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FOR EDUCATIONAL USE ONLY2011 WL 4528 (ASPATORE)

JLRCPT

Aspatore*1 December, 2011

INTELLECTUAL PROPERTY LICENSING STRATEGIESLEADING LAWYERS ON EDUCATING CLIENTS, DRAFTING LICENSING

AGREEMENTS, ANDRESOLVING DISPUTES

ANOMALIES IN THE WORLD OF TRANSACTIONAL IP

Salem M. Katsh[FNa1]

Partner

Schnader, Harrison, Segal & Lewis LLP

Copyright 2010 by Thomson Reuters/Aspatore; Salem M. Katsh

IntroductionThe first thing to state is that an IP license agreement has more in common with "ordinary"

commercial agreements than not. Franchise agreements, distribution agreements, music, Internetand publishing agreements, construction contracts, employment contracts, and on and on, will

often implicate IP issues to a greater or lesser extent. At the same time, IP agreements featuremany of the same provisions as commercial agreements. Thus, while agreements dealing with

different areas of commerce will, of course, have their special features, the objective of, interalia, properly stating the terms of the parties' agreement and incorporating effective provisions to

deal with implementation and contingencies are shared.This chapter will focus mainly on agreements providing for the transfer of patent and/or trade

secret rights. A principal objective is to examine and critique several of the "standard" clausescommonly employed in these agreements.

The "Standard" Clause" -- Copycat Emptor

Although primarily an IP litigator, over the years I have worked on hundreds of IPtransactions. From the perspective of a litigator, I have had the benefit of seeing how the drafting

of clauses and provisions in transactional documents plays out in a courtroom. Often, for manyof the reasons I will discuss below, it is not a pretty picture. Unfortunately, license agreements

often reflect the rote replication by lawyers of form clauses or provisions taken from otheragreements or even the Internet--clauses and provisions that frequently do not conform to the law

or make sense in the circumstances.Just recently, a client required assistance with respect to an agreement he had signed. The

agreement had been furnished to the client by a fourth or fifth year law school graduate who hadworked at a big law firm. The agreement was thirty-five pages long, single space, and it was


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clear that most of the definitions and provisions--including, to our amazement, many dealingwith environmental issues that had nothing to do with the deal--were entirely superfluous to the

rather straightforward transaction that was involved.This type of lawyering wastes everyone's money. The fundamental purpose of a contract is to

reduce the uncertainties inherent when two parties commit to trade goods, license rights or

otherwise interact commercially. One can use forms and previously drafted agreements asreference tools, but it is incumbent upon the drafting lawyer to ask and answer a basic questionas to each clause before borrowing language. The question is: "Does the language make sense--

legally and contextually?"*2 Unfortunately, as for many agreements and various clauses, it appears that this question is

not asked or properly addressed. One could write an entire book going through "standard"provisions and demonstrating how too many agreements fail to reflect a basic skill we are

supposed to have mastered well--drafting a contract. I will discuss a number of "standard"clauses to illustrate this problem.

Termination Clauses

Consider the following language in three termination clauses:Agreement A. "In the event any party hereto violates or fails to keep or perform any

obligation, term, or condition of this Agreement ... then the other parties hereto, at their soleoption, may cancel and terminate this Agreement ...." (See Exhibit A, sec. 11.)

Agreement B. "If [A] shall fail to observe any covenant of this Agreement or shall commitany material breach of any covenant or any agreement herein contained, or shall violate any of

its obligations, [B may terminate the Agreement]."Agreement C. [This agreement may be terminated ... ] in the event any party hereto violates

or fails to keep or perform any obligation, term, or condition of this Agreement,")I would wager (and my own experience evidences) that a great many commercial agreements

use such or similar language in providing grounds for termination. What is the problem?A threshold problem--which I will mention but is not my main focus (as I will discuss

below)--is a difficulty that runs through all types of commercial agreements that we lawyersgenerate. And that is the use of words that are redundant--thus, Agreement B speaks of violations

of "covenants," "obligations," and even "any agreement contained herein." Are these wordsintended to mean different things? Agreements A and C speak of violations of any "obligation,

term or condition" of the agreement. Again, are these words intended to mean different things?I do not advocate that lawyers absolutely refrain from using some additional words, having

the same or similar meaning, in a reasonable effort to "cover the waterfront." What I do advocateis that this process should proceed intelligently and in a manner that strengthens an agreement. In

Agreement A, not only is the use of the term "agreement" unhelpful, but the clause erroneouslysuggests that there might be three types of actionable wrongs-- "[(1)] fail[ure] to observe any

covenant ...; [(2)] commit any material breach of any covenant ...; [(3)] or ... violate any of itsobligations." Agreements B and C talk about a "violat[ion] or fail[ure] to keep or perform any

obligation, term, or condition of this Agreement."This type of drafting does not reflect an intelligent effort by lawyers wanting to be "super

diligent." From a client standpoint, all that is achieved by the approaches reflected in theseclauses is needless ambiguity that can potentially result in difficult and expensive litigation. See

discussion infra at 5 et seq.


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*3 But, as stated above, there is a far more fundamental problem with these clauses that Iwish to address.

That problem is the fact that the wording in these clauses is manifestly overbroad,inconsistent with the law of contracts, and light years away from what the parties could have

intended. For what these clauses plainly provide is that the agreement may be terminated if a

party "fails to observe any covenant," commits a "material breach" of "any" of its obligationsunder the agreement, etc. (Emphases added). The language ("any") would mean, for example,that the agreement could be terminated if a party failed to comply with an immaterial obligation.

I have seen hundreds of agreements that suffer from these or similar problems, and it isperplexing. [FN1] The above-quoted language is flatly inconsistent with black letter principles of

contract law. It has long been the rule that "slight, causal, or technical breach[es]" of a contractwill not warrant termination of the contract. The injured party retains, of course, a claim for

damages. See E.g., Callanan v. Powers, 199 N.Y. 268, 284-285 (1910).On the other hand, when a breach is "so substantial and fundamental as to strongly ... defeat

the object of the parties in making the contract," termination is permitted. RR Chester LLC v.Arlington Buildings Corp., 22 A.D. 3d 652, 654 (N.Y. Sup. Ct. 2005); Clanton v. Smith, 170

A.D. 2d 643, 643 (N.Y. Sup. Ct.1991); Restatement (Second) of Contracts 251.Although the parties to a contract are free to use provisions that deviate from the common

law, it is difficult to conceive why they would routinely (or ever) make their contracts terminablefor immaterial reasons (especially in an agreement such as Exhibit A, which states that "time is

of the essence" (sec. 13 (H)). [FN2] Hence, we are justified in concluding that these criticallysignificant clauses do not, in fact, accord with the parties' intent, yet they are nonetheless

routinely incorporated.The problem appears so endemic that these faulty clauses have been adopted by experienced

lawyers writing books about licensing for sale to and use by the bar. In Drafting TechnologyPatent License Agreements, (Aspen Law & Bus. 1999), the author, a senior partner at a premiere

IP boutique firm, provides a section called "Exemplary License Agreements." The "exemplary"termination clause (Id. at F1-16) provides that licensor may terminate the agreement if licensee

defaults "in the payment of any royalties ... or in the performance of any of its other obligationsunder this Agreement ...." (Emphasis added.)

The courts seem to be just as perplexed as we are in terms of why these kinds of terminationclauses are in use. The case ofPublicker Chemical Corp. v. Belcher Oil Co., 792 F.2d 482 (5th

Cir. 1986) (attached as Exh. B), makes these points well. In that case, the judge was, as weshould be, astounded by the fact that the parties had used language permitting termination based

on the breach of "any" obligation. It is useful to quote the court's consideration of this issue, as itis directly on point:

*4 Belcher contends that this clause unequivocally expresses the parties' intent to reject theLouisiana jurisprudence of [breach of] primary ["material"] and ancillary obligations, and to

permit termination for any breach, however insubstantial. It would be remarkable if the partiesactually intended such a rule to govern a complex, long-term commercial relationship, between

sophisticated parties, involving millions of dollars. Minor mishaps and disagreements affectingcontract rights are inevitable in the course of any such relationship. A rule permitting either party

to threaten termination of the entire relationship on the basis of any one of these minor incidentswill encourage such threats whenever one party finds that the contract is no longer economically

advantageous. Prudent businesses ordinarily avoid the risk and uncertainty of such drasticarrangements. If the parties truly had intended to be governed by such a rule, they would have


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memorialized this intent by referring to the breach of any "primary or ancillary" obligation orwords to that effect.

See also United States of America v. Samuel A. Abady, 2004 WL 444081 (S.D.N.Y. March11, 2004); South Central Bell Telephone Co. v. Canal Place Limited Partnership, 927 F.2d 867

(5th

Cir. 1991) (citing Publicker as "applying Louisiana law and refusing to interpret words of a

contract literally when the effect would be absurd, unreasonable, or inequitable").In the Publicker case, the court essentially reformed the contract. But not all defendants willbe so lucky. Many if not most courts will enforce unambiguous contract language, however odd.

See, e.g., Louisiana Nevada Transit Co. v. Marathon Oil Co., 770 F. Supp. 325 (W.D.La. 1991)("courts have repeatedly stated that termination clauses as agreed upon by the parties shall be

enforced as written"); Bonanza International v. Restaurant Management Consultants, 625 F.Supp. 1431, 1440 (E.D. La. 1986).

No one should assume, moreover, that the drafting problems we have been discussing relatesolely to contracts drafted by small firms or single or inexperienced practitioners. To the

contrary, in many large firms and companies, if one wished to deviate from an accepted format,it might well not be all that easy to convince senior lawyers to alter clauses, provisions or

approaches that have been institutionally blessed. An associate may well hesitate before raisingsuch questions to the partner who gave him an agreement he once drafted to use as a template, or

a book containing exemplary clauses that the partner authored and was published by a majorpublisher of legal reference books. Yet it is the younger in-house or outside lawyers who will

normally be assigned the task of putting pen to paper. I always get a kick out of asking associatesabout these clauses; all too often the answer is, "well, that's the way it's always done," "I got this

right out of a book," or "I got this from an agreement I got from [another partner]'s associate."*5 Human nature being what it is, these responses are not surprising and they suggest that, if

a consensus develops that reform is needed, it will have to come from the leaders of the bar--senior corporate legal staff and senior law firm partners initiating and supporting bar association

and/or academic actions.

The "Integration" ClauseThe "standard" integration clause provides another illustration of the problem we have been

discussing. Here is a typical integration clause, taken from a "sophisticated" license agreement:Any modification of this Agreement or additional obligation assumed by either party in

connection with this Agreement shall be binding only if evidenced in a writing signed by eachparty or an authorized representative of each party.

Integration clauses are meant to embody the parol evidence rule. The rule holds that factsmay not be admitted as evidence to vary, contradict or add to the terms of a written agreement.

Masterson v. Sine, 68 Cal. 2d 222 (Cal. 1968) ("[a clause that states that] there are no previousunderstandings or agreements not contained in the writing ... expresses the parties' 'intention to

nullify antecedent understandings or agreements' (See 3 Corbin, Contracts (1960) 578, p.411)".) [FN3]

From the standpoint of the parol evidence rule, it does not seem that the above quotedintegration clause has any relevant meaning. It says nothing about the admissibility vel non of

parol evidence. It says nothing about disallowing, as evidence, other documents or oralstatements as evidence of contractual meaning.


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The clause, at best, might not be construed as precluding the application of the common lawparol evidence rule. At worse, it opens the Pandora box of parol evidence the parties presumably

thought they were closing.Much better is the clause used in the agreement I have attached as Exhibit A (sec. 13(A)).

While there are many problems with that agreement, they got the integration clause right:

Entire Agreement. This Agreement shall constitute the entire agreement between the partiesrelative to the subject matter hereto, and any prior understanding or representation of any kind,whether made orally or in writing, preceding the date of execution of this Agreement first written

above shall not be binding upon either party except to the extent incorporated into thisAgreement. All headings used herein are solely for convenience of reference only and shall not

affect the construction of any provision of this Agreement.It is my experience that lawyers most often use this type of proper integration clause rather

than the kind of deficient clause I initially quoted. But given the number of commercialagreements concluded in this country every day, it is of concern if any substantial number of

agreements does not incorporate a proper approach.

"Know-How"; "Technology"; "Confidential Information"; "Trade Secrets"; "Proprietary"*6 Lawyers involved in drafting IP agreements will be familiar with these terms. But how

often do we ask ourselves whether they mean the same or different things? All too often,agreements include definitions of several of these terms, and thereby create a risk that the

granting clause will not confer rights with respect to all of them.Carpenter v. United States, 484 U.S. 19 (1987), is a useful case to consider because it was not

decided as an intellectual property case. The Supreme Court held that pre-publicationinformation belonging to the Wall Street Journal was a protected form of property, whether or

not there was a specific contract with the employee prohibiting the disclosure of this information.The Court did not invoke trade secret principles but the analysis would not have changed. Thus,

viewed through the lens of trade secret principles, the Journal had adopted reasonable policies toprotect the information from unauthorized disclosure, and the information was of competitive

value.The point that Carpenter illuminates is that there are not different types of protected

confidential information. If a person or firm does not bother to take reasonable steps to protectinformation, a court will find little reason to classify the information as a trade secret or

otherwise to provide a remedy against its disclosure, whether it is called "know-how" or someother term.

If, on the other hand, information has been confidentially held by the owner, and has value, acourt will, ceteris paribus, protect it from unauthorized disclosure.

To be sure, the arguments for protecting information will be stronger in some cases than inothers. The degree to which a company protects its information, the effectiveness of its

protective measures, whether the information is old, whether it is in part known by others, itsvalue, etc., are key factors that will be taken into account. But the courts will look to substance in

reaching a decision; the various labels that can be applied to characterize the information arelabels, nothing more.

In drafting an agreement, by using various different terms to refer to the same thing ("knowhow," "proprietary information," etc.), the draftsperson introduces elements of ambiguity that

serve no apparent purpose and could complicate the implementation and enforcement of theagreement. The better practice is to use and focus on one articulation of the intangible property


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to be transferred--whether calling it "trade secrets," "proprietary technology," "know-how,""confidential information," etc., and most importantly to ensure that the defined information

referenced in the granting clause subsumes all of the valuable information the licensee bargainedfor.

Duration; "Readily Ascertainable"; Bailments; Relief IssuesA few other noteworthy issues in respect to trade secret licenses: (1) agreements that havelanguage limiting the restriction on the disclosure of the trade secrets to a period of years; (2)

agreements that state that information that can be "readily ascertainable" is not to be consideredas protected information; (3) the difference between a trade secret license and a bailment; and (4)

the GE case and how some of these issues play out in litigation.*7 Duration. Years ago, I was in involved in evaluating agreements among major companies

involving hundreds of millions of dollars. The agreements contained a trade secret license formanufacturing a product, and they provided that the agreement's disclosure and use restrictions

for the technology would expire after five years. This provision was not part of the parties'bargain, but was inserted because of an assumption that a licensee could not be subjected to

interminable nondisclosure restrictions. A recent concrete example can be seen in Exhibit A (sec.14), where, again, a five-year term is used.

Even during the years when patent and know-how licenses were vulnerable to per seillegality challenges under the antitrust laws and misuse doctrine, there never was a rule that

placed a duration on a license of valid trade secrets. Indeed, in the absence of coercion, partiesare free to agree that royalties can continue to be paid for information that was a trade secret but

has become public. Aronson v. Quick Point Pencil Co., 440 U.S. 257 (1979).Trade secrets have value only for so long as they remain secret. Conversely, for so long as

the information is secret, has value, and is used, there is no duration for protection. Patents havea time-limited duration. Patent and trade secret protection is substantively very different.

Kewanee Oil Co. v. Bicron Corp., 416 U. S. 470 (1974). The formula for Coca-Cola is as much atrade secret today as it has been for decades.

Therefore, a trade secret owner who agrees that the licensee will no longer be subject torestrictions after a period of years is giving up valuable rights and should not do so unless he has

received adequate consideration.Readily Ascertainable. As to the "readily ascertainable" issue, this term was introduced by

the Uniform Trade Secrets Act to deny protection to information that is "readily ascertainable byproper means by, other persons ...." [FN4] The UTSA is itself an example of how the urge to

tinker with well-established frameworks (in this case, state common law and the Restatement)can lead to an increase in costs and uncertainty for all concerned. Candidly, the "readily

ascertainable" phrase is an unnecessary, gratuitous, and ambiguous gloss on long-established andwell-understood trade secret principles. The phrase has given rise to much discourse and

litigation by those who have sought to create a loophole for information that has not been, butallegedly "could be," reverse engineered.

In most cases, a defense of "readily ascertainable," based on the ability to reverse engineer,will be quite difficult to establish. Where one takes or uses information in breach of a

nondisclosure agreement, or by misappropriating it, the presumption of economic value andsecrecy will be extremely strong. In such cases, the question the defendant holding plaintiff's

claimed secrets will be forced to answer and convincingly prove is quite simple. "If theinformation was readily ascertainable, or so easy to reverse engineer, why did you take/keep and


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use plaintiff's materials?" Answers such as "since I could easily have reverse engineered theproduct, I saw no need not to use plaintiff's information," will not, to say the least, present a

defense with a high chance of success. For the above reasons, I do not believe that, in clausesthat attempt to make clear what information will not be considered by the parties to fall within

the scope of a trade secret, we should include the concept of "readily ascertainable." Doing so

gives the concept undeserved recognition.

Bailments

*8 In Eli Lilly & Co. v. Genentech Inc., 1990 WL 305392 (S.D. Ind. 1990), Genentech suedEli Lilly for allegedly misusing DNA sequences Genentech "licensed" to Lilly to make

recombinant insulin. What Genentech gave Lilly was not a written disclosure of the sequences(ATG ..., etc.), but a bailment of actual biological materials containing the sequences--

"plasmids" that were ready to produce (and did produce) human insulin.In seeking summary judgment, Genentech showed that Lilly manipulated the DNA material

for the unauthorized purpose of making recombinant human growth hormone. The license clauseread:

Genentech hereby grants to Lilly the exclusive, irrevocable world-wide right with the right togrant sublicenses, to use all Genentech Recombinant [genetic material] for the limited purpose of

manufacturing, selling, and using Recombinant Insulin without regard to Genentech PatentRights, and in connection only with such production, sale, and use, to use all technical

information and know-how supplied by Genentech hereunder.Notwithstanding Genentech's proof, the court held that this language did not, as a matter of

law, arise to a contractual negative covenant.Important lessons can be learned from this case. First, the license uses one paragraph to

convey licenses to three distinct forms of property. Thus, the first portion of the paragraphprovides for the transfer of the physical DNA material coupled with a patent license--"to use all

Genentech Recombinant [genetic material] for the limited purpose of manufacturing, selling, andusing Recombinant Insulin without regard to Genentech Patent Rights ...." The rest of the

paragraph conveys a trade secret license--"and in connection only with such production, sale, anduse, to use all technical information and know-how supplied by Genentech hereunder.

Note that neither the bailment nor the trade secret license imposes a flat-out negativecovenant. The words used are quite understated ("for the limited purpose"; "in connection only").

While it is unclear whether this decision would have been affirmed had an appeal been taken (thecase settled), clear and effective language must be used when licensing different forms of

valuable technology, and when spelling out what a licensee (and bailee) may and may not do.The bailment aspect of the agreement is interesting because it is not clear that the draftsman

understood that physical property is subject to different rules than intangible property. That is,the DNA was not intangible know-how; it was physical, tangible property. This kind of transfer,

whether or not denominated as a "license," is effectively and substantively a bailment of goods.Referring to the licensed property solely as a trade secret or confidential information introduces

ambiguities that can complicate the interpretation and enforcement of the agreement.

Relief Issues in Regard to Trade Secrets*9 Actions to redress the misappropriation of trade secrets must deal with the fact that, if the

secret--the intangible property--has been disclosed, the horse may well have left the barn. If the


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case also involves tangible embodiments of the trade secrets (e.g., drawings, plasmids), it wouldbe possible to seek recovery of the property under a claim of conversion.

The interplay between these issues was raised in a case brought by GE against a Koreancompany that had misappropriated a set of drawings for the production of industrial diamonds.

General Electric Company v. Sung, 843 F. Supp. 776 (D. Mass. 1994).

As in Genentech, technology falls into two legal categories--(1) tangible documents, and (2)the intangible knowledge engineers could derive from the documents.GE was initially successful in obtaining a jury verdict of liability for misappropriation. But it

chose to forego an award of damages, since, if it accepted an award of damages to make itwhole, it would effectively have provided a paid up license to the Korean company. GE was

successful in obtaining an injunction (1) ordering the return or destruction of all items of stolentangible information (e.g., drawings); (2) ordering the Korean company to destroy its diamond

presses, and (3) prohibiting the company from reentering the industry for a period of seven years.The court understood that ordering the company to return only the stolen documents would

not be an effective remedy given the Korean company's mastery of the information. Moreover,simply requiring the company to tear down the plants it had built would not suffice as a remedy

because the company knew enough to make new plants. Thus, the court entered a fairlyunprecedented order requiring not only the destruction of its plants but also prohibiting the

company from reentering the market for seven years.In sum, in regard to trade secrets, it is one thing to investigate, find misappropriation, and

even secure a finding of liability. In terms of securing truly effective relief, however, in somecases that will represent an important milestone but will not yet provide the kind of relief the

plaintiff will want.

ResidualsThe use of so-called residual clauses originated rather recently in connection with hi-tech

agreements and the increased use of non-disclosure agreements (NDA).A residual clause pertains to the mental retention of knowledge of a trade secret. When

parties get together to discuss a deal, a venture or some other collaboration, and it is necessary, tohave a meaningful discussion, for one or both sides to disclose trade secrets, there is a worry that

if the parties cannot reach an agreement, people will walk away, without restriction, withresidual information.

Some companies will not lightly entertain technology proposals at all--will not routinely takea first step--because of their concern that the entreating company might someday claim a new

product based on their technology, disclosed at some preliminary meeting.*10 Where parties do meet to explore a transaction involving trade secrets, one or both

parties having access to the other side's trade secrets may request or insist upon a clause in theNDA making it clear that, unless someone purposefully memorized specific information, the

residual information they obtained will be viewed as their "general knowledge" and not as thedisclosing party's trade secret.

Residual clauses have come into use generally to protect the party receiving trade secretinformation. At the NDA stage, the party disclosing trade secret information must take effective

steps to minimize the amount of information he discloses and to identify/classify the trade secretshe is disclosing very clearly to minimize what the receiving party might claim as residual

information.


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For example, the NDA, in addition to having the normal clauses prohibiting the receivingparty's use of disclosed trade secrets, should have annexed to it a list that identifies as

specifically as possible each trade secret.Another approach for protecting the disclosing party can be used where the receiving party is

not in the market. The NDA, in addition to non-disclosure and non-use restrictions, and in

addition to itemizing the trade secrets being disclosed, could provide that if the parties don'treach agreement, the receiving party will not enter the market on its own for a period of time.This is a preferred mechanism for protecting the trade secrets because it addresses the actual risk

the disclosing party faces--new competition based on its having disclosed its secret technology.

Licensing Strategies for a New Client; Antitrust and Misuse ConsiderationsWhether representing the licensor or licensee, the lawyer must understand all the value

components of the deal, before beginning to craft the licensing agreement.In the case of a technology agreement, one should seek to meet and discuss the technology

with the licensor's engineers or scientists. A thorough understanding of the technology to belicensed is essential, whether you are representing the licensor or licensee. Background

documents such as inventor notebook and corporate PowerPoint presentations about the marketand the company, can be very valuable in understanding the company, the industry, the

significance of the technology, and how it relates to other technologies. When a lawyer canexhibit an obviously comprehensive knowledge of his client's business, the involved technology,

and other contextual facts, he will achieve a degree of credibility that will inure to the advantageof his client and to his own standing.

In terms of the basic strategy that should be followed when a new client comes in the door,there would appear to be three basic elements: (1) secure a clear understanding of what your

client's goals are; (2) secure a clear understanding of whatever technology is needed to preparethe appropriate license; and (3) strive for simplicity, as and to the extent compatible with other

imperatives.*11 In the context of patent or trade secret licenses, working on behalf of either a licensor or

licensee involves the worry that you may be "leaving something on the table." The licensor mustconfine the grant of rights so that the licensee receives no more than what was agreed upon.

Conversely, the licensee must ensure that he is receiving no less than what was agreed.Key questions include whether current or future licensor improvements will flow to the

licensee (grant forwards), automatically or otherwise, whether and what type of grant backprovisions should be included, and co-inventorship questions.

In regard to grant backs, in times past it was legally questionable as a matter of patentmisuse/antitrust whether a licensor could condition the grant of a patent license on the licensee's

agreeing to grant back exclusive licenses under patents owned by the licensee (or assign themoutright to the licensor). In this essay, I do not address the evolution of antitrust law and misuse

principles as they relate to patents and other forms of intellectual property. [FN5] Suffice it tosay there has been a sea change over the last twenty years in the application of the antitrust laws

and misuse doctrine to restrictions in license agreements. Virtually all provisions that would havebeen vulnerable to a per se illegality challenge would today be assessed under the rule of reason.

To prove a claim, an anticompetitive impact in a relevant market would have to be demonstrated,and further, it would have to be shown that the impact was not outweighed by pro-competitive

effects. See generally Richard Gilbert and Carl Shapiro, Antitrust Issues in the Licensing of


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Intellectual Property: The Nine No-No's Meet the Nineties, Brookings Papers: Microeconomics1997. http://faculty.haas.berkeley.edu/shapiro/ninenono.pdf. [FN6]

Nonetheless, whenever a licensor has sufficient bargaining leverage to exact concessionsfrom a licensee that restricts competitive activity, antitrust/misuse principles should not be

ignored. For example, ostensibly to deal with the issue of "residuals," some companies with

substantial market power have conditioned granting a trade secret license on the licensee'sagreement to disqualify the employees that will be working with that technology from engagingin similar work for a period of years. Some agreements even call for the segregation--during the

agreement's duration and for a period of time thereafter--of the work unit assigned to the projectby the licensee.

These types of licenses are far from immune from antitrust challenge. Cf. United States v.Microsoft Corp., 56 F.3d 1448, (D.C. Cir. 1995); Department of Justice/Federal Trade

Commission, Antitrust Guidelines for the Licensing of Intellectual Property,http://www.justice.gov/atr/public/guidelines/0558.htm

Co-Inventorship Issues/Sublicensing/Assignment

A failure to name an inventor in a patent application can invalidate the patent. At the sametime, the criteria governing co-inventorship are, to say the least, less than clear. See, e.g., Eli

Lilly & Co. V. Aradigm Corp., 376 F.3d 1352 (CA Fed. 2004).*12 In cases where it may be less than clear that third parties must be named as co-inventors,

in-house patent counsel understandably will not be incentivized to weigh the facts in favor ofadding third parties. In certain cases, adding a third party company as a co-inventor could mean

the loss of millions or hundreds of millions of dollars. Outside counsel can play a constructiverole in helping in-house counsel balance difficult issues and conflicting interests, and ensuring

that the company's long-term interests are given determinative weight.The sublicense provisions must also be carefully drafted: will the licensee have the right to

sublicense and, if so, what rights can be sublicensed? Similarly, can the agreement be assigned?Obviously, the licensor has a critical interest in controlling any transfer of rights by the licensee

to a third party. Sometimes, however, lawyers miss important issues in this area. For example, anassignment provision must make clear whether, if an assignment is made to a subsidiary of a

parent (or parent of a subsidiary), the parent (subsidiary) can enjoy the license rights.

License Terms Relevant to Potential InfringementTwo elements must be considered when a client believes a company is using its product

without license: first, the alleged infringement must be investigated and confirmed (or not) to theextent possible, and second, the client must decide whether it wishes to focus on securing a

license from the infringer or whether it wishes to litigate. Litigation would normally not be thefirst choice unless, inter alia, the client is in the posture of "first to market" and an infringing

product could lead to a reduction in the market price of the product. Once the price for a newproduct has been diminished, the patentee will rarely, if ever, be able to restore the monopoly

price.A major factor, of course, is the strength of the patent. Often, when companies apply for

patents, they do not do a prior art search. Prior art searches are typically done, under contract, bythird party specialist firms, to determine whether there is prior art that is "close" to the invention

sought to be claimed by means of a patent. If there is, one would regard the patent, if it were toissue, as relatively weak in comparison to an invention as to which no prior art was close.


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There is no legal obligation that an inventor conduct such a search prior to filing for a patent.As a legal matter, it is the job of the Patent and Trademark Office (PTO) to determine whether a

patent application meets the criteria for patentability, and to do the required spade work. If aninventor does not know of prior art, he obviously cannot cite it to the PTO. Many companies

hold off on prior art searches for strategic reasons. They see a benefit in obtaining issued patents

even if there might be prior art they did not know about and the PTO examiner did not discover.Obtaining issued patents has value of its own. However, prior to launching an enforcementeffort, a company may well wish to consider how strong the patents are--that is, anticipating to

the extent possible how a company might attack the patents in defending against a claim ofinfringement, whether a demand for a license could trigger a declaratory judgment action, what

other issues, counterclaims, etc., may become involved. Any serious patent litigation (which willtypically involve complex antitrust defenses whether meritorious or not) will cost millions of

dollars.*13 Once a patent has issued, even if material prior art were then uncovered in a patent

search, there is no obligation to submit the art to the PTO. The patentee does have the option ofcommencing a reexamination proceeding. Many searches will reveal that the patent is absolutely

or relatively strong. On the other hand, if the search uncovers prior art that is a "dead-on"anticipation, it may not be feasible to assert the patent underProfessional Real Estate Investors

Inc. v. Columbia Pictures Industries Inc., 508 U.S. 49 (1993) (assertion of an objectively baselesspatent claim for the purpose of hindering competition can be attacked as an antitrust violation).

The complexity of patent litigation should not be underestimated. Starting such a litigation isoften akin to a declaration of war. It should come as no surprise that in some cases litigations

have been commenced by companies thinking they have initiated a small, inexpensive venture,only to have the litigation explode into a morass of defenses and counterclaims that were not

anticipated and that greatly increase the expense of the controversy. Wholly apart from anyconcerns about asserting a frivolous claim, a company, before firing the first shot, should

carefully evaluate the cost/benefit equation as to all possible claims and issues that may becomeimplicated in a lawsuit. Managements and boards of directors do not like expensive surprises.

License Terms Relevant to the Enforcement of a Licensing Agreement

A license agreement is a contract. Contracts are quintessentially creatures of state law.License agreements will invariably specify the state law that will govern the interpretation of the

agreement. Although there are differences, the basic principles of contract law are quite similaras among the several states.

Choice of law will sometimes be less of an issue than the choice of forum--that is, where willa dispute be adjudicated. In a recent situation, a movie producer did not care if New York law

applied so long as the venue for any dispute was Los Angeles. This was not surprising in that thefactual circumstances would have played very well in plaintiff's favor, and against the producer,

to a New York jury.Also, the decision whether to agree that any dispute will be handled through arbitration,

rather than through the courts, involves a complex balancing of relevant factors. Arbitration is nolonger the "darling" of dispute resolution mechanisms as it once was. Arbitrations are

conceptually structured to take less time than court cases--they are to involve limited discovery,and the decision by the arbitrator(s) is not subject to substantive appeal. In a court setting, a

breach of contract case will often be triable to a jury, will permit significant discovery of partiesand third parties, and the losing party will have the right to appeal.


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[FN3]. Ozerol v. Howard University, 545 A.2d 638 (D.C. App. 1988) ("[the parol evidence] ruleprovides that when parties to a contract have executed a completely integrated written

agreement, it supersedes all other understandings between the parties. Thus, the writing itself isviewed as the expression of the parties' intent."

[FN4]. The UTSA defines a trade secret as "information, including a formula, pattern,compilation, program, device, method, technique, or process, that: (i) derives independenteconomic 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 itsdisclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to

maintain its secrecy."

[FN5]. Cf. Katsh, Collateral Restraints in Joint Ventures, 54 Antitrust L. J. 1003 (1985); ABANational Institute on Industrial and Intellectual Property, 53 Antitrust Law Journal 479, 483, 535

(1985); Katsh, Testimony before the Federal Trade Commission in Hearings on Competition andIntellectual Property Law and Policy in the Knowledge-Based Economy, http://

www.ftc.gov/opp/intellect/index.htm (2003); Katsh, Testimony before the Department of Justice(Antitrust Division) in Hearings on Competition and Intellectual Property Law and Policy in the

Knowledge-Based Economy, http:// www.ftc.gov/opp/intellect/index.htm (2003).

[FN6]. Although it is believed this precedent will be overturned by the Supreme Court, clausescalling for the payment of royalties after the licensed patent has expired are still per se illegal.

Brulotte v. Thys Co., 379 U.S. 29 (1964).2011 WL 4528 (ASPATORE)

END OF DOCUMENTAspatore

*1 December, 2011

INTELLECTUAL PROPERTY LICENSING STRATEGIESLEADING LAWYERS ON EDUCATING CLIENTS, DRAFTING LICENSING

AGREEMENTS, ANDRESOLVING DISPUTES

MISTAKES TO AVOID IN CRAFTING AN IP LICENSE: WHAT TO WATCH FOR TO

AVOIDCREATING ISSUES IN LATER LITIGATION

Daniel N. Yannuzzi[FNa1]

Partner

Sheppard, Mullin, Richter & Hampton LLC

Copyright 2010 by Thomson Reuters/Aspatore; Daniel N. Yannuzzi

Introduction


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When parties initially negotiate a license agreement, they sometimes have difficultyimagining the relationship souring. The excitement and promise of the new business relationship

can tend to dominate the parties' approach to the licensing negotiation. The parties can envisionthemselves working together in harmony for years to come, and do not consider the what-ifs that

sometimes arise. However, these what-ifs often do arise, whether from factors outside the parties'

control, or from changing circumstances among or between the parties themselves. By the timethey do arise, it is often too late. The license agreement has been in place, and its terms willaffect how your litigation unfolds. Moreover, what parties often fail to realize is that the license

agreement not only affects litigation between the parties over issues involving the licenseagreement itself, but it can also affect litigation with third parties over the licensed IP rights.

Often, a new client comes to us with a license agreement that they would like to enforce, oran agreement under which they are trying to operate and would like to understand their rights.

Other times, a client would like to enforce patents of theirs that are subject to licenses to thirdparties. In many instances, the existing agreement includes provisions or omissions that can

create issues for the client during litigation--issues that in many cases could have been avoided.This chapter discusses some of the most frequently encountered issues with license agreements

and offers suggestions for dealing with those issues.

Exclusive LicensesExclusive licensing can be a powerful tool for both the licensor and the licensee. Where a

licensee has exclusive rights under a license agreement, that licensee is the only party authorizedto exercise those rights. Depending on the rights licensed, the exclusive licensee can make, use,

and sell the licensed technology without the threat of competition from other licensees, and ifproperly worded, without competition from the licensor. Accordingly, many prospective

licensees are willing to pay more for an exclusive license. From the licensor's perspective, theexclusive license offers a one-stop licensing opportunity and generally with a higher royalty rate.

However, if the pitfalls of exclusive licenses are not carefully considered, they can lead toserious consequences for the parties.

Standing to Sue for Infringement and Necessary Parties to Litigation

One fundament right associated with patents that can be conveyed to the exclusive licensee isthe right to sue for infringement. Parties should consider carefully the implications of their

exclusive licensing arrangement as it could affect who has standing to sue for infringement of theunderlying IP rights. Moreover, parties should be aware that the license could dictate whether the

licensor or licensee can bring suit individually, or whether both parties must join in the litigationif suit is to be brought. Without considering these issues up front, a party to an agreement may

find themselves unable to enforce their rights without the full cooperation of each other.*2 The Patent Act provides that a patentee has a remedy by civil action for patent

infringement. 35 U.S.C. 281. The term "patentee" is defined in 35 U.S.C. 100(d) as includingnot only the person to whom the patent issued, but the successors in title to the patentee. This has

been interpreted to require that a suit for infringement must ordinarily be brought by a partyholding legal title to the patent. Accordingly, an assignee generally has standing to sue for

infringement in its own name. The Supreme Court addressed the issue of standing to sue as farback as the nineteenth century in the case of Waterman v. Mackenzie. In this case, the Court

stated that an assignment by the patent owner of the whole of a patent, an undivided part or share


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of the patent right, or all rights in a specified territory gives an assignee the right to bring aninfringement action in his or her own name. Waterman v. Mackenzie, 138 U.S. 252 (1891).

Whether an exclusive licensee has standing to sue for infringement, then, depends on therights granted under the license agreement and whether the agreement is effectively an

assignment rather than a mere license. If an exclusive license agreement transfers "all substantial

rights" to the patent(s) and "the surrounding circumstances indicated an intent to do so," then thelicense may be considered an assignment for purposes of standing. Vaupel Textilmaschinen KGv. Meccanica Euro Italia S.P.A., 944 F.2d 870, 874 (Fed. Cir. 1991); see, also, Morrow v.

Microsoft Corp., 499 F.3d 1332, 1340 (Fed. Cir. 2007). In other words, where a patent ownertransfers all substantial rights to the patent in a license agreement, this confers constitutional

standing on the assignee to sue for infringement in its own name alone.What the exclusive licensor patent owner must be aware of in these situations, however, is

that even though he or she remains the legal title owner of the licensed patents, he or she nolonger has the ability to bring an infringement action without the joinder of the exclusive

licensee. Accordingly, an exclusive license can give rise to a situation where the patent ownercan no longer bring suit for infringement of his or her patents without cooperation from the

licensee.In many cases, the exclusive license expressly grants to the licensee the right to sue third

parties for infringement, and does not reserve any rights in the licensor for sale and marketing ofthe patented technology. Such licenses typically are considered as assignments and confer

standing to sue on the licensee. However, the courts have held that licenses that fall short in theseareas can result in the exclusive license not being considered an assignment for purposes of the

standing requirement. Indeed, courts have found that the retained right "is the most importantfactor in determining whether an exclusive license transfers sufficient rights to render the

licensee the owner of the patent." Alfred E. Mann Found. for Sci. Research v. Cochlear Corp.,604 F.3d 1354 (Fed. Cir. 2010).

*3 In the Alfred E. Mann Found (AMF) case, the Court of Appeals for the Federal Circuitfound that AMF had proper standing to sue defendant Cochlear for patent infringement, despite a

license that AMF previously granted to Advanced Bionics. In the AMF case, the license grantedby AMF to AB included the right to grant sublicenses to accused infringers.

Express covenants can be used to govern behavior between the licensor and licensee, but thecontract cannot alter the statutory requirement that the suit be brought by the "patentee."

Independent Wireless Telegraph Co. v. Radio Corp. of America, 269 U.S. 459 (1926); AbbottLabs. v. Diamedix Corp., 47 F.3d 1128 (Ill. 1995). A licensee with sufficient proprietary interest

in a patent has standing regardless of whether the right to sue is expressly granted in thelicensing agreement. Likewise, a right to sue clause cannot negate the requirement that, for co-

plaintiff standing, a licensee must have beneficial ownership of some of the patentee'sproprietary rights. A patentee may not give a right to sue to a party who has no proprietary

interest in the patent. Crown Die & Tool Co. v. Nye Tool & Machine Works, 261 U.S. 24, 44(1923). Where the licensor retains a right to sue accused infringers, that right often precludes a

finding that all substantial rights were transferred to the licensee. Id. Retained litigation rightswere sufficient to preserve the licensor's ownership of the patents-in-suit even when those rights

failed to give the licensor complete control over the litigation it initiated; instead, the licensorand licensee would have joint control of the litigation. AsymmetRx Inc. v. Biocare Med. LLC,

582 F.3d 1314, 1321 (Fed. Cir. 2009).


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However, if the licensor's right to sue is rendered illusory by the licensee's ability to settlelicensor-initiated litigation by granting royalty-free sublicenses to accused infringers, then a

court may find that less than all substantial rights were transferred. Speedplay Inc. v. Bebop Inc.,211 F.3d 1245, 1251 (Fed. Cir. 2000). The courts have found that a licensee's right to grant

royalty-free sublicenses to defendants sued by the licensor rendered illusory the licensor's right

to sue. Id. at 1251. In contrast, courts have found that the licensor's right to sue was not illusorybecause any sublicenses the licensee might grant included the requirement to pay royalties. Id.,citing Abbott at 1132.

Licensors and licensees must also be aware that the exclusive license may give rise to thesituation where both the licensor and licensee are deemed to be necessary parties to an

infringement action brought to enforce the licensed patents. A licensee may obtain sufficientrights in the patent to be entitled to seek relief from infringement, but to do so, it ordinarily must

join the patent owner. Unlike the patentee or actual assignee of the patent, however, an exclusivelicensee ordinarily may not sue in its own name alone, but must join the patent owner in an

action brought against an accused infringer. Propat Int'l Corp. v. RPost US Inc., 473 F.3d 1187,1193 (Fed. Cir. 2007). Typically, the courts will look to determine whether the accused infringer

would be subjected to multiple actions for infringement if the patent owner were not joined as anecessary party. Cases have held that participation of the patent owner "as a party is

indispensable not only to give jurisdiction under the patent laws, but also in most cases to enablethe alleged infringer to respond in one action to all claims of infringement for his act."

Independent Wireless, 269 U.S. at 468.*4 When there is an exclusive license agreement, as opposed to a nonexclusive license

agreement, but the exclusive license does not transfer sufficient rights to make the licensee thepatent owner, either the licensee or the licensor may sue, but both of them generally must be

joined as parties to the litigation. Aspex Eyewear Inc v. Miracle Optics Inc. Viva Optique Inc,434 F.3d 1336, 1344 (Fed. Cir. 2006). The licensee must be aware that, as the owner of the

patent, even if he or she refuses or is unable to join an exclusive licensee as co-plaintiff, there arecircumstances in which a licensee may make him or her a party defendant by process.

Independent Wireless, 269U.S. at 468.Important to this determination is whether the exclusive licensee also granted the exclusive

right to sue for infringement of the licensed patents. Vaupel, 944 F.2d at 875; see also Abbott, 47F.3d at 1132. The Federal Circuit has held that the nature and scope of the exclusive licensee's

purported right to bring suit, together with the nature and scope of any right to sue purportedlyretained by the licensor, is the most important consideration in determining whether all

substantial rights were transferred to the licensee. Alfred, 604 F.3d 1354; citing AsymmetRx Inc.v. Biocare Med. LLC, 582 F.3d 1314, 1320- 21 (Fed. Cir. 2009).

A few recent federal circuit decisions shed some light on these issues. In the notable patentcase cited above, Abbott, the patent owner had retained too great an interest in the patents to

enable the licensee to sue for infringement on its own. Those interests included "a limited right tomake, use, and sell products embodying the patented inventions, a right to bring suit if [the

licensee] declined to do so, and the right to prevent [the licensee] from assigning its rights underthe license to any party other than a successor in business." Abbott, 47 F.3d at 1132. More

specifically, the agreement stated that if the patent owner asked the licensee to bring suit againstan alleged infringer and the licensee declined to do so, the patent owner had the right to bring its

own infringement action. Thus, although the licensee had the option to initiate a suit forinfringement, "it [did] not enjoy the right to indulge infringements, which normally accompanies


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a complete conveyance of the right to sue." Id. at 1132. In addition, even if the licensee didexercise its option to sue for infringement, it was "obligated under the agreement not to

'prejudice or impair the patent rights in connection with such prosecution or settlement."' Id.In contrast to this, the exclusive license considered in the Vaupel case granted the right to sue

to the licensee in its entirety, subject only to the obligation to inform the patent owner of the

existence of the suit. In this case, because the licensor retained only limited rights, the courtfound that the patentee was not a necessary party and the licensee had standing to sue on its own.Vaupel, 944 F.2d at 875. It is instructive, then, to understand what rights the patent owner did

retain in Vaupel. The only rights under the licensed patent retained by the patent owner were:*5 A veto right on sublicensing

The right to obtain patents on the invention in other countries A reversionary right in the patent in the event of bankruptcy

A right to receive infringement damagesIn this circumstance where there was a complete transfer of the right to sue for infringement,

the limited rights retained did not reduce the transfer of patent rights to a mere license, becausethey did not substantially interfere with the full use of the exclusive rights under the patent and

were thus not inconsistent with an assignment. Id. at 875.Oftentimes, exclusive licensees will grant exclusivity only in a particular territory, or only in

a particular field of use. What effect, if any, do these territorial and field-of-use restrictions haveon considerations relating to standing and necessary parties? Generally speaking, an exclusive

license of the entire bundle of rights for a defined territory gives the exclusive licensee standingto sue for infringement in that territory. Enzo APA & Son v. Geapag A.G., 134 F.3d 1090, 1093,

(Fed. Cir. 1998). Even where a license is exclusive, if it is granted only in a limited territorialregion and is only for a limited field-of-use in that region, it does not give the licensee standing

to sue for infringement in that region without joinder of the legal patent owner. Int'l Gamco Inc.v. Multimedia Games Inc., 504 F.3d 1273, 1275-279, (Fed. Cir. 2007). This is because field-of-

use licenses divide the patent rights among multiple entities. In this situation, if the exclusivelicensee in a particular field were permitted to bring suit by itself, the possibility that the accused

infringer would be subject to multiple infringement actions arises as the patent rights are sharedamong various entities.

Reversion

When granting exclusive rights in your intellectual property, you should consider including aprovision for reversion of the litigation rights to the licensor in the event of a breach or

termination of the agreement. Standing is determined upon commencement of the action.Therefore, a licensee deemed to have standing can bring a lawsuit for patent infringement. The

courts have found that where an agreement makes no express provision of reversion rights backto the licensor, the right to sue does not revert back to the licensor for a litigation properly

brought by the licensee even after the licensee breached the license agreement and it wasterminated. Master Craft Tool Co. LLC v. Stanley Works, 2007 WL 2008685 (D. Minn. July 6,

2007)

Set Minimum Performance RequirementsAlthough performance thresholds are typically not a topic that gives rise to issues in

litigation, it is an important point to keep in mind when entering into an exclusive license and istherefore worthy of brief mention. One issue that can arise with exclusive licensees is the


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licensee's failure to commercialize the technology in accordance with anticipated expectations. Ifa licensor has given the licensee exclusive rights in the technology, even if only in a particular

field of use or territory, that licensee is expected to perform. If the licensee fails to perform, thelicensor is losing value. Accordingly, the exclusive licensor should build minimum performance

requirements into the exclusive license agreement. These can be in the form of minimum sales

quotas, minimum marketing expenditures, minimum market share goals, and so on.*6 Specific remedies for failure to meet the required minimums can and should be built intothe agreement. One such remedy is a minimum royalty. In this scenario, the licensee can be

required to pay a minimum royalty regardless of the amount of sales the licensee actually makes.In this way, the exclusive licensor can be guaranteed a minimum stream of revenue even if the

licensee fails to commercialize the technology as expected. This puts the burden on the licenseeto perform as promised while removing some or all of the risk. Another remedy is conversion of

the license from exclusive to non-exclusive. With this remedy, the licensor is not "stuck" withthe original licensee and can then offer licenses to others to commercialize the technology.

However, a downside of this conversion remedy is that the licensor will not be able to offerexclusivity to anyone else. Therefore, another remedy available is termination of the license

agreement entirely. With the license terminated and the original licensee removed from thepicture, the licensor is free to offer the technology to others on an exclusive or non-exclusive

basis.

The License's Impact on Damages

Accrual of Damages and Patent Marking Provisions in LicensesIf licenses are granted under your patents, you should include a provision requiring that

licensees properly mark each covered product sold with the patent number. Failure to do so canlimit the damages to which you are entitled. As a patent owner, you are entitled to collect

damages for infringement that occurs prior to filing your infringement suit, but only if thedefendant was put on notice of his or her infringement. This requirement for notice is set forth in

the Section 287 of the Patent Act, which provides, in pertinent part:Patentees, and persons making, offering for sale, or selling within the United States any

patented article for or under them or importing any patented article into the United States, maygive notice to the public that the same is patented, either by fixing thereon the word "patent" or

the abbreviation "pat.," together with the number of the patent ... In the event of failure so tomark, no damages shall be recovered by the patentee in any action for infringement, except on

proof that the infringer was notified of the infringement and continued to infringe thereafter, inwhich event damages may be recovered only for infringement occurring after such notice. Filing

of an action for infringement shall constitute such notice.35 U.S.C. 287(a) (1999).

Such notice can be provided by actual or constructive notice to the accused infringer. Actualnotice can be provided by a letter informing the accused infringer of the identity of the patent

and the products or activities that are believed to be an infringement, accompanied by a proposalto abate the infringement, whether by license or otherwise. SRI Int'l v. Advanced Tech. Lab., 127

F.3d 1462, 1470 (Fed. Cir. 1997). Constructive notice can be provided by the patentee markingthe product in compliance 35 U.S.C. 287(a) of the patent laws. Absent marking, damages may

be recovered only after actual notice is given. SRI Int'l, 127 F.3d at 1469.


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*7 Of importance to licensors is the fact that the marking provisions also apply to "personsmaking or selling any patented article for or under [the patentees]." 35 U.S.C. 287. These

provisions also apply to patentees who do not make or sell any products themselves, but wholicense others to manufacture and sell patented articles in the United States. Amsted Indus. Inc.

v. Buckeye Steel Castings Co., 24 F.3d 178, 184-85 (Fed. Cir. 1994). Along these lines, courts

have held that licensees and other authorized parties such as manufacturers must also complywith the marking requirements, or damages will not accrue. Amsted Indus., 24 F.3d at 185.Therefore, the licensor is advised to include in its license agreements provisions requiring

licensees to mark licensed products and to police the marking to ensure compliance.What happens, though, if your licensees fail to mark licensed products despite a properly

drafted license agreement requiring marking? Section 287(a) requires that "substantially all"patented articles be marked to constitute constructive notice and that the marking must be

substantially consistent and continuous. 35 U.S.C. 287(a). Fortunately, the courts recognizethat with third parties unrelated to the patentee, such as licensees, it may be difficult for a

patentee to ensure complete compliance with the marking provisions. Therefore, the courts mayapply a "rule of reason" approach in such a case, and substantial compliance may be found to

satisfy the patent statute. When the failure to mark is caused by someone other than the patentee,courts may consider whether the patentee made reasonable efforts to ensure compliance with the

marking requirements. Maxwell v. J. Baker Inc., 86 F.3d 1098, 1111-112 (Fed. Cir. 1996).Accordingly, licensors should make at least reasonable efforts to enforce marking provisions in

their license agreements.

Damages CalculationsLicensees should be aware that royalties set forth in licensing agreements might be used as a

guide to determining damages that can be awarded in a suit to enforce the patents. In certaincircumstances, patentees will grant a license to a third party at a below-market rate for a variety

of reasons. For example, the licensee may be a friend or past colleague, the licensor may belooking to stimulate the market, the licensor may be looking to quickly resolve a dispute, or the

licensor did not appreciate the actual value of the licensed technology. However, while thelicensor may be entitled to argue that these special-circumstance licenses should not be

considered in determining royalties in litigation, these licenses can become an issue for thelicensor.

Section 284 of the 1952 Patent Act provides, in part:Upon finding for the claimant the court shall award the claimant damages adequate to

compensate for the infringement, but in no event less than a reasonable royalty for the use madeof the invention by the infringer ...

*8 35 U.S.C. 284 (1999).The statute contemplates that when a patentee is unable to prove he or she is entitled to lost

profits, margin erosion, or an established royalty rate, the patentee is at least entitled to"reasonable royalty" damages. As such, reasonable royalties are sometimes viewed as a floor for

patent damages. In what has become one of the most relied upon cases for damages analysis,Georgia-Pacific Corp. v. U.S. Plywood Corp., the court set forth a detailed list of fifteen factors

that may be relevant in determining a reasonable royalty. Georgia-Pacific Corp. v. United StatesPlywood Corp., 318 F. Supp. 1116, 1120 (S.D.N.Y. 1970), modified and aff'd, 446 F.2d 295, (2d

Cir. 1971), cert. denied, 404 U.S. 870 (1971). These factors, which are routinely relied on fordamages analysis, have come to be referred to as the "Georgia Pacific Factors." Several of these


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factors include considerations of past royalties received by the patentee for licensing the patent insuit:

The royalties received by the patentee for the licensing of the patent in suit, proving ortending to prove an established royalty.

The rates paid by the licensee for the use of other patents comparable to the patent in suit.

The nature and scope of the license, as exclusive or non-exclusive, or as restricted or non-restricted in terms of territory or with respect to whom the manufactured product may be sold. The licensor's established policy and marketing program to maintain his patent monopoly

by not licensing others to use the invention or by granting licenses under special conditionsdesigned to preserve that monopoly.

The commercial relationship between the licensor and licensee, such as, whether they arecompetitors in the same territory in the same line of business, or whether they are inventor and

promoter. The effect of selling the patented specialty in promoting sales of other products of the

licensee; the existing value of the invention to the licensor as a generator of sales of his non-patented items; and the extent of such derivative or convoyed sales.

The duration of the patent and the term of the license.As these factors illustrate, past licensing practices, not just royalties, can affect patent

damages in an infringement action under a previously licensed patent. Indeed, courts have heldthat licenses granted by the patent for the patent in suit must be considered, and that failure to do

so is an error of law. Studiengesellschaft Kohle v. Dart Industries Inc., 862 F.2d 1564, 1568(Fed. Cir. 1988). The licensor must be aware that licenses that suggest a lower rate have in some

cases been deemed to carry considerable weight. See, for example, Unisplay, S.A. v. AmericanElec. Sign Co., 69 F.3d 512, 519 (Fed. Cir. 1995). In fact, some courts have gone so far as to

state that if reasonable royalty damages are set differently from the licensing history, the courtmust justify the difference. Studiengesellschaft, 862 F.2d at 1568.

*9 However, damages calculations are always dependent on the facts and circumstances ofthe case, and exceptions have been made in certain circumstances. For example, it has been

stated that a single licensing agreement does not generally demonstrate uniformity oracquiescence in the reasonableness of the royalty rate. Instead, for a royalty rate to be considered

"established," it must be paid by a sufficient number of licensees such that a generalacquiescence in its reasonableness can be shown. Rude v. Westcott, 130 U.S. 152, 165 (1889).

However, it would still be wise for the licensor to avoid the situation where even a single licenseis granted at below-market rates.

Some areas can provide somewhat of a safe haven for damages analysis. For example, Rule408 of the Federal Rules of Evidence provides a restriction on the use of evidence regarding

offers to compromise a dispute. FRE 408 excludes the introduction of compromise offers "toprove liability for or invalidity of the claim or its amount" and further excludes "[e]vidence of

conduct or statements made in compromise negotiations." Thus, settlement negotiations amongthe parties are often conducted with the understanding that the parties are free to make settlement

offers, without the settlement offer being introduced into evidence as the alleged value of aclaim. Where the settlement offer involves an offer to license intellectual property, FRE 408 can

also provide protection to the IP holder. Licensing offers in compromise made in contemplationof infringement litigation have been found to be inadmissible for damages analysis underRule

408 of the Federal Rules of Evidence.


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Also, in Hanson v. Alpine Valley Ski Area Inc., 718 F.2d 1075, 1078-79 (Fed. Cir. 1983), theFederal Circuit found that the fact that licenses were offered at a particular rate does not show

that that rate was the "established" rate, because showing an established rate requires actuallicenses, not mere offers to license. Moreover, because in that case offers were made after the

infringement had begun and litigation was threatened or probable, their terms "should not be

considered evidence of an 'established royalty,"' since "license fees negotiated in the face of athreat of high litigation costs 'may be strongly influenced by a desire to avoid full litigation ...."'Id. at 1078- 79; see also Panduit Corp. v. Stahlin Bros. Fibre Works Inc., 575 F.2d 1152, 1164

(6th Cir. 1978).However, there are cases that can be considered in contrast to Hanson. For example, in Deere

& Co. v. Int'l Harvester Co. the Federal Circuit found error where evidence of a third partylicense negotiated during infringement of the subject patent was excluded. Deere & Co. v.

International Harvester Co., 710 F.2d 1551 (Fed. Cir. 1983). Although the third party license wasnegotiated while the litigants in that action were "locked in disputes over [the] validity and

infringement of the ... patent," the Court concluded that the third party license was not itselfinadmissible evidence of the settlement of the dispute between the parties. The court in Deere

found that Rule 408 is limited to actual disputes over existing claims. The court therefore foundthat Rule 408 did not apply to the licensing offers, including rejected offers, for a patent that is

not yet the subject of a lawsuit, as that offer was not an offer by Deere for settlement of adisputed claim. Deere, 710 at 1557.

Venue and Forum Selection

*10 In those circumstances when the relationship does break down and dispute resolutionmechanisms are considered, the agreement will often provide guidance as to what law applies

and where disputes are resolved. As it was so aptly put by Judge Cardamone: "A plaintiff maythink that as the initiator of a lawsuit he is the lord and master of where the litigation will be tried

and under what law. But if he is a party to a contract that contains forum selection and choice oflaw clauses his view of himself as ruler of all he surveys may, like an inflated balloon, suffer

considerable loss of altitude." Phillips v. Audio Active Ltd., 494 F.3d 378, 381 (2d Cir. N.Y.2007). Accordingly, forum selection and choice of law provisions should be considered carefully

by the parties and not glossed over in negotiations. Also, care should be taken when draftingsuch provisions so as to effectuate the parties' intentions.

When negotiating a contract, you should consider where breaches are at the greatest risk ofoccurring, the nature of such likely breaches, the likely breaching party, and the desired

remedies. Only after these are considered can the proper forum be selected. The parties shouldconsider whether they want disputes under the agreement to be arbitrated or whether they will

head to court to resolve their differences. The parties should also consider which country's orstate's laws will govern their agreement and in which jurisdiction they wish to arbitrate or litigate

their disputes. A license agreement is a contract, and in the United States contract disputes aregenerally governed under state law.

If the parties want to have their disputes arbitrated, they should include an arbitrationprovision in their license agreement. Absent an agreement to submit disputes to arbitration, one

party typically cannot compel the other to submit to arbitration to resolve their dispute. UnitedSteelworkers v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582, (1960) ("arbitration is a

matter of contract and a party cannot be required to submit to arbitration any dispute which hehas not agreed so to submit."). When included in the license agreement, an arbitration provision


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can set forth whether disputes are arbitrated, the types of disputes submitted to arbitration, theprocess for arbitration, and rules governing the arbitration process. Many agreements even map

out a pre-arbitration process for resolving disputes among the parties before submitting thematter to arbitration. The Federal Arbitration Act at 9 U.S.C.S. 1 et seq allows parties to tailor

many facets of arbitration in their agreement, including, for example, the way arbitrators are

chosen, what their qualifications should be, which issues are arbitrable, along with procedure andchoice of substantive law. Hall St. Assocs. L.L.C. v. Mattel Inc., 552 U.S. 576, 586 (U.S. 2008).If a dispute arises under an agreement and one of the parties files suit in a court of law where

a properly drafted arbitration clause was included in the agreement, and if the dispute falls underthe arbitration provision, the other party can (and typically does) move to stay that action and

compel arbitration. Courts do have the power to compel the party who filed suit to proceed withthe arbitration even in cases where the arbitration is located in some other jurisdiction.

*11 However, as with the rest of the contract, the express language in the agreement is key.Courts have held that an agreement to arbitrate disputes "arising out of" or "arising under" the

agreement does not cover disputes that are merely "related to" the agreement. Tracer ResearchCorp. v. National Envtl. Servs. Co., 42 F.3d 1292, 1295 (9th Cir. Ariz. 1994). The Ninth Circuit

held, for example, that a licensee's alleged post-termination use of licensed trade secrets was notsusceptible to arbitration as arising "under" the agreement. Id. at 1295. Accordingly, if the parties

wish to be able to compel arbitration for disputes that relate to the subject matter of theagreement in addition to those that arise under the agreement, you should consider using "arising

out of or relating to" language to ensure that all claims touching matters covered by theagreement are arbitrable. Genesco Inc. v. T. Kakiuchi & Co., 815 F.2d 840, 845 (2d Cir. 1987);

See, also Rhone-Poulenc Specialities Chimiques v. SCM Corp., 769 F.2d 1569, 1571 (Fed. Cir.1985).

The parties can also identify forum selection for different disputes in the agreement. Choiceof law and forum selection clauses set forth in a license agreement are typically honored by the

courts. Indeed, the Supreme Court has held that where forum selection clauses freely negotiatedbetween the parties are included in the agreement, they are generally valid and enforceable. M/S

Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 15 (U.S. 1972) ("in the light of present-daycommercial realities and expanding international trade we conclude that the forum clause should

control absent a strong showing that it should be set aside."). Where a party files suit under theagreement in a jurisdiction contrary to a clear forum selection clause contained in that

agreement, the action is subject to dismissal for improper venue. Likewise, the courts givesubstantial weight to choice of law provisions. Phillips v. Audio Active Ltd., 494 F.3d 378, 384

(2d Cir. N.Y. 2007); See, also, State Trading Corp. of India Ltd. v. Assuranceforeningen Skuld,921 F.2d 409, 417 (2d Cir. 1990) ("[A] contractual choice of law clause generally takes

precedence over choice of law rules ....").The courts, however, have frequently classified forum selection clauses as either mandatory

or permissive, so it is important to be careful when drafting the forum selection clause. ExcellInc. v. Sterling Boiler & Mech. Inc., 106 F.3d 318, 321 (10th Cir. 1997). "Mandatory forum

selection clauses contain clear language showing that jurisdiction is appropriate only in thedesignated forum." Id. at 321. "In contrast, permissive forum selection clauses authorize

jurisdiction in a designated forum, but do not prohibit litigation elsewhere." Id. Language of aforum selection clause that does not specify exclusivity of the forum can be construed as

permissive rather than mandatory. Citro Florida Inc. v. Citrovale S.A., 760 F.2d 1231, 1232(11th Cir. 1985) (concluding that language of a forum selection clause that addressed jurisdiction


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using nonexclusive language could reasonably be construed as a permissive forum selectionclause); see, also, Keaty v. Freeport IndonesiaInc., 503 F.2d 955, 957 (5th Cir. 1974).

*12 In contrast, where venue is specified in a forum selection clause with sufficient clarityand certainty to be considered obligatory, the clause will be enforced. K & V Scientific Co. Inc.

v. Bayerische Motoren Werke Aktiengesellschaft (BMW), 314 F.3d 494, 498 (10th

Cir. 2002).

However, the parties negotiating the license should be aware that where the forum selectionclause only specifies jurisdiction, the courts in several circuits have not enforced the clauseunless there is some further language indicating the parties' intent to make venue exclusive.

Paper Express Ltd. v. Pfankuch Maschinen GmbH, 972 F.2d 753, 757 (7th Cir. 1992); JohnBoutari & Son, Wines & Spirits, S.A. v. Attiki Imp. & Distrib. Inc., 22 F.3d 51, 52 (2d Cir.

1994); Docksider Ltd. v. Sea Tech. Ltd., 875 F.2d 762, 764 (9th Cir. 1989); Citro Florida, 760F.2d at 1232;Keaty v. Freeport Indonesia Inc., 503 F.2d 955, 957 (5th Cir. 1974). Applying this

rule, these circuits (and the district courts within them) have held the following forum selectionclause language to be permissive:

"Any dispute arising between the parties hereunder shall come within the jurisdiction of thecompetent Greek Courts, specifically of the Thessaloniki Courts." John Boutari, 22 F.3d at 52.

"The laws and courts of Zurich are applicable." Caldas, 17 F.3d at 127. "The courts of California, County of Orange, shall have jurisdiction over the parties in any

action at law relating to the subject matter or the interpretation of this contract." Hunt, 817 F.2dat 76.

"Place of jurisdiction is Sao Paulo/Brazil." Citro, 760 F.2d at 1231. "This agreement shall be construed and enforceable according to the law of the State of

New York and the parties submit to the jurisdiction of the courts of New York." Keaty, 503 F.2dat 956.

"This agreement shall be governed by and construed in accordance with the laws of theFederal Republic of Germany. * * * Place of jurisdiction shall be Dresden." Hull 753 Corp., 58

F. Supp. 2d at 926.In contrast, courts have held clauses mandatory where the language of the clause is clear and

unambiguous. Applying the same rule, these courts have held the following clauses to bemandatory:

"Place of jurisdiction ... is the registered office of the trustee [in Germany], to the extentpermissible under the law." Frietsch v. Refco Inc., 56 F.3d 825, 827, 829 (7th Cir. 1995);

(concluding that the phrase "to the extent permissible under the law" "would have no function ifthe [forum selection] clause were not mandatory--if, in other words, a party could sue anywhere

he wanted"). "In all disputes arising out of the contractual relationship, the action shall be filed in the

court which has jurisdiction for the principal place of business of the supplier .... The supplieralso has the right to commence an action against the purchaser at the purchaser's principle place

of business." Paper Express Ltd. v. Pfankuch Maschinen GmbH, 972 F.2d 753, 755-756(concluding the last sentence "would be appropriate and meaningful only if the clause were in

fact mandatory").*13 "Licensee hereby agrees and consents to the jurisdiction of the courts of the State of

Virginia. Venue of any action brought hereunder shall be deemed to be in Gloucester County,Virginia." Docksider Ltd., 875 F.2d at 763.

The only circuit that has deviated from the above framework is the Sixth Circuit. That courtinterpreted the following forum selection clause as requiring exclusive jurisdiction.


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"Place of jurisdiction for all disputes arising in connection with the contract shall be at theprincipal place of business of the supplier. This shall also apply for claims in summary

procedures on bills of exchange, promissory notes, or checks. The supplier is also entitled to filea suit at the principal place of business of the purchaser." General Electric Co. v. G.

Siempelkamp GmbH & Co., 29 F.3d 1095, 1097 (6th Cir. 1994).

In construing this clause, the Sixth Circuit concluded that, "because the clause states that 'all'disputes 'shall' be at [defendant's] principal place of business, it selects German court jurisdictionexclusively and is mandatory." Id. at 1099.

Accordingly, licensors and licensees are advised to be clear when setting forth their desires inthe licensing agreement. If the clause is intended to be mandatory, the parties should consider

stating that it is the "exclusive jurisdiction for disputes" arising under the agreement.Licensors should also be aware that reaching out to a licensee in another state and negotiating

a license agreement with that licensee in that state may subject the licensor to in personamjurisdiction in that territory. This will depend on the subject state's long-arm statute. California,

for example, has a long-arm statute that is coextensive with the limits of due process.Accordingly, the inquiry collapses into a single inquiry--whether jurisdiction comports with due

process. In the seminal case on personal jurisdiction, the Supreme Court held that "due processrequires only that in order to subject a defendant to a judgment in personam, if he be not present

within the territory of the forum, he have certain minimum contacts with it such that themaintenance of the suit does not offend 'traditional notions of fair play and substantial justice."

International Shoe Co. v. Washington, 326 U.S. 310, 316, (1945).In keeping with International Shoe and other jurisprudence, the Supreme Court in the Burger

King case identified the three factors that are considered when making the due process inquiry.Burger King Corp. v. Rudzewicz, 471 U.S. 462 (U.S. 1985). These factors were summarized by

the Federal Circuit in the case of Akro v. Luker: (1) Whether the defendant purposefullyestablished minimum contacts within the forum State--i.e., whether its activities were

"purposefully directed" at residents of the forum state; (2) whether the claim asserted "arises outof or relates to" the defendant's activities with the state; and (3) the assertion of personal

jurisdiction would comport with "fair play and substantial justice." Akro Corp. v. Luker, 45 F.3d1541, 1545 (Fed. Cir. 1995).

*14 The first "minimum contacts" prong of the due process inquiry focuses on whether thedefendant "has purposefully directed his activities at residents of the forum and the litigation

results from alleged injuries that arise out of or relate to those activities." Burger King, 471 U.S.at 471-76. Following this framework, it has been held that negotiating licensing agreements with

a licensee in another state (even where negotiation was accomplished by telephone and mailfrom your home state) and collecting royalties from the licensee in his or her own state has met

the "minimum contacts" requirement of International Shoe. Inamed Corp. v. Kuzmak, 249 F.3d1356, 1361 (Fed. Cir. 2001).

It is noted that complaints for breach of the licensing agreement are typically accompaniedby one or more counts of patent infringement. Where the licensor has stated a claim arising

under the patent laws in a well-pleaded complaint, the action can be said to arise under an Act ofCongress related to patents, thus giving rise to exclusive jurisdiction to the federal district courts

of the United States. 28 U.S.C. 1338. In such circumstances, disputes surrounding the licensingagreement that relate to the question of infringement and defenses thereto will be joined.

Likewise, where initial jurisdiction is based upon a claim of patent infringement under28 U.S.C.


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1338 any appeals will be heard by the Federal Circuit, even in circumstances where the caseturns on state law contract principles. Kennedy v. Wright, 851 F.2d 963 (7th Cir. 1988).

Protective Orders

In many instances, confidential information is shared among the parties in a licensing setting.

For example, many licensing agreements include trade secret and know-how licenses. As anotherexample, in a joint-development or joint venture setting, parties can exchange their existingconfidential

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