ANATOMY OF A PATENT LICENSE AGREEMENT

ANATOMY OF A PATENT LICENSE AGREEMENT Raymond L. Owens Eastman Kodak Company January 24, 2005 BACKGROUND Color Print Company Inc. manufactures and sells color ink jet printers. Black and White Print Company Inc. manufactures and sells black and white ink jet printers. Color Print owns U.S. Patent No. 8,000,000 that relates to an improved system for operating an ink jet printer. It reduces manufacturing costs and improves quality. It works on both black and white as well as color ink jet printers. Color Print has agreed to license this patent on a non-exclusive license to Black and White Print. However, the license includes a field of use restriction limiting Black and White Print’s license under the patent to black and white printers. No continuation or divisional applications were filed based on U.S. Patent No. 8,000,000. The Grant Back clause, Article 1B., from Black and White Print to Color Print was the subject of extensive negotiations between the parties. Color Print reduced the running royalty percentage of “net selling price” from 2½% to 2% to receive the benefit of this clause. Initially, Color Print proposed a clause that required a legend in a clearly readable prominent position that stated, “This product is made in accordance with a license under U.S. Patent No. 8,000,000 assigned to Color Print Company, Inc.” The parties agreed not to include the product marking clause in the agreement. The following is the license agreement (with comments) entered into between the parties. This Agreement entered into as of the _____ day of ____________, 20___, by and between: BLACK AND WHITE PRINT COMPANY, INC., a corporation organized and existing under the laws of the State of New York, having a place of business at 40 Front Street, Syracuse, New York, hereinafter referred to as BLACK AND WHITE PRINT, and COLOR PRINT COMPANY, INC., a corporation organized and existing under the laws of the State of New York, having a place of business at 755 Lake Avenue, Rochester, New York, 14612, hereinafter referred to as COLOR PRINT. COMMENT: The heading should properly identify each party, stating its address and status, e.g. a corporation of a named state or foreign country, partnership, individual, an individual doing business as (dba) the named enterprise, and an individual contracting both individually and on behalf of a corporation. The names should be capitalized and each party identified by a single significant term (rather than a general term such as “LICENSEE”) to be used throughout the agreement in referring to the party, although LICENSEE may be used in printed forms where identical licenses are to be granted to a number of licensees. Since COLOR PRINT is the owner by assignment of all right, title, and interest in U.S. Patent No. 8,000,000 relating to operating ink jet printers, and Since BLACK AND WHITE PRINT has requested a nonexclusive license under U.S. Patent No. 8,000,000 and COLOR PRINT is willing to grant such license on the terms herein set forth, NOW, THEREFORE, the parties hereto hereby agree as follows: COMMENT: The above clauses (sometimes referred to as “recitals”) set forth the circumstances and context of the agreement. They serve as an introduction and are often useful in explaining the reason for any unusual provisions in the agreement. The Agreement should be worded so as not to impose improper limitations on any clause in the agreement itself. The “agreement” of the parties is subsequent to the “NOW, THEREFORE”, and the above clauses are not the proper vehicle for significant obligations or consideration. ARTICLE 1. GRANT A. COLOR PRINT hereby grants to BLACK AND WHITE PRINT a non-exclusive license (without sublicensing rights) under U.S. Patent No. 8,000,000 to make, use, offer to sell, sell, or import Licensed Ink Jet Printers. B. BLACK AND WHITE PRINT hereby grants to COLOR PRINT a fully paid-up, irrevocable nonexclusive license (without sublicensing rights), to make, use, offer to sell, sell, or import Ink Jet Printers under any patent or patent application filed in any country that BLACK AND WHITE PRINT has a right to grant a license and has an effective filing date before the expiration of U.S. Patent No. 8,000,000. COMMENT: The “A” grant is restricted to a single field. The term Licensed Ink Jet Printers is defined in Article 2B. as an inkjet printer that uses only a single color ink. The “B” grant is the grant back clause negotiated between the parties. It should be noted that the grant back of Article 1B. includes both black and white as well as color printers in any country. ARTICLE 2. DEFINITIONS A. For the purpose of computing royalties under this agreement, the “Net Selling Price” of Licensed Ink Jet Printers shall be the invoice price charged therefore by BLACK AND WHITE PRINT in selling the same to the trade, excluding the following: 1. Direct taxes or direct governmental charges assessed on the manufacture or sale or delivery of such Licensed Ink Jet Printers which are included in such invoice price as a separately stated charge; 2. Common-carrier charges for transporting such Licensed Ink Jet Printers to the customer, to the extent included in said invoice price, whether or not as a separately stated charge; 3. Credits or allowances (up to the net selling price of the Licensed Ink Jet Printers involved) given by BLACK AND WHITE PRINT to its customers based on the return or rejection by such customers of Licensed Ink Jet Printers on which royalties hereunder have been paid; and 4. Trade, quantity and cash discounts allowed, or commissions to agents other than employees of BLACK AND WHITE PRINT and its subsidiaries, paid or payable by BLACK AND WHITE PRINT to the extent included in such invoice price. B. The term “Licensed Ink Jet Printers” means ink jet printers that use only a single color ink to make images and need a license under U.S. Patent No. 8,000,000. COMMENT: Many License Agreements include a more detailed “Definitions Article”. For example, if subsidiaries are involved in the license, the term “subsidiary” should be defined. Where there are multiple U.S. patents and applications, and corresponding foreign patents and applications, they can be defined in a definition clause and listed in an appendix or exhibit attached to the Agreement. In another clause, the licensed products can be defined as using the patent rights defined in the previous clause. If the patents are licensed in a certain technical field, that field will need to be defined with care. Territorial restrictions also need to be carefully defined as well, with the caveat that certain territorial restrictions may have antitrust implications. ARTICLE 3. ROYALTIES BLACK AND WHITE PRINT shall pay COLOR PRINT 2% of the net selling price of Licensed Ink Jet Printers. COMMENT: In the above clause, the royalty base is the “Licensed Ink Jet Printers” and a running royalty is applied to the “net selling price” of the royalty base. If the Licensed Ink Jet Printers are to be leased, the Grant and Royalties Articles will have to be changed. The royalty can be based on a fixed amount for each item sold, e.g., “ten cents per optical disc sold” or “fifty cents on a per pound basis” of licensed material. Where the licensed product is to be integrated into a system that is sold as a single entity, the “net selling price” is often defined as a percentage of the net system selling price of the integrated system. Many license agreements make provisions for up-front payments that may or may not be creditable against running royalties. Often Licensors require a minimum payment for each reporting period. Sometimes agreements provide the granted non-exclusive license becomes paid up after a maximum cumulative amount of royalty has been paid. If the negotiated license was to be paid-up, then Article 5 would be deleted and Article 3 would be changed to read, “BLACK AND WHITE PRINT, upon execution of this agreement, will pay to COLOR PRINT, by a certified check or a bank check, in the amount of One Million U.S. Dollars ($1,000,000).” Article 1A. would be changed to read, “COLOR PRINT hereby grants to BLACK AND WHITE PRINT a non-exclusive paid-up license (without sublicensing rights) under U.S. Patent No. 8,000,000 to make, have made, use, and sell Licensed Ink Jet Printers.” ARTICLE 4. AGREEMENT TRANSFERABILITY A. Neither this Agreement nor any right, license or obligation hereunder is assignable or transferable by BLACK AND WHITE PRINT or its subsidiaries, through sale of BLACK AND WHITE PRINT’s assets, through bankruptcy proceedings, or otherwise, without written authorization of COLOR PRINT. B. This agreement and any right, license or transferable obligation hereunder is assignable by COLOR PRINT, without authorization of BLACK AND WHITE PRINT. Written notice of such transfer shall be promptly given to BLACK AND WHITE PRINT. COMMENT: Most license agreements should include some clear statement as to transferability (separate from any specific exclusion of sub-licensing rights). Black and White Print should have tried to change this clause to permit Black and White Print to transfer this license to any company that bought their ink jet printing business. ARTICLE 5. RECORDS, ACCOUNTS, STATEMENTS, AUDIT A. During February and August following each calendar half-year during the term in which this Agreement shall have been in force, BLACK AND WHITE PRINT shall furnish to COLOR PRINT a written statement setting forth (1) the total number (quantity) of Licensed Ink Jet Printers sold by BLACK AND WHITE PRINT during the preceding calendar half-year and, (2) the total royalty payable thereon. In the written statements furnished hereunder, BLACK AND WHITE PRINT shall also state separately the total number of licensed products made, but not sold, prior to the end of the royalty period covered by that statement. At the time of furnishing each statement, BLACK AND WHITE PRINT shall pay royalty to COLOR PRINT in accordance with such statement. B. For so long as this agreement is in force, BLACK AND WHITE PRINT shall maintain full and accurate records and accounts of all data necessary for preparation of the statements and for calculation of the royalties required by this agreement and shall retain the records and agreements relating to each statement submitted hereunder, for three (3) full calendar years after furnishing that statement to COLOR PRINT. C. The records, accounts and statements referred to herein shall, upon request by COLOR PRINT, be audited from time to time at the expense of COLOR PRINT by certified public accountants agreeable to both parties, or if no such accountants are agreed upon within 30 days of COLOR PRINT’s request, by WE CAN COUNT, INC. of Rochester, New York, which accountants shall furnish to each party hereto a certificate setting forth only their findings as to the completeness and accuracy, or the extent and nature of any inaccuracy, of said records, accounts, and statements. COMMENT: Normally if royalty payments are to be paid on final inventory, the definition of Net Selling Price should require an accounting of Licensed Ink Jet Printers in final inventory and the Royalties article should specify the royalty thereon. ARTICLE 6. TERMINATION A. Unless, and except to the extent, sooner terminated in accordance with Article 6B, or by written agreement of the parties, the licenses granted herein shall continue in force until expiration of the last licensed patent licensed under Article 1A or 1B. B. In the event BLACK AND WHITE PRINT has not made royalty payments for three consecutive calendar half-years, Article 5A., COLOR PRINT shall have the option to terminate this agreement on notice to BLACK AND WHITE PRINT, except that the license granted under Article 1B. shall survive such termination. The termination of this agreement under Articles 1A or 1B shall not relieve BLACK AND WHITE PRINT of its obligations to submit statements, permit audits and pay any sums of money due and payable or accrued hereunder. COMMENT: Generally a license expires with the last patent and the agreement effectively continues until all royalty statements and accrued royalty payments have been made and the licensor has had the agreed opportunity to audit the royalty records of the licensee. ARTICLE 7. COMMUNICATIONS Any notice, statement, other communication, or payment hereunder shall be in writing, and any such communication and any payment hereunder shall be sent to the person who signed the Agreement at the address stated at the beginning of this Agreement or as changed by written notice. Any such notice, statement, other communication, or payment shall be effective as of the date received, unless sent by registered or certified mail, in which case it shall be effective as of the date mailed, as evidenced by a postal document received at the time of such registration or certification. ARTICLE 8, SEVERABILITY If any term of this Agreement is held invalid or unenforceable for any reason, the remainder of the provisions will continue in effect as if this Agreement had been executed with the invalid portion eliminated. COMMENT: If a court of competent jurisdiction finds any provision of this Agreement unlawful or unenforceable, that provision will be enforced to the maximum extent permissible so as to effect the intent of the parties, and the remainder of this Agreement will continue in full force and effect. ARTICLE 9. APPLICABLE LAW This Agreement shall be construed and interpreted under and in accordance with the laws of the State of New York, United States of America. COMMENT: It is appropriate to establish the jurisdiction applicable law, as in the clause: COMMENT: Dispute Provision The present agreement does not have a Disputes clause. Under this Agreement the parties, in event of a dispute, would have to sue in a court having competent jurisdiction, unless they can mutually agree to use some method of alternative dispute resolution. A Disputes clause may set forth a procedure to be used by the parties before litigation. This clause may also specify that arbitration must be used instead of litigation in any court of law. COMMENT: Warranty Provisions There is no need for a Warranty provision in this agreement. However, if a warranty is needed, it should be in the body of the agreement. For example, if there is some question about ownership of a patent or sublicensing rights, then a warranty would be appropriate. When a payment covers past infringement, a warranty clause should establish, as a condition precedent, the exact extent of past infringement including dates, models, prices, and quantities, or use.