PART LICENSING OF PATENTABSTRACTMany emerging growth companies face patent licensing issues. In particular, new life

science companies usually require the "in-licensing" of intellectual property that will

establish the essence of their company. Patent licensing raises a host of critical legal and

business issues that the company will need to address appropriately in order to ensure it

has the right level of protections as it approaches the marketplace. Later on, in the later

90’s the company owing patent started part licensing of it, “one patent and one thousand

licensee…….” became the method of getting maximum profit because now the royalty

and other money is coming from a number of user. Thus, it gets multiplied. Can this be

allowed from licensee’s point of view who paid high money to obtain the monopoly from

patent owner but later on, he disturbed his monopoly by granting the same sort of license

to others also? The purpose of project is to study answer these jurisprudential question

and test the legality of part licensing in IP regime. This article highlights several key

issues particularly regarding part licensing from its validity to its economic efficiency.

C HAPTER 1 I NTRODUCTION

In today’s commercial arena licensing policy holds it own importance as a tool of

business and marketing. License essentially means a permission to use another’s

property. Generally, a license is been given by licensee to another person to sell,

manufacture or make use of the commodity in any commercial manner, subject to the

terms and conditions of the contract. In IPR parlance, licensing is becoming an increasing

phenomenon whereby the patentee grants license of his patent rights to another person.

The general trend is that any patent or patent application and the rights derived there from

may be sold or assigned to another person temporarily, completely or in part (license), be

given as a gift or otherwise be made available to the public. A license can be of exclusive

type, non exclusive and limited type. A license shall be of an exclusive character if the

licensee receives exclusive rights to exploit the invention in accordance with the

provisions provided for in the license contract and the licensor maintains the rights to

exploit the invention within the limits of the rights which have not been transferred to the

licensee. A license shall be of a nonexclusive character, if the licensor, in transferring to

another person the right to exploit the invention, maintains the right to exploit this

invention, as well as the right to grant a license for the same invention to third parties. As

the project title shows the project work will be focused on part licensing, therefore, the

work will necessarily aims at deciphering the facets of part licensing of patents. Keeping

in mind that Limited licensing is the present trend in commercial market, this policy of

licensing should required its testing with respect to IP rights because this may be result

into violation of principle of jus cogens, on which author would be hampering all along

during the project work. Part licensing means permitting another person to use the

property partly and keeping the rest with himself. Though at this point of time, author is

unable to go into much deep of the subject but prima facie it seems to author that Part

licensing can be allowed wherein IP rights are severable but problem arises where the IP

rights can’t be segregated but even then in order to maximize the profit patentee grants

part license. It has been held by the courts that right of patent owner to license his or her

patent is not a creature of statute, but of the common law1.

1 L. L. Brown Paper Co. v. Hydroiloid Inc., 32 F. Supp. 857, 44 U.S.P.Q. 655.

C HAPTER 2 I NTERFACE O F J URISPRUDENCE O F I NTELLECTUAL

P ROPERTY R IGHTS A ND P ART L ICENSING

Before dealing with the property in term of jurisprudence, it will better to have an

overlook of rights. In terms of Salmond, rights s an interest recognized and protected by a

rule of right2. Rights granted under IP regime are legal rights as differentiated from moral

rights3, wherein the difference between two is of sanction. Though rights have been

classified on different subject but for the sake of this chapter rights can be classified

under two hands:-

1. Proprietary rights.

2. Personal rights.

Proprietary right means a person’s right in relation to his own property whereas

personal rights are rights relating to status and that arising out of contract. The

aggregate of a person’s proprietary rights constitutes his property or estate. At this

stage only, it is necessary to discuss the concept of property. Jurisprudentially

property has been considered as a bundle of rights. Salmond divides property under

two hands:-

1. Corporeal Property i.e. right of ownership in material things.

2. Incorporeal Property i.e. right of ownership in any other proprietary right in rem.

This is further divided into two categories:-

2.1) jura in re aliena or encubrances, whether over material or immaterial things,

2.2) jura in re propria covers immaterial things. Patents are covered in this

category4.

For the sake of clarity the diagrammatic classification of property is represented as:-

2 Salmond, Salmond on Jurisprudence, (P. J. Fitzgerald : Universal Law Publishing Co. Pvt. Ltd.,2002)3 Legal right is an interest recognized and protected by a rule of legal justice-an interest the violation of

which would be a legal wrong, done to him whose interest it is, and respect for which is a legal duty.

Moral right, on the other hand, means, interests recognized and protected by a rule of natural justice-an

interest the violation of which would be moral wrong, and respect for which is a moral duty.4 Supra Note 2

Bentham, unlike Salmond, considers it as metaphorical and improper the

extension of the term property to include other rights than those which relate to material

things5. In contrast to property so defined, rights have also been classified as right in re

propria and right in re aliena. Right in re aliena is a right which limits the right of a

person due belonging of some more general rights in respect of the same subject matter,

that’s why they have been also called as encumbrances. This reflects the situation where

the right vested in one person becomes subject to or subordinate to an adverse right

vested in some another person. An owner of his chattels is jus in re propria i.e. having

right in his own property, the pledge of it will be jus in re aliena i.e. having right in

soneone’s else property. Applying this in licensing of patent, a patent owner have a right

in propria over the patent but as soon as the patent is licensed both licensee and licensor

has got a right in aliena over the patent because both of their rights are subject to the

limitation posed by one another. However, if a license is assigned the assignee gets a

right in propria, because assignment transfers the title of the patent itself to the assignee.

Leaving the concept of property and right here at this infant stage only, and

coming to the concept of part licensing. The word license has been derived from the latin

term “licentia” meaning freedom or liberty. License is a permission to use certain

property given by the owner of that property to other person. Section 105 of Transfer of

Property Act, 1882, and Section 52 of Indian Easements Act, 1882 covers the issue of 5 Supra Note 2

Property

Jura in re propria Jura in re aliena

Material Things Immaterial Things Leases, Servitudes, Securities etc.

Land, Chattels etc. Patents, Copyrights, Trade-marks etc.

licensing. TPA deals with license of immovable property only. B M Lall v. Dunlop

Rubber Co.6 held that lease is a transfer of a right to enjoy the premises, whereas a

license is privilege to do something on premises which otherwise would be unlawful. On

the same lines, the court again in the case of Board of Revenue etc. v. A M Hussain etc.7,

held that license is a permission only to enjoy property. If a document gives a right to use

the property in a particular way or under certain terms while it remains in possession and

control of the owner, it will be a license.

Section 11 of the TP Act, states that if an absolute interest is created in

favor of any person, but the terms of transfer directs that such interest shall be applied on

enjoyed him in a particular manner he shall be entitled to receive and dispose such

interest in such a manner as if there was no direction. Considering this approach and part

licensing, since patent is an intangible rights then the transfer of patent has to be in its

entirety, in that case, even if certain conditions or limitation put by the owner will be void

as per the above mentioned section.

6 AIR 1968 SC 1757 AIR 1976 SC 1813

C HAPTER 3 E CONOMIC A NALYSIS O F P ART L ICENSING

Part licensing has become a tool for maximizing profit from the patented invention,

therefore, patentee licenses it to as many people as follows but at the same time, this

should also be economical. The economic efficiency should be kept in mind while

making license, otherwise the licensing scheme will not yield the optimum profit which it

ought to have. The two major considerations for part licensing are breadth and duration

of the license. Breadth refers to how similar another license can be granted without

infringing the patent for the original license. Duration refers to the number of years for

which license has been granted. Initiating the decision, one should consider the question

whether broad or narrow license should be granted? Here the broad and narrow refers to

the field of use.

A licensor who licenses his product risks more than royalty because the

information in the application is going to somewhere else. Therefore, an efficient breadth

should be considered for licensing the patent. This can be understood with the help of the

following example. Let, there is a patent over article “X” owned by “Y”. Y license it to

“A” allowing him to manufacture and at the same time, licensed X to “B” to use the

article. B contends that using the article also includes manufacturing it. Thus, under the

broad rule a single license encompasses both the area i.e. manufacturing and using. B will

get monopoly both as to manufacturing and using it. Contrast to it, under narrow rule,

both A and B will have their different areas of license. A will have control over

manufacturing and B will have control over use of the manufactured product.

To analyse the effect of broad and marrow license, consider a patent “X”

which still needs development to bring to market, the invention is much pioneering in

certain field. But the patent owner grants different licenses to different people

demarcating their respective areas. This puts a burden on the licensee to develop the

invention in order to make use of it. Development includes a small series of

improvements. Consider the example that an investment of Rs. 1,000 has been done for

inventing the patent. But at this time the patent doesn’t have any commercial value and

the patent owner grants the license to the licensee. The licensee subsequently has to

invest for its development. Subsequent investment of Rs. 500 will bring the commercial

applicability of the patent to the extent of Rs. 2000. Now, the question arises how to

divide Rs. 2000? In this case, if broad licenses are granted then the licensee may well

invest their part of money because that will yield the same to them but if small licenses

are granted, the licensee will be scared to invest because the return is not predictable. If

patent owner grants broad licenses, a license for the pioneering invention covers license

for improvements also but if the patent owner grants narrow licenses, separate license

will be required for both pioneering and improvement patent.

Thus, question arises what breadth of patent license is most efficient? If the

social value of investment that licensee has to invest, if exceeds the social value of

investment on developing applications, then patent license should be broadened.

Conversely, if the social value of investment on developing application exceeds the social

value of investment on fundamental research then patent license should be narrowed.

In reality, question of breadth of patent license is co-extensive with the ambit of

patent itself and should be determined in accordance to doctrine of equivalence.

According to this doctrine, the court have sometime reasoned that an improvement with

commercial value should not be interpreted as infringing on a pioneering invention with

little stand alone8. As already stated license breadth is co extensive with patent breadth,

so doctrine of equivalence will be applied in the same manner while construing the

breadth of license.

Commercial application and pioneering inventions are joint products of

fundamental research. Therefore, the license should be so given in such a manner as to

include both commercial application and fundamental invention within the ambit of

license to preserve and maximize the profit of licensee.

One has to consider the case where the patent owner kept one field of patent

for its own use and licenses the rest part to the other licensee. The other licensee further

develops it which brings its commercial application. Then the problem as to incentive

begins? This can be resolved in a case when transaction cost9 is zero but not when there is

8 Westinghouse v. Boyden Power Brake Co, 170 U.S. 537 (1898)9 Transaction cost is the cost incurred during the process of bargain.

transaction cost is also involved. If transaction cost is zero than Coase theorem10 can be

applied and proper benefits can be given to both the licensee. At the same time, other

problem has also to be consider whereby the patent owner develops further the invention,

which is ancillary and essential to the original patent. The problem comes as how to

divide it between different licensees? If the transaction cost is zero, again Coase Theorem

can be applied but transaction cost can impede the whole process. In that case Normative

Hobbes Theorem11 will be applied, which states allocate the rights to the parties who

value them the most. Thus, this is how the breadth of the patent license is construed

keeping in mind the economic efficiency.

Next comes the question of optimal duration of patent license. While

analyzing this economic model, it should be kept in mind that the theory applies only for

non-exclusive license only, wherein the interest in patent has been divided among a

number of people. As the patent license gives the patent licensee to use it for the given

time period, but what should be the optimal time period of that license so that it strikes a

balance between the interest of licensor and licensee. No doubt, the interest of licensee is

to maximize his economic benefit but if the license is for a shorter term then the patent

life, the licensor has to also see that the patent don’t get disseminated. Same will be the

consideration of licensee also, but only till the duration of his license but licensor has to

think it after that also. As the duration of patent license if increased, society will enjoy

more benefits and at the same time if licensees are increased the society will enjoy more

benefits because there is a presumable competition will be there in between two. But the

rate of increasing benefit will go downward because the rate at which society will enjoy

benefit will gradually decrease with time. This in consequence decreases the marginal

benefit as the duration increase, because in the initial period the marginal benefit will be

at maximum. The other reason for this is that, as patent is nothing but a temporary

10 Coase Theorem asserts that breadth of patent license does not matter to economic efficiency so long as

licensees can bargain with each other costlessly and make efficient new contracts.11 Normative Hobbes Theory states “Structure the law as to minimize the harm caused by failure in private

agreements.” According to this principle, the law should be designed to prevent coercive threats and to

eliminate the destructiveness of disagreement. The principle is normative because it offers prescriptive

guidance to lawmakers. For detailed study see, Robert Cooter and Thomas Ulen, Law and Economics, 1st

Edition, (2004 : Pearson Education, India)

monopoly, in strict economic terms; the society will start searching for the substitutes and

longer the duration more substitute the society will find. Thus, with the finding of

substitute the social cost of patent also decreases. This, in turn decrease the marginal cost

of the patent, which force the licensee to have a license for a shorter time period.

Duration increase Rate of benefits of society decrease

Marginal benefit decreases with duration

Society will search for substitutes and

Will find more substitute in longer duration

The rate of increase of social cost will decrease.

Thus, this way the cycle goes on. The problem arises as to the

conclusion whereby it has been concluded that increasing duration will decrease the

marginal cost, thus not giving licensee maximum profit. But this happens after a certain

point of time, whereby till one time the marginal cost increase which will be the peak and

after that it starts decreasing. One has to identify that peak point. For this, let MSBp be

marginal social benefit that a licensee can get under patent license and MSCp be the

marginal social cost. It has already been discussed that with the increase in duration the

rate of increase of marginal social benefit decreases. Similarly, marginal social cost

increases but with a diminishing rate which reveals that extending the duration of patent

Marginal Cost decreases

increases the loss from monopoly pricing and less dissemination. The following diagram

will show this.

The horizontal axis in the figure indicates the life of patent license in years. The

vertical axis indicates the cost and benefits of invention. The little bending in the two

curves has been given to show a little flexibility as to decline in the diminishing rate. The

intersection of two curves, point t, gives the point wherein the marginal social cost of

extending the license life for that period equals the marginal social benefit of having a

patent license life of that duration. Thus, duration t gives the maximum benefit under any

patent license to the licensee.

The point “t” will be different for different licenses and it will be affected by

some other ancillary factors also like market condition, nature of patent, royalty etc.

which should also be duly taken into account.

t

MSCp

MSBp

Money

0 t’ (patent life in years)

C HAPTER 4 D IALECTICS O F P ART L ICENSING I N IP R EGIME : A

D ISCURSIVE A PPROACH

Patent and patent applications are assignable by the owner. However, the right to

sell or lease a patent right is subject to the same restrictions as those which governs

transfer of other sort of property12. A contract to sell patent rights in violation of a statute

to prevent and punish fraud in the sale of such rights is void as between the parties.

Assignment v. License Every patent confers on the patentee the right to exclude others

from making, using or selling the invention throughout the patent territory and patentee

can assign, sell or license these rights to someone else. However, a patentee cannot assign

some of the claims to one and other claims to another person13, though the patentee may

grant separately the three rights namely, right to make, right to use and right to sell. But

instead of thus dividing the three rights constituting a patent, a patentee may grant an

exclusive license under the patent to the whole or specified part of the covered territory

under patents, and therein lies the distinction between assignment and license. In case of

assignment, an agreement must convey the exclusive right to make, use and vend the

entire invention14, whereas the grant of exclusive right to make and sell the patented

device is a mere license because it doesn’ grant the right to use the device15. Even an

assignment of right to make and vend the invention in a certain territory, reserving to the

patentee a similar right on paying a similar consideration to the assignee, is a mere

license. But the grant of exclusive right t make, use and vend the invention, even in only

a specified territory, is an assignment because it excludes all other persons including the

patentee , from making, using or vending the invention in that territory16. It was held in

the case of L. L. Brown Paper Co. v. Hydroloid Inc.17, that an assignment transfers the

12 Commercial Union Tel. Co. v. New England Tel. & Tel. Co., 61 Vt 241, 17 A 107113 Pope Mfg. Co. v. Gormully & Jeffery Mfg. Co., 144 US 248, 36 L Ed 423. 14 Crew v. Flanang, 242 Minn 549, 65 MW2d 878, 102 U.S.P.Q. 324.15 Waterman v. Mackenzie, 138 US 252, 34 L Ed 923.16 Wilson v. Rousseau, 45 US 646, 11 L Ed 1141.17 32 F. Supp. 857, 44 U.S.P.Q. 655

monopoly as well as the invention and connotes the right to do the thing from which the

patentee excludes others, while the license transfers only the invention and does not

affect the monopoly otherwise than by estopping the licensor from exercising his

prohibitory powers in the derogation of the privileges conferred by him upon the licensee.

In essence, license is a transfer of any right to make, use or vend an

invention less than that constituting an assignment. Whether the transfer of particular

right or interest under a patent is an assignment or a license does not depend upon the

name of the instrument but upon the legal effects of its provisions. An exclusive license

reserving nothing to the grantor except the right to receive compensation is legally

tantamount to the assignment18. The different types of license are:-

1. EXCLUSIVE LIECENSING The grant of exclusive license precludes the licensor

from competing with the licensee in respect to the subject matter of the license. A

licensor may covenant not to use or promote the licensed subject matter in violation

of the exclusive right granted to the licensee. But the covenant may not lawfully be

extended to cover products or processes outside the scope of the license. Therefore,

the grant of an exclusive license, may by implication precludes the licensor from

granting other licensee. The grant of exclusive licensee even bars the licensor to

practice the invention unless he has specifically reserved the right to do so. The

grantor may however, retain the right to practice he licensed subject matter. It

therefore follows that the exclusive licensee may not be he only party authorized to

practice the invention19.

Without the ability to exclude others from exercising patent rights, letters

patent would be valueless. The heart of the monopoly is excluding others from

capitalizing on the invention. With only a limited life--twenty years at best-- no one

wants to share the patent's short existence with others. So preserving exclusivity is

uppermost in an exclusive licensee's mind.

18 Supra Note 11.19 This condition is wholly governed by the agreement inter se parties. Exclusive licensee, if the only party

practicing the invention is called “sole licensee”. A “sole license” is one which is exclusive to the

licensee, subject to the reservation of right to the grantor.

The best way to keep the patent rights to itself is for the licensee to tie the licensor's

hands so the licensor cannot grant any patent rights to anyone else. Merely inserting the

word "exclusive" in the grant will do the job20:

LICENSOR hereby grants to LICENSEE an exclusive license to

make, use, and sell the Patent, subject to the terms and conditions of

this Agreement.

The other interesting point about exclusive license is that, an exclusive license which

includes the right to make, use or sell for the life of a patent is, for tax purposes, a sale,

as distinguished from the license. An exclusive license which otherwise qualifies as a

sale will probably be disqualified if it contains geographical or use limitations21. There

are special rules to consider the license which contains any geographical or field-of-use

restriction22. Courts have substantially pointed out difference between exclusive

licenses under a geographical or time limitation and an exclusive license under a field

of use limitation23.

A patent owner’s grant of exclusive manufacturing right to A and

exclusive marketing rights to B implies the patent owner’s agreement to refrain from

competing with A and B in the manufacture and sale of patented articles24. A licensor

violates an exclusive license agreement by evading the licensee’s territory and making

sale therein without paying royalties to the licensee25.

20 Mark S. Holmes, Patent Licensing: Strategy, Negotiations, and Forms, (2004: Practicing Law Institute,

California)21 Supra Note 1722 Channel Master Cor. v. JFD Electronics Corp., 151 U.S.P.Q. 498, 260 F. Supp. 568. In this case the

antennas there licensed were designated for amateur and citizens band transmission. Radar and military

transmission use were excluded.23 The reason for the distinction appears from the logic that the licensor in the case of geographical or time

limitation has granted an assignment of the whole patent and the interests of both the parties are identical,

even though there is a geographical or time limit restriction but so is not in the case of field-of-use

restriction.24 Plastray Corp. v. Cole, 324 Mich 433, 37 NW2d 162, 8 ALR 1199.25 Manning v. Galland-Henning Pneumatic Malting Drum Mfg. Co., 141 Wis 199, 124 NW 291.

2. NON EXCLUSIVE LICENSE Legally speaking, nonexclusive licenses are

agreements by the licensor not to sue the licensee for infringement of the intellectual

property rights transferred. The rights conveyed are generally constructed as personal

to the licensee. Nonexclusive licenses have no statutory basis and constitute merely a

waiver of infringement under the licensed invention26. Herein, the licensee has no

property interest in the patent monopoly and no contract with the licensor that other

shall not practice the invention.

With regard to non exclusive the Canadian law is different

from US patent laws, in Canada, for example, a nonexclusive licensee can sue for

infringement27. The difficulty with this rule is that if there are several nonexclusive

licensees, the infringer may have to come to terms with each one of them in order to

effectively settle the litigation.

3. IMPLIED LICENSES Under implied license, the patent employing an invention

which infringes another’s earlier patent has been held estopped from suing the

licensee for infringement of the after-acquired, earlier patent by use of a device

identical in structure to the invention. This is because the licensor cannot negate the

license which he granted28.

4. LICENSE TO MAKE AND SELL A license to a person engaged in business to make

and sell the patented article in his business ordinarily does not restrict the licensee to

manufacturing the article with his own hands or selling it by his personal efforts, but

allows him to employ as many hands as many salespersons and agents as the business

necessities.

5. LICENSE TO USE A nontransferable license to practice the invention at the

licensee’s own establishment has been held not to entitle the licensee to practice the

invention at an establishment occupied by himself and others or to authorize others to

practice the invention with him or otherwise.

26 L.L. Brown Paper Co. v. Hydroloid Inc., 32 F. Supp. 857, 44 U.S.P.Q. 655. 27 Armstrong Cork Canada v. Domco Ind. Ltd., 66 C.P.R. 2d 4628 AMP Inc v. United States, 182 Ct Cl 86, 389 F2d 448, 156 U.S.P.Q. 647.

C HAPTER 5 D ISCUSSING F EW M ODES O F P ART L ICENSING

For maximizing profit, inventor license his products to as many people as possible

and for this purpose he has to divide his invention into certain parts. He tries to do it by

putting limitations on licenses, say for example, a patentee has got a patent over

semiconductor. He can license to sell it in Delhi to A and to rest of India to B. At the

same time, he can license it to manufacture to C and license to use it to D. Thus, he has

licensed his product partly to A, B, C and D. For this the licensor has to limit the field-of-

use of licensee. For Example,

The license granted herein to LICENSEE includes a license to convey to any customer of

LICENSEE, with respect to any product or service furnished by LICENSEE, rights to use

such product or service as furnished by LICENSEE provided, however, that no rights

may be conveyed to customers with respect to any invention which is directed to:

(i) a combination of such product or service (as furnished) with any other item

which is not a product or service furnished by LICENSEE, or

(ii) a method or process which is other than the inherent use of such product or

service itself (as furnished).

The simplest example of part licensing is that the licensor limits the scope of the license

granted in exclusive manner i.e. licensor deliberately excludes some rights from the

license. For Example,

OWNER hereby grants to LICENSEE a non-transferable, non-exclusive license

under the Patent Rights, without the right to sublicense, for the sole purpose of

manufacturing, using and/or selling Licensed Products under its own label in the

Territory for the life of this Agreement.

Additionally the licensor or the patent owner may put a sort of residuary clause in the agreement

barring the licensee to step shoes out of the boundary. For Example

No license under the Licensed Patents is granted, and no license shall be implied,

with respect to activities outside the Field of Use.

A patentee may often license the manufacture, sale or use of the patented

invention only within a certain field, or for a fixed quality of manufacture or use, or

within a territory. The General Talkies Pictures Corp. v. Western Electric Co.29, upheld

a patent license limited as to field as reasonably within the reward the patent is intended

to secure. In US, as the patent regime is fully developed the authority under US law also

hold a sort of persuasive value under Indian Law. It was held in US that where the

licensor agreed not to manufacture or sell articles covered by patent rights exclusively

licensed to the licensee, the licensor was precluded from making or selling patented items

substantially similar to those licensed30. The court categorically held that a restrictive

license to manufacture a patented device is legal. The case is of much importance,

whereby the court tried to apply doctrine of equivalence in case of license.

Justice Gray in the case of Waterman v. Mackenzie31 opined that the monopoly

thus granted is one entire thing, and cannot be divided into parts, except as authorized by

those laws. The patentee or his assigns may, by instrument in writing, assign, grant and

convey, either, 1st, the whole patent, comprising the exclusive right to make, use and

vend the invention throughout the United States; or, 2d, an undivided part or share of that

exclusive right; or, 3d, the exclusive right under the patent within and throughout a

specified part of the United States, but later on this lead to differentiation between

assignment and license, whereby the part transfer is termed as license in which no legal

title is transferred. Often the Licensor wishes to restrict how a licensee may use the

patented rights. For instance, a licensee may wish to restrict a licensee to using the patent

under its own name or label. A simple provision such as the following would suffice:

LICENSOR hereby grants to LICENSEE a non-transferable, non-exclusive

license under the Patent Rights, without the right to sublicense, for the sole

29 305 US 124(1938). In this case the Western Electric licensed the manufacture and sale of patented

vacuum tube amplifiers, the license extending only to use in the noncommercial field. One of the licensee

made amplifiers for commercial use and sold them to the defendant, who bought with the knowledge that

they were made and sold in the violation of the license. Supreme Court found infringement in the

manufacture and use outside the field specified in the license.30 Touchett v. E Z Paintr Corp., 150 F. Supp. 384, 113 U.S.P.Q. 16.31 138 U. S. 252

purpose of manufacturing, using and/or selling Licensed Products under its own

label in the Territory for the life of this Agreement.

The relationship between licensor and licensee is compared as that of with landlord and

tenant. There is, however, no implies warranty or covenant of quiet employment in the

sale or lease of patent rights. The owner of a single patent, mat at his will, restrict the

scope of license grant with respect to class of activity, duration, area, volume of

production, or size and capacity of the license subject matter. One owning a patent with

several claims cannot assign a single claim only, so as to convey the legal title, or enable

the assignee to sue thereon in his own name, and such an assignment will be construed as

a mere license32. The finding has been wrongly interpreted by a number of scholars

whereby they interpreted the judgment saying that part licensing has been disallowed by

the case but perhaps, the intention of court was different behind the virtual simple and

plain language. The Court wanted to say that licensing on the basis of claims can’t be

done which can be termed as “divided interest” whereas in part license undivided interest

has to be licensed to other person, which is within the permissible limits.

In Waterman v. Mackenzie,33 a ‘license agreement,’ was made between Mr.

and Mrs. Waterman on November 20, 1884, by which she granted to him ‘the sole and

exclusive right and license to manufacture and sell fountain pen-holders, containing the

said patented improvement throughout the United States,’ and he agreed to pay her ‘the

sum of twenty-five cents as a license fee upon every fountain pen-holder so manufactured

by him.’ Later on, the licensee also started using the fountain pen holders contending that

it is within his license, but the court held that “A grant, by the owner of a patent, of the

sole and exclusive right and license to manufacture and sell the patented article

throughout the United States does not include the right to use such patented article, at

least if manufactured by third persons.” In Mitchell v. Hawley 34 , an instrument granting

‘the sole right and privilege of manufacturing and selling’ patented articles was executed

not expressly authorizing their use, because, though this might carry by implication the

right to use articles made under the patent by the licensee, it certainly would not authorize

32 Pope Mfg. Co. v. Gormully & Jeffery Mfg. Co., 144 US 248, 36 L Ed 42333 138 US 252, 34 L Ed 92334 16 Wall. 544

him to use such articles made by others. Thus, herein the basic limitation that can be put

by licensor in order to make the license part, are discussed herein:-

1. TERRITORIAL LIMITATION

35 U.S.C. 261 provides that “the applicant, patentee, or his assigns or legal

representative may…grant and convey an exclusive right…to the whole or any

specified part of USA.” Thus, a patentee may find support from this provision to put

territorial limitation on his license. Moreover, since rights under a US patents are only

coextensive with the geographical limits of the US, such rights may not justify an

agreement by a licensee not to sell the patented product outside of US. It has become

a customary rule that a territorial restriction cannot prevent one who purchases a

patented article within the territory from using the article outside the territory35.

Courts by a number of decisions held without any doubt that the territorial limitation

can be put in a license and that can’t make the license invalid36.

In Brownell v. Ketchman Wire & Mfg. Co37, license was

granted to manufacture, sell, loan, give in sub-license or dispose of otherwise in the

United States and its territories and possessions, the articles covered by said patents

and applications for patents, and all improvements thereon at the following conditions

…….; and it was further provided in the license agreement that licensee will not sell

or export the articles covered by the aforesaid patents and patent applications to any

foreign country. US federal court upheld the validity of territorial limitation put by

the license agreement by stating that it is a valid means of doing business in patents

and it doesn’t violate the federal patent Act.

35 The principle was first established in Adams v. Burks, 17 Wall. 453 (1873)36 For cases relating to territory limited by country, See Brownell v. Ketchman Wire & Mfg. Co., 211 F.2d

121, 100 U.S.P.Q. 338; Becton, Dickinson & Co. v. Eisele & Co. 86 F.2d 267. For cases relating to

territory limited by state, See Keeler v. Standard Folding Bed C., 157 U.S. 659(1895); Industrial mach.

Tool Co. v. Miami Window Corp., 234 F.2d 301, 93 U.S.P.Q. 1. For case relating to territory limited by

city See Adams v. Burks, 84 U.S. 453(1873).37 211 F.2d 121, 100 U.S.P.Q. 338

2. SIZE, QUALITY, CAPACITY AND STYLE LIMITATION

The licensor may restrict or direct the licensee with respect to size, quality,

capacity or style limitation. The object of this may be anything i.e. may be licensor

want to reserve a share of market for him or to prorate production upon multiple

users. The quantitative provision in license agreement is stated in terms of the

maximum or minimum number of patent devices which can be produced under the

agreement. Under the maximum production limit, the protection from infringement

applies to that number only. License granting right to use patents to make devices of

specific size does not have negative covenant implied not to use patents to make

devices of other sizes.

The licensor at the same time, may restrict a licensee to manufacture of

patented items of “small size” only38. Similarly, the restriction about capacity may

also be put in the same fashion. In the case of Shaw v. E. I. du Pont de Nemours &

Co.39, the license granted by the licensee limited the licensee’s manufacture, use and

sale of the licensed filaments to ‘filaments having, in the drawn state, a maximum

cross sectional dimension of not more than 5 mils. The Court implied a negative

covenant from the language of the license “that the plaintiff patentee reserved. Or his

assignee, the property in the patent as to all filaments in excess of the dimension

specified.”

In another case of Lanova Corp. v. Atlas Imperial Diesel Engine Co40, plaintiff

entered into a license agreement with defendant. The latter corporation assigned its

rights under this contract to the defendant, a non-exclusive right to manufacture

engines and replacement parts therefore embodying the inventions of its patents, "said

license being limited to stationary, marine, industrial and automotive engines with a

piston displacement of more than 1000 cubic inches, aeroplane and passenger car

engines excepted." This license also extended to all patents to be issued on certain

pending applications Thus the license agreement provided for “style limitation”,

which was duly upheld by the court in a subsequent litigation.

38 Lanova Corp. v. Atlas Imperial Diesel Engine Co., 55 A.2d 272, 75 U.S.P.Q. 225.39 152 U.S.P.Q. 36440 55 A.2d 272, 75 U.S.P.Q. 225

In the same manner, style or design limitation may be inserted into license

agreement.

3. FIELD OF USE LIMITATION

The owner of a patent may grant a license to licensee restricting the area of use

by putting certain conditions. The licensor may put restrictions with respect to style,

manner of vending, use etc. of the licensed article. A licensor may wish to limit the

licensee’s right to sell the licensed subject matter for use only in certain definite

fields. The limitations, therefore, becomes one on the class of customers to whom the

licensee may sell. Limited licenses to sell to customer, who will use the patented

subject matter only in certain fields, or for certain specific purposes, were held to be

valid41. On the other hand, where a grant as to use is broad, it will be given effect,

and will even include new uses which are foreseeable42.

The USSC there upheld the validity of field-splitting licensing program. Under that

program, Western Electric, the plaintiff was granted an exclusive license to make and

sell sound amplifiers in the commercial field (including theaters and the like), and

non-exclusive licenses were granted to others to make and sell in the private field.

Despite uneasiness about the future of limiting the licensee’s practice to a given field,

General Talking Picture has really been followed43.

In this regard, the case of Benger Labs v. R. K. laros Co.44, wherein the licensor

granted two licenses for a single patented drug. The first license was with regard to

the use of dug in veterinary field and other license was for use of drug in human field.

The court held the license valid.

41 Armstrong v. Motorola Inco., 374 F. 2d. 764, 152 U.S.P.Q. 53542 Boosey & Hawkes v. Walt Disney Co., 145 F.3d 48, 46 U.S.P.Q.2d 1577. The case was related with the

grant of license with regard to copyright. The grant was to record “in any manner”, a later video format

was therefore included.43 Automatic Radio Mfg. Co. v. Hazeltine Research Inco., 339 U.S. 827. Also see the case of SCM Corp. v.

Radio Corp. of Am., 318 F. Supp. 433, 167 U.S.P.Q. 196, wherein separate licenses were granted over

process and product claims and was held valid.44 209 F. Supp. 639, 135 U.S.P.Q. 11

4. GRANT BACK

Grant back provides for license or agreement to the licensor of any

improvement patented by the licensee on the products or processes of the licensed

patent. Thus, this gives some additional right to the licensor and expands the licensors

monopoly over the patent. Though grant back has several times raised the problem

with respect to provision of Antitrust Act45 but the courts has tried to harmonize the

two.

Except under the circumstances described in the last sentence of this Section,

solely for the purpose of enabling Licensor and its licensees to continue the

development and commercialization of Licensed Products to which Licensee no

longer has rights, Licensee shall grant to Licensor a fully paid-up, irrevocable, non-

exclusive, worldwide license, with the right to grant sublicenses under the "Licensee

Patents", if any, to make, have made, use, sell, and import any Licensed Product and

for no other purpose. For purposes of the foregoing, "Licensee Patent" means any

Patent Right existing at the time of termination of this Agreement which would block

Licensor from practicing any Patent Right included in the Licensed Patents. Licensor

shall not be entitled to any grant-back rights under this Section if this Agreement is

terminated by Licensee under Section [Breach or Default Provisions] or [Bankruptcy

Provision] or if Licensee's obligation to pay royalties has expired pursuant to Section.

5. RESALE RESTRICTIONS

Resale restrictions have also remained questionable and were also

upheld by the courts. It has been held valid by the courts that one may license a party

to manufacture a product and restrict the licensee to only those who are licensed to

use the product. In Brownell v. Ketchman Wire & Mfg. Co46, license was granted to

manufacture, sell, loan, give in sub-license or dispose of otherwise in the United

States and its territories and possessions, the articles covered by said patents and

applications for patents, and all improvements thereon at the following conditions

…….; and it was further provided in the license agreement that licensee will not sell

45 Transparent Wrap Mach Corp. v. Stokes & Smith Co., 329 U.S. 637, 72 U.S.P.Q. 148 (1947).46 211 F.2d 121, 100 U.S.P.Q. 338

or export the articles covered by the aforesaid patents and patent applications to any

foreign country. US federal court upheld the validity of resale limitation put by the

license agreement by stating that it is a valid means of doing business in patents and it

doesn’t violate the federal patent Act

Clause providing that the license shall remain in effect so long as

any of said patents are extant but that the licensee shall not grant any sub-license, or

assign the contract without the plaintiff's consent, is not a complete bar on resale but

is regulatory in nature47.

47 Supra Note 40

C HAPTER 6 P ART L ICENSING I N I NDIA – A C ASE S TUDY

Being a developing nation and having an infant agrarian economy, the patent regime in

India is not at its stake as compared to other nations. Indian Patent Act, 1970 gives

directions for licensing from which the writer has drawn his analogy. Section 6848 of The

Patents Act, 1970 gives mandatory conditions for a valid transfer/assignment/license i.e.

1. the agreement should be in writing and

2. the agreement between the parties concerned should be reduced to the form of

a document.

Deep understanding of the Section reveals the fact that after United States, India is the

second country specifically providing for part licensing in the Act itself. The opening

words of the Section 68 of the Act states that “an assignment of a patent or of a share in

a patent…” thereby expressly stating that a share i.e. a part of a patent can also be

separately licensed. Indian market is not fit for certain statutory class of patents because

of available substitutes in that particular field and the practicing piracy in that area

irrespective of the measures adopted by the government. In that case, it is very hard for

the patentee to make economic benefit, therefore licensing is the option left to him.

Part licensing is a process which is based on a particular market economy. This

part of the paper aims at analyzing the Indian patent market conditions vis-à-vis part

licensing. The Indian patent market takes into account several factors, which are shown

in the figure in order to analyze the economic incentives of the patent.

48 Section 68 An assignment of a patent or of a share in a patent, a mortgage, licence or the creation of

any other interest in a patent shall not be valid unless the same were in writing and the agreement

between the parties concerned is reduced to the form of a document embodying all the terms and

conditions governing their rights and obligations and duly executed.

Taking these factors into account, following conclusion can be drawn:-

1. By part licensing, the patentee can reduce the development cost for further

developing the invention.

2. The projected revenue stream, in which if the patentee himself practice or

assigns49 the patent to someone, the revenue flow will be from only on use,

whereby part licensing can multiply the flow of revenue to patentee.

3. If the patent is of such a nature that it is difficult to make it to the reach of

common use, in that case part licensing can be of immense help.

Thus, it shows that Indian patent market economy as well as concerned statute

immensely supports part licensing.

Part Licensing of Patents by Academic Institutions

In India, mostly part licensing is practiced the universities and other academic

institutions owing patent which prominently includes IITs, Indian Institute of Science,

Bangalore and few medical institutes because there purpose is bit different from just

creating monopoly and rule over the market. They need immediate finance back from the

patent which they incurred on the patent for its development and for carrying on further

R&D. These institutes license the patent in part or in entirety (generally they part license)

at their own discretion for commercialization through third parties who may or may not 49 The difference between assignment and license is of technical importance, it should be kept in mind.

Risks – time to market

Projected revenue stream

Development costs

Scope of patent protection

Character and type of inventor

Inventor’s future plans – Chances for developing

Invention

Field of technologyLife science vs. Physics & Engineering

be the creator through the grant of licenses, or assign its ownership rights to third

parties/creator safeguarding the interests, financial or otherwise, of the Institute. At the

same time these institutes may under special circumstances retain a non-exclusive

royalty-free license to use the property for teaching and research. Indian Institute of

Science, at present owes 119 live patents and under there licensing policy they have part

licensed most of there patent justifying it as a method of converting science into a method

of business. Part licensing insures quick flow of finance to the patentee which is the main

thrust of these institutions because of financial paucity. Apart from this the other factors

favoring these institutions for part licensing their inventions instead of assigning are:-

1. An assignment may be appropriate however where the patent owner prefers to

receive a lump sum price, at the time of the assignment, rather than collecting

royalties.

2. The lump sum payment relates to a lesser period, then assignment would be

inappropriate, and instead there should be a license for the period that relates to

the actual lump sum payment.

3. Royalties may be received over a period up to 20 years for example, in the case of

a patent.

4. The disadvantage to a patent owner is that the lump sum amount at the time of the

assignment will be assessed on the value of the patent at that time.

5. Another disadvantage is that the patent owners, by assigning, ceases to have the

prospect of blue sky financial return should the patent have otherwise generated

greater royalties than the lump sum amount has been assessed on.

Not in India only, but this trend of part licensing by academic institution is

going successful worldwide. Example:-

– The average licensing revenue of the top 10 US Universities is USD71

million.

– Stanford University made USD87 million through the licensing fees of just

one basic biotech patent.

Part Licensing by Pharmaceutical Industries

Pharmaceutical sector is another sector where part licensing is done in order to have two

fold advantages apart from financial maximization:-

To make the invented drug/chemical available to the public quickly because in

case of patent of life saving drug or any other product of general public use it is

moral duty on the patentee that instead of concentrating on monopoly, he should

make them available in the market;

In pharmaceuticals strict division of patent is sometimes not possible because the

patent in the entirely is semi-separable in nature, in that case part licensing creates

competition among the licensee themselves which ensures low price and better

service.

As an example to this, recently in 2002, Ranbaxy Laboratories Limited, India’s

largest pharmaceutical company entered into a contract of part licensing with Synaptic

Pharmaceutical Corporation (Nasdaq: SNAP), USA, a leading developer of next-

generation GPCR-based pharmaceuticals whereby the Synaptic Pharmaceutical

Corporation granted part license of manufacturing a particular drug to Ranbaxy. In return

to this, Ranbaxy gave Synaptic an up-front licensing fee, milestone payments and

royalties. Ranbaxy has a strong drug discovery program in urology with special emphasis

on BPH and urinary incontinence. The agreement with Synaptic will allow Ranbaxy to

generate intellectual wealth in the area of urology using Synaptic’s patented technology.

This helped Ranbaxy as they can further create intellectual wealth using the licensed

invention, Synaptic by getting high up front money and to the public who can be

benefited by further invention.

C HAPTER 7

C ONCLUSION

When a holder of IP right wishes to permit another person does something that is within

his or her control as the IP owner, a licence may be agreed. A licence is effectively a

contractual agreement and should set out precisely what the licensee is permitted to do

and any terms and conditions applying to this use, including the amount of any payment

or royalty to be paid to the licensor (the IP owner). Licences can be limited in time, say to

last for only two years, limited by territory, say to allow exploitation of the IP in only one

country, or limited by which exclusive rights under the IP right are licensed. Also, in

some circumstances, licenses might be purely verbal agreements or even be only implicit

in some wider agreement. Again it is up to the parties involved to negotiate what is

appropriate, but a clear written agreement about the licensing of IP is also a good idea if

disputes about what was licensed are to be avoided in the future. So, it is the doing of

things restricted by the exclusive rights that can be licensed, but it is important to

remember, that there may be other IP rights owned by someone else that will also need to

be licensed before a product can me made or an activity undertaken.

Intellectual property can be exploited in several ways. For example, one can

either assign (sale of IP) or licence the intellectual property right to a third party and in

licensing also the most economic efficient method is part licensing. It is now well settled

that part licensing of patent i.e. licensing a patent in parts is permissible within IP regime.

In this case, the licensor and licensee both should be very clear about their field of use

and other restriction because now a days part licensing has become a matter of patent

litigation. Licensee in order to have financial benefit encroaches upon the non-licensed

domain and infringement of patent takes place because for that part he was not been

permitted to use. The advantages of part licensing is that one retain ownership and

control over the use of the intellectual property right and one can maximize his

commercial returns by obtaining a continuous royalty stream from a number of licensed

users.