Structuring Patent Licensing Agreements: Avoiding Litigation, Allocating...

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Structuring Patent Licensing Agreements:

Avoiding Litigation, Allocating Risk

and Maximizing Patent Value

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

THURSDAY, MARCH 24, 2016

John M. Augustyn, Shareholder, Leydig Voit & Mayer, Chicago

Peter J. Toren, Weisbrod Matteis & Copley, Washington, D.C.

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John Augustyn, Esq.

John Augustyn is currently active in all facets of patent litigation, client counseling, and prosecution. His litigation experience has involved various industries. In addition, he manages the patent prosecution for several international corporations. Furthermore, he has extensive experience in the drafting and negotiation of agreements relating to intellectual property, including patent licenses. He has authored numerous articles and chapters for books, has appeared on multiple television and radio programs, and has provided seminars for attorneys and clients. Mr. Augustyn was a law school instructor for several years. Prior to attending law school, he worked as an engineer at a large equipment manufacturer.

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Peter Toren, Esq. Peter J. Toren is a partner with Weisbrod, Matteis & Copley in Washington, D.C. Previously, he was a partner at Sidley & Austin in N.Y.C. He specializes in patent, trademark, copyright and trade secrets cases that involve diverse technologies from computer software and hardware to light-emitting diodes, biotechnology to semiconductor manufacturing and fabrications, optics and medical devices to business methods. He is the winner of the 2010 Burton Award for Excellence in Legal Writing. In addition to his book, his teaching positions and over 100 articles, Mr. Toren is a frequent contributor to the press and has recently appeared in The Wall Street Journal, New York Times, Forbes, CNN, Bloomberg TV and The Guardian.

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Structuring Patent License Agreements March 24, 2016, Strafford Publications Webinar John Augustyn, Shareholder, Leydig, Voit & Mayer, Ltd.

Peter J. Toren, Partner, Weisbrod Matteis & Copley PLLC

Disclaimer

Any views expressed through this presentation are those of the author and may not reflect the views of Leydig, Voit & Mayer or Weisbrod Matteis & Copley, or any of their respective clients. This presentation is for information purposes only and not for the purpose of providing legal advice. Use of any information contained within this presentation does not create an attorney-client relationship. © Leydig, Voit & Mayer, Ltd. © Weisbrod Matteis & Copley PLLC. All rights reserved.

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Structure of License is Dictated by Objectives of Licensor and Licensee

Reasons to Grant a License 1. Money

2. Settle Dispute

3. Expand Markets

4. Second Source

5. Cross License

6. Access to Future Improvements

7. Sale of Business

8. Combination of Above

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Reasons to Take a License

1. See items 1-8 above

2. Benefit from Patent Protection

3. Accommodate Customers

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Reasons to Not Grant a License

1. Creates a Competitor

2. Disclose Proprietary Information

3. Cost of License Obligations

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Reasons to Not Take a License

1. Royalties Reduce Profit

2. License Obligations

3. Disclose Confidential Information

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Introductory Clauses

• Introductory paragraph o Identification of parties (principal place of business, legal status)

• Background recitals o Intent of parties (optional)

o “Whereas” clauses

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Recitals and Definitions • Among the most important parts of the license. • “LICENSED PATENTS” means the patents and patent applications listed on

Schedule 1, patents to be issued pursuant thereto, and all divisionals, continuations, reissues, reexaminations, and extensions thereof.

• “LICENSED TECHNOLOGY” means unpublished technical information, know-how, trade secrets, and data in Licensor’s possession as of the Effective Date of this Agreement, and used by Licensor to produce Licensed Products.

• “LICENSED PRODUCTS” means products that in the absence of this license agreement would infringe at least one claim of a Licensed Patent, or products that are made using a method, process machine or substance, which when used would infringe at least one claim of a Licensed Patent, or products made, at least in part, using Licensed Technology.

• Defined terms must be clear, consistent, and sufficient to deal with all anticipated future events and scenarios.

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KEY DEFINITIONS

• “Affiliate” or “Licensed Subsidiaries”

• “Effective Date”

• “Field of Use” or “Licensed Uses”

• “Hybrid Products”

• “Licensed Patents” or “Patent Rights”

• “Licensed Products (Systems, Methods, Processes)”

• “Licensed Technology”

• “Net Sales”

• “Territory”

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Grant Clause

1. Exclusive vs. Nonexclusive

2. Make, Use and/or Sell (Separable Rights)

3. Geographic Scope

4. Licensed Patents, Term, Licensee, etc. covered in definitions or other provisions

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Sublicensing

• Generally no right to sublicense if not specifically permitted in the written agreement o Whether a licensee is merely exercising its rights under a patent by

objectively reviewing the nature of the relationship in question.

o Courts may allow a licensee to engage third parties to exercise rights under a patent for the benefit of the licensee, even when the patent license expressly prohibits sublicensing. See e.g., Unidisco Inc. v. Schattner, 824 F.2d 965 (Fed. Cir. 1987) (finding that grants of exclusive distributorship to sell licensed products was not a sublicense); Cyrix Corp. v. Intel Corp., 77 F.3d 1381 (Fed. Cir. 1996) (finding no “sham” where licensee exercised “have made” right under a license to a third party manufacture patented chips that were then sold to customer).

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Payments and Royalties

1. Lump Sum

2. Time Payments

3. Royalties A. Royalty Base

i. Product - Net Sales Price (Invoice Price)

ii. Process – Volume of Product or Cycles of Equipment

iii. Given Away – Provide Determination of Value

iv. Avoid – Cost of Product, Net Profit, or Gross Profit

4. Minimum Annual Royalty

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Royalty Reporting

1. Specify Detail of Records to be Maintained and Retention Period

2. Reports by Licensee A. Time Period for Reports

B. Payment at Time of Report

3. Audit Procedure A. Audit Frequency, Location and Time

B. Licensor’s Expense Unless Underpayment of X%

C. Confidential Information – Appoint CPA

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Third Party Infringement

• Notice by Licensee

• Licensor right (not obligation) to prosecute infringement of Patent Rights

• Right of Licensee (not obligation) to prosecute infringement of Patent Rights (in Field/Territory) if Licensor does not take action within reasonable period

• Allocation of damages award, if infringement action is successful

• Cooperation, including providing witnesses or documents

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Indemnification

1. Licensor to Defend and Indemnify Licensee for Third Party Infringement

2. Notice of Claim or Suit

3. Licensor Control Suit and Settlement

4. Limited to Specified Features of Product

5. Limit Licensor’s Liability

6. Limit Adverse Effects on Licensee

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Improvements

1. Each Party Wants Rights to Improvements of the Other

2. Definition of Improvement

3. Scope and Royalty Terms

4. Notice of Improvement

5. Avoid Antitrust in US and Other Countries

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Patent Prosecution/Enforcement

• Responsibility for preparing, prosecuting, maintaining and enforcing patents arising from collaboration. o Determining whether to file patent applications?

o Prosecute applications?

o Maintain issued patents?

o Control litigation?

o Allocate costs

o Right to assume control if other party decides not to pursue a particular right.

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Most Favored Licensee

1. If Nonexclusive Licensee, then Potential Competitive Harm from Later Licensee

2. Need Basis for Comparison

3. Notice to Licensee A. All Licenses

B. Only More Favorable as Determined by Licensor

4. Licensee has Option to Elect

5. Exclude Settlement for Past Infringement

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Representations and Warranties

• Seek to avoid risks that could create liability greater than the financial rewards of the License.

• Typical provisions o Licensor’s ownership of the IP, and power to grant the license

o Validity/enforceability of Licensed Patents

o Infringement of third party patents by Licensed Products

o Accuracy/sufficiency of Licensed Technology, Licensed Products, or technical assistance provided under the license

o Product liability with regard to the Licensed Products

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Example Of Licensor Disclaimer

THE LICENSOR TECHNOLOGY, LICENSED PRODUCT(S) AND ALL MATERIALS AND INFORMATION PROVIDED UNDER THIS AGREEMENT ARE PROVIDED ON AN “AS IS” BASIS AND LICENSOR MAKES NO REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT THERETO, LICENSOR MAKES NO REPRESENTATIONS OR WARRANTIES WITH RESPECT TO THE VALIDITY OR SCOPE OF THE PATENT RIGHTS THAT ANY PATENT APPLICATION INCLUDED IN THE PATENT RIGHTS WILL ULTIMATELY ISSUE AS A PATENT; THAT LICENSEE SHALL HAVE AN EXCLUSIVE RIGHT TO USE ANY PORTION OF THE PATENT RIGHTS THAT HAS BEEN PREVIOUSLY PUBLISHED OR THAT LICENSEE SHALL HAVE THE RIGHT TO USE ANY PORTION OF THE LICENSOR TECHNOLOGY THAT IS CLAIMED IN A PATENT OR ANY THIRD PARTY; LICENSOR SHALL NOT BE LIABLE TO LICENSEE WITH RESPECT TO: ANY CLAIM ARISING FROM LICENSEE’S USE OF THE LICENSOR TECHNOLOGY, LICENSED PRODUCT(S), OR ANY INFORMATION PROVIDED UNDER THIS AGREEMENT OR FROM THE MANUFACTURE, USE OR SALE OF LICENSED PRODUCT(S).

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Term

1. Life of Patent(s)

2. Shorter than Life of Patent(s) (Time Period or Event)

3. Longer than Life of Patent(s) (Brulotte Rule) See Kimble v. Marvel (US Supreme Court 2015)

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Termination

1. Breach

2. Licensee Terminate Without Cause

3. Effects of Termination A. Royalties and Reporting

B. Disposition of Products

C. Sublicenses

D. Rights to Improvements and Trade Secrets

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Bankruptcy

• Section 365 of the Bankruptcy Code o Trustee has the authority to assume or reject executory contracts or

assign them to a 3rd part

o “Executory contract” – material performance remains to some extent by both parties

o Most patent licenses are executory

o Section 365(n) – Protects the rights of a non-debtor Licensee from being unilaterally cut off by the debtor-Licensor

Rejection of the license by debtor-licensor, licensee has 2 options: (1) treat the rejection as a breach of contract giving rise to a potential claim for money damages; or (2) elect to retain the rights to the licensed IP.

Subject to many limitations

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• Jaffe v. Samsung Electronics Co., 737 F.3d 14 (CAFC 2015) o Involved balancing of interests of patent portfolio cross-licenses

against interests of foreign debtor.

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Protecting the Licensee in a Licensor Bankruptcy • Classify the agreement as “executory”

• Define all IP under the agreement is intended to be IP within the meaning of §§ 101(35A) and 365(n)

• Section 365(n) expressly applies

• License may prevent extinguishment of license through sale

• Licensee may ask for an express provision allowing assumption and assignment of license in bankruptcy

• Clearly and narrowly defined terms

• Right to improvements – otherwise may not be entitled to post-petition improvements

• Source code rights – Escrow

• Create disincentives for debtor-Licensor to reject License.

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Protecting Debtor-Licensor

• Include precise assumption and assignment clauses to ensure the ability to assume/assign license in the event of bankruptcy

• Structure fee payments to licensor’s advantage

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Licensee Bankruptcies

• Same options to assume, reject or assume and assign executory contracts as a licensor

• Section 365(n) does not apply

• A non-debtor Licensor cannot unilaterally terminate the license post-petition

• Debtor-Licensor may assume contract and assign it to licensor’s competitor or to a 3rd party that is not satisfactory to the licensor

• Nonexclusive patent license is a nonassignable executory contract

o Split on whether a debtor-Licensee can assume an executory contract if that contract is not assignable even if there is not intent to assign the contract

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Techniques to Protect Licensor in a Licensee Bankruptcy

• Make rejection a less attractive option to the debtor-Licensee o Security interests

o Early termination fees

o Liquidated damages provisions

o Acceleration of future royalty payments on termination

• Include right to assume without consent o Limit consent to assumption of the agreement to situations that do

not involve a change of control over the licensee

• Use language so it appears that applicable law prohibits assignment without consent o Limit use of “exclusive” licenses

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• Retain a property interest in embodiments of IP held by Licensee

• Prevent assignment to competitor or unrelated third party

• Protect IP from becoming part of the Bankruptcy Estate by establishing non-bankruptcy termination triggers

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Techniques to Protect Debtor-Licensee

• Include explicit assumption and assignment clauses that can be used to ensure assignability

• Limit discretion of Non-debtor Licensor to prevent assignment

• Consider length of agreement

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Assignment of License

1. License Travels with Assignment of Patent

2. Licensee Cannot Assign License A. Except with Sale of Business

B. Without Approval of Licensor

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Confidentiality

1. Entire Agreement

2. Allow Parties to Make a Specified Statement Concerning the License

3. Allow Exceptions for Subpoenas, Government Requests, Outside

Accounting Firm

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Choice of Law

1. Choose a State Which has a Connection With the Parties or the License

2. Choose Carefully if a Foreign Country is Specified in the Choice of Law

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Miscellaneous

• Third party infringement – If licensor refuses to sue, licensee may be given right

• Choice of Venue – Arbitration (Binding between parties) o Nonbinding arbitration, mediation, or no alternative resolution

o Cheaper

o Discovery limitations

• Force majeure – Prevent breach beyond licensee’s control

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Government Approval

1. Contingent Upon Government Approval, such as, FDA, Export Control, Department of Defense, etc.

2. If Party is a Non-US Entity, Contingent Upon Approval in Required Countries

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Patent Marking • Patent Marking – Requirement for pre-suit infringement damages • Must be “substantially consistent and continuous” from inception if

sales of the patented product, o Rule of reason – used to determine compliance o Require licensee to mark and provide for right to inspect marked articles o Licensee should actively police licensee’s patent marking efforts –

Otherwise may support a finding that patent owner failed to comply with statute.

o False marking – Private parties may only now sue for damages if they have suffered a competitive injury as a result of the violation of the false marking statute.

o Require licensee to indemnify for false marking o Licensee should be required to warranty that it will not engage in false

marking

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Releases

1. Settlement of Infringement Lawsuit or Dispute

2. All Causes of Action Between Parties Prior to Specified Date

3. All Causes of Action Between Parties Involving Product and/or Patent

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Patent Exhaustion

• Definition: An authorized sale of an article that embodies essential features of a patent exhausts the patent holder’s rights. Patent owner is barred from claiming infringement of post-sale use of article. o Once there has been an authorized sale of a patented item, that sale

confers on the purchaser or any subsequent owner, the right to use or sell the thing as he sees fit.

o Defense only arises where the patentee’s assertion of infringement was, or depended on, an assertion that an authorized acquirer was using the same invention by infringing the asserted claims.

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• Quanta Computer Inc. v. LG Elecs. Inc., 553 U.S. 617 (2008) o License agreement whereby Intel can “make, use, sell …” chipsets and

processors that use LGE’s patents

o Disclaims any express or implied license when third parties combine Intel and non-Intel components

License agreement stated: “Nothing herein shall in any way limit or alter the effect of patent exhaustion that would otherwise apply when a party hereto sells any of its Licensed Products.”

o Exhaustion shall not apply, however, if licensee has no authority to sell patented product due to license agreement limitation

Licensors should place any restrictions or conditions in the license agreement and not in any ancillary or master agreement.

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• TransCore, LP v. Elec. Transaction Consultants Corp., 563 F.3d 1271 (Fed. Cir. 2009) o Sales made pursuant to an unconditional covenant not to sue are

“authorized sales” for purposes of patent exhaustion.

o To avoid patent exhaustion, licenses and covenants not to sue should be drafted in a manner that explicitly precludes any authorized and unconditional sales.

Limiting covenant not to sue authorization to “making” or “using” would not amount to an “authorized sale.”

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• Bowman v. Monsanto Co., 133 S.Ct 1761 (2013)

o Patent exhaustion gives the purchaser of a patent article the right to use or resell the article, but not the right to make new copies of the article.

Purchaser of genetically engineered seeds sold by Monsanto

License allowing farmers to plant/harvest 1 generation of seeds.

o By planting and cultivating the seeds, Bowman did not simply use the patented article, made new copies of the article, infringing the patent.

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• Helferich Patent Licensing, LLC v. New York Times Co., 778 F.3d 1293 (2015) o Single inventor coming up with two inventions presumed to be

separately patentable, one invention to be practiced by one group of users, the other invention by another group, where each invention tends to make the other more useful when separately practiced

o “Within the boundaries of the current doctrine of exhaustion, a patentee owning multiple patents covering complementary goods by different producers has the freedom to negotiate different licenses, subject to all the complexities and variations of market forces and existing institutional structures.” Id. at 1307.

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Standing of Licensee to Sue for Patent Invalidity/Unenforceability

• MedImmune v. Genentech, 549 U.S. 118 (2007) o A patent licensee does not have to materially breach or terminate a

license agreement in order to bring an action against the licensor challenging the patent covered by the agreement.

o Threat of litigation and coerced payment is enough to establish a “case or controversy”

A licensee need not be exposed to liability before bringing a DJ action challenging a licensor’s patent.

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• Court noted the absence of a contractual prohibition against challenges to the validity of the patents in the license agreement and would not imply them “from the mere promise to pay royalties on patents” not found to be invalid o “No Challenge to Validity” is unenforceable

o Licensor – include a termination provision which vests if the Licensee challenges the licensed patent

o Consider including a clause requiring the licensee to initiate reexamination proceedings in the USPTO, a clause requiring validity disputes be submitted to binding arbitration, and/or a clause requiring advanced notice to licensor or any basis for invalidity the licensee intends to use

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• Medtronic Inc. v. Mirowski Family Ventures, LLC., 134 S.Ct 843 (2014) o Patent licensee paying royalties into an escrow account under a patent

licensing agreement and that it did not infringe the patent, and therefore did not owe royalties for those products, did not have burden of persuasion; burden of persuasion rests with patentee, just as it would had the patentee brought an infringement suit.

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• Organic Seed Growers & Trade Ass’n v. Monsanto., 718 F.3d 1350 (Fed. Cir. 2013) o Binding representations by patent holder to refrain from taking legal

action under a certain set of facts prevents any party alleging those facts from seeking a DJ of noninfringement/invalidity

Farmers alleged that their fields had accidentally become contaminated with trace amounts of Monsanto, and they feared an infringement suit.

Monsanto released a statement on its website: “It has never been, or will it be Monsanto policy to exercise its patent rights where trace amounts of our patented seeds or traits are present in farmer’s fields as a result of inadvertent means.”

o Court: Statement/other representation made as part of the lawsuit ensured that plaintiffs could not be sued by Monsanto. Plaintiffs lacked standing.

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• WiAV Solutions LLC v. Motorola, Inc., 631 F.3d 1257 (Fed. Cir. 2010) o Standing determination of a licensee focuses on whether an exclusive

licensee holds any exclusionary right in a patent against the defendant

Standing does not hinge on whether a licensee has the right to exclude all others form practicing the patent; only the ability to exclude the defendants from practicing the patents is required.

o An exclusive licensee, however, lacks standing to sue a party who has the ability to obtain a license from another party with the right to grant it

Right of any third party to obtain a sublicense does not automatically defeat a licensee’s claim of exclusivity and, consequently, its constitutional standing to sue.

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Thank you!

Any questions, please contact:

John Augustyn Leydig, Voit & Mayer, Ltd.

312-616-5600 [email protected]

Peter Toren Weisbrod Matteis & Copley PLLC

202-499-7900 [email protected]

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