TECHNOLOGY LICENSING TODAY
Karl F. Jorda
David Rines Professor of Intellectual Property Law & Industrial Innovation
Director, Kenneth J. Germeshausen Center for the Law of Innovation & Entrepreneurship
Franklin Pierce Law Center
Two White Street, Concord, NH 03301 USA
Workshop
IP Academy/Exploit Technologies
Singapore
March 1, 2007
1
I.
INTRODUCTION
A. Increasing Importance of IPRs
Live in “Golden Age” for IPRs
• Patent filings and issuances are skyrocketing
• Talk of patent “revolution,” “explosion,” “frenzy”
•
•
•
•
“Anything under the sun that is made by man” is patentable
Courts, Congress, Justice Department — pro IPRs
Corporations built on patented technologies
Motto: Innovate or perish
•
•
•
•
•
Value of IPRs for securing exclusivity — simply invaluable
Royalties for licensing IPRs in 2002: $150 billion
Over $1 billion for some companies
Universities jumped on bandwagon
Getting patents, concluding licenses, collecting royalties
2
B. Similar Developments Abroad
India of all places is the best example.
There has been a sea change in how IP is viewed in India.
In the North/South debates, India had spearheaded the opposition to patents, proclaiming
that technology was the “common heritage of mankind” and should therefore be made
available for free.
Back in 1992, when I attended a WIPO program at the University in Delhi, I was crucified
for the pro-patent views I expressed.
A few years ago when I attended a WIPO International Conference in Delhi it came as a
great surprise to me that they had turned decisively pro-patent.
They were singing a different tune now that “IP is available in abundance in India”:
• IP is being taught in “all academic schools” under government sponsorship,
• IP institutes are springing up all over,
• the Chamber of Commerce is promulgating the slogan “Patent or Perish,”
• the phrases “IP literacy” and “IP awareness” have become buzzwords and
• they are trying to “bring IP from a legalistic ivory tower down to the common man.”
What an about-face!
3
C. Licensing – A New Ball Game
We have a new ball game in the field of technology licensing and technology transfer.
Years ago there was little or none.
All product innovation had to be home-grown. NIH factor played a role.
There is often an innate reluctance to license because
• it is more profitable to self-commercialize than to license out.
• There is risk that licensing will set up a competitor.
Westinghouse, DuPont, Ciba-Geigy didn’t license.
Ciba-Geigy scuttled projects and did not even inquire about availability of a license.
4
C. Licensing – A New Ball Game (continued)
Nowadays no longer simple, straight-forward plain-vanilla licenses.
Instead,
• complex and sophisticated hybrid agreements,
• option/license agreements,
• cross-licenses, joint venture, corporate partnering, co-promotion or co-marketing
arrangements,
• strategic alliances and consortium licensing.
Other very significant developments and trends in
• licensing attitudes and practices (win-win),
• IP valuation and royalty setting (other quid pro quos).
Entirely different antitrust climate: restrictions commonly found in license agreements are
viewed as pro-competitive and IP is considered property rather than a monopoly.
Licensing, technology transfers and investments are ever so much easier to carry out via
patents and other IPRs as vehicles or bases.
5
D. REASONS FOR LICENSING
•
•
•
•
•
Unblock interlocking IPR’s
Settle IP litigation, interference
Grow and diversify the business
Deal with outside idea submission
Convert dormant IP portfolios into profits
6
E. KINDS OF LICENSES
a)
Patent License
Trademark License
Know-How License
Trade Secret License
Copyright License
Software License
Hybrid License
Franchise
b)
Exclusive License
Non-Exclusive License
Sole (semi-exclusive) License
c)
Royalty-bearing License
Royalty-free License
d)
U.S. (domestic) License
(Specific country) License
World-wide License
7
E. KINDS OF LICENSES (continued)
e)
Sublicense
Cross License
Package License
Label License
Shrinkwrap License
Grantback License
Grant-forward License
f)
Implied license
Compulsory License
g)
Shopright
Option Agreement
Consultation Agreements
Technical Assistance Agreement
Invention Agreement
Employment Agreement
Releases, Waivers
h)
Assignments
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F. DUE DILIGENCE
An investigation undertaken in the course of an IP transaction.
The purpose of a due diligence investigation is to provide the data
needed to analyze and assess the business and legal risks
associated with the IP rights that are the subject of the transactions.
Due diligence procedures may include, among other things:
1)
2)
3)
4)
identification of all IPRs involved in the transaction,
verification of ownership and inventorship of the IPRs,
determination of the enforceability or strength of the IP assets,
review and verification of all documentation associated with the
IPRs, including registrations, licenses, security liens, file wrappers,
and claims of infringement; and
5) interviews of those persons with knowledge of the subject IPRs.
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G. NEGOTIATION TACTICS
Prepare thoroughly
• do research on other side
• develop strategy
• prepare draft agreement or outline
Choose third or fourth choice candidate for first round
Form a team
Stage a dress rehearsal
Go in with win/win approach — not “wimpy/wimpy”
Assure comfort and convenience
Take good notes
Take up less controversial issues first
Take up money matters at end
• agreement clauses have economic weight
Use silence in negotiations
Volunteer to draft agreement
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II.
Patent Licensing – Dos and Don’ts
A. Royalty Setting
Misconceptions about royalties abound, e.g.,
• licensors can charge what the traffic will bear,
• licensors can recoup their R&D expenses,
• the cost of the development of a technology is a big factor,
• there are royalty standards within each industry to go by, etc.
None of this is necessarily true.
There is a limit to what a licensor can charge.
The licensee’s economics, not the licensors, control the royalty determination.
Less is more and greed never pays off.
At Ciba-Geigy several agreements went South because the royalties were too high, the
profitability was not there and the deals could not be sustained in the end.
On other occasions, agreements had to be renegotiated for lower royalties.
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A. Royalty Setting (continued)
The cost to licensor of the development of the technology is not even a factor.
“The research and development costs of developing the TI (Technical Information) are
sunken expenses expended by the licensor whether or not the TI is licensed and,
therefore, should not be considered by the licensor in arriving at a suitable royalty.”
(Martin Landis)
The public’s interest in buying a product is unrelated to the cost of developing it.
(Tom Arnold)
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A. Royalty Setting (continued)
What about royalty standards in industry?
Common belief: there are norms to rely on.
But per John Romary industry average royalty rates are “folklore” and “suspect as a
royalty-rate guide.
E.g., “a 5% running royalty for a non-exclusive license helps very little in evaluating an
exclusive license on different but related technology.”
A “1.5% running royalty on technology that can be effectively designed around is equally
unavailing in pegging the value of a pioneer patent critical to the competitor.”
Still commonly recited averages provide additional data points.
Such figures are based on the net sales price and a non-exclusive license.
A 20 to 50 per cent premium may be a reasonable average for an exclusive license
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A. Royalty Setting (continued)
Factors to be taken into consideration in royalty setting:
Tom Arnold’s “100 Factors Involved in Pricing the Technology License” (1988 Licensing
Law Handbook)
A handy checklist — not all factors play a role.
The most important are:
• the stage of development (embryonic and untested v. tested and commercial),
• the strength of the IP rights (solid v. weak, easy to design around),
• the degree of exclusivity (exclusive v. non-exclusive) and
• geographic scope.
Also, the importance and volume of complementary collateral trade secrets.
Many other operative clauses in a technology license have economic weight, e.g.
• grantback and grant-forward clauses,
• payment structures and schedules,
• MFL clauses,
• representations and warranties, etc.
Hence, royalty setting is not the first task in licensing negotiations but the last one — after
all the others have fallen into place.
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A. Royalty Setting (continued)
MOST IMPORTANT FACTORS
a) the state of development of the subject technology
(embryonic and untested v. tested and commercial),
b) the strength of the IP rights (solid v. weak, ease to
design around vel non), and
c) the degree of exclusivity (exclusive v. non-exclusive).
----d) the amount of, and value added by, trade secrets
“Trade secrets are a component of almost every
technology license...(and) can increase the value of a
license up to 3 to 10 times the value of the deal if no
trade secrets are involved.” (Melvin Jager).
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A. Royalty Setting (continued)
Royalty-bearing
Lump sum — single or installments
Running royalties
Fixed
Sliding
Increasing
Decreasing
Maximum (Cap)
Minimum
Combination of both
Most common combination
1) Initial lump sum (about 10%)
2) Running royalty (on net sales)
3) Minimum yearly royalty
Total royalty income depends on
Royalty base
Royalty rate
Duration of agreement
Royalty-free
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II.
Patent Licensing – Dos and Don’ts
B. Royalty-Free Licenses
There is significant royalty-free (yes, free!) licensing, which makes eminent business sense
but would hardly be endorsed by the IP value extraction and monetization gurus.
In my experience there is great virtue in royalty-free licensing in terms of good will and
good relationships, bringing about increased sales of goods and supplies and hence larger
market share.
I prepared once over 20 royalty-free non-exclusive licenses to carpet manufacturer under
patents I had obtained in the U.S. and Canada on an important improvement in tufting
carpets.
Ciba-Geigy was not in the business of manufacturing and selling carpets but dyestuffs.
Ciba-Geigy had no intention to practice this tufting method itself.
Licensing was the best alternative - for free.
Expectation: this would induce grateful carpet manufacturers to buy or buy more dyestuffs
from Ciba-Geigy because these carpet manufacturers were pleased to be licensed for free
to practice an important new technique for tufting carpets.
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B. Royalty-Free Licenses (continued)
•Note also the recent royalty-free licensing by Iridian Technologies of iris-scan patents.
Iridian owns many patents on iris-recognition software for accurately identifying people at
airport security or automated teller machines.
Iridian licensed these patents also on a royalty-free basis, after deciding that the “upside of
software sales was greater than the downside of collecting royalties.”
They then won contracts with Schiphol Airport and the UAE government and expect other
big government contracts.
IP Law & Business concluded: Iridian will “end up getting a lot of business”.
•Royalty-free licensing for creating good will and establishing or cementing good
relationships and market share can be savvy business move.
•In the field of licensing law and practice there are other instances of, or occasions for,
granting free licenses, for instance
—
—
—
—
interference settlement agreements,
grant-back/grant-forward provisions,
releases of patent rights to employees,
in standard setting situations, and others.
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II. Patent Licensing- Do’s and Don’ts
C. CONTRACT DRAFTING
1. Inescapable Uncertainty Principle In Contract Drafting
a. Semantic Dilemma
— undefined terms
— terms incapable of definition
— few terms universally understood to have a single meaning
e.g. “public domain”, “line of business”
if try to define, often substitute another uncertainty
stiff definitions important
b. Human Frailty
Imperfection of human intelligence and attentiveness, press of business
— can be mitigated
Can lead to three defects
a.) ambiguity
— two possible meanings —
— different from vagueness (imprecise boundaries)
e.g. “residence,” “period from June 15 to” can be eliminated
— of different words
— additional words
b.) excessive vagueness — e.g. “indivisible”
c.) unclear modifier
— most common, most dangerous
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2. Content of the All-Important Grant Clause
The grant clause is the most important clause
It has the following five elements:
1) ABC Corp. grants (or agrees to grant or grants and agrees to grant) to XYZ Inc.
2) a (non) exclusive (or sole) license under certain IP Rights
3) to make, have made, use, offer to sell, sell or import Licensed Products (or to
practice Licensed Methods)
4) throughout the Territory
5) for the duration of this Agreement.
Insertion of such modifiers as “indivisible,” “irrevocable” and/or “non-transferable” in
boilerplate fashion is inadvisable.
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2. Content of the All-Important Grant Clause (continued)
The term “indivisible” will take away the right “to have made”, which normally is implied and
included in the term “to make,” when it is not specifically recited. Ambiguity may result.
It will also rule out the right for subsidiaries and affiliates to operate under the license.
And the term “irrevocable” does not belong in the grant clause. Conditions, if any, of
revocability should be recited in the termination clause.
The “non-transferable” language would not grant any right to assign or sublicense and
would be ambiguous if assignment or sublicensing rights are recited.
Re the bundle of rights to be granted, it is preferable to track the statutory language. Other
terms, e.g. “lease,” “dispose of”, may lead to a restrictive reading because of the general
rule that inclusion of one means the exclusion of the other.
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3. Protection Of Exclusive Licensor
1. Lumpsum payment — paid up license
2. Minimum royalties
3. Termination power — outright
• if a desired total not reached
• if annual minimums not maintained
4. Conversion to non-exclusive license
5. “Best efforts“ clause
•
•
•
•
dubious language
variously interpreted
very strictly or leniently
better: reasonable diligence consistent with interests of
business
best: objective, quantitative criteria of performance
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4. Better Alternatives for the Common Best Efforts Clause
“Best efforts” clauses are routinely written into exclusive license agreements.
A best efforts clause to the effect that ABC “shall exercise its best efforts to exploit the
Licensed Products,” is useless as a device for the protection of licensor, where licensee’s
performance is unexpectedly low or inadequate.
It is dubious language that courts can interpret strictly or loosely as merely stating a theme
rather than a course of conduct.
Preferable wording:
“Reasonable diligence consistent with the interests of the business” or
“’Best Efforts’ shall mean those efforts which a reasonably prudent person knowledgeable
of such matters would consider desirable, necessary or commercially reasonable to further
the intentions of the Parties hereunder.”
Better yet: statements of objective, quantitative criteria of performance.
Best of all: a requirement for minimum royalty payments, coupled with conversion from
exclusive to non-exclusive status or termination power, if specified levels of performance or
annual minimums are not maintained.
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4. Best Efforts Obligation
Licensee shall exercise its best efforts to
produce, sell and offer for sale Licensed
Machines. “Best efforts” shall mean those
efforts which are commercially reasonable to
further the intentions of the Parties with
respect to quality as well as quantity of the
Licensed Machines produced. Production of
250 Licensed Machines per half year after
March 1, 2001 of a quality that conforms with
established industry standards, will satisfy
Licensee’s best efforts obligation hereunder.
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5. Protection of Licensees from Third-Party Dominant Patent Risks
Not infrequently, a licensee finds the exercise of the license blocked or impeded due to the
existence or issuance of a third-party patent:
•
•
•
Mostly a dominant patent,
a patent on a component or subcombination, or
a patent one is aware of and rules out as being infringed but later turns into a threat
due to a novel interpretation of the claims or claims scope or a novel (twisted)
of infringement.
This may occur in spite of rigorous due diligence.
For protection licensee should negotiate a hold-harmless clause stipulating
•
licensor would get licensee another license,
•
provide a non-infringing alternative or
•
defend an infringement suit (but not open-endedly).
Also a cost-sharing arrangement, if royalties to be paid to the third-party patentee or if it
comes to an infringement suit.
Renegotiation of the royalty provision in the first license is a possibility.
example.
Our Tolban
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5. Protection of Licensees from Third-Party Dominant
Patent Risks (continued)
Licensor should not represent and warrant that the licensed subject matter “does not
infringe any valid rights of any third party.”
Licensor can’t foresee what licensee will do and evaluate the risk nor can licensor foresee,
what other secret pending patents might issue.
All licensor can represent and warrant is that it is not aware of any patents of others that
would be infringed.
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6. Trouble-Free MFL Clauses
An MFL clause is a frequent bone of contention in my experience and in light of the
number of lawsuits.
It is a very important clause in non-exclusive licenses
Licensees should negotiate MFL clauses to extend identical terms or to refrain from
granting to subsequent licensees more generous terms.
Licensor can include a so-called negative MFL clause.
A general or overly broad MFL clause can be troublesome to licensor in special
circumstances, e.g., a license arising from a settlement or litigation.
It is advisable
•
to stay away from vague phrases, such as, “other terms and conditions,”
•
to include escape clauses or exceptions, e.g. settlements, and
•
to give licensee the right to terminate and renegotiate the license, if a subsequent
licensee has been overly favored.
Thus, an MFL provision, should be limited to royalty or other money terms giving prompt
notice to licensee and option to accept such new terms within, say, 30 days.
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6. Trouble-Free MFL Clauses (continued)
PATLEX LICENSE
ARTICLE XII – MOST FAVORED LICENSEE
If subsequent to the effective Date of this Agreement
another manufacturer of lasers, laser systems, or Low or
High Power Laser Tubes similarly situated to LICENSEE
is granted a license by PATLEX which provides to said
another manufacturer a combined royalty rate and
royalty base materially more favorable to said another
manufacturer with respect to any of the Licensed Patents
than that provided herein to LICENSEE for lasers, laser
systems and Low or High Power Laser Tubes sold or
leased in the United States, then LICENSEE may, at its
option, adopt the subsequent license in its entirety,
mutatis mutandis, as of the effective date of such
subsequent license. PATLEX shall notify LICENSEE of
any such subsequent license and provide LICENSEE an
opportunity to exercise the option provided herein.
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7. Additional Clauses Needing Close Attention
Definitions — the second-most critical clause in licenses
Confidentiality — crucial where trade secrets are involved
Improvements — “grant-back” by licensee to licensor or
“grant forward” by licensor to licensee where they continue
their R&D,
a narrow, precise definition, tied to the scope of the patent
claims,
in non-exclusive form
Sublicensing rights — especially important in exclusive licenses
for practical and legal reasons
Termination — this third most important clause is a multipronged
concept,
each prong needs to be defined separately,
a license never terminates over night,
different rights and obligations of the parties continue
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II. PATENT LICENSING – DOS AND DON’TS
D. Assignment Rather than Exclusive License
Illustrative licensing experience in New Zealand
At one point I was to go to New Zealand, to chase down an elusive invention and an elusive inventor
and prospective licensor and come back with a signed patent application ready for filing in the U.S. and
Canada. And I was to bring back an executed exclusive license agreement, ready for execution by my
management as well.
Invention: a novel bovine parturition control method invented by a veterinarian of a dairy company
employing dexamethasone TMA, a pharmaceutical of Ciba-Geigy.
I came back with a finished patent application but
installment payments based on net sales.
also with an assignment with a provision for
Why an assignment and not a license?
I don’t recall why I prepared an assignment. Perhaps it was intuition, because it was not until later that I
learned of Tom Arnold’s suggestion that
“what is perceived by the businessman as an ‘exclusive license,’ is best negotiated into the form of
a patent assignment with rights to reversions of title if royalties are not paid … because the
exclusive license differs from assignments only in areas (like who sues infringer and has authority
to compromise in settlement) which may be better borne by the party actively in the business than
by the passive transferor of the technology
Indeed, the New Zealand dairy company was merely a “passive transferor of the technology” and my
company was going to have to do considerable additional R&D work to obtain the requisite government
approvals for commercialization.
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II. PATENT LICENSING – DOS AND DON’TS (continued)
E. Implied Licenses
•
Shopright — employer-employee relationship
•
Via acquiescence or laches — where patent owner sits on his/her rights
•
Licensor-Licensee Relationship
under unlicensed but indispensable patent — e.g. dominant patent issued later to
licensor or earlier-issued dominant patent acquired by licensor
•
Seller-Buyer relationship
under combination or method patent of seller who sells a component or article for use
in the patented combo or method
See Jacobson v. Cox, Dist. Ct., Arizona, 1991
•
Business relationship — close cooperation on innovative project
See Wang v. Mitsubishi, CAFC, 1997
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II. PATENT LICENSING – DOS AND DON’TS
F. Case History – Gould Laser Patents
This licensing story played out in the eighties. But it is not ancient history at all.
It harbors
• Invaluable lessons and
• important licensing concepts and ingenious licensing strategies.
It shows creativity in crafting win-win license agreements to resolve intractable
controversies and disputes.
Timeless, priceless! Mother of all Case Histories.
As was stated by Tom Arnold:
“(T)he various clause concepts are as keys upon a piano. Each may be
played loudly, softly, staccato or with lingering resonance; and each may be
played in solo melody or in chords with the others in infinite variety; they
constitute a piano upon which infinite varieties of transactions can be played. “
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LICENSING CASE HISTORY
GOULD LASTER PATENTS
CAST OF CHARACTERS
1.) Gordon Gould
Sole inventor as Columbia graduate student — Owns 20% of patent rights and
has a 20% share of the royalties.
2.) Richard I. Samuel
Partner of Lerner, David, Samuel, et al — prosecuted Gould applications —
became President and CEO of PATLEX which had acquired 80% ownership
in Gould patent rights from REFAC, a New York City licensing outfit, initially
retained by Gould/Lerner, David, Samuel, et al to exploit Gould patent
rights. (REFAC receives 16% and PATLEX, 64% of royalty income.)
3.) Herbert Dwight, Jr.
Entrepreneur and founder of Spectraphysics and its CEO till retirement in 1988.
4.) Frank Borman
Former Astronaut and Chairman of Eastern Airlines, became Board Chairman
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of PATLEX in 1988.
LICENSING CASE HISTORY
GOULD LASER PATENTS
THE PRINCIPAL PATENTS
1.) USP 4,053,845
Optically Pumped Laser Amplifiers
Filed 4/6/59 — issued 10/11/77 — expires 10/11/94
2.) USP 4,161,436
Method of Energizing a Material
Filed 4/6/59 — issued 7/17/79 — expires 7/17/96
3.) USP 4,704,583
Gas Discharge Light Amplifier
Filed 4/6/59 — issued 11/3/87 — expires 11/3/2004
4.) USP 4,746,201
Brewster Angle Window Laser Device
Filed 4/6/59 — issued 5/24/88 — expires 5/24/2005
(Canada — 907,110 — ‘89)
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LICENSING CASE HISTORY
GOULD LASER PATENTS
PATENT PROCUREMENT & LITIGATION
Difficult Prosecution
Multi-party Interferences
Three Re-examinations
Appeals from PTO to District Court and Federal Circuit
Infringement Litigation
Control Laser FL
Quantronix CA
General Photomics CA
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LICENSING CASE HISTORY
GOULD LASER PATENTS
STANDARD PATLEX LICENSE
1. User License
Grant:
non-exclusive worldwide license under USP 4,161,436 on
“Method of Energizing and Material” — immunity under all
Gould patents.
3% of purchase price of all lasers — for past
infringement — within 60 days of effective date.
2)
1% of purchase price on first, second and third
anniversary of effective date.
3)
6% of purchase price for future purchases unless
purchased from licensed source.
4)
8% for lasers which licensee hides.
5)
In case of acquisitions of companies over $20M,
royalties as per 1) — 4) within 60 days of acquisition.
Royalty:
1)
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LICENSING CASE HISTORY
GOULD LASER PATENTS
STANDARD PATLEX LICENSE
2 Manufacturer License
Grant: non-exclusive worldwide license under all Gould
patents.
Royalty:
For Past Infringement:
1) 5% of net selling price upon signing under USP
4,053,845.
2) 13% under USP 4,161,436.
3) 5% under Can. Pat. 907,110..
4) 6% under USP 3,562,662, 3,576,500 and 3,586,998.
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LICENSING CASE HISTORY
GOULD LASER PATENTS
STANDARD PATLEX LICENSE
As Future Royalties:
1)
5% under USP 4,053,845
(Optically Pumped Lasers)
2)
2% under USP 4,704,583
(Gas Discharge Laser) or
3-1/2% or 5% depending on occurrence of certain conditions.
3.)
3-1/2% under Application No. 869,831
(Brewster’s Nagle Window)
4)
3% under USP 4,161,436
(User patent)
5)
5% under Can. patent 907,100
6)
6% under USP 3,576,500
(Copper Vapor Laser)
7)
O% under any other Gould patent.
For multiple patents — highest rate.
Other terms:
Complicated provisions with respect to the above patents as to royalty base.
No royalty on governmental sales.
Licensee’s customers won’t be sued.
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LICENSING CASE HISTORY
GOULD LASER PATENTS
PATLEX/COHERENT LICENSE
USA Sales
Sales Range
$ O — $12.5 million
$12.5 million and above
Foreign Sales
Sales Range
$ O — $7.5 million
$7.5 million and above
Royalty Rate
5.0%
4.0%
Royalty Rate
2.0%
1.6%
As long as Spectraphysics is neither licensed nor sued, royalty is only 3% of
U.S. net sales and 1.2% of foreign net sales.
Annual cap of $125K under Use Patent License.
Contains MFL Clause.
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LICENSING CASE HISTORY
GOULD LASER PATENTS
VOLUME BREAKPOINTS OR DESCENDING ROYALTY SCALE
Sales Range
$ 0-$15 million
$15-$20 million
$20-$25 million
$25 million and above
USA Sales
Royalty Rate
5.0%
3.0%
1.0%
0.5%
Foreign Sales
Sales Range
Royalty Rate
$ 0-$ 5 million
2.0%
$ 5-$10 million
1.0%
$10-$15 million
0.5%
$15 million and above
0.25%
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LICENSING CASE HISTORY
GOULD LASER PATENTS
KEY PROVISIONS — CRUX OF THE AGREEMENTS
Step-up royalty from 2% to 5% in 2 steps
Triggers:
1) when one competitor licensed or sued
up to 3-1/2%
2) when both competitors licensed or
sued up to 5%
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LICENSING CASE HISTORY – GOULD
LASER PATENTS
This case history clearly illustrates the dynamic interplay of
•
step-up royalty/MFL clauses to induce the smaller players to sign up when the bigger
competitors — here Coherent and Spectra-Physics — are holdouts and thus have an
additional competitive edge by not paying any royalties and
•
descending royalty schedules to entice the holdouts to take out licenses, inasmuch as
their total royalty exposure is significantly reduced, e.g. down to about 1.7% in the
case of Spectra-Physics.
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II. PATENT LICENSING – DO’S AND DON’TS
G. Case History Clock Calculator Patent
Four-Step Project
1.
2.
3.
4.
Exhaustive infringement search and study
Exhaustive validity search and study
Design of comprehensive Licensing Strategy
a) Patent ownership transferred to new subsidiary
b) Narrow royalty base
c) Low royalty rate
d) Offer of paid-up licenses
e) Agreements prepared for both paid-up and
running royalty licenses
Implementation
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II. PATENT LICENSING – DO’S AND DON’TS
H. Administration of Licensing Program
Post-Signing Issues
Distribution of license agreement — “working copies”
Cooperation with Accounting re royalty set up
Continuing contacts with and monitoring, notifications of other party re
–
–
–
–
–
–
–
–
–
–
–
–
–
Quality control (in trademark licenses, franchise agreements)
Royalty audits
Information exchange and technical assistance
Grantback and grantforwards
MFL clauses
Sublicenses
Patent activities
Patent markings
Bankruptcies — M& A’s
Renegotiation, revision
Termination — Multipronged
Breach of contract
`Other follow-through
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III. HYBRID LICENSES
A. Patent/Trade Secret Technology Licenses
Patents and trade secrets (and other IPRs)
Very prevalent — >80% of technology
Over 90& of all new technology is grist for trade secrets, not patents, i.e.
patents are tips of icebergs in an ocean of trade secrets
Problematic — different duration, etc.
Brulotte v. Thys Co. (Supreme court, 1964):
collection of royalties after patent expiration — per se patent misuse or
antitrust violation
Solutions:
• Separate agreements — ideally
• Lumpsum payments
• Differentiation between patents and trade secrets
• Allocation of royalties to each
• Reduction of royalty rate if patents
••
terminate
••
declared invalid
••
if applications not issued
• Reduction of royalty-payment period (e.g. 10 years)
• Grant of royalty-free license to patents
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• Grant of trade secret license — no patent license
B. FRANCHISING
•
Trademrks and trade secrets (and other IPRS)
•
Franchising is big business
•
Franchised businesses account for:
–
–
–
–
–
•
One trillion in annual sales
50% of Gross National product
50% of all retail sales
10 million people employed
600,000 franchised locations
Very popular and versatile form of
– Marketing and
– Expanding businesses
– Nationally and internationally
•
Truly win/win business arrangement
•
But legally it is a minefield
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Franchising (continued)
Business Advantages
•
Franchisor’s Benefits
– The franchisor can engage in rapid system expansion and market penetration
without the expenditure of any capital whatsoever, but instead with an infusion of
capital
– The franchisor acquires the aggressive self-motivation of franchisees, whose
ownership fervor is generally far greater than that of the employee managers
– The franchisor can rely on “local entrepreneurs” that can decipher local
requirements because of their direct customer contact and garner goodwill
engendered in that contact
– The franchisor can obtain revenue from a variety of sources: a substantial fee for
the sale of the franchise, a royalty for the use of the mark and the business
system, savings due to the reduction of large inventories and profits due to
reduction of large inventories and profits due to economies of scale in the
production, storage, and handling of products
– The franchisor has the ability to motivate and control huge numbers of indirect
employees, avoids a certain amount of risk inherent in most businesses, receives
the benefit of the constant accretion to the value of its trademark or service mark
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Franchising (continued)
Business Advantages
• Franchisee’s Benefits
– The franchisee is given access to a proven product or
service that has been advertised and is known to
customers.
– The franchisee benefits by the guidance provided by
the franchisor in the form of business standards and
from a standardized management system and
methods of internal control
– The franchisee is assisted in capital matters like site
selection, design and engineering of the facility,
layout, choice and sources for equipment, furnishings,
supplies and even general contractor services.
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Franchising (continued)
Franchise System Structure
•
•
•
A prospective franchisee has little choice but to put his entire faith and
confidence in the franchisor. From sources of supply to advertising, to
orders, payments, credits, discounts, the franchisee must look to the
franchisor for total guidance in every material aspect of the franchise
relationship.
As franchising is a creature of contract, the entire structure of a franchise
system will be contained in a franchise agreement, which set forth in detail
the rights, duties, obligations and activities which each party pledges to
undertake and perform. The basic franchise is the unit franchise
relationship, — only one — franchise outlet, at a specified location with a
designated territory.
The beginning point of the franchise relationship is the duration of the
franchise relationship. If the term is too short, it will attract few buyers.
Franchisees are purchasing a business opportunity where time is needed to
develop name recognition, to maximize goodwill and to recoup their
investment. If the term of the franchise is too long, the franchisor may be
stuck with a less than desirable franchisee, who is unwilling or unable to
operate the franchise successfully
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Thank You!
Karl F. Jorda
David Rines Professor of Intellectual Property Law & Industrial Innovation
Director, Kenneth J. Germeshausen Center for the Law of Innovation &
Entrepreneurship
Franklin Pierce Law Center, Concord, NH
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