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					                      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

                                 CLE PROGRAM
                       New York County Lawyers‘ Association
                                  New York City
                                  April 23, 2007

               I. Introduction
                     A.    ―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

Ronald Myrick, formerly of General Electric, put it this way: ―The attraction
     of IP is simple; it‘s at the forefront of the technology that‘s driving the
     world and IP is one of the unique entities in the law where you‘re
     actually creating assets.‖                                                 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!

                 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.

         Licensing – A New Ball Game (continued)
Nowadays no longer simple, straight-forward plain-vanilla licenses.

•    complex and sophisticated hybrid agreements,
•    option/license agreements,
•    cross-licenses,     joint  venture,    corporate   partnering,   co-promotion     or   co-marketing
•    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.

             II. Integration Strategy for IPRs
From former fragmentation by specialties, IPRs are now a ―seamless web,‖ due to
progress in technology and commerce, per Professor Jay Dratler.

Professor Dratler was the first one to ―tie all the fields of IP together.‖ ―Integrative
treatment.‖ (Intellectual Property Law: Commercial, Creative, and Industrial – 1991)

In 1997 the authors of ―Intellectual Property in the New Technological Age‖ (Professors
Merges, Merrell, Lemly & Jorde) also
• avoid the fragmented coverage
• approach IP as a unified whole; and
• concentrate on the interaction between different types of IPRs.

Thus we now have a unified theory in the IP world, a single field of law with subsets and
significant overlap between IP fields. Several IPRs are available for the same IP or
different aspects of the same IP for dual or multiple protection. Not taking advantage of
the overlap misses opportunities or, worse, amounts to malpractice.

    Integration Strategy for IPRs (continued)
One IPR category is center of gravity and more important—most often patents

Other IPR categories are then supplementary but very valuable to
•   cover additional subject matter
•   strengthen exclusivity
•   invoke additional remedies
•   standup if primary IPR becomes invalid
and thus provide synergy and optimize legal protection.

Multiple forms of protection are especially important in the fields of biotechnology and computer.

The most important strategy is exploiting the overlap between patents and trade secrets.

Illustrative examples are:
•    GE‘s industrial diamond process technology
•    Wyeth‘s Premarin process
•    Pizza Hut decision

      Multiple Protection in Biotech

Protection for a diagnostic kit involving
  monoclonal antibodies:

• Product patent on the test kit
• Process patent on the preparation of the
• Copyright for test kit‘s instructions
• Trademark
• Trade secrecy for production know-how
• Trade secrecy for collateral know-how
        Multiple Protection for Computers
A data processing system can involve:
•   patented hardware and software
•   patented computer architecture on circuit designs
•   patented business methods
•   trade secret production processes
•   trade secrecy for collateral know-how
•   copyrighted microcode
•   copyrighted operating system
•   copyrighted instruction manual
•   semiconductor chips protected as mask works
•   consoles or keyboards protected by design patents
•   or as trade dress under trademark principles
•   trademark registration

IP Integration Concepts




         BUILD A WALL








III. The Role Of Trade Secrets In Licensing

•   In our knowledge-based high-tech era it is important to exploit the overlap
    between IP categories for dual or multiple protection.

•   This is true especially between patents and trade secrets.

•   Patents and trade secrets are not incompatible but dovetail: the latter can
    protect volumes of collateral know-how.

•   This results in synergistic integration and secures invulnerable exclusivity.

•   Most technology licenses are hybrid licenses covering patents and trade

•   Licenses under patents without access to collateral know-how are
    insufficient for commercial use of patented technology.

         A.    Trade Secret Primer

                  IP RIGHTS (IPR)

       IP                   IPR
Invention           Patent, Trade Secret
Know-how, Invention Trade Secret
Brand name          Trademark
Work of Authorship  Copyright


Personal Skill                             Generally Known

                 Trade Secrets
            Technical                 Business
           Information              Information

                 Readily Ascertainable
•   "Trade Secret law is the oldest form of intellectual property protection, "
    according to Perritt. (Cave people?!)

•   Back in Roman times, the law afforded relief against a person who induced
    another‘s employee (slave) to divulge secrets relating to the master‘s
    commercial affairs.
•   Trade secrecy was practiced extensively in the European guilds in the Middle
    Ages and beyond.

•   Modern law evolved in England in early 19th century — in response to the
    growing accumulation of technology and know-how and the increased mobility of

•   Recognized in U.S. by middle of 19th century, Peabody v. Norfolk (1868) held
    that a secret manufacturing process is property, protectable against
    misappropriation; secrecy obligation for an employee outlasts term of
    employment; a trade secret can be disclosed confidentially to others who need
    to practice it and a recipient can be enjoined from using a misappropriated trade

•   By the end of the 19th century the principal features of contemporary law were
    well established.
•   1939 the Restatement of Torts attempted to ―codify‖ it.
1. A trade secret may consist of any formula, pattern, device or compilation of information which
    is used in one‘s business, and which gives him an opportunity to obtain an advantage over
    competitors who do not know or use it. It may be a formula for a chemical compound, a
    process of manufacturing, treating or preserving materials, a pattern for a machine or other
    device, or a list of customers.
    (Restatement of Torts, § 757 comment b (1939))

2. A trade secret is any information, including a formula, pattern, compilation, device, method,
    technique, or process, that:
    (i) derives independent economic value, actual or potential, from not being generally known
    to, and not being readily ascertainable by proper means by, other persons who can obtain
    economic value from its disclosure or use, and
    (ii) is the subject of efforts that are reasonable under the circumstances to maintain its
    (Unif. Trade Secrets Act § l(4), 14 U.L.A. 372 (1985 & Supp. 1989)

3. A trade secret is any information that can be used in the operation of a business or other
    enterprise and that is sufficiently valuable and secret to afford an actual or potential
    economic advantage over others.
    (Restatement (Third) of Unfair Competition, § 39 (1995))

            TRADE SECRETS
The Restatement of Torts adopted and the courts relied on the following criteria
for determining whether a trade secret exists:

(1)   the extent to which the information is known outside of the business;

(2)   the extent to which it is known by employees and others involved in
      the business;

(3)   the extent of measures taken to guard the secrecy of the information;

(4)   the value of the information to the business and to competitors;

(5)   the amount of effort or money expended in developing the information;

(6)   the ease or difficulty with which the information could be properly
      acquired or duplicated by others.

               TRADE SECRET

The term ―trade secret‖ means all forms and types of financial,
business, scientific, technical, economic, or engineering
information, including patterns, plans, compilations, program
devices, formulas, designs, prototypes, methods, techniques,
processes, procedures, programs, or codes, whether tangible or
intangible, and whether or how stored, compiled, memorialized
physically, electronically, graphically, photographically, or in writing
if —

A) the owner thereof has taken reasonable measures to
   keep such information secret; and

(B) the information derives independent economic value, actual or
    potential, from not being generally known to, and not being
    readily ascertainable through proper means by, the public.
Natural and legal persons shall have the possibility of preventing
information lawfully within their control from being disclosed to, acquired
by, or used by others without their consent in a manner contrary to honest
commercial practices so long as such information:

       (a) Is secret in the sense that it is not, as a body or in the precise
           configuration and assembly of its components, generally known
           among or readily accessible to persons within the circles that
           normally deal with the kinds of information in question;
       (b) Has commercial value because it is secret; and
       (c) Has been subject to reasonable steps under the circumstances,
           but the person lawfully in control of the information, to keep it
(TRIPS Agreement, Part II, Sect. 7: Protection of Undisclosed Information,
Art. 39, Par. 2, 1994)

Know-how. The knowledge and skill required to do something
correctly. (Dictionary Definition)

Know-how. Information that enables one to accomplish a particular
task or to operate a particular device or process. (McCarthy’s Desk
Encyclopedia of Intellectual Property, Second Edition, p.236)

Know-how is knowledge and experience of a technical,
commercial, administrative, financial or other nature, which is
practically applicable in the operation of an enterprise or the
practice of a profession. (AIPPI Resolution – Mexico Congress –

• No registration requirement.
• No subject matter or term limitation.
• No tangibility requirement.
• No strict novelty requirement.
• Subject matter must not be generally known or available.
• But secrecy is the most important criterion — a sine qua non.
  There are no exceptions.
• Affirmative measures must be taken to safeguard a trade secret.
• Sufficient economic value or competitive advantage is also a
• Proper criterion is not ―actual use‖ but ―of value to company‖, i.e.
  negative results can also give a competitive advantage.

1. Memorialize the trade secret policy in writing
2. Inform employees of trade secrets
3. Have employees sign Employment Agreements with
   confidentiality obligations
4. Conduct exit interviews
5. Restrict access to trade secrets (on need-to-know basis)
6. Lock gates and cabinets
7. Label trade secret documents
8. Restrict public accessibility
9. Screen speeches and publications
10. Use contracts in dealing with third parties

           TRADE SECRETS
1. Acquisition by improper means
2. Acquisition by accident or mistake
3. Use of or disclosure of a trade secret
   a) Acquired improperly
   b) In violation of a duty to maintain confidentiality

    ―Improper means‖ includes ―theft, bribery, misrepresentation,
    breach or inducement of a breach of a duty to maintain
    secrecy, or espionage through electronic or other means.‖

    ―Proper means‖ which do not support a claim for
    misappropriation, include independent discovery, reverse
    engineering, or discovery from observing what has been
    allowed to enter the public domain.

      B. The Importance of Trade Secrets
Trade secrets are the ―crown jewels‖ of corporations — not the ―cesspool
of the patent system.‖

Mark Halligan: ―Trade secrets are the IP of the new millennium and can no
longer be treated as a stepchild.‖

James Pooley: ―Forget patents, trademarks and copyrights…trade secrets
could be your company‘s most important and valuable assets.‖

Trade secret misappropriation recently cost Walt Disney $240 million,
Cargill $300 million, and Toshiba over $400 million.

88% of responses in an IPO Survey indicate trade secrets to be the really
important intellectual assets because patents have limits: patentability
requirements, publication and invent-around feasibility.

        The Importance of Trade Secrets
Trade secret protection operates without delay and undue
cost against the world — unlike patents which are territorial
and so expensive to obtain and maintain that only very
selective foreign filing is done.

Patents are tips of icebergs in an ocean of trade secrets
• Trade secrets cover over 90% of new technology
• Over 80% of technology licenses cover trade secrets or
  are hybrid licenses

Trade Secrets are the ―workhorse of tech transfer.‖ (Bob
         C. Patent/Trade Secret Interface

As a practical matter, licenses under patents without access to associated,
collateral know-how are often not enough, because patents rarely disclose the
ultimate scaled-up commercial embodiments of products and processes.

―In many cases, particularly in chemical technology, the know-how is the most
important part of a technology transfer agreement.‖ (Homer Blair).

―It is common practice in industry to seek and obtain patents on that part of a
technology that is amenable to patent protection, while maintaining related
technological data and other information in confidence. Some regard a patent as
little more than an advertisement for the sale of accompanying know-how.‖
(Peter Rosenberg).

In technology licensing ―(r)elated patent rights generally are mentioned late in the
discussion and are perceived to have ‗insignificant‘ value relative to the know-
how.‖ (Michael Ward, Honeywell VP Licensing).

  Patent/Trade Secret Interface (continued)
―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).

―One potential shortcoming of focusing on patents as a measure of innovation, besides the
fact that it ignores the other types of intellectual property, is that patents are often
valueless absent the ‗know-how‘ that translates protected intellectual property into viable
products.‖ (Gavin Clarkson, Harvard).

―A company with one or more patents for its technology will usually have substantial
valuable technical and business information related to, but outside the direct coverage or
disclosure obligations of, its patents. The company can maintain vigorous efforts in both
areas of legal protection. (Jerry Cohen, Perkins, Smith & Cohen).

―It is frequently stated that know-how is the most valuable element of technology transfer.
This is consistent with the writer‘s own experience.‖ (Robert Goldscheider).

Failed Brazilian tactic — translation of foreign patents
CIBA-GEIGY examples: Eastman Kodak & DuPont patent licenses were useless.

    Patent/Trade Secret Interface (continued)

•   In the past- and even today – the question always was phrased in the alternative
•   E.G., titles of articles discussing the matter read ―Trade Secret v. Patent
    Protection,‖ ―To patent or not to patent?‖ ― Trade Secret or Patent?‖ ―To Patent
    or to Padlock?,‖ etc.
•   Anent this choice, the respective advantages and disadvantages, e.g. in terms
    of duration and scope of protection, were considered controlling.
•   On scrutiny the perceived differences are not there.
•   The patent life may be more or less than twenty years from filing and a garden-
    variety type of trade secret, far from being indefinite, may last but a few years.
•   Nor is there a difference as regards to the scope of protection with ―everything
    under the sun made by man‖ being patentable.
•   And while a patent does, and a trade secret does not, protect against
    independent discovery, a patent leads to efforts to design or invent around and a
    trade secret, properly guarded and secured, may withstand attempts to crack it.

D. Patent/Trade Secret Complementariness

 •   Supreme Court (Kewanee Oil, 1974): perfectly viable alternatives.

 •   Not mutually exclusive but mutually reinforcing — dovetail, in harmony

 •   ―Coexistence is well-established.‖ (Don Chisum).

 •   Inextricably intertwined: Most R&D data and collateral know-how cannot and
     need not be included in patent applications — grist for trade secrets.

 •   Every patent is born as a trade secret.

 •   Trade secrets precede, accompany and follow patents.

 •   Tom Arnold: it‘s ―flat wrong‖ to assume that ―because the patent law requires
     a best mode requirement, patents necessarily disclose or preempt all the
     trade secrets that are useful in the practice of the invention.‖

    Patent/Trade Secret Complementariness (continued)

All patents are born as trade secrets
• In the critical R&D state and before any patents issue, trade secret law
     ―dovetails‖ with patent law.
•    Assuming that a development has been enabled and the best mode
     described, all collateral know-how not disclosed, whether or not inventive,
     can be retained as a trade secret.
•    All R&D data, including data pertaining to better modes, developed after
     filing, again whether or not inventive, can also be protected as trade secrets.
•  With respect to technologically complex developments consisting of many
   patentable inventions and volumes of associated know-how, complementary
   patenting and secreting is tantamount to having the best of both worlds
The question is not whether to patent or to padlock but rather
what to patent and what to keep a trade secret.

Patent/Trade Secret Complementariness (continued)

•   Best policy and strategy is to patent as well as to padlock.
•   Initially file a broad or several patent application(s) simultaneously or
    sequentially per the time honored maxim‖ file early, file often‖
•   Pending applications are secret
•   This keeps options open and permits to defer a decision to keep
    invention secret if application is not allowed.
•   Even if allowed, application can be abandoned and invention is kept
•   Continue filing on improvements and additional patentable aspects
    throughout R&D stage and beyond — offensively and defensively —
•   A la IBM, CIBA-GEIGY and other corporations, going for ―big numbers.‖
    Pitney Bowes obtained over 100 patents on their Paragon Mail
    Processor, a ―simple machine.‖
•   Concurrently always keep innovations of disallowed applications and
    the huge volumes of collateral know-how as trade secrets.

            E. The Best Mode Requirement

Conventional wisdom: coexistence is impossible because of the ―best mode‖
The ―best mode‖ requirement applies
• only to the knowledge of the inventor,
• only at the time of filing and
• only to the claimed invention
Hence ―best mode‖ requirement is no impediment, because —
1. Patent applications are filed early in the R&D stage to get the earliest possible
   filing or priority date.
2. The specification normally describes in but a few pages only rudimentary lab
   experiments or prototypes.
3. The best mode for commercial manufacture and use remains to be developed
4. Patent claims tend to be narrow for distance from the prior art.
5. As shown by case law, manufacturing process details are, even if available, not
   a part of the statutorily-required ―best mode‖ disclosure of a patent.

        F. Exemplary Trade Secret Cases

1. GE‘s exclusive industrial diamond process technology
    •   Holds patents (some expired) and trade secrets
    •   Refused to grant licenses
    •   Fast-track GE scientists stole trade secrets for Far Eastern interests for
        million dollar payments
    •   In the end got caught, tried, jailed

2. Wyeth‘s exclusive Premarin manufacturing process
    •   Has market exclusivity since 1942
    •   Patents expired decades ago
    •   Closely guards its trade secrets
    •   Natural Biologics stole these trade secrets
    •   Wyeth sued, got sweeping injunction
Exemplary Trade Secret Cases (continued)

   3. Pizza Hut case
   •   Pizza Hut supplier, C&F Packing, invented and patented a
       manufacturing process for pizza sausage toppings and kept
       improvements secret
   •   Pizza Hut misappropriated trade secrets and got sued
   •   Court decision:
        1. patents are invalid on on-sale bar grounds (on
           Summary Judgment)
        2. trade secrets are enforceable and Pizza Hut had to pay
           $10.9 million (after trial)

         G. Conclusion on Trade Secrets

• These and other cases are examples of how trade secrets serve
  as a fall-back position when patents fail
• Patents can be at risk due to three dozens of invalidity and
  unenforceability reasons and many attrition factors such as
   – Narrow claims granted by IP offices
   – Enforcing patents being a daunting and expensive task
   – Only very limited or no coverage in foreign countries
   – Only about 5% of a large patent portfolio have commercial value
     (per Emmett Murtha, ex. IBM and former LES President) and
   – The effective economic life of a patent being only about five years
   – As well as others.

  Conclusion on Trade Secrets (continued)

• Trade secrets are indeed a viable mode of protection.
• They can be used in lieu of patents but, more
  importantly, they can and should be relied upon at
  the same time and side by side with patents to
  protect any given invention as well as the volumes of
  collateral know-how.
• Hence, it is patents and (not ―or‖) trade secrets. A
  happy marriage!

  IV. The Primary Objective of IP Protection

 • Providers of IP consultancy services focus in particular on
     — ―IP value extraction,‖
     — ―IP monetization,‖
     — ―Maximizing royalties.‖
• However, this overlooks that much greater gains can be realized from
protection of, and exclusivity for, a company‘s products and processes.

Self exploiting via manufacturing and selling can be much more lucrative than

In an exam paper, a student of mine put it this way:
     ―Licensing is not where the big bucks are. Patentees can most often get the
     best value out of their patents by commercializing and marketing the
     technology themselves. Licenses only happen when patentees for whatever
     reason cannot fully exploit patents themselves. Also, when you license
     technology you often create a competitor.‖

    The Primary Objective of IP Protection
• Market exclusivity under IP protection is the primary objective
  for all but a few of the biggest corporations.
• Entrepreneurs, start-ups, small and middle-sized companies
  would not last absent IP protection and market exclusivity.
• Such companies are completely dependent on IPRs for their
• Licensing their IPRs would set up competitors —good reason
  behind the general reluctance to license-out.
• And pharmaceutical and biotech companies need IPRs and
  market exclusivity to protect their enormous R&D investments.

    The Primary Objective of IP Protection
• As is well known, licensing normally carries little risk
  but also little reward.
• Royalty income at prevailing rates amount to at best
  a small percentage of net sales of licensed product,
  while markups on products sold under IP protection
  could be much higher, by multiples, and may reach a
  1000% or more.
• This is another reason for the innate reluctance to
  license-out IPRs.
• 97% of all patents are not licensed for this reason or
  because the technology they cover is not useful,
  feasible or marketable (Emmett Murtha, an ex-IBM
  and former LES President).
      The Primary Objective of IP Protection
•   Marshall Phelps, Microsoft‘s new Corporate Vice President for Intellectual
    Property (ex-IBM), had this to say on the subject:
•   Our emphasis is first and foremost about the quality of innovation and then the
    subsequent and logical protection of that innovation. We will be investing some
    $6.9 billion in R&D annually. It would be foolish if we did not do everything we
    could to protect the output of such a large investment…. This type of investment
    is going to generate a healthy stream of intellectual property. As with others in
    the IT industry, our most important IP strategy is to protect our innovations and
    our substantial investment in the area of R&D, through IP laws and, in some
    instances (!) to seek compensation for this investment through licensing to third
    parties or engaging in technology transfers with other innovators. (Emphasis
•   Joe Siino, IP VP of Yahoo, and David Simon, Chief IP Counsel of Intel chimed in
    by stating respectively:
•   While it is true that IP strategy should be tied to the business strategy, it‘s risky
    to treat IP as another profit center. A company‘s most valuable IP (on its core
    business) will never be licensed.
•   Our head is at being a successful business rather than using the IP department
    to make money. I‘d rather have us see a lot more product — which will
    contribute a lot more money to the bottom line — than to maximize my assets
    trying to get people to take a license.

    The Primary Objective of IP Protection
• My former employer, CIBA-GEIGY Corp. realized
  $3.5 billion in profits — yes, profits — from producing
  and selling Atrazine, a corn herbicide, over a 17-year
  period. This period coincided with the patent life,
  inasmuch as EPA permission to sell and patent
  issuance occurred in the same year. Had CIBA-
  GEIGY licensed the Atrazine patent, which they
  refused to do for obvious reasons, the royalty income
  would at best have been merely a small fraction of
  the profit that was garnered.

   The Primary Objective of IP Protection
• Interestingly, from a chart of descending willingness to license
  out, it is clear that licensing for royalties is last. Willingness
  goes down from licensing a subsidiary, an associated company,
  in a joint venture, for cross licensing or for royalties.
• Money consideration comes last and other quid pro quos, e.g.
  cross-licenses under licensee‘s patents covering products that
  can be made or sold profitably are preferred or insisted upon.
• In fact, obtaining such cross-licenses as quid pro quos rather
  than accepting mere royalties is one of the significant recent
  trends in licensing/technology transfer.

 The Primary Objective of IP Protection

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

                 V. Royalty-Free Licenses

  •Would IP ―value extraction‖ and ―monetization‖ advocates ever
  contemplate or recommend royalty-free licensing? Very doubtful!
  •But there is significant royalty-free licensing. Makes eminent business
  •There is indeed 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.

At one point in my career at CIBA-GEIGY Corp. (now Novartis), I prepared
over 20 royalty-free non-exclusive licenses to carpet manufacturers 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. Rather than
doing it for royalties, we did it for free with the expectation that this would
induce grateful carpet manufacturers to buy more dyestuffs from CIBA-
GEIGY. Carpet manufacturers were pleased to be licensed for free to
practice an important new technique for tufting carpets.
        Royalty-Free Licenses (continued)

A more recent example is the royalty-free licensing by Iridian
    Technologies of iris-scan patents.
Iridian owns a broad patent and another two dozen patents on iris-
    recognition software, which is able to accurately identify people
    at airport security or automated teller machines.
They 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 won contracts with Schiphol Airport and the UAE government
    and expected other big government contracts.
Iridian will ―end up getting a lot of business‖ per US Today of
    August 15, 2005.
This case also shows that giving away valuable patent rights for
    free can be a savvy business move.

         Royalty-Free Licenses (continued)
In the field of licensing law and practice there are other instances of, or
    occasions for, granting free licenses.

•   Interference settlement agreements.
•   Grant-back provisions in license agreements often are royalty-free.
•   Releases of patent rights to employees, where a corporation or
    university has no interest in the employee‘s invention.
•   Hybrid patent/trade secret licenses with royalty based on the trade
•   Corporations owning patents that would be infringed by university
    research grant the university a royalty-free license.
•   In standard setting situations, assurances by patentees to license on
    royalty-free terms.

The conclusion is inescapable that royalty-free licensing of valuable IP
   rights in preference to royalty-bearing licenses, is savvy business
   strategy conducive to creating good will and establishing or cementing
   good relationships, with attendant increases in market share.
         VI. General Valuation Considerations
•   As regards IP valuation and royalty settings in licensing, many
    considerations and factors play a significant role and cannot be ignored.
•   Vastly different values may reside in broad pioneering or basic patents
    versus narrow improvement or picture patents, that it is easy to design
•   For competitive reasons, patent applications are filed very early after
    conception and reduction to practice and hence have little experimental
    support and cover technology in a mere embryonic stage. That is entirely
    different from a patent that covers a successful commercial product or
•   There is a significant difference in value between a patent that is strong and
    enforceable and a patent that is weak and of questionable enforceability.
    Also, a patent that has been upheld in court as valid, will significantly gain in
•   And of course values may vary widely from industry to industry.
•   Also, in most patent transactions a package of patents (issued patents,
    pending applications, rights to apply for patents) is the merchandise, but the
    purchase price or royalty is not cumulative.
•   Due diligence is indispensable in IP transactions which may take weeks or
    months and without which one may ―buy a lawsuit‖ rather than an asset.
           General Valuation Considerations
•   Contrary to common assumptions, it is not true that
      – 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.
•   Indeed, there is a limit to what a licensor can charge and most often it is the
    licensee‘s economics, not the licensor‘s, that controls the royalty determination
    (Gordon Smith).
•   And isn‘t there a 25/75% rule? Isn‘t licensee entitled to the lion‘s share because
    of the greater risk he/she carries, especially with less-than-fully developed
•   Above all, when it comes to royalties less is more and greed never pays off.
•   In my corporate experience, 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 several other occasions, agreements had to be renegotiated for lower
    royalties for the same reasons.

In other words, they were not viable win/win license agreements to begin with.
So much for maximizing the ―royalty stream!‖
          General Valuation Considerations
•   Actually, the cost to licensor of the development of the technology is
    not a factor at all. These R&D costs are sunken expenses expended
    by the patentee/licensor whether or not it is licensed and, therefore,
    should not be considered in arriving at a suitable royalty. That is to
    say, the public‘s interest in buying a product is essentially unrelated to
    the cost of developing it (Tom Arnold, Martin Landis, Gordon Smith).
•   Anent royalty standards in industry and the figures given as industry
    averages, John Romary (Finnegan Henderson) called such average
    royalty rates ―folklore‖ and ―suspect as a royalty-rate guide.‖
•   He also states that these figures are based on the net sales price of a
    non-exclusive license and that a ―20 to 50 per cent premium‖ and ―as
    much as a 300 per cent premium…in the pharmaceutical field‖ may be
    a reasonable average for an exclusive license.

        General Valuation Considerations

In IP valuation exercises one cannot ignore the fundamentals of
IPRs in terms of integration strategies for dual or multiple protection
of innovation, nor the relevant fundamentals of IP licensing law and
practice. If this is true and if it is also true that ―business decisions
(should not) end up being made by patent attorneys who may not
understand the long-term commercial ramifications,‖ as has been
stated by a noted representative of the IP value extraction school,
then symbiotic collaboration and teamwork between the two
practices is the answer to best serve clients


• One day an American firm announces
  a breakthrough invention;
• Next day the Russians claim they made
  the same discovery twenty years ago;
• On the third day the Japanese start
  exporting the new product.

                         VII. 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

On other occasions, agreements had to be renegotiated for lower royalties.
                    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)

                  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

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                                                             53
                Royalty Setting (continued)

According to Tom Arnold there are 100 factors to be considered by both
   sides in licensing negotiations. They are tabulated and discussed in
   Appendix C, 1998 Licensing Law Handbook, Clark Boardman, p.295.
• This tabulation is a handy checklist
• Not all factors play a role in a given technology license
• They are grouped under the rubrics of
    –   Intrinsic Quality
    –   Protections and Threats of Protection
    –   Market Considerations
    –   Competitive Considerations
    –   Values Brought to the Table by the Licensee
    –   Financial Considerations
    –   Particular Risk Considerations
    –   Patent Portfolios
    –   Legal Considerations
    –   Government Regulatory Considerations

                   Royalty Setting (continued)
Among the most important factors are
   – the state of development of the subject technology (embryonic and untested v.
       tested and commercial),
   – the strength of the IP rights — ―be it patent, trade secret, or both‖ — (solid v.
       weak, easy to design around vel non),
   – the degree of exclusivity (exclusive v. sole, semi- or co-exclusive v. non-
       exclusive) and
   – geographic scope.

Note reference to ―trade secrets‖

The amount of, and value added by, trade secrets covering essential collateral know-
how is indeed important:
           ―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).

The tons of complementary collateral trade secrets have to be factored in or money is
left on the table.

            Royalty Setting(continued)

According to Martin Landis (of AT&T)
     ―The patent royalty negotiated by the parties is determined
     largely by the strength of the patent itself and only
     secondarily, by the value of the technology. For example, a
     U.S. patent on a commercially significant technology may
     only command a low royalty rate because the most pertinent
     prior art, an obscure dissertation gathering dust on a library
     shelf in a small town, teaches the thrust of the invention, yet
     was never considered by the Patent Office which issues the
     patent.‖ (Journal of Proprietary Rights, August 1991)

             Royalty Setting (continued)

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.

                  Royalty Setting (continued)
  Lump sum — single or installments

Running royalties
  Maximum (Cap) (Paid-up license)
  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                                    58
       Royalty Setting (continued)

New-fangled Gimmicks

• IP Law & Business of March 2007 (p. 16) carries an
  article titled ―Good Measure?‖ regarding new tools,
  termed ―Patent Analytics,‖ offered by Ocean Tomo,
  1790 Analytics and The Patent Board
• Factors or indicators used are, e.g.
   •• number of citations received by patents,
   •• timely maintenance fee payments
   •• science strength based on citations to
       scientific journals
New-fangled Gimmicks (continued)

• IP attorneys are said to be skeptical, for instance,
• Per Michael Benarek of the Paul, Hastings firm:
• These ―analytics‖ are subjective, inaccurate gimmicks
       based on the dubious assumption that all
  patents have some value, when ―the vast majority
  have zero value.‖
• I share the skepticism — it goes double for me.

VII. 20 Steps For Pricing A Patent

IP monetization folks start talking about market, cost and income
approaches almost from the outset on the stated or unstated
assumption that patents are presumed to be valid, meaning that a
patent is a patent is a patent and by definition a ―Rembrandt in the

Nothing could be further from the truth!

According to a 2004 publication of the AICPA (American Institute of
Certified Public Accountants), entitled ―20 Steps for Pricing a Patent,‖
choosing one of the traditional valuation approaches comes only as
step 18, with step 19 then being the choice of the income method.

Steps 1-14 deal with a close reading of the patent and an investigation
of the patent situation.
20 Steps for Pricing a Patent (continued)

 The author of this article (Timothy Cromley) is a CPA,
 professional engineer and U.S. patent attorney.

 This article is silent on trade secrets, but trade
 secrets must also be considered.
 Preface: To value an invention you have to
 understand it.

20 Steps for Pricing a Patent (continued)
   Steps dealing with patent considerations:
      –   1. Check whether the patent is in force.
      –   2. Identify the context.
      –   3. Gather information.
      –   4. Assemble a valuation team.
      –   5. Read the patent.
      –   6. Investigate the patent‘s scope.
      –   7. Talk with a patent attorney.
      –   8. Inquire about the patent‘s validity.
      –   9. Inquire into blocking patents.
      –   10.Consider synergies among patents.
      –   11.Investigate foreign patent protection.
      –   12.Consider the remaining life of the patent.
      –   13.Analyze any prior royalties paid for the patent.
      –   14.Inquire into any actual or threatened litigation involving the
          patent.                                                         63
20 Steps for Pricing a Patent (continued)
Steps dealing with commercial considerations:
      – 15.Identify the next-best alternative technologies.
      – 16.Estimate a demand curve for the patented item.
      – 17.Determine the patented product‘s point of profit
Steps on valuation approaches:
      – 18.Consider the applicability of traditional valuation approaches.
      – 19.Do an income-approach valuation.
Final step:
      – 20.Write the patent valuation report.

    20 Steps for Pricing a Patent (continued)

   Missing essential steps re trade secrets:
          •       Inquire about the existence of trade secrets on
                  discrete aspects as well as on collateral know-how for
                  patented inventions
          •       Analyze security measures that are in place to
                  maintain trade secrecy
          •       Consider the efforts and investments involved in
                  developing the proprietary know-how

With addition of steps re trade secrets, Cromley‘s outline of essential ―steps for
pricing a patent‖ is a prescription of due diligence par excellence.

                        Due Diligence
An investigation undertaken in the course of an IP transaction.

An indispensable exercise.

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)   identification of all IPRs involved in the transaction,
2)   verification of ownership and inventorship of the IPRs,
3)   determination of the enforceability or strength of the IP assets,
4)   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.

                         A. 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
    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.

   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.

       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
    •    best: objective, quantitative criteria of performance

   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.
            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.

    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)
     doctrine 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.   Our Tolban

  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.

                  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.

     Trouble-Free MFL Clauses (continued)

                   PATLEX LICENSE

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.    76
 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
  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
   B. 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       also with an assignment with a provision for
installment payments based on net sales.
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.

                     C. 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

  D.       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                                           80
                     E. Hybrid 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
Problematic — different duration, etc.
Brulotte v. Thys Co. (Supreme court, 1964):
collection of royalties after patent expiration — per se patent
   misuse or antitrust violation
• 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                        81
• Grant of trade secret license — no patent license
                       F. Negotiation
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

                     NEGOTIATION (continued)
A. Object —
   1.     Good deal for both sides: win-win
B. Necessary pre-negotiation homework — the more the better
   70% of negotiation is preparation
   1.     Licensor‘s information
          a)          about company
          b)          product or process description
          c)          proprietary position
          d)          sales history of product
          e)          materials, components and equipment required
          f)          cost data
          g)          licenses already granted
          h)          other
   2.     Licensee‘s information
          a)          place in market
                      1. names and volume of competitors
          b)          financial position
          c)          physical plant
                      1. availability of space and capital for expansion
          d)          ownership
                      1. other affiliations
                      2. other licenses
          e)          estimated costs for new license program
          f)          estimated future market
          g)          annual sales volume for past few years for other products, related   83
                      and non-related
                       NEGOTIATION (continued)
C.    Pre-negotiation internal discussions.
      1. Selecting the team
      2. Who does what
      3. Practice negotiation – dress rehearsal
          a) helps your people feel comfortable
          b) try to determine and understand other needs
          c) may discover your, or other‘s, weak points
D.    The negotiation
      1. With as high a level as possible
      2. With knowledgeable people on both sides.
      3. Convince other party of reasonableness of your position
      4. Listen to, and analyze, other party‘s position
      5. Know what is important and what is not — what you can give and what
          you cannot
      6. Be creative and flexible
      7. Say enough, but not too much
      8. Caucus as often as necessary
          a)          some emphasize items agreed upon
          b)          some emphasize items not agreed upon
          c)          a above is better
      9. At end of session, state current status and what is next
      10. Volunteer to prepare first draft
Homer O. Blair
     G. Case History Clock Calculator Patent

                       Four-Step Project

1.    Exhaustive infringement search and study
2.    Exhaustive validity search and study
3.    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
4.    Implementation

   H. Licensing 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. ―

                   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
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 of PATLEX in 1988.
               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)                            88


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
                GOULD LASER PATENTS

1. User License
Grant:     non-exclusive worldwide license under USP 4,161,436
                on ―Method of Energizing and Material‖ —
                immunity under all         Gould patents.

Royalty:   1)   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.                                              90

2. Manufacturer License

   Grant: non-exclusive worldwide license under all Gould
   For Past Infringement:
       1) 5% of net selling price upon signing under USP
       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.

                   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.                                      92


                             USA Sales
                      Sales Range            Royalty Rate
                  $ O — $12.5 million           5.0%
                $12.5 million and above         4.0%

                            Foreign Sales
                       Sales Range          Royalty Rate
                   $ O — $7.5 million          2.0%
                   $7.5 million and above      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.


                          USA Sales
      Sales Range                     Royalty Rate
    $ 0-$15 million                      5.0%
    $15-$20 million                      3.0%
    $20-$25 million                      1.0%
  $25 million and above                  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%       94

Step-up royalty from 2% to 5% in 2 steps
1) when one competitor licensed or sued up to 3-1/2%
2) when both competitors licensed or sued up to 5%

                 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.

I. Ethics in Patent/Trade Secret Licensing
     •       Negotiations (under state law)
             often governed by--ABA Model
         –      Rule 4.1, Rule 8.5, Rule 5.5, Rule 5.5,
                Rule 1.1
     •       Patents
         –      Accelerated Examination
                 •     Characterization of Prior Art
         –      New IDS requirements
                 •     Characterization of Prior Art
     •       Sarbanes Oxley
         –      additional requirements
         –      IP as an asset

• The ABA model rules of Professional Conduct
  – Most recent rules adopted in 2006
  – Important ABA Model Rules 4.1, 4.4., 1.1, 5.5
     • Truthfulness (Lying v. Puffing)
              » Examples
     •   Unauthorized practice of law
     •   Failure to disclose
     •   Limits on Embarrassment, delay and burden
     •   Requirement of competent representation

  ABA (2006) Model Rule 4.1
• Truthfulness in Statements to Others
• In the course of representing a client a lawyer
  shall not knowingly:
  – (a) make a false statement of material fact or law
    to a third person; or
  – (b) fail to disclose a material fact to a third person
    when disclosure is necessary to avoid assisting a
    criminal or fraudulent act by a client, unless
    disclosure is prohibited by rule 1.6.

        Rule 4.1 (comments)
• However
  – Misrepresentation (Comment 1)—generally no affirmative
    duty to inform an opposing party of relevant facts; don‘t
    incorporate or affirm statement known to be incorrect
  – Statements of Fact (Comment 2)—Certain types of
    statements ordinarily are not taken as statements of material
    fact…estimates of price or value…party‘s intentions as to an
    acceptable settlement of a claim
  – Fraud by a client (Comment 3)—Substantive law may
    require a lawyer to disclose certain information to avoid
    being deemed to have assisted the client‘s crime or fraud
    (subject to obligations of rule 1.6)

                    For Example
• ABA Formal Opinion 06-439
  – Statements that can fairly be characterized as
    negotiation “puffing,” ordinarily are not considered “false
    statements of material fact” within the meaning of the
    Model Rules1.
  – In a negotiation, a party, directly or through counsel,
    makes a statement in the course of communicating its
    position that is less than entirely forthcoming--In a
    settlement negotiation to understate the willingness to
    make concessions to resolve the dispute—insisting to not
    agree to resolve a dispute for less than $200, when, in
    reality, it is willing to accept as little as $150 to put an end
    to the matter.

 ABA Formal Opinion 06-439
– Defendant manufacturer in patent infringement litigation—
  repeatedly reject demands that a license be part of the
  settlement agreement, when in reality, the manufacturer has
  no genuine interest in the patented product and, once a new
  patent is issued, intends to introduce a new product that will
  render the old one obsolete.
– A party in a negotiation also might exaggerate or emphasize
  the strengths, and minimize or deemphasize the
  weaknesses, of its factual or legal position. A buyer of
  products or services, for example, might overstate its
  confidence in the availability of alternate sources of supply to
  reduce the appearance

            Puffing verses Lying
• Puffing                           • Lying
   – Client will not accept less      – Client can not accept
     than 2% royalty, even if
                                        less than 6% royalty
     client will accept 1%
                                        because of Most Favorite
   – The patent is valid, not
                                        Licensor status (no such
     acknowledging weaknesses
                                        MFL exists)
   – The licensed right is valid,
     not acknowledging prior          – The patent is valid—has
     mark or non-use of mark            been abandoned or ruled
     (not abandonment)                  invalid
   – Generally inference,             – The Mark is valid—has
     interpretation, intention          been abandoned

           No Brightline Rule
• What is Legal verses what is Right
  – Let your goals be your guide
     •   Long term business relationship
     •   Avoiding litigation
     •   Maximizing current profit
     •   American v. Foreign negotiation tactics

• Before negotiating marketing agreement with retailer,
  client tells lawyer about new, better, cheaper
  competitive product to be introduced by competitor
  within 12 months. During negotiation, retailer‘s
  lawyer asks if client knows of any new competitive
  products soon to be introduced.

   What does the lawyer do?

   --Changes the subject
   --Says ―I can‘t answer that‖
   --Tells the retailer what he knows

• Before commencing negotiation to grant exclusive, world-wide
  trademark license to manufacture a merchandising product,
  licensee counsel receives common law search results and notes
  prior use of same mark on similar product but only in
  metropolitan New York.

What does lawyer do?

--Refrain from disclosing to licensee‘s counsel and proceed with
--Voluntarily disclose to licensee‘s counsel and offer to obtain rights
   in New York

• Shortly after negotiations begin,
  potential licensee comments on his
  marketing plans, noting that his
  strongest market position is in large

• Is lawyer‘s obligation different?

• In negotiations to grant exclusive patent license,
  lawyer for patent owner knows that his client has
  granted two nonexclusive licenses under the same
  patents. Lawyer knows that preexisting nonexclusive
  licenses do not prevent granting an exclusive license.

What does lawyer do?

--Say nothing
--Inform potential licensee

• During review of draft exclusive license prepared by licensee‘s
  counsel, lawyer notes proposed representation that patent
  owner had granted no other licenses.

What does lawyer do?

--Leave it in the draft
--Delete it and wait for licensee‘s counsel to ask why
--Call licensee's counsel and disclose preexisting licenses

• In drafting exclusive license agreement lawyer for
  licensee inserts provisions that disclaims any
  obligation on licensee to make or sell any licensed
  product. Lawyer then sends draft agreement to
  licensor‘s counsel.

What should lawyer do?

--Nothing more
--Bring provision to attention of opposing lawyer?

• Both parties understood that the licensee wanted and would get
  the right to grant sublicenses. The licensee's lawyer created
  first draft of the proposed agreement and did not include any
  express grant of such a right. In reviewing the draft, licensor‘s
  lawyer noticed the omission.

What should the licensor‘s lawyer do?

--Add the provision to the draft
--Ask opposing counsel if he intended to omit it.

• Licensor‘s counsel calls licensee‘s counsel about the omitted
  sublicense grant, but the latter says, ―The provision is
  unnecessary since the right to grant sublicenses is inherent in
  the basic grant.‖ Despite a belief that this is wrong, licensor‘s
  counsel agrees, and they leave the agreement as is.

What should the licensor‘s counsel do?

--Call licensee‘s counsel back and explain the law
--Add the provision as ―Belt and suspenders‖
--Avoid confrontation since it is the licensee who suffers

• During negotiations, client, in response to direct question for
  potential marketing licensee, says there as been no claim of
  infringement by any third party. Lawyer knows this to be false.

What should lawyer do?

--Privately advise client of error and request correction
--Withdraw from negotiation and representation as to matter if client
   refuses to make a correction
--Do nothing

ABA Model Rule 5.5:Unauthorized practice of law (UPL)

• Corporate Counsel (UPL)
   – Mostly exempted under 5.5(d)1
      • (d) A lawyer admitted in another United States
        jurisdiction, and not disbarred or suspended
        from that practice in any jurisdiction, may
        provide legal services in this jurisdiction that:
         – (1) are provided to the lawyer‘s employer or its
           organization affiliates and are not services for which
           the forum requires pro hac vice admission; or
   – Comment 16—applies to in-house counsel
             ABA Model Rule 5.5:
          Unauthorized practice of law
• Rule 5.5
• Birbrower v. ESQ Business Services Inc.
   –   California Client
   –   New York Firm
   –   Negotiations controlled by California Law
   –   Unauthorized Practice by NY Firm
• Response
   – ABA safe harbors
   – California‘s exempting of certain arbitrations
• Need for caution in negotiations and other legal work
  across state lines depending on the other state‘s
  Professional Responsibility Rules
• However—changing to be more inclusive
   – E.g. NH: temporary service related to pending or potential
     proceeding…                                                  115
                ABA Model Rule 4.4

• Respect for Rights of Third Persons (4.4)
   – (a) In representing a client, a lawyer shall not use means
     that have no substantial purpose other than to embarrass,
     delay, or burden a third person, or use methods of obtaining
     evidence that violate the legal rights of such a person
   – (b) a lawyer who receives a document relating to the
     representation of the lawyer‘s client and knows or
     reasonably should know that the document was
     inadvertently sent shall promptly notify the sender.
• What is the line between aggressive advocacy and

                ABA Model Rule 1.1

• Competence
   – A lawyer shall provide competent representation to a client.
     Competent representation requires the legal knowledge,
     skill, thoroughness and preparation reasonably necessary
     for the representation.
• Negotiations often require business skill
   – Lawyers often lack this experience
   – Should coordinate with business people
   – Or use ignorance of business knowledge as a bargaining

    Scope of representation
• Criminal or fraudulent actions?
  – Rule 1.2(d)
     • A lawyer shall not counsel a client to engage,
       or assist a client in the conduct that the lawyer
       knows in criminal or fraudulent…
     • Comment 10 :may be necessary for the client
       to give notice of the fact of withdrawal and to
       disaffirm any opinion, document, affirmation or
       the like
     • Noisy withdrawal

   Practice Before the USPTO
              37 C.F.R. § 10.20

• In General, patent law is exempted from
  UPL Exempted under 5.5 (d)2
    • (2) are services that the lawyer is authorized to
      provide by federal law or other of this

     Accelerated Examination

• Requires disclosures of related art
• Art must be characterized and
  differentiated from the current invention
• But, what if you get it wrong?
  – Inequitable conduct?
  – Sanctions?

    New Information Disclosure
     Statement requirements
• Similar to the requirements for
  Accelerated Exam
• What if you mischaracterize the
  differentiation, what if you get it wrong,
  where is the line?
  – Inequitable conduct?
  – Sanctions?

        …more than just accounting
• To create accurate financial reporting
• Board of Directors and top Management
  – Requires internal controls established and
  – Criminal penalties apply
  – Are Trade Secrets financial assets?

    Trade Secret are Assets
• Trade secrets are the ―crown jewels‖ of
• Injunctions have become a greater threat in
  trade secret misappropriation cases
• Damage awards in the hundreds of millions
• Patents are but the tips of icebergs in an
  ocean of trade secrets

 Ignoring Intellectual Property
• Organization is your client
   – If lawyer ―knows . . .likely to result in substantial injury to
     organization, then lawyer shall proceed as is reasonably
     necessary in the best interest of the organization
• ABA Model Rule 1.13 was written to model
• Sarbanes-Oxley could open lawyers up to liability for
  endorsing and or acting on plans that ignore
  intellectual property as an asset.
   – Especially if this results in loss of IP

   Trade Secrets and Sarbanes
• Method to account for trade secrets
• Establish controls to ensure they are
  protected and maintained
• Would outside counsel have an obligation to
  tell the company‘s management team about
  potential IP weaknesses?
  – Section 307 outlines obligations to bring material
    reporting issues
• Trade Secret Holding Companies?

          •Thank you

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