the necessary consideration, but so too can the performance of an agreed act. Courts typically will not disturb an agreement between the parties acknowledging the adequacy of the consideration.34

9. Condition vs. Covenant

The manner in which a contractual term is structured in the license can have a significant impact on the remedies that may be available if the licensee breaches the license. Contractual terms that limit the scope of a license are “conditions,” the breach of which can give rise to a copyright infringement claim. If, on the other hand, the contractual term is a “covenant,” then a breach will be treated as any other breach of contract claim and the licensor typically will only be able recover its actual damages. If the breach is sufficiently material, then the licensor may be able to terminate the license but the licensor would still only be able to assert an infringement claim for post-termination uses. The difference can be significant because a copyright claim permits the recovery of the infringer’s profits in addition to actual damages—or, if the copyrighted work was timely registered, statutory damages up to $150,000 per work.

There are no hard and fast rules for distinguishing between a covenant and a condition. Courts generally favor finding that a contractual obligation is a covenant rather than a condition.35 Stating that the license grant is conditioned on the licensee complying with a contractual term or is made “provided that” an obligation is satisfied will make it more likely that a court interpreting the provision will view it as condition. For example, in Jacobsen v. Katzer,36 the court interpreted an open-source license that grants users the right to copy, modify, and distribute the software “provided that [the user] insert[s] a prominent notice in each changed file” and “provided that” the user meets one of four other requirements.37 The court held that “provided that” typically denotes a condition and the context of the license supported that interpretation.38

10. License vs. Sale

If the licensed content will be distributed to the public on physical media or incorporated into products, then the licensor should carefully consider the implications of the “first-sale doctrine” in copyright law. Section 109 of the Copyright Act, which codifies the first-sale doctrine, states that “the owner of a particular copy . . . is entitled, without authority from the copyright owner, to sell


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or otherwise dispose of the possession of that copy.”39 A copyright holder may want to restrict the resale of its works. This is a common practice, for example, in the software industry.

The ability to resell a particular copy only applies to an “owner” of a copy. A consumer has no right to resell a licensed copy. Courts have held that the purchaser of a copy of software is a licensee rather than an owner where the copyright holder:

■ Specifies that the user is granted a license;

■ Significantly restricts the user’s ability to transfer the software; and

■ Imposes notable use restrictions.40

On the other hand, the distribution of copies of a work without any notable use restrictions has been deemed subject to the first-sale doctrine.41

The Supreme Court recently held that the first-sale doctrine applies to copies made overseas.42 As a result, it currently is legal for a consumer to purchase a copy of a work in a foreign market and resell the work in the United States. Rights holders often seek to charge different prices in foreign markets. In light of this decision, the distinction between licensing copies and transferring ownership of copies becomes even more important.

11. Copyright Notice

Under the current US Copyright Act, copyright notice is not required to maintain protection for a copyrighted work. A proper copyright notice can, however, affect the amount of statutory damages that are recoverable by the copyright holder. This is because a defendant who infringes upon a work containing a proper copyright notice is unable to argue that its infringement was “innocent” and thus subject to lower minimum statutory damages ($200 per work rather than $750 per work).43 As a result, it is a recommended practice to include a copyright notice wherever practical. The proper form of a copyright notice is set forth in Section 401 and 402: © [year of first publication] [name of copyright holder]. In the case of phonorecords, the letter “P” in a circle should be used instead of ©.

Licensee shall display a credit line and copyright notice in the form specified in the Invoice adjacent to any use of the Licensed Content.

B. Parties to the License and Third-Party Beneficiaries After addressing the granted rights, the next step is to identify (1) who owns the copyrighted works being licensed and any works developed pursuant to the license, and (2) who will be granted rights to use the copyrighted works being licensed and developed, both now and in the future.



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1. Defining the Licensor

The identity of the licensing party often will be clear. For example, when one is dealing directly with the individual who created the work, defining the proper licensor typically is not difficult (although the licensor should still represent that she owns all of the rights being conveyed, as will be discussed). On the other hand, a legal entity serving as a licensor may complicate things. For example, related companies sometimes create works together without thinking about the consequences for ownership of the works. Even if the work is created by a single entity, it may not always be clear which entity owns the work if there is a complicated corporate structure (e.g., an employee might identify himself as working for a subsidiary even though the parent corporation is paying his salary).

Two significant principles of copyright law must be understood in order to properly evaluate who owns the rights to a particular copyrighted work. First, works created by employees of a company within the scope of their employment are considered “works made for hire” under the Copyright Act, and as a result, are owned by the company absent an agreement to the contrary.44 Courts apply traditional agency principles to determine if a creator is an employee for purposes of applying the work-made-for-hire doctrine. Factors that courts consider include:

■ The skill required;

■ The source of the instrumentalities and tools;

■ The location of the work;

■ The duration of the relationship between the parties;

■ Whether the hiring party has the right to assign additional projects to the hired party;

■ The extent of the hired party’s discretion over when and how long to work;

■ The method of payment;

■ The hired party's role in hiring and paying assistants;

■ Whether the work is part of the regular business of the hiring party;

■ Whether the hiring party is in business;

■ The provision of employee benefits; and

■ The tax treatment of the hired party.45

Second, if two or more authors create a work “with the intention that their contributions be merged into inseparable or interdependent parts of a unitary whole,”46, then the resulting work is a “joint work.” Each joint owner has the right to use the work and to grant others the non-exclusive right to use the work, subject to a duty to account to each other for any profits based upon the author’s equal, undivided interest in the work.47 Joint owners also may sue third parties for infringement without joining the other co-owner(s).

Revisiting the example of employees of related companies, if an employee of company A and an employee of company B, its subsidiary, create a “joint work,” company A and company B would


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be co-owners of the work. Either could grant a non-exclusive license to use the work, but neither alone could grant an exclusive license.

Usually this situation will not give rise to a conflict because the two companies are related and “friendly.” A situation might arise, however, if company A alone purports to grant an exclusive license to a third company, thinking it owns all of the rights in the work. If company B is sold, company B might decide to start licensing the work to other parties, thereby negating the exclusive nature of the license.

For these reasons (and others), it usually is preferable to include all possible rights holders as a party to the license (i.e., in this example, both company A and company B), especially if the license is exclusive. At a minimum, a licensee should seek a strong indemnification provision in the event it turns out that the licensor does not possess the necessary rights (which will be discussed in more detail).

The licensor, on the other hand, should seek an acknowledgement from the licensee that it owns the copyright in the licensed work. This provision makes it more difficult for the licensee to challenge the licensor’s rights if there is a dispute.

2. Defining the Licensee

Similar considerations affect the definition of the licensee. The licensee typically will want to include not only itself but also all related persons and entities that may need to use the work. For example, “Licensee” might be defined to include the primary licensed entity and “its representatives, agents, parents, affiliates, subsidiaries, successors, and assigns.”

The issue then becomes whether the license needs to include unrelated third parties. Often this will depend on the nature of the license. For example, a license for use of a photograph in a television commercial will need to include a broad enough definition of the licensed parties to include the marketing agency and its employees that are preparing the commercial.

On the other hand, a licensor typically will want to limit the parties that can use the work to the smallest subset reasonably necessary to make the intended use, in order to minimize the possibility of misuse. For example, a licensor may restrict access to the Licensed Content “to those persons reasonably necessary in order to prepare the end uses under the agreement.”

3. Sublicensing

Addressing whether the licensee has the right to sublicense is a related issue, but requires special consideration. The type of license at issue will often dictate whether the right to sublicense is necessary to effectuate the purpose of the license. Nevertheless, more care is required because the licensor often will not know the identities of the parties being sublicensed. The licensor may therefore want to place limits on the categories of parties that may be sublicensed to ensure that the work is not sublicensed to a competitor, for example.

If the agreement is silent on the whether the licensee can sublicense the work, then a court (or jury) may or may not find sublicensing permissible based on other language in the agreement.48 Thus,



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the license should explicitly address the right to sublicense to remove any ambiguity and effectuate the parties’ intent. A prohibition on sublicensing typically will be enforced.

The following is a sample provision allowing sublicensing:

Licensee shall have the right to grant sublicenses as shall be necessary in connection with the exercise of its rights under this Agreement.

4. Assignability

If an agreement is silent on the issue of assignability, then courts typically have held that non-exclusive copyright licenses are not assignable.49 Some courts have viewed exclusive licenses as freely assignable,50 although not all courts agree.51

A copyright license should address assignability to eliminate any doubts as to the operation of the agreement. The following is a sample provision barring assignment:

Neither Party may assign this Agreement or delegate its duties without the other Party’s prior written permission. Any assignment in violation of this provision will be null and void.

If assignment is permitted under the agreement, the assignment should bind assignees, as follows:

Except as otherwise provided, this Agreement shall be binding on and inure to the benefit of each of the Parties, their successors, and assigns.

5. Ownership of Derivative Works

If a copyright license allows the licensee to create “derivative works,” then the license needs to address who will own these works. “Derivative works” are defined in the Copyright Act as “a work based upon one or more preexisting works” that has been “recast, transformed, or adapted.”52 Examples of derivative works include a movie adaptation of a book or a foreign language translation.

The protectable aspect of a derivative work “extends only to the material contributed by the author of such work, as distinguished from the preexisting material employed in the work, and does not imply any exclusive right in the preexisting material.”53 The default operation of copyright law is that the author of a derivative work (here the licensee) is the copyright holder.54 But the parties are free to agree that the licensor will own any derivative works created pursuant to the license.55 Even if the licensee owns the derivative work, the licensor may want to secure a license back to use the work.


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6. Joint Ownership

Copyright ownership is further complicated if the licensor and licensee are both making copyrightable contributions to a work being developed pursuant to the license. If there is any chance that a work developed under a copyright license will be deemed a “joint work,” the parties typically will want to spell out their relative rights. As noted, US copyright law provides that joint owners each can authorize third parties to use the copyrighted work, but that they have a duty to account to the co-owner for their share of the profits. The parties can alter this arrangement by contract.56 But even if the parties are fine with the default operation of the law, it generally is advisable to clarify how the parties intend to account to each other and under what payment terms.

7. Independent Contractors

If the licensor intends to acquire rights in a work created under the license, the licensor typically will want to require that the licensee secure the appropriate agreements with independent contractors that contribute to the work so that there are not any future chain-of-title issues.

Under the Copyright Act, there are two ways to acquire ownership of copyrightable material created by independent contractors. First, if the work fits into one of nine enumerated categories in Section 101 of the Copyright Act:

1) a “contribution to a collective work,”

2) a “part of a motion picture or other audiovisual work,”

3) a “translation,”

4) a “supplementary work,”

5) a “compilation,”

6) an “instructional text,”

7) a “test,”

8) “answer material for a test,” or

9) an “atlas”—and there is a written agreement with the independent contractor that the work is a “work made for hire,” then the hiring party is deemed by law to be the copyright holder.57

Failing this scenario, the second method is achieved when the hiring party secures an assignment from the independent contractor. A hiring party would prefer to secure ownership of the work as a “work made for hire” rather than an assignment, because the Copyright Act provides a right to terminate transfers of ownership after 35 years.58 The termination right does not extend to works made for hire. Since it is often difficult to know whether the contributions will be deemed to match



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one of the limited categories in Section 101, it is prudent to secure a “backup” assignment as part of any work-made-for-hire agreement.

The following provision provides sample work-made-for-hire language with a backup assignment:

The Parties agree that Licensor has commissioned all of the content that Licensee develops or prepares under this Agreement (the “Works”), including without limitation the images and text for the Works and the overall look and feel of the Works, as contributions to collective works, and accordingly, such materials are works made for hire under the U.S. copyright laws and Licensor shall be deemed the “author” of the Works for purposes of the copyright laws. In addition to and without limitation of the foregoing, Licensee irrevocably assigns to Licensor as of the Effective Date all worldwide rights, title, and interest in the Works, including all copyrights and other proprietary rights. If Licensee subcontracts any work from independent contractors, Licensee will obtain a similar written assignment to Licensor of all rights in any copyrights and other proprietary rights in all works contributed by such independent contractors.

The licensor also may want to secure a power of attorney that would permit it to secure copyright registrations, and file recordations as necessary if the licensee fails to cooperate, as follows:

Licensee agrees to execute and deliver to Licensor (whether during the term of this Agreement or afterward) any additional documents necessary for Licensor to confirm or register its rights in the Works. In the event that Licensor is unable for any reason whatsoever to secure Licensee’s signature to any lawful and necessary document required to apply for or execute any copyright or other applications with respect to the Works, Licensee hereby irrevocably designates and appoints Licensor and its duly authorized officers and agents as its agents and attorneys-in-fact to act for and in its behalf and instead of Licensee, to execute and file any such application and to do all other lawfully permitted acts to further the prosecution and issuance of copyrights or other rights with the same legal force and effect as if executed by Licensee.

C. Duration and Timing of Performance After defining the parties and the nature of the rights granted, the next questions to be addressed are (1) when must parties perform their obligations and (2) when does the license terminate, either by its own operation or by affirmative termination by one of the parties.

1. Term

If a license is silent on its duration, then a court will apply various rules of contract interpretation to set a term, often with unpredictable results. Accordingly, a license generally should include an express term. The express term of the agreement typically will govern the duration of the license, even if the contract recites a perpetual term.59


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If the license does not include an express term, then a court likely will treat the contract as indefinite and thus terminable at will by either party under state contract law.60 The parties possibly could avoid this result by including a right of termination based on certain defined events.61

It also is important to keep in mind that the Copyright Act can supersede the parties’ agreement. Section 203 of the Copyright Act provides that “[i]n the case of any work other than a work made for hire, the exclusive or nonexclusive grant of a transfer or license of copyright or of any right under a copyright . . . is subject to termination” after 35 years “notwithstanding any agreement to the contrary.”62 For example, a 50-year license grant is subject to early termination under Section 203 if the licensor exercises its right to terminate the grant in accordance with the statute.

The Ninth Circuit has held that Section 203 of the Copyright Act governs when the license is terminable if the term is deemed by a court as indefinite; in other words, the term is 35 years rather than being terminable at will.63 This decision has been widely criticized, however, and it likely is questionable authority in jurisdictions other the Ninth Circuit.64

2. Termination

A copyright license that is silent on the right to terminate generally will be deemed, under state law, in force for a reasonable time and subject to termination upon reasonable notice.65 Since the determination of what is “reasonable” in a particular context can lead to unpredictable results, the preferred approach is to specify how the license can be terminated. Termination can be conditioned on an agreed-upon event (e.g., the sale of a defined number of copies), for cause, or at will. The license should provide for a sufficient notice period to allow the non-terminating party to make the appropriate arrangements to seamlessly transition away from using the work in its business. The length of the notice period will vary depending on the type of license and the parties involved.

The parties may also want to include a cure period that allows a non-breaching party to cure a defect in its performance before the license is terminated. A licensee may also want to bargain for a sell-off period for any remaining inventory at the time of termination. A licensor may request that the licensee return or delete materials provided to the licensee under the license, especially if digital materials are involved. Digital copies make it more likely that others will use the work outside the scope of the license.

The following is a sample provision that incorporates these concepts:

Any Party may terminate this Agreement “for cause” immediately upon delivery of written notice to the other Party specifying clearly the grounds for termination, with “for cause” termination rights being limited to a material breach of this Agreement that is not cured within thirty (30) days of written notice of the breach being received by the breaching Party. For the avoidance of doubt, termination will be without prejudice to any liability incurred prior to the effective date of termination.

Once a license is terminated, future use of the copyrighted work by the licensee gives rise to a claim for copyright infringement.66



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D. Territory, Law, and Forum The next set of questions that should be resolved is (1) where the licensed rights can be exercised and (2) where disputes should be resolved.

1. Territory

It is advisable to specify the geographic scope of the license. In the absence of a territory provision, the court will be faced with interpreting an ambiguous agreement with unpredictable results.67 An express provision in the license should resolve this ambiguity.

A broad license often will identify a “worldwide” territory. A licensee, however, should consider whether its intended use might occur, in whole or in part, in outer space. For example, software may be used in a satellite or space vehicle. Even if use in space seems like a remote possibility, a licensee may want to consider securing rights “throughout the universe” if the license is of a long duration to account for the possibility of future markets in outer space, especially since recreational travel to outer space is no longer an entirely remote possibility. Of course, a licensor generally should resist this language to preserve unforeseen markets unless it is truly necessary for the intended use.

2. Choice of Law

In the absence of a contractual provision specifying a choice of law, courts will apply various conflict-of-law rules to determine the governing law. The outcome of this analysis often is not predictable. As a result, most licenses include a choice-of-law provision. These provisions are usually enforced by courts, at least to the extent that the scope of the provision includes the claim at issue.68 Choice-of-law provisions often only specify only the state whose laws will govern, as follows:

This Agreement shall be governed by the laws of the State of Georgia.

The reference here to state law does not govern claims governed solely by federal law, such as claims arising under copyright laws.69

3. Choice of Forum

In all but the rarest cases, courts will enforce a clause specifying the judicial forum. It is advisable to be as specific as possible. A well-drafted provision will specify the court (assuming it has subject matter jurisdiction) and the city where disputes should be resolved.


The Parties consent to the exclusive venue and jurisdiction of the United States District Court for the Northern District of Georgia, or if the District Court does not possess subject


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matter jurisdiction, then to the jurisdiction of the state courts in Fulton County, Georgia. The Parties waive any defense or objection otherwise available based on jurisdiction, venue, or the doctrine of forum non conveniens.

This particular provision indicates that the choice of forum is mandatory—i.e., the specified courts have exclusive jurisdiction. It is possible, although usually not advisable, to make the choice of forum permissive—i.e., the choice of forum confers jurisdiction but does not preclude a claim being brought in another court that has jurisdiction.

Courts also generally enforce clauses requiring arbitration of disputes.70 The parties should consider whether they want all claims to be decided by arbitration, including copyright infringement claims for use of the work outside the scope of the license, or would prefer to limit it to specific types of claims, such as those for breach of contract.

The parties may also want to incorporate a multi-step framework for dispute resolution that requires non-binding mediation or a non-formal grievance process (including, e.g., a notice and cure provision) before either party is entitled to submit the dispute to binding arbitration or litigation.


Before either party files a lawsuit against the other party, that party (the “Enforcing Party”) shall first provide notice in writing to the party (the “Accused Party”). The parties shall then negotiate in good faith regarding a resolution of the dispute. If the parties’ good-faith negotiations fail to result in a resolution of the dispute within thirty (30) days of the date that the Enforcing Party provides notice of its claim, the parties shall submit their dispute to mediation with a mediator mutually agreed upon by the parties. If mediation fails to result in a resolution of the dispute, the Enforcing Party may bring its lawsuit. The parties acknowledge and agree that the dispute resolution procedures contemplated by this Section shall not be prejudicial to the Enforcing Party’s right to seek injunctive relief in the event that the dispute resolution procedures are unsuccessful.

E. General Considerations The following section presents some general considerations and miscellaneous “boilerplate” provisions that are common in copyright licenses. The parties should carefully consider how these considerations should be addressed in the particular license at issue. Standard boilerplate for one type of copyright license may be inappropriate for another type of license, or for the specific context of the parties’ agreement.

1. Bankruptcy

A provision that allows the license to be terminated in the event a party files for bankruptcy would be unenforceable.71 On the other hand, the license can provide for the right to terminate a party becomes “insolvent” but has not yet filed for bankruptcy. “Insolvency” in this context must be



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carefully defined because it is susceptible to different meanings.72 Section II of this article on patent licenses provides additional bankruptcy-related considerations to keep in mind when drafting IP licenses.

2. Injunctive Relief

Copyright licenses often include a provision indicating that the parties agree that post-termination uses of the copyrighted work will result in irreparable harm entitling the licensor to injunctive relief. In the event that an injunction is sought to prevent the licensee from using the copyrighted work post-termination, the licensor must demonstrate: “(1) that it has suffered an irreparable injury; (2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury; (3) that, considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction.”73

The court’s discretion in evaluating these factors is not circumscribed by the provision in the license. Nevertheless, such a provision may influence the court’s treatment of the issue.74 The court can also forgo the requirement of a bond if the licensee waives such right in the license.75


Licensee acknowledges that the Licensed Content has special, unique, and extraordinary character that gives it a peculiar value, and that, in the event of any actual or threatened breach of any term, condition, representation, warranty, or covenant contained in this Agreement, Licensor shall be caused irreparable injury, including loss of goodwill and harm to reputation, which cannot be adequately compensated in monetary damages. Accordingly, in the event of such breach, actual or threatened, Licensor shall have, in addition to any other legal or equitable remedies, the right to temporary, preliminary, and permanent injunctive relief, without the obligation of posting any bond or surety.

3. Warranties and Indemnification

Most copyright licenses also include express warranties, particularly with regard to the licensor’s ownership of the copyrighted work and non-infringement for licensee’s use. These warranties typically will be enforced.


Licensor represents and warrants that: (a) Licensor owns and/or controls the rights granted to Licensee in this Agreement and has the right to grant such rights and to enter into this Agreement; (b) the Licensed Content does not infringe upon or violate (i) any copyright, patent, trademark, or other proprietary right of a third party or (ii) any applicable law, regulation, or non-proprietary right of a third party; and (c) Licensor has no knowledge of any claim which, if sustained, would be contrary to Licensor’s warranties, representations, and agreements contained in this Agreement.


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This is typically followed by an indemnification provision, such as the following:

Licensor agrees to defend, indemnify, and hold Licensee harmless from any claims, suits, demands, actions, proceedings, judgments, costs, and expenses (including attorneys’ fees) with respect to any loss, accident, injury, damage, cost, and/or expense arising from Licensor’s breach of the foregoing representations and warranties, or any other failure of Licensor to perform its obligations under this Agreement.

F. Medium-Specific Considerations All copyrightable mediums have unique issues that must be considered when negotiating and drafting a copyright license. A full treatment of all of these issues is outside the scope of this InfoPAK. (Software licensing and music licensing could merit their own stand-alone treatises.) The authors nevertheless have included a brief discussion of a few platforms that require particular attention.

1. Software

Software licenses are unique in many ways from other types of copyright licenses. The following discussion presents a mere handful of the special considerations for software licenses.

Some courts have held that software licenses involve a transaction in goods that is subject to Article 2 of the Uniform Commercial Code; other courts have held to the contrary. Whether Article 2 applies plays a role in the interpretation of license provisions.76

Warranties are particularly important in software licenses because, aside from the standard warranties in a copyright license (discussed earlier), a licensee often will want to seek warranties that the software will perform in an error-free manner and will satisfy the licensee’s specific needs. The licensor, on the other hand, typically will seek to license the software on an “as is” basis.

The scope of a software license also deserves special attention. Software licenses often are tailored narrowly for a very specific purpose. For example, the software may be licensed only for a certain number of employees and only at specified locations. These licenses typically impose restrictions on copying (e.g., for limited backup and maintenance purposes). It is not uncommon for software licensors to conduct periodic audits to ensure that their licensees are complying with these restrictions.

The confidentiality provision in the license also takes on potentially heightened importance if source code is provided to the licensee. Source code may be entitled to trade-secret protection, which can be forfeited if the appropriate level of confidentiality is not maintained (as discussed elsewhere).

Finally, some states levy taxes on certain software transactions. The parties to a software license should consider potential tax implications before finalizing a license.77



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2. Music

Music licensing can be particularly daunting for those tackling the issues for the first time. The complexity starts with the fact that the US Copyright Act recognizes musical compositions (the words and notes of a song) and sound recordings (the recorded performance of a musical composition) as distinct works entitled to protection.78 Further complicating the matter is that the rights to the musical composition and the sound recording often are held by different entities. Thus, for example, using music in a video typically will require a license both from the record label that holds the rights to the sound recording and from the music publisher that holds the rights to the musical composition.

It also is important to note that the right to publicly perform a musical composition often is carved out of the license from the music publisher. Instead, if these rights are needed, they must be sought from performing rights organizations (“PROs”). The following PROs license public performances of musical compositions in the United States: American Society of Composers, Authors and Publishers (“ASCAP”), Broadcast Music Inc. (“BMI”), and SESAC (originally known as the Society of European Stage Authors and Composers, though the organization apparently does not consider its name to be an acronym). Their catalogs are mutually exclusive, so a company performing a large number of songs often will need licenses from all three organizations. Different organizations license these rights in other countries.

By way of background, the exclusive public performance right granted to copyright holders in sound recordings is more limited. It applies only to “digital audio transmissions,”79 and is further circumscribed in various ways by Section 114 of the US Copyright Act.80

3. Journals and Newsletters

Companies that subscribe to journals and industry newsletters should be particularly attentive to the number of employees who are licensed under the subscription. Statutory damages in copyright cases can range as high as $150,000 per work.81 As a result, for journals and newsletters that are published frequently, sometimes even daily, the damages arising from unauthorized use can be exorbitant. For example, in Lowry’s Reports, Inc. v. Legg Mason, Inc.,82 the court upheld a jury award of $19 million for the defendants’ distribution of a stock-market newsletter within the company where such distribution went beyond the scope of the subscription license. Some newsletter publishers now employ software to track forwarding of their email newsletters.

The Copyright Clearance Center (“CCC”) offers blanket and per-use licenses to reproduce articles and excerpts from books. While CCC can provide a convenient mechanism for licensing some works, CCC licenses often are limited in many ways. For example, CCC does not license all such works, and the rights it can offer differ depending on the rights holder and the work at issue. Companies should be mindful of these limitations when seeking a license.


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IV. Trade Secret Licenses A trade secret is economically valuable, confidential information that is used in a company’s business and that is not generally known to the public. Trade secrets are creatures of state law. Trade secrets can include business processes, customer lists, formulas, designs, marketing plans, and virtually any other type of information that is protected appropriately and has value because of its confidential nature. In contrast to patents, trade secrets can be protected forever, provided that certain safeguards are in place to protect trade secrets.

Moreover, trade-secret rights may be licensed in perpetuity, even after the trade-secret information has become public. Thus, trade-secret rights can work symbiotically with patent rights to protect confidential know-how and processes that enable the patented technology to be commercialized. Trade secrets often work in harmony with patent rights to protect all aspects of an invention from the core technology (which may have patent protection) to the know-how and implementation details (which are more appropriately protected as trade secrets).

A. Trade Secret Law: The Uniform Trade Secret Act States vs. Common-Law States

The Uniform Trade Secrets Act (“UTSA”) has been adopted, with minor modifications, in 47 states. Most recently, New Jersey adopted the UTSA on January 9, 2012. In addition to their specific statutes, many states also rely upon the Restatement (Third) of Unfair Competition83 to determine the meaning of “trade secret.” Three states have declined to adopt the UTSA; Texas and New York follow common law, while Massachusetts has adopted its own trade-secret statute based on the common law.

1. The UTSA and Misappropriation

The UTSA defines a trade secret as “information, including a formula, pattern, compilation, program, device, method, technique, or process” that:

■ derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and

■ is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.84

Under the UTSA, misappropriation of a trade secret can occur in one of two ways.85

a. Improper Means

Misappropriation may occur by the “acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means.”86



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The UTSA defines improper means to “include[] theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means.”87

b. Disclosure Without Consent

Misappropriation may occur through “disclosure or use of a trade secret of another without express or implied consent by a person” who:

■ “used improper means to acquire knowledge of the trade secret,”88

■ “before a material change of his [or her] position, knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake,”89

■ “at the time of disclosure or use, knew or had reason to know that his knowledge of the trade secret was” either

o “derived from or through a person who had utilized improper means to acquire it,”

o “acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use,” or

o “derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use.”90

The UTSA also includes provisions relating to injunctive relief,91 damages,92 and the award of attorneys’ fees.93

2. The Common-Law States: New York and Texas

A primary difference between the common law of trade secrets and the UTSA is the requirement of “continuous use.” Under common law, in order to be a trade secret, information must be in “continuous use” by a company. This requirement eliminates a wide variety of information that would be considered a trade secret in a UTSA state but that may not be eligible for trade-secret protection in a common-law jurisdiction.

One particular category of trade secret that a “continuous use” requirement may disqualify is “negative know-how” or “negative trade secrets.” This area of trade-secret law has assumed heightened prominence, particularly as software and software development take a larger role in the economy. In essence, “negative know-how” is simply the knowledge of what path not to take to develop a product. For example, knowing which chemical formulations do not create a cancer-causing drug could be a trade secret under this doctrine. In a state requiring continuous use, this information would likely not be protected because the company is not actively using these failed formulations, and thus there is no “continuous use.”


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B. Confidentiality and Royalty Obligations

1. Confidentiality Obligations

As noted, the most important aspect of protecting a trade secret is maintaining its secrecy at all times. This requirement does not mean that absolute secrecy is required, but it does require that when disclosing trade secrets, the information is protected through markings, non-disclosure agreements, confidentiality clauses, and even physical protections (e.g., lock and key security, passwords, limited physical access).

Confidentiality provisions are critical to protecting trade secrets. Restrictions on the use and disclosure of trade secrets through confidentiality agreements or clauses within a broader license agreement can ensure that trade secret rights are maintained. Importantly, these confidentiality obligations must apply even after the parties’ relationship is terminated to adequately protect the trade-secret rights.

Key provisions for a confidentiality agreement include restrictions on the area of use for the trade secrets, the purpose for such use, obligations to protect the information, and exceptions to the secrecy obligations, including a time period for the confidentiality obligations. Examples of such provisions include the following.

■ The territory in which Licensees may sell [products/services] developed as a result of the trade secrets shall be [limit the scope to the territory that is needed and no more].

■ Licensee may use the trade secrets only [spell out the express purpose of why the licensee is getting access to the trade secrets].

■ Licensee may only disseminate the trade secrets to those employees of Licensee who have:

o a demonstrable need to know in order to effectuate the purpose of this license;

o been informed of Licensee’s obligations hereunder; and

o are bound by obligations to Licensee regarding confidentiality and restriction of use that are at least as broad in scope as Licensee’s obligations hereunder.

■ Licensee shall not take any action that may cause the trade secrets to lose their status as trade secrets. Without limiting the foregoing, Licensee shall not:

o publish, disseminate, or otherwise disclose or make available confidential information received hereunder to any person, firm, or corporation without prior written consent of Licensor; or

o use trade secrets for any purpose including, without limitation, [include appropriate clarifying description, e.g., selling, leasing, renting, licensing, marketing, or otherwise distributing any trade secrets or products or services embodying or derived from same].



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■ Licensee shall take all precautions, except those which involve gross and impractical economic expense, to maintain the secrecy of the trade secrets and to prevent any unauthorized disclosure of them. [Insert specific provisions regarding password protection, firewalls, maintenance of records of access, or identification of the only specific individuals who will have access]. Licensee shall render to Licensor a periodic report as to the security precautions taken with information related to the trade secrets, and Licensee shall promptly implement any additional specific precautions requested by the Licensor, except for requests which involve gross and impractical economic expense.

■ Following termination, Licensee shall return to Licensor all materials related to the trade secrets and any disclosure made by Licensor, including copies, notes, summaries, and materials derived from any disclosure, and shall execute an affidavit of compliance. Licensor shall be entitled within thirty (30) days of the termination of this Agreement to make an inspection of Licensee’s premises and records to verify compliance.

■ Licensee’s obligations respecting confidentiality and maintenance of secrecy under this Agreement shall survive and remain in full force and effect following termination of the license unless Licensee can demonstrate through dated documentation that the trade secrets have become part of the public domain through no fault of Licensee.

2. Royalty Obligations

Royalty obligations are an equally important aspect of trade-secret licenses, because they can demonstrate that the trade secrets have “economic value from not being generally known” to the public.Royalty obligations can survive the secrecy of a trade secret. In the famous “Listerine” case, the court addressed whether Warner Lambert Pharmaceuticals had to continue to pay royalties for the rights to use the chemical compound to create “Listerine” even when that formula had been published in medical journals for decades.94

The court noted that:

[T]he parties are free to contract with respect to a secret formula or trade secret in any manner which they determine for their own best interests. A secret formula or trade secret may remain secret indefinitely [or] it may be discovered by someone else . . . [This] does not mean that one who acquires a secret formula or trade secret through a valid and binding contract is then enabled to escape from an obligation to which he bound himself simply because the secret is discovered by a third-party or by the general public..95

The court’s decision stemmed from the logic that the licensor had derived a substantial benefit from licensing the trade-secret rights and therefore obtained an early entrance into the marketplace; even if others later learned of the secrets, the licensor already had a “head start.”96

However, a trade secret royalty cannot be charged to protect patented rights once the patent has expired.97


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The type of royalty, whether lump-sum or continuous, is largely dependent on the circumstances of the particular technology that is protected as a trade secret. For example, in the Listerine case, an ongoing royalty resulted in the payment of over $22 million in royalties for a 75-year period from 1881 to 1956. A lump-sum payment in 1881 for use of the Listerine formula for 75 years would likely have never amounted to as much of a payment, even when discounting $22 million to present day. But, in a circumstance when the trade secret is likely to be most beneficial at the outset of a license and only of marginal utility thereafter, a lump-sum royalty may be more beneficial.

Moreover, if a hybrid license (licensing both patent and trade-secret rights) is contemplated, then to avoid arguments of patent misuse, a royalty structure could involve:

■ A lump-sum payment only;

■ Separate royalties that are clearly defined for patent and trade-secret rights; or even

■ A royalty-free license for the use of the patents with an ongoing royalty for the trade-secret rights.

These options would be dependent on the relative value and importance of the patented technology, as compared with the trade secrets being licensed.

C. Additional Considerations

1. Sublicensing

Because trade secrets are protected by virtue of their secret status, it is not advisable to allow a licensee to sublicense the right to use the licensor’s trade secrets to third parties. In certain circumstances, however, sublicensing may be necessary (e.g., if the licensee needs to outsource production of the licensed technology). If so, then it will be essential to require that the licensee impose on its sublicensee confidentiality restrictions that are no less than and at least equal to the confidentiality restrictions to which the licensee is bound in order to ensure the continued protection of the trade secret. Confidentiality restrictions described herein would be appropriate to include in any such sublicense, along with clearly defined instances in which sublicensing is appropriate.

2. Assignability

Allowing a licensee to assign its trade-secret rights to others can even more blatantly jeopardize the trade-secret status of the protected information than the risks inherent in sublicensing. Thus, even though trade secrets are assignable, it is not recommended to allow assignability of trade secret rights without the licensor’s express consent.

A recommended clause regarding assignability is as follows:

Licensee shall not assign or transfer any rights or obligations under this Agreement without the prior written consent of Licensor. Subject to the limitations set forth in this Agreement,



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this Agreement will inure to the benefit of and be binding upon the parties, their successors and assigns.

3. Territory/Field of Use (FOU) Restrictions

Restrictions on the territory or field of use for the trade secrets are another important way to protect the continued status of a trade secret. Such restrictions should be clearly defined in a license agreement, and should be tied to the purpose for which the license is being undertaken. For example, a company wishing to use the trade secret rights to sell goods or services in the United States should not be given a worldwide license to use the trade secrets. Limiting the scope of use of the trade secrets to areas in which the licensee is likely to need to use the rights is an important element to demonstrating that the trade-secret rights are being adequately protected.

D. Jurisdictional Issues

1. Joint Ownership

As discussed, a critical issue impacting trade secrets is the degree to which they are protected from public disclosure. When a trade secret is jointly owned, both parties must protect the trade secret from disclosure. One party’s failure to do so could jeopardize the trade-secret status of the information.

In recognition of this challenge, any joint-venture agreements should expressly require both owners of trade secret rights to abide by confidentiality restrictions similar to those described herein. The agreement should also reflect that the trade secrets must be protected by either party at the same degree of protection for which the party gives its own trade secrets. Using this standard ensures that the jointly developed trade secret is not given lesser status or protection within a company. Finally, any joint venture or joint-ownership agreement should include representations and warranties that the parties “have taken efforts and maintain procedures that are reasonable under the circumstances to maintain the secrecy of the trade secrets.”

In light of the potential pitfalls with joint ownership, however, it is advisable to agree that only one party will own the trade secrets that are developed, even in a joint venture. Requiring that “any and all derivatives of the trade secrets will be the property of” one party may be the best approach to avoid the concern that the other party’s protection mechanisms are less than adequate to protect the trade secret.

2. Enforcement Rights

Trade-secret rights are enforceable through claims for injunctive relief, damages, and even attorney’s fees. The UTSA specifically includes provisions relating to injunctive relief,98 damages,99 and the award of attorneys’ fees.100 States that do not follow the UTSA have similar enforcement mechanisms.


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A license for the use of trade secrets should also enumerate the licensor’s enforcement rights, so that enforcing one’s trade-secret rights can be accomplished through the contractual terms as well as through the state law governing trade secrets. Clauses that clearly enumerate equitable enforcement options for trade secret misuse, such as the following, should be included in licenses for the use of trade secrets.

1. Equitable Remedies. Licensee acknowledges that monetary damages may not be a sufficient remedy for unauthorized disclosure or use of the trade secrets and that, in addition to all rights and remedies to which it may otherwise be entitled, Licensor shall be entitled to injunctive or other equitable relief for any breach of this Agreement.

2. Attorneys’ Fees. If Licensor employs attorneys to enforce any rights arising out of or in relation to this Agreement, in addition to any other remedies to which Licensor may be entitled, Licensor shall be entitled to recover its reasonable attorneys’ fees.

3. Bankruptcy

Trade secrets are considered to be “property” that is vested in the trade-secret owner, and therefore can be passed to a trustee in bankruptcy.101 Moreover, trade-secret licenses impose material (and typically ongoing) obligations on the parties. Thus, it is likely that such agreements would be considered to be executory, and therefore appropriately considered to be part of the bankruptcy estate.102

V. Trademark Licenses

A. Statutory and Common-Law Principles Governing What Constitutes a License

In the United States, trademark licensing is governed by both statutory and common-law principles. It is important, therefore, to note the statutory provisions that most commonly impact trademark-license agreements, as well as the common-law principles that govern their construction and interpretation. The laws and principles discussed below primarily address US law and thus apply if US law governs the contract; if that is not the case, then the parties to any license agreement should seek local counsel in the jurisdiction that governs the agreement to determine what law and other principles apply.

1. Canons of Contract Law

Beginning with the most basic, license agreements are, after all, contracts, and are therefore governed by contract law. Generally, it is recommended that all license agreements be in writing,



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but trademark owners should be aware that it is possible, but not advisable, to form oral licenses that are enforceable in the United States103 (though this might not be the case in other jurisdictions). Because disputes regarding license agreements are adjudicated under canons of contract law, care should be taken in drafting license provisions to make them as clear and thorough as possible.104 For example, a well-crafted trademark license agreement should not leave open-ended the parties’ respective post-termination rights, or what happens following the natural expiration of the agreement. In a 2008 case, the Second Circuit found such ambiguity existed with respect to the latter, even though the former was carefully laid out.105 The license agreement at issue provided that “upon termination . . . [licensee] would have no further right” to use the licensor’s marks or technology, except under limited, well-defined circumstances. While the agreement clearly spelled the parties’ rights during the term of the license and in the event of termination, the court found there was no express language stating that the licensee’s right to use the licensed material would end at the natural expiration of the term of the license.106 The aforementioned problem is easily resolved by inserting the words “and/or expiration” after the word “termination” in the aforementioned clause.

2. Standing to Sue in Federal Court and Bring Administrative Actions

Because jurisdictions vary on the default rights accorded to a licensee, parties to a license agreement should consider whether, or under what circumstances, a licensee will be entitled to bring a trademark infringement, dilution false advertising, or administrative action against third parties concerning the licensed marks. In the United States, only the registrant of a mark may bring a claim for federal trademark infringement.107 However, a party need not be the owner or registrant of a mark to have standing to sue for under Section 43(a) of the Lanham Act for federal unfair competition.108 Nor is a licensee precluded from bringing an administrative proceeding, such as a notice of opposition, against a party seeking to register a mark that may create a likelihood of confusion with the licensed mark.109 In light of the fact that a trademark owner’s rights may be substantially impacted in any such litigation or administrative action, an owner should carefully evaluate any right to sue conveyed to a licensee, and the extent to which the owner maintains control over such actions.

3. Licensing Formalities

In any given trademark-license arrangement, particularly when international trademark rights are involved, parties should pay particular attention to local jurisdiction regulations relating to license formalities, including the following.

■ Signature. Aside from the usual signature blocks for both parties, many jurisdictions require execution of agreements in the presence of a notary, or that they otherwise be witnessed or created through the vehicle of a public deed. Best practice dictates having all trademark licenses signed by both parties in the presence of a notary, and making sure to execute and notarize as many originals as might be needed for any necessary recordations. In many countries, the signatures on the original document need to be authenticated, either by Apostille or by consular legalization, before local authorities will accept them as authentic documents memorializing the parties’ license arrangement.


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■ Recordal. Many jurisdictions provide the option of recording a license; others mandate it. In the United States, recordation of a trademark-license agreement is not necessary, but in other jurisdictions there can be significant consequences for not recording.110

o In some jurisdictions (e.g., Algeria, Armenia, China, Kazakhstan, Thailand, and the Russian Federation), failure to record can risk the validity of a trademark registration.

o In other jurisdictions (e.g., Brazil, China, Egypt and Jordan), recordal is generally required to enforce a licensee’s royalty obligations.

o Recordation may be required in some jurisdictions (e.g., Estonia, Guatemala Ireland, and New Zealand) for a licensee’s use of the mark to inure to the benefit of the licensor.

o Recordation in some jurisdictions (e.g., the Czech Republic, Finland, Hong Kong, and France) allows or improves a licensee’s ability to enforce the subject trademark rights against third parties.

Because recordation can create additional legal abilities for licensees—such as allowing them to sue third-party infringers—licensors should research, understand, and weigh the relative costs and benefits of recording a license agreement in light of the particular jurisdiction’s laws.

Several additional considerations bear keeping in mind in the recordal process, including the following.

■ In many jurisdictions, a license cannot be recorded against an application. As a result, the license-recordation process must be undertaken only after a trademark application has matured to registration.

■ Authenticated translations of the license agreement might be required to properly record it.

■ If a license agreement contains sensitive commercial information that the parties would rather not be made public, then a number of jurisdictions will permit the recordation of extracts license agreements.111

4. Ensure the Agreement is a License Agreement

Trademark licenses are typically driven by business objectives—namely, increasing brand awareness or revenue by either (a) expanding a brand owner’s market or product line or (b) lowering production or supply costs. Sometimes, however, trademark licenses are used to resolve disputes. Parties may, for example, decide to enter into a license agreement rather than litigate, such that the alleged infringer becomes an authorized user of the mark in exchange for acknowledging the owner’s superior rights and paying a royalty to benefit from those rights.

Often, however, when agreements are used to resolve disputes, the parties are motivated to alter key licensing ingredients, and they may want to enter into an arrangement that falls short of an



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actual trademark license. For instance, an alleged infringer, or perhaps a senior user in an entirely different product category, may not want to submit to the trademark owner’s quality-control requirements or oversight. These motivations often cause parties, wittingly or unwittingly, to enter into coexistence or consent agreements rather than trademark-license agreements. Other arrangements, like joint ventures or co-branding agreements, could also come into play to resolve a dispute, and could result in the creation of new entity that will “license” the mark to each party for use in related or unrelated revenue-generating activities.

a. Coexistence and Consent Agreements

“A license integrates, while a [coexistence agreement] differentiates.”112 The premise of a license is that absent such an agreement, the licensee’s use is an infringement. Nevertheless, a coexistence agreement is premised on parties’ assent that their respective marks, and the way they are used, create distinct commercial impressions such that neither infringes the other. A coexistence agreement thus allows both parties to act independently, and merely provides guidelines sufficient to avoid confusion in the marketplace.

The term “consent agreement” is sometimes used interchangeably with “coexistence agreement.” Conceptually, however, a consent agreement is a type of a coexistence agreement; it typically provides for nothing more than that both parties consent to the use and registration of their respective marks for their respective lines and/or geographic markets. A consent agreement, unlike a coexistence agreement, typically does not contain any limitations on either party.

Consent agreements typically are entered into so that one of the parties may overcome a refusal from the Trademark Office to register its mark due to an existing registration. Such agreements are almost always accepted by the US Trademark Office because, as the predecessor court to the Federal Circuit explained, “A mere assumption that confusion is likely will rarely prevail against uncontroverted evidence from those on the firing line that it is not.”113

Coexistence agreements typically will address many concern,s such as future geographic and line expansion, adoption of new logos accompanying the word mark, or the abandonment by one party of its use. They should also address how the parties will handle future events disputes that may arise, including what jurisdiction’s legal standards will apply, whether disputes will be decided through arbitration, and whether the agreement may be assigned.

b. Covenants Not to Sue

Just as coexistence and consent agreements are not equivalent to trademark licenses, neither are covenants not to sue, which also are often used to resolve disputes. Covenants not to sue often are employed as relatively straightforward means of resolving a dispute; typically a trademark owner covenants not to sue an adverse party over a particular mark or design, or a junior user may assign its trademark rights in exchange for an agreement to retain the ability to use the mark and a covenant not to be sued for such use. As simple as such arrangements may seem, they may have unexpected consequences. For example, in Nike, Inc. v. Already, LLC, Nike entered into a covenant not to sue with Yums following a dispute over allegedly infringing footwear Yums had been selling.114 When Yums later attempted to maintain a federal court action for its counterclaims seeking declaratory relief and a petition to cancel Nike’s mark, the Second Circuit held the breadth of Nike’s covenant not to sue precluded such a suit because it eliminated any case or controversy between the parties.115 Unbeknownst to Yums, the covenant not to sue caused Yums to lose its


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ability to seek the relief it sought; on appeal to the Supreme Court, which affirmed the Second Circuit decision, it was found that Nike’s covenant not to sue was broad enough to satisfy the “voluntary cessation” doctrine, whereby the covenant rendered Yums, its agents, and customers with no apprehension of suit, and hence no viable right to pursue its counterclaims.116

Unlike many licenses which may provide a licensee with the ability to sublicense, a covenant not to sue may not extend to a recipient’s affiliates, vendors, or sublicensees. Thus, although the difference between a license and a covenant not to sue may appear to be a purely semantic issue when parties are in the midst of resolving a dispute, the consequences may be more far-reaching.

c. Co-Branding Arrangements

Co-branding arrangements arise when two distinct brand owners decide that their brands can work together and/or complement each other for a either a product or service (whether old or new). The result is an alliance for manufacturing, marketing, distribution, and sales which should benefit both brand owners. Typical co-branding agreements involves two or more companies who agree to cooperate and to brand the product with multiple brands or logos, color schemes, or other brand identifiers.

The objective and advantage of co-branding is the instant combination of recognizable goodwill in the co-branded trademarks, which results in an increase in brand awareness among consumers who are willing to pay a premium price. Co-branding also enables the product or service to be more resistant to copying by private-label manufacturers, or to combine the different perceived properties associated with these brands with a single product. There are several forms of co-branding, including ingredient co-branding, same-company co-branding, joint venture co-branding, and multiple sponsor co-branding. Some popular examples of co-branding are Dell and Intel; Nike and IPod; Adidas and Polar.

Co-branding efforts are usually the result of their success. But they present some potential disadvantages as well, including the following:

■ Negative associations. If one brand suffers damages to its reputation for quality or is associated with negative publicity, then this could transfer to the other brand.

■ Dilution. This occurs when consumers no longer see independent brands and associate the two brands as one, thereby diluting the value of the brands standing alone, with each brand losing its distinctiveness in the marketplace.

■ Financial Issues. Co-branding arrangements are usually associated with complex joint-venture and profit-sharing provisions that might take a long time to agree on— and, if

“Co-branding can be an effective strategy to survive down times and even grow. It can create new revenue streams, increase momentum and raise brand awareness as well as reduce costs. Co-branding, though, is not a one-stop solution for everyone and should be used judiciously so as not to dilute positive brand equity.”

Dan Beem, President of Cold Stone Creamery



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the brands ever want to separate, a long time to untangle from.

A delicate balancing act is required for any co-branding venture to achieve not only the short-term goals for success but also a successful route to minimize risk and exposure to the brands from any termination in the long term. Whatever legal and financial agreements at which the brand owners arrive, a sharing of risk and an equitable financial approach is imperative.

5. The Franchise Surprise

Many practitioners are familiar with the differences between trademark licenses on the one hand, and coexistence agreements, consent agreements, and covenants not to sue on the other. Practitioners, however, are regularly surprised by franchise issues lurking behind every trademark license. These are virtually unknown because franchise law is typically viewed as a discrete area involving an entirely different expertise, but brand owners should routinely consider the “franchise issue” every time they enter into a trademark license.

Franchising has exploded no less than trademark licensing. Recent reports suggest that 1 out of every 12 businesses in the United States is a franchise.117 Franchising is governed by a complicated quilt of state and federal law that, while inconsistent, is clear on one point: a franchise requires, among other things, a trademark license and the exercise of control by the licensor over the licensee. Thus, every trademark license automatically satisfies at least one of the statutory elements to finding the existence of a franchise arrangement.118

If a trademark licensor is a de facto franchisor and has not complied with the relevant state and/or federal laws, then its licensee is also a franchisee entitled to various remedies, including, e.g., rescission of the license, monetary damages, and protection against improper termination of the license. Additionally, the surprised franchisor/trademark licensor may be subject to significant penalties for failing to follow the statutory franchise requirements of the federal or applicable state law.

The Federal Trade Commission enforces the federal law regulating franchise arrangements set forth in 16 C.F.R 436.1 et seq. Under these rules, a franchise relationship is formed when a trademark owner offers the right to sell or distribute goods or services associated with its mark, exercises a “significant” degree of control over or provides assistance to the licensee, and charges a fee other than payments for good or services at a bona fide wholesale price. Thus, it appears that a license that requires, for example, an upfront signing payment or contributions to a marketing fund might satisfy the requirements for finding a franchise.

The issue is even more complicated, however, because many states use definitions that do not coincide with federal law. For instance, in California the degree of control is not dispositive by the mere existence of a marketing plan.119 New Jersey does not require the payment of a franchise fee, but applies one whenever the gross sale of products between the trademark owner and the licensee exceeds $35,000 in any 12-month period or where more than 20 percent of the licensee’s revenue is related to the license.120 New Jersey courts have held that these rules apply whenever one of the parties does business in New Jersey, even if the license states it is not a franchise agreement and even if the license is governed by the law of another state. To round out the list of examples of states out of step with federal law, to constitute a “franchise,” New York law requires only that


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either a “marketing plan” be shared by the parties or that the putative franchisee use of the purported franchisor’s mark or other commercial symbol.121

The trademark lawyer and the brand owner cannot afford to ignore the implications that the trademark-license arrangement may have under relevant franchise law. But, to the best of the authors’ knowledge, there is no case that has held a trademark license to actually be a franchise.

B. A Licensing Model to Maximize Benefits for Both Parties Having considered the statutory and common-law backdrops for forming license agreements and other arrangements, parties that enter into trademark-license agreements should recognize clearly the benefits and drawbacks of various licensing provisions, and take these into consideration during the course of negotiation. For brand owners, the principal benefits of licensing include brand recognition; generating revenue with minimal risk and minimal cost; and tapping the potential for expanding the brand not only geographically, but also to different customer demographics and distribution channels. The drawbacks for brand owners can be many, including losing complete control over the brand, receiving only a percentage of the sales revenue, and risking a licensee damaging the brand’s reputation or image or hindering future growth.

Licensees often take the position that they are assuming all the risk. But there are several favorable benefits for them in trademark-license arrangements, including the opportunity to generate large revenues and expand into new, untapped consumer markets with minimal investment in having to develop a brand by drawing on the already established licensed brand image, goodwill, and strength. Conversely, the drawbacks for most licensees include being required to submit to quality-control parameters set solely by the licensor for manufacturing, labeling, sourcing, shipping, and the like, and that the license grant may be limited or non-exclusive for certain territories, products, and/or trade channels.

The following chart summarizes some of the priorities for trademark licensors and licensees that should be taken into consideration.122

Licensor Licensee

Pre-License Considerations

■ Protection of the brand

■ Expansion of the brand

■ Royalty structure; minimum guarantees

■ Full and clear trademark warranties and representations

■ Delayed financial commitment

■ Low minimum guarantees

Grant Considerations

■ Define the trademark narrowly

■ Non-exclusive rights

■ Define the products/services

■ Retention of rights

■ Maximize revenue stream; minimums and guarantees

■ Limit renewal rights

■ Define the trademark broadly

■ Exclusive rights

■ Retain goodwill for investment

■ Maximize profit

■ Expanded renewal rights; Right of First Refusal/First Negotiation



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Territory ■ Narrow

■ Internet usage

■ Broad

■ Geographic options

Approval Process ■ Everything must be submitted for approval

■ Silence is not approval

■ Licensee investment

■ Reduce time for approval process

■ Reduce interference

■ Licensor investment and commitment

Quality Assurance, Controls, and Monitoring

■ Strict quality control

■ Supervision

■ Narrow testing guidelines

■ Broad audit rights

■ Third-party manufacturing control

■ Self-regulation

■ Less supervision; reduce time for approval

■ More leeway in testing, manufacturing, packaging, advertising

Termination Rights

■ Licensor terminate at will

■ Right to damages for breach, including guaranteed revenue

■ Choice of law, jurisdiction, and venue for dispute resolution

■ Arbitration/mediation clauses

■ Licensee has right to terminate

■ Choice of law, jurisdiction, and venue for dispute resolution

■ Right to litigate

Internet/social media distribution

■ Narrow

■ Internet/social media usage

■ Broad

■ Geographic options

In the context of licensors’ and licensees’ relative predispositions for negotiating a license agreement, the parties must work through various key provisions constituting the heart of any licensing arrangement.

1. The Grant Considerations

The scope of any grant of rights in a license should be dealt with up front, and the parties should anticipate not only their current situations when drafting and entering into the deal, but future prospects as well.

a. Scope: Exclusivity

More often than not, licensors and licensees have a general notion of the anticipated scope of the license grant at the point when they enter into license negotiations—namely, whether the license grant will be exclusive or non-exclusive, and what products or services the grant will cover in the defined territory. For the licensor, granting exclusivity is akin to relinquishing control and acknowledging that the licensee can perform better in the product category, territory, or distribution channel being licensed. Consequently, licensees who bargain for such exclusivity must show experience, success, and strong capabilities in the exclusively licensed area, and also be prepared to pay for such exclusivity.


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Although the issue of exclusivity may be clearer-cut in the domestic context, it is important to realize that in some jurisdictions (e.g., Brazil) a truly exclusive license may preclude the licensor from using its own mark in the jurisdiction. In these situations, what might be preferable is a sole (rather than exclusive) grant, where the licensor and the licensee both retain rights to use the mark in any given jurisdiction. It is important to appreciate the local use and implications of a sole, an exclusive, or a non-exclusive grant of a license.

b. Scope: Sublicenses and Assignments

Another important issue to address in the scope of a license is whether sublicensing will be permitted. US law is clear that a trademark license does not include a right to sublicense or assign the license to a third party unless that right is expressly conferred. Nevertheless, the best practice is to insist on express provisions addressing either the right to sublicense or its prohibition. If sublicensing is allowed, then the agreement should also address the means for handling infringements by the sublicensees, and it should compel licensees to identify their sublicensees—a thing many licensees are loath to do. The licensor must obtain assurances of cooperation from the licensee to address unauthorized use, e.g., warrant that the licensee will vigorously enforce the trademark against sublicensees, or, if the licensor has sufficient leverage, mandate that the licensor be identified in the sublicense as a third-party beneficiary, thereby giving the licensor standing to sue the sublicensee under both trademark and breach-of-contract theories (the latter of which might be easier to prove than trademark infringement).

Just as permissions or prohibitions regarding sublicenses should be expressly stated in any well-crafted license agreement, so too a license should clearly address whether the grant of rights is assignable. As with sublicensing, licensors with leverage in a negotiation generally will insist that the license be non-assignable so as to avoid the pitfalls of future, unknown third parties using, enforcing, and making decisions with regard to the brand owner’s marks. Licensees often take the opposite view, particularly where their interests are less certain and the prospect of being able to have another party step into one’s shoes is critical business objective.

More often than not, if the licensee demands the right to assign or transfer, then the licensor may demand a transfer fee. The consideration for such a fee is that the licensor has not bargained for the transferee of its licensee, and that if the licensor grants the right to transfer, the transferee must be capable of paying the transfer fee and performing under the terms and obligations of the original license.

c. Scope: Licensed Products

Great care also needs to be taken with the scope of the goods and services covered by the license, especially when the purported license covers international jurisdictions. For example, if the license covers retail services, the parties need to keep in mind that, in some jurisdictions (e.g., Argentina and Venezuela), retail services are not registrable. In other jurisdictions, they may be only registrable with specific, special language123—and even then, that special language may at first blush look nothing like what one would typically consider retail or related services.124 If the license cites trademark registrations whose scope of goods or services are worded in the generally accepted Nice Classification System class heading language, then it is also important to note that jurisdictions differ on their interpretations of what exact goods or services are covered by using this general class-heading language.



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To illustrate the point, while most European Union member states would consider the Class 25 class heading (i.e., “clothing, footwear, headgear”) to cover all manner of these goods, other jurisdictions construe them far more narrowly (especially those jurisdictions such as China and other Asian countries which rely on sub-class descriptions of goods as well). Best practice dictates that the protected coverage of the mark in the licensed jurisdiction at a minimum mirrors the scope of the license.

These considerations are relevant when a trademark owner grants a license for use outside the United States. Even if the trademark owner has a registration in a foreign country, that registration may be subject to cancellation for non-use, and may require a new filing. Many trademark owners, as well as licensees, want to take advantage of the global marketing opportunities offered by emerging Internet and other distribution technologies. For example, if a trademark owner wants to license his mark for use with online slot machines, the licensee will invariably desire a worldwide license; the licensee will hope to find consumers for this service everywhere. But very few brands have been cleared for “worldwide” rights, much less registered in every jurisdiction around the world.

One common way for a trademark owner to address the issue of scope is to grant a license in every jurisdiction where the licensor owns a valid registration, and also to put the responsibility on the licensee to apply for and maintain (in the licensor’s name) the protection for the licensor’s trademark. This is predicated on the licensee’s willingness to pay for the trademark clearance, prosecution, and maintenance of the licensor’s registration of the mark in that jurisdiction. Obviously, licensees may not want to incur this expense, especially if the license is of limited duration. In this situation, the licensee should be required to justify the expense for the licensor to conduct a clearance study and filing a trademark application, i.e., by presenting a business and/or marketing plan to the licensor. There is hardly a circumstance which warrants the licensee owning the trademark registrations outright, and licensee’s ownership of licensor’s marks should be avoided.

Another way to tackle this scope issue is for the licensor to limit its warranties to only those jurisdictions where it owns trademark registrations, and to expressly disclaim any obligation of indemnification with regard to trademark claims in any other jurisdiction.

d. Term

The term of the license should be addressed at the outset of negotiations, and the parties may have competing interests when defining the initial term and any renewal terms. If for any reason terms and renewal terms are rejected in lieu of a perpetual license, then be aware that some US state laws may find such arrangements in violation of the rule against perpetuities, and national laws of a number of countries have provisions addressing perpetual licenses and their validity.125 An initial term, followed by serial renewal terms, may prove the best way to address the perpetual-license conundrum. In the international context, some countries may not consider a license term valid if it exceeds the registration term of the licensed trademark; this should be vetted by local counsel so as to avoid voiding the agreement or, at a minimum, calling its validity into question.

e. Renewals and the Right of First Refusal/First Negotiation

License renewal rights are often intensely negotiated, typically by the licensee. Licensees with foresight and initiative wish to avoid at all costs the scenario where—upon the eve of the


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expiration of their licensed rights, and after having spent many years and large sums of money growing consumer recognition and nurturing the licensor’s brand—they are faced with the prospect of losing all of these gains and future revenue streams to a new licensee who needs to do little but reap the former licensee’s harvest.

To mitigate this risk, parties in a trademark license negotiation will often resort to Right of First Refusal or Right of First Negotiation provisions. Licensees favor the former, licensors the latter. The Right of First Refusal usually contemplates that the licensor will negotiate or receive terms for a proposed new license agreement from a third party, and then the licensor will have to give the licensee an opportunity to match the terms in the newly proposed license agreement.126 The Right of First Negotiation usually provides that the licensor must first negotiate with the licensee for a new license, and only if the parties do not agree to terms can the licensor seek a new third-party licensee that may offer better terms. In either case, the rights depend upon the actions of third parties, but the Right of First Refusal gives the licensee more control, as it has a chance to match the best offer the licensor can find; in the Right of First Negotiation situation, the licensor controls the negotiations and usually has more options to find a better deal after it receives the licensee’s best deal.

If the parties cannot agree on which of the aforementioned paths to take, then another way for licensing parties to tackle the renewal issue is to establish thresholds for any renewal to take effect. Such thresholds can be based on meeting certain levels of sales or payments of royalties, or keyed to market penetration or expansion (e.g., selling the licensed products in a specified number of new doors, or creating a certain number of new products within the licensed category).

Because these provisions have critical implications for the future, they should be carefully considered, drafted, and defined. It is important for each party to decide early in the process on its own preferred approach. Choosing rashly or failing to consider all of the possible implications of these clauses can seal the fate of a license. When a license comes to an end (as it invariably will), the grant provision often will determine whether this ending will be a “happy” one.

2. Territory

a. International Considerations

Brand owners that turn to licensing as a means of extending a brand’s reach in the domestic marketplace soon consider new territories for licensing. The last several years have seen an explosion of licensing in emerging markets such as the BRIC countries (Brazil, Russia, India, China) and some Eastern European countries. Licensing plays a key role in the economies of less-developed countries as well, where large local enterprises and even governments look to trademark licensing as a means of bringing in much-needed capital.

The financial motivations for undertaking extensive, multi-jurisdictional licensing programs are so strong that licensors sometimes fail to appreciate all of the ramifications of an international licensing program. Eager to get an expansive licensing program underway, licensors who grant a “worldwide” license or a license in “all current major markets” without fully appreciating the implications can get embroiled in conflicts in many countries—which can have costly, and sometimes disastrous, results.



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Licensors should take great care in selecting which marks to license in any given territory, to understand well the licensed territory’s requirements for trademark registration and enforcement, and to become aware of and comply with license recordal and enforcement regulations in the territory. In all jurisdictions covered by the defined territory, licensors need to make sure that they—and not their licensees, local distributors (absent any special arrangements), or others—own the rights to the marks in those jurisdictions.

Both parties in a trademark license arrangement have an interest in defining clearly the scope and nature of the licensed products’ distribution. For the licensor, it provides clarity of trade channels and revenue streams, with quantifiable targets. For the licensee, it provides clearly delineated avenues of activity and expectations. It also helps to address the ever-present risk of parallel imports and gray-market activity. From the licensor’s perspective, added enforcement insurance can be derived from discrete, well-defined channels of distribution which are addressed clearly in the license agreement, combined with a prohibition on the licensees from engaging in or encouraging parallel importation.

To the extent permitted under local law, obligating licensees to police actively against gray-market activity and report any known or suspected behavior adds another useful deterrent. It is important, however, to verify that the specified enforcement obligations do not violate any national or other jurisdictional laws relating to anti-competitive behavior. It is important to make sure that license provisions forbidding the licensee’s challenge of the licensor’s ownership of the mark or the validity of the trademark registrations do not run afoul of such laws as well.

Choice-of-law provisions in a licensing agreement, which are important in overcoming uncertainty when seeking relief for a breach of a license, can in some circumstances themselves be construed as anti-competitive. There may be local laws that limit a brand owner’s ability to enforce choice-of-law provisions in the licensed territory (e.g., China, where strong antimonopoly laws exist) or which even prescribe choice of law. There may be other requirements, such as minimum contacts and public policy considerations, that call into question the enforceability of a choice-of-law provision (e.g., Argentina).

Public policy aside, even if the parties agree to have all trademark-licensing disputes adjudicated under, e.g., US law in US courts, there is no guarantee that the local courts will enforce any orders or judgments rendered by a US court against a local national. This is one reason why some global brand owners are now using international arbitration to govern disputes with international licensees. In many countries outside the United States, non-US courts are more likely to enforce an arbitral award than a local court order. The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (known as the "New York Convention”) is accepted and followed by many countries, including China, and it greatly increases the chances for a successful recovery if incorporated into an international license agreement. The authors of this InfoPAK recently implemented enforcement using this precise strategy; not only were they able to get a China court to recognize the arbitration award, but they also were able to recover more than $1 million for a brand owner client from the terminated Chinese licensee.

The following is a draft arbitration provision that could govern an international license:

Arbitration. With the exception of disputes or claims concerning trademark misuse, unfair competition, dilution, counterfeiting, or trademark infringement, all other disputes,


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controversies, and claims arising out of this Agreement shall be settled and determined by arbitration in New York City before a panel of three (3) arbitrators pursuant to the [International Arbitration Rules] [Commercial Arbitration Rules] of the American Arbitration Association. The parties agree to impose a time limit of six (6) months on any such arbitration proceeding, as measured from the date of the first claimant’s first filing. The parties agree that the arbitrators shall have the power to award forms of relief including but not limited to damages, injunctive relief, preliminary injunctive relief, temporary restraining orders, and reasonable attorneys’ fees and expenses to any party in such arbitration. Anything to the contrary herein notwithstanding, a temporary restraining order or injunction may be obtained by Licensor or Licensee from a court of appropriate jurisdiction pending the determination of any controversy pursuant to this arbitration provision. For all claims or controversies arising out of Licensee’s trademark misuse, unfair competition, dilution, counterfeiting, or trademark infringement, Licensor may prosecute and seek all relief permitted by law for such claims in any court of appropriate jurisdiction.

Licensor and licensee alike (or their attorneys) are encouraged to work with local counsel in the pertinent licensed territory to ensure the appropriateness and validity of the license agreement, because they can best advise on the effects these agreement clauses may have on the licensing arrangement.

Timing is also crucial in any trademark-licensing arrangement. Internationally, it is often the case that the rights to a trademark are only as good as the registration for the mark, and it is also often the case that the party first to file for registration of the mark holds the rights to it. In certain jurisdictions, unregistered marks and marks that are the subject of pending applications may not be licensed, and it is therefore imperative to ensure that the trademark registration process gets started as early as possible. For example, in Paraguay, as in other Latin American jurisdictions, a mark must first be registered before a license of it can be recognized, and the same holds true in many other countries.127

A sophisticated licensee is unlikely to enter into a license without adequately protected trademark rights, and no reputable licensor is likely to agree to the licensee’s “doing the licensor a favor” by registering the rights to the licensed trademark in the licensee’s name, thereby owning and controlling the licensed mark. It is therefore important to identify as early as possible the geographic reach of the license, and for the licensor to conduct appropriate clearance searches and get protection for the licensed trademarks underway. Neither party wishes to discover that a long-standing registration for the key licensed mark is held by a pirate, with no cost-efficient or timely prospect of ousting the infringer.

A sample of this kind of trademark expansion provision follows:

If Licensee desires to sell Licensed Products outside the Territory, Licensee must first obtain the written approval of Licensor, which Licensor may withhold in its sole discretion. Licensor’s failure to timely respond to such request for approval shall be deemed as its disapproval of the request. If Licensor agrees in writing to approve sales outside of the Territory, the Territory shall be deemed to have been amended to include the approved location. Licensor shall be under no obligation to obtain trademark protection for the Licensed Trademarks in any approved locations outside the original Territory, and Licensor does not



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guarantee that such protection will be obtained during the Term or Renewal Term of this Agreement, if ever. Nevertheless, if Licensor approves the sales of Licensed Products outside of the Territory and Licensor determines that some form of trademark protection is necessary in the approved location beyond Licensor’s existing trademark rights in such location, Licensor and Licensee shall negotiate and determine which party shall be responsible for fees and costs associated with obtaining trademark protection for the Licensed Trademarks and/or recording licenses in the approved location, provided that under any circumstance any and all trademark rights in the expanded Territory shall be exclusively owned by Licensor.

The Chinese system of protection and enforcement provides fertile ground for discussing many of these points.128 Although it is often cited as the “poster child” of piracy, China is by no means alone. Many other Asian, Latin American, and Western countries have their fair share of IP abuses. When launching or licensing a brand in such countries, brand owners should proactively identify “red flags” unique to the relevant jurisdiction before entering into the licensing relationship.129 At minimum, the foreign brand owner should:

■ Research the state of the intellectual property rights in the owner’s specific industry;

■ Research the history of any potential licensee;

■ Be cognizant of cultural differences;

■ Register the trademark in the licensed territory;

■ Conduct face-to-face contract negotiations and use a translator;

■ Travel to the licensed territory before problems arise, and certainly after they arise;

■ Periodically return to the licensed territory and visit the licensee to ensure the terms of any license agreement are being fulfilled; and

■ Establish a continuous presence in the licensed territory to show that the brand owner is invested in its licensing program in, and licensed goods from, the territory.130

It is always advisable to consult with local trademark counsel at the initial stages of securing mark protection to avoid any dispute about the validity of the mark’s registration, as well as subsequent ability to license the mark in the territory.

Brand owners often encounter problems in territories associated with counterfeiting, improper use of child labor, use of low-quality materials, and/or shoddy construction. Even with these potential pitfalls, licensing arrangements in these jurisdictions can provide a boon to both licensor and licensee. Thorough and effective license provisions which address quality control, manufacturing protocols, compliance with regulations, and enforcement (all of which will be discussed in greater detail) can spell the difference between a thriving licensing arrangement and a floundering one.

b. The Internet and Other Digital Distribution Channels

In our ever-expanding global commerce facilitated by the Internet, mobile devices, and social media, no trademark license would be complete without considering how the licensed products can or should be distributed. These new distribution media should not be treated differently than


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existing distribution channels. The traditional provisions for scope, territory, quality control, and the like should be contained in any trademark license that covers distribution via the Internet or other channels.

Several additional considerations should be kept in mind. Perhaps most obvious is to make sure the license covers the ability (or inability) of a licensee to sell the licensed products across Internet and related e-commerce channels; and, if so, whether the licensee is permitted to sell outside the territory where the licensor owns trademark rights. Related to these considerations is the need to address the following questions.

■ What are the permissible Internet outlets (e.g., will the licensee be allowed to sell on e-Bay, be limited to brick-and-mortar websites, or use a newly designed exclusive website built by the licensee)?

■ Who will own the online identity?

■ Has the licensor filed trademark applications for online use of the licensed trademark?

■ Is mobile phone distribution included in the agreement?

■ Who will control social media considerations (e.g., promotions, sweepstakes, blogs, advertising) , and how will approvals be handled?

■ Who will be responsible for privacy considerations? Will the indemnifications be sufficient?

The following draft provision is limited to websites, but could be expanded to cover other digital distribution.

Licensee shall have the right to [market, sell, promote] Licensed Products via the [insert digital distribution], provided that no sales be made outside the Territory, and further provided that such sales are made via a separate website dedicated to the Licensed Products, such website having a domain name including the [Licensed Trademark] and such website being registered and owned by Licensor. Any domain name used by Licensee in connection with the sale of Licensed Products shall be pre-approved by Licensor at Licensor’s sole discretion. Upon Licensee’s written request, Licensor shall apply for, obtain, and maintain the ownership of the domain name in the Territory at Licensor’s expense for exclusive use by Licensee during the Term of this Agreement. If the desired domain name is not available or is unacceptable (e.g., it may be confusingly similar to a trademark or domain name of a third party), Licensor shall select an available domain name at its sole discretion. Prior to its going live, any [website or other digitial distribution channel] associated with a domain name under this Section must have Licensor’s Approval, and such [distribution channel] and its operations shall remain subject to relevant provisions of this Agreement during its existence. Licensee shall be solely responsible, financially and operationally, for all day-to-day operations and maintenance of any [distribution channel] associated with a domain name [or the Licensed Trademark] obtained under this Section, and shall ensure that any such [distribution channel] prominently features the following disclaimer: “[Licensed Trademark] branded products available through this website are for distribution and sale only in the United States, its Territories and Possessions, Mexico, and Canada” [or insert whatever



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rights are appropriate here]. Licensee shall not deviate from the procedures of this Section without written pre-approval from Licensor.

Another related, but often overlooked, issue is how the parties will address user-generated content in connection with online licensed products. The license agreement should ensure that the parties understand their respective obligations, for example taking advantage of any safe harbor provisions under the Digital Millennium Copyright Act, creating and implementing a Privacy Policy and Terms of Use, and reviewing and ensuring compliance with federal and local consumer protection and privacy laws. Much of the burden will likely be placed on the licensee to satisfy the obligations for selling on the Internet and through other new distribution media, but licensors should also be aware that they must prepare for this consequence, and address it specifically in their trademark-license agreements.

3. Quality Assurance and Controls

A trademark licensor has the duty to control the quality of the goods or services offered by a licensee under the mark.131 Traditionally, trademark owners have used licensing to outsource entire production process to third parties.132 This form of licensing—sometimes referred to as classical licensing—is now supplemented by what is known as collateral licensing, or line expansion. Line expansion allows a company known in one area to leverage its reputation by permitting a third party to use its mark in connection with a new line of products, typically in an area in which the original owner has no expertise. Recently, trademark licensing has expanded into promotional licensing, in which the product is typically an impulse low-cost item that, theoretically, will become more desirable simply because it bears the owner’s trademark. These practices mandate that the licensor and licensee alike ensure the quality of products bearing the trademark.

Under US law, regardless of the source of licensed products, if the trademark license does not contain quality control provisions, or if no quality control is exercised by the licensor, then the license may be considered a “naked license.”133 Naked or uncontrolled licensing may result in “[1] abandonment of rights in the mark,134 [2] a break in the chain of continuous use necessary to prove priority of use over another, [3] a finding that the license is void, or [4] [a finding] that the licensor is estopped from challenging the licensee’s uncontrolled use.”135 The quality-control requirement is at play in many other countries as well.136 As a result, it is imperative to build in the requisite, locally appropriate level of quality control into trademark-license agreements.

To mitigate the risk posed by insufficient quality control, a trademark license should contain, at a minimum, express terms giving the licensor the power to engage in quality control. It is common for a trademark license to contain a clause that establishes a right of the licensor to inspect and review the goods and services offered by the licensee in connection with the mark.

The extent and manner of control will vary according to the industry and/or the products at issue. Accordingly, the quality-control provision can be broadened or narrowed to the extent necessary for the individual circumstances. Although it is recommended that any license agreement contain express quality-control provisions, in some situations, the nature of the parties’ relationship and conduct may also serve as evidence of sufficient quality control, depending on the court.137


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Recently, the Ninth Circuit affirmed a lower court’s finding that a licensor had abandoned its marks because it had exercised no control over the use of the marks.138 Two years after the licensor gave permission for the licensee to use the marks, the licensor ordered the licensee to cease and desist using the marks, and the licensee filed a declaratory judgment action against the licensor. The court held that the licensor had abandoned its marks because it “(1) did not retain express contractual control over [the licensee’s] quality control measures, (2) did not have actual controls over [the licensee’s] quality control measures, and (3) was unreasonable in relying on [the licensee’s] quality control measures.”139

In that case, the absence of a written agreement “with provisions restricting or monitoring the quality of goods or services produced under a trademark support[ed] a finding of naked licensing.”140 And since there was no evidence of actual control through inspection or supervision, the court rejected the licensor’s contention that various “standards” such as its incorporation of the Yahoo! Groups’ service terms or its “etiquette guidelines” on its website, by way of example, demonstrated that it had exercised control over the trademarks.141 The Ninth Circuit noted that control in the trademark context concerns maintaining consistent quality of goods or services, and that quality controls must be enforced. The court acknowledged that licensing agreements have been upheld where the licensor is familiar with and relies upon the licensee’s own quality control efforts, but this requires that the licensor and licensee be in a “close working relationship,” including, for example, working with each other for many years.142

At the other end of the spectrum, licensors must also be careful not to exercise too much control over the operations of the licensee.143 If the level of control is deemed “significant,” such as requiring the licensee to follow specified operating procedures or to purchase ingredients from designated suppliers, then the license may be construed as a franchise agreement, subjecting the licensor to stringent federal and state franchise rules, as well as potential penalties for failure to comply with those rules.144 Advice from a franchise-law expert in connection with any planned license is recommended. High levels of control may also implicate national laws regulating anti-competitive behavior.

In short, in both the domestic and international contexts, especially when the geographic and cultural distances are such that day-to-day exchanges and monitoring by the licensor of the licensee’s goods is difficult, it is crucial to build into the license agreement an appropriate level of quality control, with specific benchmarks in the event that the parties agree that they are reasonable and that the parties are likely to meet them and not be in breach. Provisions pertaining to quality control frequently include:

■ Retention of approval rights prior to, during, and after manufacturing, sale, and use;

■ Reservation of the right to disapprove of any or all products not complying with the “standards of manufacturing” or “established as the standard in the industry or trade for the licensed products;”

■ Approval of all (or new) channels of distribution;

■ The right to audit manufacturing facilities and perform periodic quality control checks, including of advertising and marketing of licensed products;

■ Required approval of pre-production samples and post-production samples;

■ Compliance with specific grade and quality of materials to be used;



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■ Specification of dates certain by which the licensee should submit all samples, to whom they should be submitted, and by when approval will be given;

■ Reservation of the right to require the licensee to recall any/all products if they do not meet requirements in the license agreement;

■ Reservation of the right to monitor the licensee’s sales activity and distribution, including Internet activity;

■ Reservation of the right to review employee complaints;

■ Reservation of the right to inspect the factory at which the products are being made at any given point in the production and distribution process; and

■ Require that remedial action be taken for any breach of the foregoing provisions.

It is important for a licensor to keep a watchful eye on the manufacture of licensed products not only to ensure quality but also to maintain fundamental control over the license arrangement and compliance with regulatory requirements. In addition to general provisions mandating that licensed products be manufactured, sold, marketed, and advertised in compliance with the law generally and in keeping with certain standards, specific provisions may be created to ensure compliance with a litany of regulations, including those governing child labor, prison labor, product and consumer safety, recycling costs, wages, human rights, discrimination, environmental regulations, animal testing, and others.

The following is a sample of an effective compliance provision:

(a) Licensee represents and warrants that it will at all times comply with all federal, state, and local laws, regulations, rules and guidelines, including but not limited to product safety, food, health, drug, cosmetic, sanitary, or other similar laws and all voluntary industry standards relating or pertaining to the design, manufacture, promotion, advertising, distribution, sale, or use of the Licensed Product(s). Licensee shall comply with any regulatory agencies that have jurisdiction over Licensed Product(s) and shall obtain and maintain in effect any and all certifications, permissions, or authorizations from any applicable authorities that may be required in relation to the Licensed Product(s) and Licensee’s manufacture, marketing, distribution, sale, and use thereof. Licensee also represents and warrants that each Licensed Product and component thereof and all packaging and promotional materials relating thereto, manufactured, disposed of, marketed, sold or distributed under this Agreement, shall comply with all applicable laws, regulations, guidelines, rules, and voluntary industry standards, including without limiting the generality of the foregoing, the Consumer Products Safety Act, the Federal Hazardous Substance Act, the Federal Food, Drug and Cosmetic Act, the Foreign Corrupt Practices Act and all similar state and local laws and relevant industry standards (all of which as set forth in this Section shall be referred to collectively as the “Laws, Regulations, and Standards”).

(b) Licensor is committed to the advancement of fair, decent, and humane working conditions throughout the world, not only in Licensor’s manufacturing plants but also in the manufacturing facilities of its suppliers and trademark licensees. As such,


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Licensee shall comply with, and shall cause its approved third-party manufacturers, distributors, and suppliers to comply with the __________ which may be modified by Licensor in its sole discretion from time to time during the Term. In addition to, and without limiting the generality of the foregoing, Licensee and its approved third-party manufacturers, distributors, and suppliers shall make no use of child, prison, or slave labor, nor shall Licensee engage in any unfair labor practice or violation of human rights. Licensee and its third-party manufacturers, distributors, and suppliers shall certify their compliance with this Section by providing a sworn declaration of an officer, director, or managing agent of Licensee and such manufacturers, distributors, and suppliers at the Effective Date and on or before the last day of February of each year during the Term of this Agreement.

Once quality-control provisions have been established, both parties typically benefit from instituting a system to track compliance. In addition to tracking compliance with quality standards and regulatory regimes, it is important for a licensor to monitor a licensee’s quantity of production. A number of licensors employ third-party labels or other detection devices to validate the quantities of licensed products manufactured by their licensees. These labels not only help verify the amounts produced, but also help with brand enforcement. Such labels or coding can likewise be useful as part of a licensor’s control of the quality of products sold under its mark.

The following is a list of current trends in quality-control and monitoring:

■ Customs registration;

■ Accessible Uniform Brand/Style Guides;

■ Accessible and updated Brand News;

■ Streamlined Approval Process (online);

■ Searchable Agreement terms database;

■ Automated Royalty tracking and reporting; and

■ Automated product tracking for source, shipping, distribution, and consumers.

New technology can assist with quality control, monitoring, and enforcement. For example:

■ Brand Protection—proprietary marking technology via overt, covert, and forensic security elements contained within a hang tag or label (e.g., electronic authentication; QR codes);

■ Consumer Engagement—consumer authentication website that engages the consumer with e-gifts, sweepstakes, rewards points, and the like;

■ Consumer Data Capture—Learn more about consumers and their view of the brand through online surveys (privacy issues, opt-in); and

■ Royalty Enforcement—Markings can be used as a tool to audit licensee royalty reporting.



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Technology is playing a larger role in enforcement. In 2009, the Second Circuit affirmed a lower court’s preliminary injunction order against a drug-store chain that was selling fragrance products from which the unique production code (“UPC”) on the bottom of each fragrance bottle had been removed.145 The court found that removing the UPCs interfered with the trademark owner’s rights by “interfering with the trademark owner’s ability to identify counterfeit goods and to control the quality of its legitimate products by identifying and recalling defective products.”146 Removal of the codes interfered with the owner/licensor’s trademark rights “regardless of whether the goods were originally authorized by Davidoff for sale in the United States or elsewhere.”147 A trademark owner has a duty and a right to control the quality of products offered under its mark, and interfering with its quality control measures constitutes trademark infringement.148 The quality assurance and anti-counterfeiting program carried out by the parties in this case is an excellent example of a highly effective and thorough quality-control system.

Auditing is another form of control that the licensor can exert in order to monitor quality in manufacturing and compliance with the license obligations. An audit of a licensee’s books and manufacturing logs, or other documents and evidence bearing on the license, is something a licensor should never feel reluctant to mandate and request. For example, audits can disclose crucial underpayments of royalties or other key inconsistencies in reporting. Audit provisions are, admittedly, often touchy topics, and legitimate concern may exist about being too intrusive, creating mistrust, and interfering with the licensing operation. Nevertheless, effective auditing is crucial to maintaining a licensing relationship, and not merely a useful vehicle to ensure the licensee is in compliance with its license obligations. Usually audits make the relationship stronger and contractual obligations clearer, as they provide for more open communication between licensor and licensee.

The following is a sample audit-of-manufacturing provision:

(a) In addition, upon Licensor’s request, Licensee shall engage, at Licensee’s expense, an independent third party auditing firm reasonably acceptable to Licensor to inspect and audit any of the manufacturing facilities for the Licensed Products to determine whether such facilities comply with the provisions of this Agreement. Licensor, directly or through an independent agent, shall also have the right to engage in reasonable inspections of each manufacturing facility in which the Licensed Products are made by or for Licensee, without notice to Licensee, to ascertain Licensee's compliance with this Section. In the event Licensor or its agents discover any non-compliance with this Section, Licensee shall, in addition to any other rights and remedies available to Licensor at law or inequity, pay Licensor for all of the costs of such inspection. Breach of this Section shall result in immediate termination of this Agreement, unless Licensor, in its discretion, permits Licensee to cure the breach following notice.

Quality control is imperative in any trademark license agreement, and is a provision that cannot be overlooked.


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4. Indemnification

It is standard for a trademark license to include an indemnification provision whereby each party agrees to indemnify the other for the risks associated with licensing. However, vast disparities exist in how the parties draft these provisions.

The preferred practice is to make clear that any duty to indemnify is based on prompt notification of any claim or threatened claim, and to contractually limit the indemnitee from trying to “solve” the problem itself. Depending on the parties’ respective leverage, a licensor generally will want to retain the right to select counsel in any case where it must indemnify the licensee, and to control the defense and/or settlement of the case. In the case of a start-up brand, however, the licensee may wish to retain this right, or at a minimum retain the option to secure its own counsel, at its own expense, because the start-up licensor may not have the means to retain adequate counsel. Accordingly, the common presumption that each party should have the same or equal indemnity rights is not always true.

The following a sample indemnity provision that tries to balance the parties’ competing interests:

Each party (“Indemnitor”) shall defend, indemnify, and hold harmless the other party and its past, present, and future affiliates, officers, directors, shareholders, managers, members, agents, attorneys, consultants, and employees (hereinafter “Indemnitee”) against any and all claims, demands, fines, losses, costs, expenses (including, but not limited to, reasonable attorneys’ fees, costs of investigation and settlement costs), liabilities, and damages (collectively, “Damages”) arising directly or indirectly from, as a result of, or in connection with (i) any defects in the material or workmanship of any of the Licensed Products provided under this Agreement (in which case, Licensee shall be the Indemnitor), (ii) Licensee’s use of any of the Licensed Trademarks of any of the materials provided by the Licensor for use by Licensee in accordance with the terms of this Agreement (in which case Licensor shall be the Indemnitor), or (iii) Indemnitor’s breach of its covenants, duties, obligations, representations or warranties under this Agreement.

Indemnitee shall give Indemnitor written notice of any such action, claim or proceeding and Indemnitor shall then take all action to defend such action, claim or proceeding on behalf of Indemnitee. In the event appropriate action is not taken by Indemnitor within thirty (30) days after its receipt of notice from Indemnitee, or fifteen (15) days after the service of a summons and/or complaint in a civil action from Indemnitee, Indemnitee shall have the right to defend such action, claim or proceeding, and Indemnitor shall reimburse Indemnitee promptly for all reasonable costs and expenses incurred by Indemnitee in connection therewith, provided that no settlement thereof may be made without the approval of Indemnitor. In either case, Indemnitee and Indemnitor shall keep each other fully advised of all developments, shall provide each other with copies of all documents exchanged, and shall fully cooperate with each other in all respects in connection with any such defense as the same is made.



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5. Enforcement

In trademark-license agreements, especially those involving international trademarks or entities, parties often agree to use their best efforts to resolve disputes arising from the license arrangement. If such efforts are unsuccessful, they frequently agree to then seek mediation, and only when that has not succeeded do they resort to litigation in court or arbitration. The parties may choose a neutral venue for a choice of law provision (e.g., New York or London), and they often choose a neutral venue for the location of the tribunal that will govern potential future disputes.

License agreements often mandate use of the American Arbitration Association (“AAA”) or the International Chamber of Commerce (“ICC”) and their respective rules to resolve disputes, but trademark license agreements may rely on The World Intellectual Property Organization (“WIPO”) or The International Trademark Association’s Panel of Neutrals (“INTA”), the last being a mediation mechanism but staffed by knowledgeable trademark practitioners who could serve as arbitrators or mediators. Knowing that the arbiters of disputes will have some degree of familiarity with trademark concepts provides a degree of comfort to both parties. In addition to specifying the relevant body and rules, arbitration provisions in trademark-license agreements may also specify:

■ The choice of law;

■ Whether arbitration or mediation is mandatory or voluntary;

■ The location for the resolution;

■ The timeframe for completing the arbitration proceedings; and

■ The type of relief the arbitrators will have the power to award.

With respect to enforcement of an international license, US practitioners should bear in mind that if a dispute arises based on conduct outside the United States—even if the license selects US law as governing the contract—the trademark law of the local jurisdiction may still control. In the arbitration context, this means that it may be very difficult to enforce an injunctive decree in a jurisdiction that would not have issued such an injunction under its own law in the first instance.

The New York Convention, which many countries have signed (including China), attempts to resolve this issue, and in fact favors arbitration awards and injunctions over similar court orders.149 As noted, arbitration can be a very useful tool to resolve international licensing disputes.

While there is no easy fix to the enforcement issue and the selection of a forum for dispute resolution, parties are advised to agree expressly to abide by the rulings of an arbitrator without the need for the prevailing party to file a motion to enforce the arbitration award in the local courts, and to specify that any arbitration award automatically becomes integrated into the contract. Depending on the exact parameters of the license, it might be in the parties’ best interests to consent to the jurisdiction of the US courts to enforce any arbitration award; if the licensee has assets in the United States, then it will be easier to enforce a money judgment in the United States. If the licensee only has assets abroad, then an enforcement proceeding will likely be necessary in the local courts to collect a money award or to enforce an injunction.

This discussion does not foreclose the tried-and-true option to have disputes resolved in the courts. One should seriously consider the provision noted earlier which allows the parties to use


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courts in situations where emergency injunctive relief is necessary to remedy a breach or an infringement.

Arbitration could be fashioned to address this situation, and many practitioners usually insert provisions that require a party seeking emergency relief to remedy a material breach or an egregious infringement in the local courts. The justification for this carve-out provision is that courts are able to provide more effective, efficient, and broader injunctive relief than would be granted in an arbitration setting.

6. Termination Rights

The termination of any license agreement is never an easy topic to negotiate, but both parties know they must address it. Termination provisions for a material breach of specific license terms (e.g., failure to pay or improper use of the licensed mark) are common. From the licensor’s perspective, it is desirable to obligate the former licensee to refrain from contesting, or assisting others in contesting, the validity or strength of the licensor’s marks once the license is terminated. After all, the former licensee may have information concerning the licensor’s enforcement practices (or the lack thereof), or the licensors’ failure to truly exercise any quality control. Although the doctrine of licensee estoppel (which is relevant in the United States and certain other jurisdictions) should prevent the licensee from directly attacking the licensor’s rights, it is preferable to memorialize these termination obligations in the agreement to avoid any ambiguity in the application of that doctrine.

In some instances, either party may have an interest in continuing to identify that it had a relationship with the other party. This is especially true if the licensor was a celebrity or a famous brand to whom the licensee may want to reference in its general marketing material. Although the doctrine of nominative fair use may provide some cover for making such a reference, it is preferable to address this issue explicitly in the termination provision. It is common practice for a licensor to prohibit any use of the licensed trademark by the licensee after termination. In other circumstances, however, the former licensee may have an interest in ensuring that it can use the formerly licensed trademark in its own promotional materials to simply state that it is a former licensee of the brand.

7. Sell-Off Periods

A sell-off provision is found in most licenses, and it usually inures to the benefit of the licensee, as it permits the licensee to sell off inventory in its possession even after expiration or termination of the license. This provision also can benefit the licensor in that it may result in making sure there is continuity in supply of licensed products until the new licensee can “ramp up” and supply the marketplace.

What becomes crucial for this relatively standard provision is to ensure that the parties can exert their greatest respective control over the sell-off before it happens—that is, to make sure the terminated licensee does not have too much inventory so it can get out of the market sooner, thereby enabling a new licensee (with arguably more favorable terms) to supply the marketplace as soon and as completely as possible.



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One way to accomplish this feat is to make sure the sell-off period is short, or completely eliminated, if the license is terminated for a material breach. Another way to exert this kind of control is with a carefully crafted wind-down provision that really benefits both parties. Such a provision anticipates the expiration or termination of the license term, and specifies that the licensee (if it does not intend to renew and is in the last year of the term) should only order a specified amount of licensed products to satisfy orders for the last season. This helps the licensee plan for the termination, and it also helps the licensor sign up a new licensee. It is also useful from the licensor’s perspective to add in a non-renewal caveat in the provision which expressly provides that, in the event the licensee does not renew, the licensor may seek out new licensees and negotiate a new license even before the old license or the sell-off period expires. A sample wind-down provision follows:

Wind-Down Period. If the parties do not enter into a Renewal Term, (a) the last season for which Licensee may manufacture and sell Licensed Products is ____ 20__; (b) Licensee shall not manufacture Licensed Products during the last nine months of the Initial Term in excess of the amount Licensee reasonably anticipates will be sold prior to the expiration of the Initial Term; and (c) Licensee acknowledges that, notwithstanding the rights granted in this Agreement, during the last six months of the Term, Licensor may grant to a third party licensee the right to develop and begin manufacturing Licensed Products and preparing for the distribution of the Licensed Products in the Territory, provided that such third party may not distribute, advertise to the public, or sell such Licensed Products until the expiration of the Term.

8. Implications of Bankruptcy

Although the following discussion focuses on the implications of bankruptcy in the United States, it is important for licensing parties to keep in mind that license provisions detailing the implications of bankruptcy on a license can have important international ramifications. Competing national provisions concerning parties in bankruptcy and public-policy considerations often come into play in these situations. In Argentina, for example, if a provision states that the license agreement will terminate upon one party declaring bankruptcy or filing a petition for insolvency proceedings, then a bankruptcy judge in Argentina nevertheless retains the discretion to order specific performance of the license agreement if the judge considers that the bankruptcy-driven termination provision runs contrary to public policy.150

a. The Licensee’s Perspective

A trademark licensee is significantly disadvantaged if the licensor files for bankruptcy protection. The US Bankruptcy Code provides important protections to licensees of certain types of IP, but these protections do not extend to trademark licensees. Thus, the general rules that apply in bankruptcy to most other types of contracts also apply to trademark licenses. The commonly applied rule for approval of a debtor’s rejection of a contract is the easily satisfied business-judgment standard. The licensee has little say about the matter. Historically, upon rejection, the licensee is stripped of use of the trademark, leaving the licensee to file a bankruptcy claim for damages against the debtor licensor. Such claims are often worth little or nothing, and fall woefully short of adequately compensating the trademark licensee for the damage to its ongoing


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business. Of course, if the debtor trademark licensor assumes in the bankruptcy case the trademark license, then all is well for the non-debtor trademark licensee, and the license continues in effect according to its terms without impact from the bankruptcy case.

Licensees’ efforts to preserve their bargained-for trademark rights in a licensor’s bankruptcy case were recently reinvigorated by the Third Circuit in In re Exide Technologies.151 The Third Circuit put the brakes on blindly applying the traditional approach to a debtor licensor’s request to reject a trademark license. Reversing both the Bankruptcy Court and District Court, the Third Circuit found the trademark license in Exide could not be rejected by the debtor licensor. Furthermore, in a concurring opinion, the Third Circuit suggested that the even if the license could be rejected by the debtor, such a rejection should not deprive the non-debtor licensee of the continued right to use the trademark.

The Exide opinion provides new hope in bankruptcy cases for non-debtor licensees in the absence of the debtor licensor assuming the trademark license. On the other hand, the Exide opinion also leaves unanswered certain questions. One important question arises in the context of a rejected exclusive license. If the Third Circuit’s concurring opinion is applied and the non-debtor licensee is allowed continued use of the trademark after rejection by the debtor licensor, does the non-debtor licensee then retain exclusive use of the trademark? Allowing the non-debtor licensee to retain exclusive use would be the result contemplated by the Bankruptcy Code in the case of a rejected patent or copyright license. But the Bankruptcy Code specifically excludes trademarks from its IP protections, and at a minimum rejection relieves the debtor licensor of its obligations under the trademark license, presumably freeing the debtor from any exclusivity provisions and allowing the debtor to license the trademark to others.

The Exide opinion is not a panacea for trademark licensees. Trademark licensees should still consider other methods to protect their interests in the event of a licensor bankruptcy. Such protections include the licensee taking a security interest in licensor’s trademark assets, creating a disincentive for the debtor licensor to reject the license. Alternatively, the licensee can consider modeling its license on the facts present in the Exide case, such as combining the trademark license with other components of a larger deal, or prepaying for the license. The risk in prepaying is that the court may nevertheless still find that the license is executory, and allow the debtor licensor to reject the agreement, possibly resulting in a situation where not only has the non-debtor licensee lost the prepayment amount, but the licensee could also lose the right to continued use of the trademark in jurisdictions that do not follow the concurring opinion in Exide.

b. The Licensor’s Perspective

A trademark licensor can seek to prevent a debtor licensee from continuing use of or realizing value from a trademark license. This argument’s success rests upon a determination that the Lanham Act prohibits a licensee from transferring a trademark license in the absence of the licensor’s consent. The root of the argument lies in an exception to the Bankruptcy Code’s general rule that a contract is freely assignable by a debtor, invalidating most anti-assignment provisions in the contract. The exception to this rule is that an agreement is not assignable by the debtor if applicable non-bankruptcy law does not allow for assignment, absent consent of the non-debtor party. This provision can have two major ramifications for a debtor trademark licensee. First, if the debtor’s business is not in a position to continue use of the trademark, then the debtor may be prohibited from otherwise realizing value from a sale of the license. Second, in some jurisdictions, if the debtor is unable to assign the trademark license to a third party, then the debtor will also be



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prohibited from assuming the license for its own continued use, potentially destroying some or all of the value of the debtor’s reorganization efforts.

Both the Seventh and Ninth Circuits have held that, as a matter of applicable non-bankruptcy law, trademark licenses are personal and non-assignable without the consent of the licensor.152 This holding comports with the treatment in bankruptcy of non-exclusive patent and copyright licenses. Although exclusive patent and copyright licenses are typically assignable by a debtor licensee, cases do not always distinguish between exclusive and non-exclusive trademark licenses, leaving the door open for the non-debtor licensor to argue that the debtor can assign neither a non-exclusive nor an exclusive trademark license.

Where a non-debtor licensor is allowed to block the debtor licensee’s attempts to assign the license to a third party, the non-debtor licensor may even be able to block the debtor licensee’s continued use of the trademark license. The majority of jurisdictions to address the issue interpret the Bankruptcy Code to provide that where a contract, as a matter of applicable non-bankruptcy law, is incapable of assignment absent the licensor’s consent, the debtor is also prohibited from assuming the trademark license for its own continued use.

The United States Supreme Court, in denying certiorari in N.C.P., identified the importance of resolving the issue of a debtor not being allowed even to continue using a trademark license (as well as patent and copyright licenses) where the debtor is not allowed to assign the license to a third party.153 Circuit and lower courts are split in applying one of two tests to determine if a debtor is allowed to continue using a non-assignable agreement. The majority of jurisdictions addressing the issue apply the “hypothetical test.” The hypothetical test means that a debtor may assume an agreement only if the debtor has the hypothetical right to assign the agreement, regardless of whether the debtor intends to assign the agreement or keep the agreement for its own use. A minority of jurisdictions to address the issue apply the “actual test.” The actual test means that a debtor may assume an agreement if it has no actual intention of assigning the agreement to a third party, regardless of whether the agreement is assignable under applicable non-bankruptcy law.154

9. Remedies for Default or Breach

Most licenses contain the typical remedies for breach, namely that the licensor is entitled to an injunction, and perhaps damages resulting from the licensee’s breach activity. A common provision is that the licensee is required to pay a certain amount of the obligated minimum guaranteed royalty to the licensor. The negotiation in this regard usually centers around how much of the minimum should be paid. Regardless of what amount is agreed upon, the parties should consider expressly stating whether this amount is a liquidated-damages amount. By providing for liquidated damages, the parties avoid having to litigate over the amount owed due to any breach. Such a provision would not obviate the other necessary non-monetary remedies for injunction or recall that may be required in certain instances. Ample case law supports the use of liquidated damages provisions in licensing arrangements, and such provisions are increasingly found in trademark-license agreements due to their cost-saving function in the event that litigation or other enforcement is required.155


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VI. Conclusion Global IP licensing is virtually certain to continue to grow as technological innovation, coupled with increasing interconnectivity, provides businesses with increased opportunities for global exploitation of their patents, brands, trade secrets, and copyright interests. As this growth continues, licensing will continue to become an even more important strategy for leveraging companies’ opportunities to increase market position and revenue. Because IP licensing carries the capacity to be an enormous revenue generator or a substantial source of liability, practitioners will serve their clients best by carefully considering the areas of potential benefits and pitfalls associated with each subject matter discussed in this article. Licenses involving patents, trade secrets, trademarks, and copyrights each have unique sets of issues to explore and strategies to consider, and every license agreement should be diligently analyzed in light of a client’s particular circumstances and objectives. The practices and experiences discussed here have been intended to provide a starting point for evaluating potential licenses. It is our hope that the issues discussed will add insight to structuring, negotiating, and assisting clients with making decisions respecting all manner of IP license agreements, bearing in mind that the areas addressed and insights offered here are most properly viewed as a starting point rather than a destination in practitioners’ work to ensure the realization of their clients’ goals and the long-term success of their clients’ intellectual property portfolios.



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VII. About Kilpatrick Townsend & Stockton LLPand the Authors

A. Kilpatrick Townsend & Stockton LLP Kilpatrick Townsend has nearly 630 attorneys in 18 offices throughout the United States; Asia; and Europe, including: Atlanta, GA; Augusta, GA; Charlotte, NC; Denver, CO; New York, NY; Oakland, CA; Palo Alto, CA; Raleigh, NC; San Diego, CA; San Francisco, CA; Seattle, WA; Walnut Creek, CA; Washington, DC; Winston-Salem, NC; Dubai; Stockholm; Taipei; and Tokyo. Offering the full range of services, Kilpatrick Townsend is one of the few general practice firms with a core commitment to intellectual property law. With 300 attorneys devoted to IP law, Kilpatrick Townsend offers clients experience and talent that exceed even the most well-known boutique firms. For more information, please visit: www.kilpatricktownsend.com.

B. Authors ■ Audra A. Dial -

http://www.kilpatricktownsend.com/en/Who_We_Are/Professionals/D/DialAudraA11245.aspx

■ Marc A. Lieberstein -http://www.kilpatricktownsend.com/en/Who_We_Are/Professionals/L/LiebersteinMarcA14665.aspx

■ R. Gwen Peterson -http://www.kilpatricktownsend.com/en/Who_We_Are/Professionals/P/PetersonRGwen14946.aspx

■ James A. Trigg -http://www.kilpatricktownsend.com/en/Who_We_Are/Professionals/T/TriggJamesA1188.aspx

■ Andrew W. Pequignot -http://www.kilpatricktownsend.com/en/Who_We_Are/Professionals/P/PequignotWAndrew13349.aspx

■ Charles H. Hooker III -http://www.kilpatricktownsend.com/en/Who_We_Are/Professionals/H/HookerIIICharlesH13008.aspx

http://www.kilpatricktownsend.com/en/Who_We_Are/Professionals/D/DialAudraA11245.aspx

http://www.kilpatricktownsend.com/en/Who_We_Are/Professionals/L/LiebersteinMarcA14665.aspx

http://www.kilpatricktownsend.com/en/Who_We_Are/Professionals/P/PetersonRGwen14946.aspx

http://www.kilpatricktownsend.com/en/Who_We_Are/Professionals/T/TriggJamesA1188.aspx

http://www.kilpatricktownsend.com/en/Who_We_Are/Professionals/P/PequignotWAndrew13349.aspx

http://www.kilpatricktownsend.com/en/Who_We_Are/Professionals/H/HookerIIICharlesH13008.aspx


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VIII. Additional Resources

A. ACC Docket “Critical Components in IP Licensing,” ACC Docket 29, no. 7 (Sept. 2011): 124-26, available at http://www.acc.com/legalresources/resource.cfm?show=1289954.

B. Forms & Policies “Copyright and Trade Secret License Agreement,” ACC Form & Policy (Feb. 2006), available at http://www.acc.com/legalresources/resource.cfm?show=13057.

“Trademark Licensing Agreement,” ACC Form & Policy (Feb. 2004), available at http://www.acc.com/legalresources/resource.cfm?show=13849.

“Patent and Technology License Agreement,” ACC Form & Policy (Mar. 2004), available at http://www.acc.com/legalresources/resource.cfm?show=13937.

C. Program Materials “Understanding Licensing Agreements,” ACC Presentation (May 2004), available at http://www.acc.com/legalresources/resource.cfm?show=1282589.

“Licensing from the Licensor's Perspective,” ACC Presentation (Dec. 2007), available at http://www.acc.com/legalresources/resource.cfm?show=19909.

“Joined at the IP: A Practical Guide to Joint Collaboration/Development Deals,” ACC Presentation (Dec. 2006), available at

http://www.acc.com/legalresources/resource.cfm?show=20164.

“Negotiating IP Contracts: Tips and Perspective on Topics Ranging from Joint Ventures to IP Indemnity,” ACC Presentation (Oct. 2010), available at http://www.acc.com/legalresources/resource.cfm?show=1238532.

“International Licensing of IP,” ACC Presentation (Oct. 2012), available at http://www.acc.com/legalresources/resource.cfm?show=1322954.

D. Articles Jaime Delgado & Arturo Reyes, “Intellectual Property Licensing (Mexico),” ACC Article (Aug. 2005), available at http://www.acc.com/legalresources/resource.cfm?show=16053.

Andrew D. Price, “Nonprofits: Don't Get Caught Naked (Licensing),” ACC Article (Mar. 2011), available at http://www.acc.com/legalresources/resource.cfm?show=1278315.

E. ACC QuickCounsel “Licensing Fees in Technology Agreements,” ACC QuickCounsel (Mar. 23, 2012), available at http://www.acc.com/legalresources/quickcounsel/lfita.cfm.

“Protecting Your Intellectual Property—Monitoring Licensees’ Use of Your Trademarks in Advertising Claims,” ACC QuickCounsel (Jan. 1, 2012), available at http://www.acc.com/legalresources/quickcounsel/pripmluoytiac.cfm.



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F. ACC InfoPAK “Intellectual Property Primer - Patents, Trademarks, Copyrights, and Trade Secrets - An Introduction to Intellectual Property for In-House Counsel in a Global Dimension 4th

Edition,” ACC InfoPAK (Sept. 2012), available at http://www.acc.com/legalresources/resource.cfm?show=19676.


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IX. Endnotes 1 Tony Lisanti, “Top 125 Global Licensors,” May 10, 2012, available at http://www.licensemag.com/license-global/top-125-global-licensors-0. 2 Gary Moss, “Success of Trademarks and Licensing Program Translates into Financial Support for Students,” March 19, 2013, available at http://gazette.unc.edu/2013/03/19/success-of-trademarks-and-licensing-program-translates-into-financial-support-for-students/. 3 See Tony Lisanti, “Licensing Industry Annual Report: The Future Looks Brighter,” Oct. 1, 2009, available at http://www.pharmtech.com/pharmtech/article/articleDetail.jsp?id=631632. 4 See The Chronicle of Higher Education, “Licensing Revenue and Patent Activity, 2009 Fiscal Year,” December 17, 2010, available at https://chronicle.com/article/Table-Licensing-Revenue-and/125729/ (last visited May 15, 2013). 5 See supra note 3. 6 Lisanti, “Top 125 Global Licensors,” May 10, 2012, available at http://www.licensemag.com/license-global/top-125-global-licensors-0. 7 Id. 8 35 U.S.C. §154(1). 9 See Corebrace LLC v. Star Seismic LLC, Case No. 2008-1502 (Fed. Cir. 2009). 10 See In WiAV Solutions LLC v. Motorola, Inc., No. 2010-1266 (Fed. Cir. 2010). 11 Id. (The licensee had standing to assert rights in several patents, despite the fact that other third parties also had a limited right to license the patents in the licensee’s alleged exclusive field of use). 12 See 35 U.S.C. §204. 13 See 35 U.S.C. §202(c)(4). 14 See 35 U.S.C. §203. 15 As a cautionary note, a sublicense agreement that grants license rights to a company and its “subsidiaries” can be tricky. Any such agreement should specify the companies that fall in the “subsidiary” group. If the agreement simply defines “subsidiaries” as companies in which the sublicensee “now or hereafter” may have a certain percentage ownership interest, then courts may allow companies to “join” the subsidiary group even after the sublicense agreement itself terminates—and, hence,

receive the protections of any sublicense rights that survive termination of the underlying agreement. See Imation Corp. v Koninklijke Philips Electronics N.V., U.S., Nos. 2009-1208, 2009-1209 (Fed. Cir. 2009). This type of unintended result can be economically significant for the sublicensor, who is precluded from collecting royalties from would-be infringers who suddenly fall under the protections of the sublicense grant. In most cases, this type of scenario can be avoided through careful drafting. 16 35 U.S.C. §262. 17 See, e.g., Ethicon v. U.S. Surgical Corp., 135 F.3d 1456 (Fed. Cir. 1998). 18 See, e.g., id.; see also Schering Corp. v. Roussel-UCLAF SA, 104 F.3d 341 (Fed. Cir. 1997). 19 See 11 U.S.C. §365(n). 20 11 U.S.C. § 365(n)(1)(B). 21 See In re Qimonda AG, Case No. 09-14766 (Bankr. E.D. Va. 2011). 22 17 U.S.C. § 106. 23 See Kennedy v. Nat’l Juvenile Detention Ass’n, 187 F.3d 690, 695 (7th Cir. 1999) (license that granted the right to “reproduce, publish, and use” copyrighted material included the right to prepare derivative works in the context of the agreement). 24 See, e.g., Kepner-Tregoe, Inc. v. Vroom, 186 F.3d 283, 286-87 (2d Cir. 1999) (finding that exclusive licensor exceeded the scope of license-back provision and thus was liable for copyright infringement). 25 17 U.S.C. § 501(b). 26 6 William F. Patry, PATRY ON COPYRIGHT § 21:25 (2013) (referring to this as the “classic” example of a beneficial copyright holder). 27 See Kennedy v. Nat’l Juvenile Detention Ass’n, supra note 23. 28 Boosey & Hawkes Music Publishers, Ltd. v. Walt Disney Company, 145 F.3d 481 (2d Cir. 1998) 29 Id. at 485-88. 30 Random House, Inc. v. Rosetta Books LLC, 150 F. Supp. 2d 613 (S.D.N.Y. 2001). 31 Id. at 620-24. 32 See 17 U.S.C. § 106A. 33 17 U.S.C. § 106A(e).



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34 See, e.g., Charter Commc’ns VI, LLC v. Eleazer, 412 F. Supp. 2d 588, 597 (S.D. W. Va. 2006). 35 See Graham v. James, 144 F.3d 229, 237 (2d Cir. 1998) (applying New York law). 36 Jacobsen v. Katzer, 535 F.3d 1373 (Fed. Cir. 2008). 37 Id. at 1380. 38 Id. at 1381-82; see also MDY Indus., LLC v. Blizzard Entm’t, Inc., 629 F.3d 928 (9th Cir. 2011) (defining a condition as “an act or event that must occur before a duty to perform a promise arises”). 39 17 U.S.C. § 109. 40 Vernor v. Autodesk, Inc., 621 F.3d 1102, 1111 (9th Cir. 2010) (resale of used Autodesk software on eBay deemed infringing). 41 UMG Recordings, Inc. v. Augusto, 628 F.3d 1175, 1180 (9th Cir. 2011) (distinguishing Vernor and permitting the resale of promotional CDs distributed to record stores). 42 See Kirtsaeng v. John Wiley & Sons Inc., 133 S. Ct. 1351, 1354-56 (2013). 43 See 17 U.S.C. § 504(c). 44 See 17 U.S.C. § 201(b). 45 Cmty. for Creative Non-Violence v. Reid, 490 U.S. 730, (1989). 46 17 U.S.C. § 101. 47 2 William F. Patry, PATRY ON COPYRIGHT § 5:7 (2013). 48 See Crispin v. Christian Audigier, Inc., 839 F. Supp. 2d 1086, 1096-97 (C.D. Cal. 2011) (right to sublicense was a triable issue of fact that could not be resolved on summary judgment). 49 See In re Patient Educ. Media, Inc., 210 B.R. 237, 242-43 (S.D.N.Y. 1997). 50 See, e.g., In re Golden Books Family Entm’t, Inc., 269 B.R. 311, 316-18 (D. Del. 2001). 51 See, e.g., Gardner v. Nike, Inc., 279 F.3d 774, 779-81 (9th Cir. 2002) (finding exclusive copyright licenses only assignable with the consent of the licensor). 52 17 U.S.C § 103 53 Id. 54 See Schrock v. Learning Curve Int’l, Inc., 586 F.3d 513, 524-25 (7th Cir. 2009) (finding that the copyright licensee would be the owner of the derivative works created pursuant to the license absent an agreement between the parties to the contrary). 55 See Liu v. Price Waterhouse LLP, 302 F.3d 749, 755 (7th Cir. 2002) (finding developer had agreed that

derivative software program would be owned by the licensor). 56 2 William F. Patry, PATRY ON COPYRIGHT § 5:7 (2013). 57 17 U.S.C § 101 58 See 17 U.S.C. § 203. 59 See P.C. Films Corp. v. MGM/UA Home Video Inc., 138 F.3d 453, 457-58 (2d Cir. 1998) (enforcing perpetual copyright license). 60 See, e.g., Walthal v. Rusk, 172 F.3d 481, 485 (7th Cir. 1999). 61 See Automation By Design, Inc. v. Raybestos Prods. Co., 463 F.3d 749 (7th Cir. 2006) (license not terminable at will where the list of ways to terminate the license was exclusive). 62 17 U.S.C. § 203(a). 63 See Rano v. Sipa Press, Inc., 987 F.2d 580, 585-86 (9th Cir. 1993). 64 See Walthal v. Rusk, 172 F.3d 481, 483-85 (7th Cir. 1999) (rejecting Rano); Korman v. HBC Fla., Inc., 182 F.3d 1291, 1295 (11th Cir. 1999). 65 See Latin Am. Music Co. v. Am. Soc’y of Composers, Authors and Publishers, 593 F.3d 95, 100-01 (1st Cir. 2010). 66 See, e.g., Paramount Pictures Corp. v. Metro Program Network, Inc., 962 F.2d 775, 789 (8th Cir. 1992) (distinguishing between pre-termination and post-termination remedies for use of a copyrighted work). 67 See Mid-West Conveyor Co. v. Jervis B. Webb Co., 92 F.3d 992, 995 (10th Cir. 1996) (finding license was limited to the United States). 68 See, e.g., Fantastic Flakes, Inc. v. Pickwick Int’l, Inc., 661 F.2d 479, 482-483 (5th Cir. 1981) (Georgia law applied to interpretation of license). 69 Id. (noting that choice of law provision designating Georgia law did not extend to copyright claims). 70 See Promega Corp. v. Life Techs. Corp., 674 F.3d 1352, 1356-59 (7th Cir. 2012) (licensee required to arbitrate royalty dispute). 71 See In re Computer Commc’ns, Inc., 824 F.2d 725, 728-31 (9th Cir. 1987). 72 See Matrix Group Ltd., Inc. v. Rawlings Sporting Goods Co., 477 F.3d 583, 590-91 (8th Cir. 2007) (distinguishing between “equitable” insolvency and “balance sheet” insolvency). 73 See eBay Inc. v. MercExchange, LLC, 547 U.S. 388, 391 (2006).


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74 See, e.g., RealNetworks, Inc. v. DVD Copy Control Ass’n, Inc., 641 F. Supp. 2d 913, 953 (N.D. Cal. 2009). 75 See Muze, Inc. v. Digital On-Demand, Inc., 123 F. Supp. 2d 118, 132 (S.D.N.Y. 2000). 76 See, e.g., Lorin Brennan, Why Article 2 Cannot Apply to Software Transactions, 38 DUQ. L. REV. 459 (2000). 77 See generally Xuan-Thao Nguyen & Jeffrey A. Maine, Taxing Facebook Code: Debugging the Tax Code and Software, 60 BUFF. L. REV. 1 (2012). 78 See 17 U.S.C. § 102(a). 79 See 17 U.S.C. § 106. 80 See 17 U.S.C. § 114. 81 See 17 U.S.C. § 504(c)(2). 82 Lowry’s Reports, Inc. v. Legg Mason, Inc., 302 F. Supp. 2d 455 (D. Md. 2004). 83 Restatement (Third) of Unfair Competition (1995). 84 UTSA § 1(e). 85 The UTSA provides a mechanism to obtain injunctive relief for “actual” or “threatened” trade secret misappropriation. UTSA § 2. 86 UTSA § 1(c)(1). 87 UTSA § 1(b). 88 UTSA § 1(c)(2)(a). 89 UTSA § 1(c)(2)(c). 90 UTSA § 1(c)(2)(b). 91 UTSA §2. 92 UTSA §3. 93 UTSA §4. 94 Warner-Lambert Pharmaceutical Co. v. John J. Reynolds, Inc., 178 F. Supp. 655 (S.D.N.Y. 1959), aff’d, 280 F.2d 197 (2d Cir. 1960). 95 Id. at 665. 96 Id. at 666. 97 See, e.g., Boggild v. Kenner, 776 F.2d 1315 (6th Cir. 1985) (noting that once a patent issues, the patent holder could no longer enforce royalty provisions for trade secret rights which are indistinguishable from the patent rights). 98 UTSA §2. 99 UTSA §3. 100 UTSA §4. 101 See Ruckelshaus v. Monsanto Co., 467 U.S. 986, 1001-04 (1984).

102 See, e.g., In re Matusalem, 158 B.R. 514, 515 (Bankr. S.D. Fla. 1993). 103 3 J. THOMAS MCCARTHY, MCCARTHY ON TRADEMARKS AND UNFAIR COMPETITION, § 18:43 (4th ed. 2008). 104 See id. 105 Topps Co., Inc. v. Cadbury Stani S.A.I.C., 526 F.3d 63, 66, 68 (2d Cir. 2008). 106 Id. at 68. 107 15 U.S.C. § 1114. 108 See MCCARTHY supra note 103 § 27:21. 109 See 15 U.S.C. § 1063 (“Any person who believes that he would be damaged by the registration of a mark” may file an opposition); 15 U.S.C. § 1092 (“Whenever any person believes that he is or will be damaged by the registration of a mark . . . .” he may file a petition to cancel the registration.); see also MCCARTHY supra note 103 § 20:7. 110 See generally http://applications.inta.org/apps/cgs_presentation/full_report_results/?Referring_ProjectID=8&Referring_JurisdictionID=12&iso=12 (last visited Aug. 27, 2013). 111 In certain jurisdictions (e.g., Algeria, Armenia, Cambodia, China, Egypt, Hong Kong, India, Israel, Jordan, Kazakhstan, Malaysia, Oman, Philippines, Qatar, Paraguay, and Uruguay), a shorter-form extract is acceptable for recordation, provided it includes certain basic information. 112 See MCCARTHY, supra note 103, § 18.79 113 In re E.I. DuPont De Nemours & Company ,476 F.2d 1357, 1363 (C.C.P.A. 1973). 114 Nike, Inc. v. Already, LLC, 663 F.3d 89, 92 (2d Cir. 2011). 115 Id. at 98-99. 116 Already, LLC v. Nike, Inc., 133 S.Ct. 721, 732, 184 L.Ed.2d 553 (2013). 117 M. Lieberstein and R. Griffith, “How To Avoid the Franchise Surprise,” THE NAT’L. L. J., May 12, 2008. 118 In California, for example, a franchise exists where a brand owner exerts control over a licensee, a “marketing plan” has been prescribed by the brand owner, and the licensee pays a “franchise fee.” See Cal. Bus. & Prof. Code §§ 20000-20043; Cal. Corp. Code §§ 31000-31506. As in many other states, if the statutory elements are met, a franchise may be found to exist, even if a contract expressly states otherwise. Gabana Gulf Distrib. Ltd. V. Gap Int’l Sales Inc., No. C 06-02584, 2006 U.S. Dist. Lexis 59799, at *19-*20 (N.D. Cal. Aug. 14 2006).



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119 Calif. Bus. & Prof. Code § 20001 and 21005. 120 N.J.S.A. 56:10-3 – 4. 121 N.Y. Gen. Bus. Law § 681. 122 A version of this chart was previously published in Marc A. Lieberstein and Stephen W. Feingold, “Trademark Licensing From a Client’s Perspective,” INTELL. PROP. TODAY (2007), available at http://www.iptoday.com/articles/2008-1-lieberstein.asp. 123 For example, in Bolivia, Bulgaria, Ecuador, Greece, Iceland, Jamaica, Jersey, Kenya, Lithuania, Malta, Monaco, Pakistan, Paraguay, Peru, Poland, Russian Federation, Tunisia, and Turkey, one may use the following language for protection of “retail services:” The bringing together, for the benefit of others, of a variety of goods (excluding the transport thereof) enabling customers to conveniently view and purchase those goods. 124 For example, in China, where “retail services” per se are not registrable, a measure of protection can be provided by filing for service mark registration of a mark, using the following description: Sales promotion for others; presentation of goods on communication media, for retail purposes; administrative processing of purchase orders; advertising; business information; business management and organization consultancy; import-export agencies; personnel management consultancy; relocation services for businesses; issuing invoices; accounting; rental of vending machines. 125 For example, perpetual licenses are prohibited in Uruguay. 126 See Houbigant, Inc. v. IMG Fragrance Brands, LLC, 2009 WL 5102791, at *3 n.3 (S.D.N.Y. Dec. 18, 2009) (stating that a right of first refusal is “a right to receive an offer” (quoting Cipriano v. Glen Cove Lodge #1458, B.P.O.E., 1 N.Y.3d 53, 60, 801 N.E.2d 388 (N.Y. 2003))). 127 This includes prohibitions on licensing applications in Algeria, the Bahamas, Bolivia, Bulgaria, Cyprus, the Czech Republic, Egypt, Estonia, Indonesia, Israel, Kenya, Latvia, Malta, Monaco, Nigeria, Poland, Romania, Russian Federation, Slovakia, South Korea, Sri Lanka, Taiwan, Turkey, Venezuela, and Zimbabwe. 128 See Marc Lieberstein and Tywanda Harris Lord, “Licensing Your Brand in China: Guidelines for Brand Owners,” Intellectual Property Litigation (Fall 2010), a publication of the ABA Section of Litigation, Intellectual Property Litigation Committee. 129 Id. 130 Id. 131 See MCCARTHY supra note 103 § 18:48.

132 See Arthur Murray, Inc. v. Horst, 110 F. Supp. 678, 679-80 (D. Mass. 1953). 133 Susan Progoff, Trademark Licensing Appendix: Sample Licensing Provisions, in UNDERSTANDING THE INTELLECTUAL PROPERTY LICENSE 2007, at 141 (PLI Course Handbook Series No. 11389, 2007); see, e.g., Barcamerica Int’l USA Trust v. Tyfield Imps., Inc., 289 F.3d 589 (9th Cir. 2002); Stanfield v. Osborne Indus., Inc., 52 F.3d 867 (10th Cir. 1995). 134 U.S. federal law provides that: “[a] mark shall be deemed to be ‘abandoned’ . . . [w]hen any course of conduct of the owner, including acts of omission as well as commission, causes the mark . . . to lose its significance as a mark.” § 45 Lanham Act, 15 U.S.C. § 1127. 135 See, MCCARTHY, supra, note 103 § 18:48. 136 These include countries such as Algeria, Argentina, Australia, Barbados, Brazil, Brunei Darussalam, Canada, China, Costa Rica (if desired by the parties), Hungary, India, Indonesia, Italy, Jamaica, Japan, Kenya, Latvia, Malaysia, New Zealand, Nicaragua, Nigeria, Pakistan, Paraguay, Peru, Philippines, Poland, Russian Federation, Singapore, Slovenia, South Africa, Sri Lanka, Trinidad and Tobago, and Turkey, though this is not an exhaustive list. 137 Doeblers’ Pa. Hybrids, Inc. v. Doebler, 442 F.3d 812, 824 (3d Cir. 2006) (noting that defendant did not meet the high burden of proof for showing insufficient control). 138 FreecycleSunnyvale v. The Freecycle Network, No. 08-16382 (9th Cir. Nov. 24, 2010). 139 Id. 140 Id. 141 Id. 142 Compare with Henry v. Pro10 Originals, LLC, 698 F. Supp. 2d 1279, 1284-85 (D. Wyo. 2010) (finding that the licensee estoppel rule bars a licensee from asserting a naked license offense based on a licensor’s alleged failure to exercise quality control during the period of the license, a period in which the licensee was enjoying the benefits of the license). 143 Progoff, supra note 131. 144 Id. 145 See Zino Davidoff SA v. CVS Corp., 571 F.3d 238, 240 (2d Cir. 2009). 146 Id. at 242. 147 Id. at 243. 148 Id. at 242.


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149 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, June 10, 1958, 21 U.S.T. 2517, 330 U.N.T.S. 38 (commonly referred to as the “New York Convention”). 150 Ricardo Pinho, “International Licensing: South America,” The Licensing Journal (Aug. 2009) 30. 151 In re Exide Technologies, 607 F.3d 957 (3d Cir. 2010). 152 In re XMH Corp., 647 F.3d 690 (7th Cir. 2011); In re N.C.P. Marketing Group, Inc., 279 Fed.Appx. 561 (9th Cir. 2008), cert.denied; N.C.P. Marketing Group, Inc. v. BG Star Productions, Inc., 129 S.Ct. 1577 (2009). 153 N.C.P., supra note 150, at 1577-78. 154 Trademark licensors need to be wary of debtor licensee attempts to side-step the sometimes draconian results facing debtor licensees. One way for a licensee to try escape the detriment of a jurisdiction not even allowing assumption where assignment is not allowed is the relatively infrequent “ride through” scenario. This involves the debtor licensee reorganizing in bankruptcy, but not affirmatively assuming or rejecting the trademark license. The “ride through” approach is infrequently encountered and its efficacy has yet to be uniformly established, and a licensor can easily stymie this approach by asking the Bankruptcy Court to set a deadline by which the debtor has to seek to either assume or reject the trademark license. 155 See NPS, LLC v. Minihane, 451 Mass. 417, 423 (Mass. 2008) (parties agreeing “in advance to a sum certain that represents a reasonable estimate of potential damages, . . . exchange the opportunity to determine actual damages after a breach, including possible mitigation, for the ‘peace of mind and certainty of result’ afforded by a liquidated damages clause.”). See also Country Inns & Suites by Carlson, Inc. v. Interstate Props., LLC, 2009 WL 1298401 (11th Cir. May 12, 2009). Note that when a license agreement includes an enforceable liquidated damages provision, mitigation of damages is neither relevant nor required of the non-breaching party. See Oscar de la Renta, Ltd. v. Mulberry Thai Silks, Inc., 2009 WL 1054830 at *7 (S.D.N.Y. Apr. 17, 2009); Crown It Servs., Inc. v. Koval-Olsen, 11 A.D.3d 263, 266, 782 N.Y.S.2d 708, 712 (N.Y. App. Div. 2004); Delvecchio v. Bayside Chrysler Plymouth Jeep Eagle, Inc., 271 A.D.2d 636, 639, 706 N.Y.S.2d 724 (N.Y. App. Div. 2000).

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