Patent Licensing by liaoqinmei


									Patent Licensing

 Economic   aspects
 Legal starting-points
 Individual clauses
Reasons for an increased focus
   Innovation processes have become
    increasingly competitive, co-operative,
    globalised, and more reliant on new entrants
    and technology-based firms. Market
    mechanisms play a more central role in
    technology diffusion. Businesses have been
    demanding more and more patents to
    accommodate these new conditions.
WHY? Zuniga and Guellec, OECD
   The target population was patent holders: 600
    European firms responded to the survey.
   Around one company in five in Europe licenses
    patents to non-affiliated partners. The relationship
    between size of the firm and probability to license
    out is U-shaped: small firms and large firms are
    more likely to license out their patented inventions.
   SMEs have more difficulties to license out their
    patents than large firms. The major barrier is
    identifying partners. More than one third of young
    European firms (born after 2000) deem patents as
    quite or very important to convince investors to
    provide them with funds.
Patent transactions
   Transfer of ownership represents approx. 20 %
    of all IP transactions and 80 % are licenses.
   A sale typically occurs when the costs for
    maintenance and adminstration of the right is
    high compared to the value of the invention or
    because the owner leaves the particular market.
   A drawback with a license is the risk of incorrect
    royalty accounting and the administration.
Licens – lat. permission
   Different settings:
Settlement of a dispute (non-exclusive).
Freedom to operate (non-exclusive).
Transfer of project (exclusivity, know-how,
Licensor’s intentions
   Quick entrance to a new market (lack of
    knowledge of local markets, lack of
    distribution or marketing capacity)
   Possibilities to combine complementary
    production capacity, particularly when the
    licensor has no manufacturing facility.
   Possibility to establish an industry standard.
   Scale advantages, allowing the technology to
    become rapidly dominant or to share risks.
Licensee’s intentions
 Use of production capacity with profitable
 An opportunity to enter a new product
 Reduction of R&D costs.
Legal background
 National contract law. Choice of law is
  possible for the parties.
 Competition law is mandatory. The law in
  the land in which the competition effects
  occur will be applicable.
 Competition law is harmonized in Europe
  through the block exemption (TTBE)
  772/2004 of 27 April 2004.
Article 81(1) EC
   Prohibits all agreements and concerted
    practices between undertakings and
    decisions by associations of undertakings
    which may affect trade between Member
    States and which have as their object or
    effect the prevention, restriction or
    distortion of competition.
Guidelines to the block exemption
(TTBE), point 9
   There is no presumption that intellectual property rights
    and licence agreements as such give rise to competition
    concerns. Most licence agreements do not restrict
    competition and create pro-competitive efficiencies.
    Indeed, licensing as such is pro-competitive as it leads to
    dissemination of technology and promotes innovation. In
    addition, even licence agreements that do restrict
    competition may often give rise to pro-competitive
    efficiencies, which must be considered under Article
    81(3) and balanced against the negative effects on
Compare a situation with and
without the license in the context
 A non-exclusive license, without any
  additional conditions.
 But where two undertakings established in
  different Member States cross licence
  competing technologies and undertake not
  to sell products in each other's home
  markets, (potential) competition that
  existed prior to the agreement is restricted.
Guidelines to the block exemption
(TTBE), point 15 and 17
   For licence agreements to be restrictive of
    competition by effect they must affect actual or
    potential competition to such an extent that on
    the relevant market negative effects on prices,
    output, innovation or the variety or quality of
    goods and services can be expected with a
    reasonable degree of probability. … Licence
    agreements, however, also have substantial
    procompetitive potential. Indeed, the vast
    majority of licence agreements are pro-
Article 81(3) EC
   As an exception to this rule Article 81(3) provides that
    the prohibition contained in Article 81(1) may be
    declared inapplicable in the case of agreements between
    undertakings which contribute to improving the
    production or distribution of products or to promoting
    technical or economic progress, while allowing
    consumers a fair share of the resulting benefits and
    which do not impose restrictions which are not
    indispensable to the attainment of these objectives and
    do not afford such undertakings the possibility of
    eliminating competition in respect of a substantial part of
    the products concerned.
   IPRs are legal monopolies, of sorts.
   Competition law should counter monopolies
   IPR:s are not immune to competition law (e.g.
    Magill and Microsoft cases)
   But what if a licensor truthfully would not have
    licensed if the licensor is not allowed to ban the
    licensee from selling to third parties coming from
    the licensor’s own territories? Is it appropriate to
    prevent such a license because it has anti-
    competitive provisions?
Article 2 TTBER
 Exemption
 Pursuant to Article 81(3) of the Treaty and
  subject to the provisions of this
  Regulation, it is hereby declared that
  Article 81(1) of the Treaty shall not apply
  to technology transfer agreements entered
  into between two undertakings permitting
  the production of contract products.
Article 2 TTBER
   The exemption shall apply for as long as the
    intellectual property right in the licensed
    technology has not expired, lapsed or been
    declared invalid or, in the case of know-how, for
    as long as the know-how remains secret, except
    in the event where the know-how becomes
    publicly known as a result of action by the
    licensee, in which case the exemption shall
    apply for the duration of the agreement.
TT Block Exemption Reg. 772/2004

Applicable if:
 competitors not together have more than 20% of
  the relevant market (product or technology).
 non-competitors, none of the parties have more
  than 30% of the relevant market (product or
 In other situations, use the Guidelines to the
  Regulation to make an individual assessment.
Product and technology markets
   An agreement between two parties which sell
    competing products and which cross license
    technologies relating to the production of these
    products may restrict competition on the product
    market concerned. It may also restrict
    competition on the market for technology.
    Technology markets consist of the licensed
    technology and its substitutes, i.e. other
    technologies which are regarded by the
    licensees as interchangeable with or
    substitutable for the licensed technology.
Artikel 81.3 EC – individual
   1. The restrictive agreement must contribute to
    improving the production or distribution of goods
    or to promoting technical or economic progress.
   2. Consumers must receive a fair share of the
    efficiencies generated by the restrictive
   3. The restrictive agreement and individual
    restrictions must make it possible to perform the
    activity in question more efficiently than would
    have been the case in the absence of the
   4. The agreement must not afford the
    undertakings concerned the possibility of
    eliminating competition in respect of a
    substantial part of the products concerned.
Article 82 EC
   No compulsory license has been granted by the
    ECJ to a patent (indirectly though in the
    Microsoft-case in the Court of First instance).
   Englihs High Court has held that it is doubtful if
    compulsory licenses can be granted in the
    patent field on the basis of competition law. It
    was not considered an abuse by the
    patentholder with a very strong market position
    (Intel), to demand cross-licenses as
    compensation for Intels patents (High Court,
    2002 06 14, Intel Corp. v. Via Tech)
Patent pools for standards
   An industry body asks of companies that
    propose technologies that get adopted into
    the standard to sign a statement that they
    will license their patents on Reasonable
    and Non-Discriminatory Terms (also called
    RAND terms).
“Agreements of minor
 EC Commission has exempted from 81.1
  companies that together have less than
  10% of the relevant market and
  individually less than 15% in a verticla
  agreement (de minimis exemption).
 Does not apply to “hard-core restrictions”,
  such as price-fixing or absolute export
”Classic” and optimal division of
 Licensor recieves 1/4 of the profits.
 Licensee recieves 3/4 of the profits.
 If the profits are 10 percent of the
  licensee’s revenue, the royalty rate will be
  2,5 percent of the invoices.
 The economically optimal solution would
  be a division of profit in relation to
  investments made
Draw-backs with license
 Much administrative work, quarterly work
  that often goes wrong.
 “In 90% of the royalty examinations we
  [PWC] undertake for our clients, we
  uncover underreported revenues due to
  clerical errors, accounting mistakes or
  contract misunderstandings. “
First page in an EP
 Publication number EP0005129, B1.
 Application number 79850022.9.
 Date of filing 03.04.79
 Priority 14.04.78, SE 7804231
 Date of publication 31.10.79
 Designated contracting states: BE, DE, etc
The Grant
   The grant of permission (license=permit).
    Exploitation rights that have not been expressly
    transferred and are not indispensable for the
    assignment's implementation, are maintained by
    the assignor or rights holder.
   Practices during the currency of the agreement.
    may change the content of the contract, but
    relatively high standards of proof apply for the
    creation of a new and different agreement.
   Must be specified in the agreement for the
    licensee to be able to demand anything
    else than a permission to use the patented

   If education is included, it should be
    specified where, when, how and at
    whom’s expense.
Field of Use
   A field of use provision in a license agreement
    limits the licensee’s rights in the licensed
    technology to specified applications.
   “Licensor hereby grants to Licensee a non-
    exclusive license of and under the Licensed
    Patents in the Territory to make, have made,
    use, sell and import Products for use in the
Absolute territorial protection
Consten/Grundig (C-56 and 58/64)
   Intention was to provide Consten with an
    absolute territorial exclusivity in France as a
    reseller of Grundig radios.
   ECJ: “For the purpose of applying article 85(1)
    [presently 81.1], there is no need to take account
    of the concrete effects of an agreement once it
    appears that it has as its object the prevention,
    restriction or distortion of competition.”
IPR:s and territorial exclusivity
   Nungesser-case (258/78). ”Open”
    exclusivity is acceptable, if need for
    opening up new markets, but not
    ”absolute” exclusivity.
    Licensee must not be restricted in
    passively accepting orders from outside
    their terriotory, but can be prevented from
    actively marketing outside their territory.
New block exemption
   Starting point: active sales by licensee may be
    prohibted, but not passive.
   Exception 1: a licensee may be prevented from
    selling to a territory that has been kept for the
   Exception 2: passive sales in the territory of
    another licensee may be limited for two years.
   Exception 3: the use by the licensee may be
    limited to the needs of the licensee self.
Grant-back (forward)
 The Licensor shall be entitled to use any
 modifications or improvements of the
 Licensed Technology made by the
 Licensee during the currency of this
 Agreement, provided an appropriate
 royalty having regard to the increased
 value of the Licensed Technology is paid
 in return.
Inner House of the Court of Session,
Buchanan v. Alba Diagnostics, [2001]
R.P.C. 851
 ”[A] difference in a feature or features in an invention
 however substantial or great, may still be regarded as an
 improvement if it may be applied to or added to or made
 a substitute for a part of a previous invention in order to
 make that original invention a better invention. … When
 however, the differences are of such a character as to
 make the resulting machine a quite distinct thing, then
 one has moved from the world of improvement … to the
 world of differences in kind.”
New block exemption
 No longer a requirement of reciprocity and
  non-exclusivity in grant-back clauses.
 Block exemption is not applicable if
  licensee is obliged to grant an exclusive
  license or transfer to the licensor the rights
  to severable improvements.
 Individual exemption is still possible,
  especially, if remuneration is paid to
 Licensee cannot grant any rights to a sub-
  licensee that the licensee does not have
 Licensee bears full responsibility for any
  contractual breaches by a sub-licensee
Consequences of patent
   A patent can always be invalidated.
   In the new TTBE any direct or indirect obligation
    on the licensee not to challenge the validity is a
    grey clause (individual assessment). It is
    acceptable to allow licensor to terminate license.
Non-challenge Article 5 p. 1(c)
  The exemption .. shall not apply to … any
  direct or indirect obligation on the licensee
  not to challenge the validity of intellectual
  property rights which the licensor holds in the
  common market, without prejudice to the
  possibility of providing for termination of the
  technology transfer agreement in the event
  that the licensee challenges the validity of
  one or more of the licensed intellectual
  property rights.
(Guidelines allow non-challenge after
Adjusting to the invalidity
 Contractually, most courts have ruled that
  the licensee must continue to pay for any
  remaining competitive advantages.
 If know-how is involved, i.e. a technology
  transfer agreement, the licensee must
  continue to pay for that.
Usefulness of the invention
   Licensors rarely warrant any quality
   ORGALIME Clause 11
    If the Licensee fails to exploit the Licensed
    Technology by ..................(date), the Licensor
    shall be entitled to terminate the Agreement.
    However, the Licensor cannot be held
    responsible for the success of the industrial or
    commercial exploitation of the              Licensed
    Technology . The risk of industrial and
    commercial exploitation rests solely with the
Third party rights – Clause 10.4

 The Licensor declares that, according to
 his knowledge at the date of signature of
 this Agreement, the Licensed Technology
 does not infringe industrial property rights
 of third parties.
Change of party to a contract
   Licensee is not able to transfer the permission to
    use the invention unless this has been
    specifically agreed with the licensor.
   In general contract law, rights can be transferred
    but not obligations – the licensor can assign the
    patent or the royalty rights, but obligations
    towards the licensee cannot be transfer absent
    an agreement with the licensee.
Change of control – ORGALIME
Clause 29
  Termination may also take place where
  there have been such changes in the
  legal structure or ownership of one of
  the Parties that they seriously affect the
  results the other Party could reasonably
  expect from the Agreement.
 Each of the Parties shall have the right to have
 the Licence registered, if such registration is
 possible under the laws of the country for which
 the Licence has been granted. Each Party shall
 give the other all powers of attorney and
 signature as are necessary to this effect. The
 cost of registration shall be borne by the Party
 that has requested the registration.
Applicable law if parties have not
   REGULATION (EC) No 593/2008 OF THE
    COUNCIL of 17 June 2008 on the law
    applicable to contractual obligations (Rome
   Art. 1.2. ”The contract shall be governed by the
    law of the country where the party required to
    effect the characteristic performance of the
    contract has his habitual residence.”
   In most countries the contract principle
    applies, meaning that the first contract
    prevails and that the reciever cannot
    repeal contracts that have been entered
    into by the patentholder before his
    bankruptcy. No registration of license is
    formally necessary.
Ipso facto clause
 Many licenses allows the licensor to avoid
 the contract if the licensee goes in to
 recievership or shows other signs of
 financial instability.
 These clauses are of doubtful validity, at
 least after the bankruptcy has occured.
Apache Web Server (Freeware)

   "Redistribution and use in source and
    binary forms, with or without modification,
    are permitted provided that the following
    conditions are met: [maintain this copyright
    notice, acknowledge in all advertising that
    distributed product contains software
    developed by the Apache group]"
Negotiation – Bike rental patent
 System for locating rental bikes in mobile
 EPO patent granted for i.a. Sweden and
 Successfully implemented in Stockholm.
  Now potential licensee in Madrid.
The grant and the remuneration
   Exclusive/Non-exclusive?
   Geographical area?
   Know-how
   Sub-licensing rights?

   Royalty, etc?
   Terms of payment?
   Grant-back?
Termination – substantial breach or
 Late royalty payment?
 Miscalculated royalty discovered by
 40 percent of the bikes are broke and
  imposssible to use
 Licensee wants to terminate because the
  patent has lapsed but secret know-how
  remains. The license states that royalties
  are due as long as production continues
Royalty after expiry - Guidelines
   “159. Notwithstanding the fact that the block
    exemption only applies as long as the
    technology is valid and in force, the parties can
    normally agree to extend royalty obligations
    beyond the period of validity of the licensed
    intellectual property rights without falling foul of
    Article 81(1). Once these rights expire, third
    parties can legally exploit the technology in
    question and compete with the parties to the
    agreement. Such actual and potential
    competition will normally suffice to ensure that
    the obligation in question does not have
    appreciable anti-competitive effects.”
 Licensor has patents in Germany, France
  and UK. Licensee is not allowed to market
  the products in the patent free Sweden? Is
  this a valid contractual provision?
 Argue on the basis of the TTBER.

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