Conforming Complex Licensing
Transactions to Business Objectives
Mark Wittow, K&L Gates
March 27, 2008
For IQPC - Patent Strategies Conference - SF
Thanks to:
Ross D. Vincenti
Senior Counsel, Technology Development and
Licensing
Sprint Nextel Corp.
2001 Edmund Halley Dr., Reston, VA 20191
703-433-4421, e-mail ross.vincenti@sprint.com
For preparing the initial draft of this presentation
Overview
Part I
Importance of Understanding the Company’s Business
and Objectives
Part II
Considerations for Complex Licensing Transactions
Part III
Problem Areas in Complex Licensing Transactions
Part I
Importance of Understanding
the Company’s Business and
Objectives
Importance of Understanding the Company’s
Business and Objectives
Key Factors to Consider and Understand:
 What type of business?
 Manufacturing industry versus service industry
 What types of assets does the Company own?
 Is it a technology dependent company?
 What technology does it rely on?
 Who owns the technology?
 How does the technology impact the products/services it
offers?
 Geographical considerations
 Where are its customers, facilities and employees?
 Is it a global business?
Importance of Understanding the Company’s
Business and Objectives
Key Factors to Consider and Understand:
 The Company’s existing IP portfolio
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Does it have a patent portfolio?
Has it registered all important trademarks?
Are trade secrets well protected?
Does the company make wide use of NDAs?
Does it have someone responsible for maintenance
and enforcement?
 Has an IP audit been performed?
Importance of Understanding the Company’s
Business and Objectives
What are the Company’s primary objectives?
 Growth versus profitability?
 What are the key financial drivers?
 Who are its competitors?
 Does it have a marketing plan?
 Does it have an overall IPR strategy?
 Does it plan to divest any part of its business in the
future?
Importance of Understanding the Company’s
Business and Objectives
How does the Company conduct business with
others?
 Do engineers and technical staff get involved in
business deals?
 Does it contribute technology or rely solely on
vendor for development of technology?
 Does it dictate its technical requirements or rely
on others to drive the technology?
Importance of Understanding the Company’s
Business and Objectives
Are the executives experienced and qualified?
 Do they clearly lay out their objectives and goals
before negotiating definitive agreements?
 Do they understand the value of owning or
having exclusive rights to technology?
 Do they see technology as a key part of the
business transaction or as an afterthought, i.e.
something for the lawyers to deal with?
Part II
Considerations for
Complex Licensing
Transactions
Considerations for Complex Licensing
Transactions
Structure of the underlying transaction:
 Purchase of goods/services – master purchase
agreement or master services or consulting agreement
 Software license agreement
 Strategic alliance, collaboration or cooperation
agreement
 Joint venture agreement – establishes a new entity
 Technology or IP license
Considerations for Complex Licensing
Transactions
 Existing (background) IP and ownership issues
 Parties typically retain ownership of their respective
background IP
 Parties may grant limited cross-licenses commensurate with
nature of the transaction (e.g., technology needed by one
party to provide services to the other or trademarks)
 If JV is formed, consider assignment versus license
 Assignment may be desirable if JV will be sole user of
technology or prefers to have enforcement rights
 License may be desirable if IP has value to original owner,
JV has no need to sublicense, or for deal valuation issues
Considerations for Complex Licensing
Transactions
 New IP and ownership issues
 Sole ownership by one party
 Joint ownership by the parties
 Ownership by the JV (if created)
Considerations for Complex Licensing
Transactions
New IP and ownership issues:
 Sole ownership by one party to the transaction can have
benefits for both parties
 More clearly establishes ownership/reduces likelihood of
disputes
 May be more appropriate if new IP is primarily enhancements to
one party’s background IP
 Easier enforcement of IP rights
 No accounting for royalties
 One party may not be able to exploit the technology as
effectively as the other
 Fewer disputes over derivative works (usually)
Considerations for Complex Licensing
Transactions
New IP and ownership issues:
 Assume agreement on sole ownership. Query, how
do you decide which party will be the owner?
Multiple ways to allocate sole ownership –
examples:
 Who paid for the new IP?
 Who invented the new IP?
 What is the subject matter of the new IP?
Considerations for Complex Licensing
Transactions
New IP and ownership issues:
 Allocate based on who paid for the new IP - i.e., if I pay 100%
of cost to develop the new IP, I should own it
 Eliminates potential windfall profits to partner
 Pricing or profit sharing in definitive agreement can be adjusted
to take into account up front payments
 Enhancements and derivative works – parties can agree that
even if the new IP is an enhancement to one party’s background
IP, the party paying the development costs owns it
 Typically a “grant back” license is granted to holder of background
IP
 Alternative is other party owns it and grants exclusive license to
use the technology
 Typically of limited duration
Considerations for Complex Licensing
Transactions
New IP and ownership issues:
 Allocate based on who invented the new IP
 If only one party is inventor, requires license grant for other party to use and
exploit the technology
 Commonly used in MSLA or MPA transactions
 License grant can be broad, narrowly tailored, exclusive, etc.
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If jointly invented, result is joint ownership
Consistent with existing patent law on ownership, i.e., the default rule
May discourage collaboration
Query – if party “A” pays 100% of development cost, but party “B”
invented the new IP, should party “B” own the new IP?
 Query – if party “A” invents an enhancement to background IP owned by
party “B”, should party “A” nevertheless own the new IP?
Considerations for Complex Licensing
Transactions
New IP and ownership issues:
 Allocate based on the subject matter of the new IP
 Does not consider identity of inventor
 Results in sole ownership by one party (assuming no
overlap between the party’s respective subject matter
areas)
 May require an assignment of ownership
 Same query – if party “A” pays 100% of development
cost, but party “B” was the inventor, should party “B”
own the new IP?
Considerations for Complex Licensing
Transactions
New IP and ownership issues:
 Joint ownership of new IP
 Seems equitable when both parties contribute to development
 Note, parties can agree on joint ownership even if only one party is the
inventor
 Consistent with default rule – i.e., if no agreement, then jointly
developed new IP will be jointly owned by operation of law
 Either party may exploit the technology
 Resulting enforcement rights may be complicated
 Can lead to serious disputes over what is jointly owned, who will
file/prosecute patents, whether parties must account for royalties
Considerations for Complex Licensing
Transactions
New IP and ownership issues:
 Joint ownership of new IP – some problems to consider:
 Parties may disagree on whether to file patent applications
 Absent agreement, no obligation to account for royalties
 Either party may exploit and license to third parties
 Each party is co-owner of the patent, no partition of rights
 Each party has veto rights when it comes to enforcement
and all co-owners are necessary parties to any lawsuit
 Note, involuntary joinder is possible and in some cases
necessary
Considerations for Complex Licensing
Transactions
 New IP and ownership issues:
 Sole ownership by the new joint venture (if formed)
 May be appropriate if it is likely the inventors of the
new IP will be employees of the JV
 Facilitates licensing to third parties -- all royalties go
to the JV
 No need for an accounting to the JV partners
 Easier enforcement of IP rights
 Potential tax advantages depending on structure and
jurisdiction of the JV
Considerations for Complex Licensing
Transactions
 New IP and ownership issues:
 Sole ownership by the new joint venture – some problems to
consider:
 During term of JV, should new IP be licensed to the partners?
 Consider whether license rights should be tailored to each partner
 What happens to IP if JV fails, is terminated or is subject of
buyout?
 Solutions depend on the situation
 New IP is an asset of the entity – how distributed?
 If any background IP was contributed by the partners, ownership
may revert back via assignment
Considerations for Complex Licensing
Transactions
Considerations for Complex Licensing Transactions:
 Scope of license rights to be granted
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Exclusivity provisions
Duration
Territorial restrictions
Field of use restrictions
Right to sublicense
Enhancements, modifications and improvements to
the technology
Considerations for Complex Licensing
Transactions
Scope of License Rights to be Granted:
 Exclusivity provisions
 Full exclusive license prevents licensor from licensing the
technology to others
 Drafting tip – What about licensor? Make sure licensor retains right
to use/practice the technology if licensor needs it
 May be limited in duration (e.g., one year)
 May be limited to certain territory (e.g., U.S.) or field of use (e.g.,
type of event) or against certain competitors
 May be conditional on certain event (payment of royalties,
counter-exclusivity clause, etc.)
 Key point – you can be as creative as you want with exclusivity
clauses
Considerations for Complex Licensing
Transactions
Scope of License Rights to be Granted:
 Duration limitations on the license grant
 Perpetual -- it lasts forever, no need to renew
 Irrevocable -- it can’t be revoked even if there’s a breach of the
license agreement itself
 Remedies are limited to breach of contract
 Negotiation point – “irrevocable so long as licensee pays royalties…”
 MSLA typically says the software license is “perpetual” and
“irrevocable”, but…
 Must pay annual software maintenance fees to receive updates and
support for the software
Considerations for Complex Licensing
Transactions
 Scope of License Rights to be Granted:
 Territorial and field of use limitations on the license
grant
 Licensor can limit license to, e.g., the U.S., or even a
region or state, etc., or it can be worldwide
 Field of use restrictions can be very creative
 To enable another technology
 For a particular type of event or circumstances
 Practice tip – the more restrictions and limits you place
on the license grant, the lower to value to the licensee
Considerations for Complex Licensing
Transactions
Scope of License Rights to be Granted:
 Right to sub-license
 Will licensee need to sub-license the technology to third
parties?
 Alternative – require licensee to identify any parties to whom it
would like to grant a sub-license, and then negotiate direct
license
 Limit sub-license solely to contractors of the licensee, “for
the sole purpose of producing Products for sale by
Licensee…”
 Other limitations – specific or category
Considerations for Complex Licensing
Transactions
Scope of License Rights to be Granted:
 Enhancements, modifications and improvements
 In context of JV, parties may want the JV to own the
enhancement, and license back to the partners
Considerations for Complex Licensing
Transactions
 Royalties/Fees
 Royalty free
 Up front, one time fee (aka development fee, nonrecurring engineering fee, etc.)
 Recurring license fees (annual, quarterly, etc.)
 Combination of up front and recurring
 Other concepts
Considerations for Complex Licensing
Transactions
Royalties/Fees:
 Royalty free license
 Can be perpetual, irrevocable, etc.
 Can be tied to party’s performance
 E.g., “royalty free so long as “A” not in breach…”
 Can be of limited duration, then become recurring
royalty or other events can trigger payment of royalties
 E.g., “if sales of the Product exceed 10,000 units in any given
month, then on a going forward basis “A” will pay to “B” a
royalty equal to two percent (2%) of the gross sales revenue for
the Product…”
Considerations for Complex Licensing
Transactions
Royalties/Fees:
 Up front, one time fee (aka development fee, non-recurring
engineering fee, etc.)
 Lump sum, paid at time of execution
 In context of software license fees, licensee may still have to pay
monthly/quarterly/annual “software maintenance fee”
 Parties can negotiate a large one time fee in lieu of recurring
royalties
 May be creditable against future royalty obligations
 Query – is it really a “royalty”?
 What if parties agree that in exchange for “A” paying NRE, “A” will own
the IP rights?
Considerations for Complex Licensing
Transactions
Royalties/Fees:
 Recurring license fees (annual, quarterly, etc.)
 Can be fixed, variable, etc.
 Flat fee per unit, percentage of sales, combinations, etc.
 Minimums (floor), maximums (caps), in the gross
aggregate or in a fixed period (monthly, annual, etc.)
 Additional royalties for enhancements, derivatives, or
for right to sublicense
 Recapture rights as to sublicense royalties
 Adjustments to royalty rate
 E.g., if patents issue (or if patents don’t issue, rates go down)
Considerations for Complex Licensing
Transactions
Indemnity and Limitations of Liability
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General Indemnity versus IP Infringement Indemnity
Carve-outs From Indemnity Coverage
Remedies for Indemnitee
Limitation of Liability carve-outs and caps
Considerations for Complex Licensing
Transactions
Indemnity and Limitations of Liability:
 General Indemnity versus IP Infringement Indemnity – what’s
the difference and why treat them separately?
 General indemnity for everything except IP infringement
 Nature of the claims are different
 Negligent/willful acts or omissions
 Different remedies – infringement remedies may give indemnitor
a choice of options to rectify the situation
 Carve-outs more likely in IP indemnity clause
Considerations for Complex Licensing
Transactions
Indemnity and Limitations of Liability:
 Consider financial condition of indemnifying party
 Indemnity may be worthless if licensor has little net worth
 Practice tip – licensor may merge, be acquired by larger company or
have organic growth, i.e. don’t assume net worth won’t change
 Scope of indemnification
 Trademarks only?
 Licensee will insist on CR/TM/PAT/TS
 Acts/omissions vs. negligence/willful acts
 Remedies
 Process by which one is indemnified
Considerations for Complex Licensing
Transactions
Carve-outs From Indemnity Coverage
 Licensor wants as many carve-outs as possible to
limit exposure
 Licensee want to limit carve-outs
 Common carve-outs:
 Unauthorized modifications
 Combination with third party products/software
 Failure to strictly adhere to licensors instructions for use
Considerations for Complex Licensing
Transactions
Sample language on indemnification carve-outs (Licensor’s
version):
Licensor shall have no obligation to defend, indemnify and hold
Licensee harmless for claims of infringement if (a) Licensee
modifies the Technology, (b) Licensor complies with the written
designs or specifications supplied by Licensee, (c) Licensee
combines the Technology with any products or services not
provided or licensed by Licensor, (d) Licensee fails to strictly
adhere to Licensor’s instructions for the use and maintenance of
the Technology, (e) Licensee fails to use the most current
release of the Software.
Considerations for Complex Licensing
Transactions
Sample language on indemnification carve-outs (Licensee’s version):
Licensor’s obligation to defend, indemnify and hold Licensee harmless
for claims of infringement shall be reduced, but only to the extent that a
claim of infringement is based on (a) Licensee’s unauthorized
modification of the Technology and the alleged infringement would not
have occurred but for such unauthorized modification, (b) Licensor’s
strict compliance with the written designs or specifications supplied by
Licensee and such compliance is the direct cause of the alleged
infringement, (c) Licensee’s combination of the Technology with
products or services not reasonably contemplated by Licensor and the
alleged infringement would not have occurred but for such combination,
(d) Licensee’s failure to strictly adhere to Licensor’s instructions for the
use and maintenance of the Technology and the alleged infringement
would not have occurred but for such failure, and (e) Licensee’s failure
to use the most current release of the Software when use of the most
current release would have avoided the claimed infringement.
Considerations for Complex Licensing
Transactions
Limitation of liability
 No punitive or consequential damages
 Usually excludes indemnification obligation and
confidentiality breach
 Caps on total liability
 Can be fixed, based on amounts paid, etc.
 May apply only to direct damages or specific claims
Part III
Problem Areas in
Complex Licensing
Transactions
Problem Areas in Complex Licensing
Transactions
Some of the more common problem areas include:
 Form of license grant
 Technology versus intellectual property
 Promises, promises…
Problem Areas in Complex Licensing
Transactions
Form of the license grant:
 Substance will triumph over form – i.e., what it is
called does not determine what it is
 Courts make the interpretation – unintended
consequences?
 Assignment of a patent
 Must be in writing
 Can be to all or part of the right, title and interest – if latter, it
creates joint ownership
 Formal or informal (by granting “all substantial rights”)
 Exclusive versus non-exclusive versus covenant not
to sue
Problem Areas in Complex Licensing
Transactions
License of technology itself versus license of
intellectual property:
 Technology is a thing, both tangible and intangible
 Technique, manufacturing process, know-how,
algorithm, software, business process or plan,
database, systems, protocols, etc.
 Intellectual property is a right
 Patents, copyrights, trademarks, and trade secrets
(includes registrations too)
Problem Areas in Complex Licensing
Transactions
License of technology itself versus license of intellectual
property:
 License to the technology itself not the same as granting a
license to IP
 License of the technology carries with it implied right to all of
the underlying IP of the licensor
 Common for finished goods
 A grants to B the right to use A’s bar code scanners in B’s
warehouse
 IP license grant appropriate if no end product involved
 A grants to B the right to manufacture, sell and distribute
products containing A’s technology covered by U.S. patent no.
1,234,567.
Problem Areas in Complex Licensing
Transactions
License of technology itself versus license of intellectual property:
 Be clear as to what you are licensing – spell it out
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Non transferable
Sublicense
Exclusive
IP type (patents, copyright, trademark, trade secret)
Rights
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Patent – make, have made, use, sell, offer for sale, distribute
Copyright – copy, perform, distribute, display, create derivative works
Trademark – use (specific restrictions on use)
Trade secret – use (specific restrictions on use)
Technology
Field of use restrictions
Territory
Term of license
Problem Areas in Complex Licensing Transactions
Promise of a grant versus a grant:
 Agreement to grant/assign is not a grant or assignment
 “A will grant to B…”, “B shall own…”, “A agrees to grant to B…”
 A promise to convey doesn’t convey anything, it merely evidences an
intent to transfer
 A promise to convey is not enforceable against a subsequent bona fide
transferee (e.g., A makes only a promise to grant to B, and subsequently
makes a grant to C. B has nothing.)
 Present assignment or grant of future patents is enforceable however
 E.g., A assigns to B all future issued patents related to X – creates an equitable
interest in B in the future patents
 As long as its an actual present assignment (not a promise to assign), title will
automatically vest in transferee when transferor obtains ownership
 Make sure all grants are present – “A hereby grants to B, and B hereby
accepts from A…”
Problem Areas in Complex Licensing Transactions
Conditions versus covenants
 Covenants are independent obligations
 Breach = breach of contract
 Conditions are tied directly to the license grant
 Breach = infringement
 Should the license grant be withdrawn if there is a
breach of the contractual provision?
 Should all provisions be conditions, or only certain
ones?
Thank you. For more information contact:
Mark Wittow
K&L Gates
925 Fourth Ave., Suite 2900
Seattle, WA 98104
Direct Dial No. 206-370-8399
Direct Fax - 206-370-6210
Switchboard: 206-623-7580
Email: mark.wittow@klgates.com
www.klgates.com