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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. WHO LICENSES OUT PATENTS AND 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, trademark). 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 technology. An opportunity to enter a new product market. 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 competition 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- competitive. 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. Question 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 technology). 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 agreement. 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 agreement. 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 importance” 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 bans. ”Classic” and optimal division of profits 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. Know-how Must be specified in the agreement for the licensee to be able to demand anything else than a permission to use the patented invention. 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 Field”. 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 licensor. 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,  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. Sub-licensing Licensee cannot grant any rights to a sub- licensee that the licensee does not have itself. Licensee bears full responsibility for any contractual breaches by a sub-licensee Consequences of patent invalidity 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) TTBER 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 settlement) 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 Licensee. Third party rights – Clause 10.4 ORGALIME 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. Clause 8 ORGALIME Registration 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 chosen REGULATION (EC) No 593/2008 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 17 June 2008 on the law applicable to contractual obligations (Rome I) 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.” Bankruptcy 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 phones. EPO patent granted for i.a. Sweden and Spain. 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 regulated Late royalty payment? Miscalculated royalty discovered by accountant? 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.” Question 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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