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Building Better Licenses

Technology Transfer Tactics Webinar

Wednesday April 27, 2011

Peter H. Durant

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Overview

• Update on recent relevant cases (words matter)

• “Challenge” clauses

• Common licensing pitfalls and questions

• Two drafting examples (before and after)

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Case Law Update – Words Matter

• Cincom Systems v. Novelis (6th Cir. 2009)

› Novelis wanted benefit of 16 year old Alcan license

› Alcan internally reorganized and changed name to Novelis via merger

› License for same computer in same building; only change was name on door

› Licensee defined as “Alcan” and did not include successors/affiliates

› Court held that “Novelis” could not use software – plain text controlled and there was no express right to transfer without written approval

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Case Law Update – Words Matter

• Imation Corp. v. Koninklijke Philips Electronics (Fed. Cir. 2009)› License said specific patent licenses continued beyond

termination date provided they were granted before termination date

› Licensee formed 2 subsidiaries 3 years after termination date of license agreement (8 years after start of license)

› Subsidiary = any entity which party now or hereafter owns more than 50%.

› Did license grant include subsidiaries created after termination date?

› Holding: license covers subsidiaries because subsidiaries defined as a class, with nod to future subsidiaries (“now or hereafter”)

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Case Law Update – Words Matter

• E8 Pharm. LLC v. Affymetrix, Inc. (D. Mass. 2010)

• In effort to hand off enforcement rights, MIT granted E8 right to grant sublicenses and covenants not to sue under License Agreement

• License did not grant E8 right to practice IP or to manufacture, but E8 required to diligently identify infringers

• Rights kept by MIT (including approval of sublicenses for non-monetary compensation, challenge rights, 3rd party beneficiary rights on sublicenses, and ongoing right to payments under sublicenses) weighed against E8 possessing right to sue

• E8 couldn’t refuse to sue and MIT kept 20% of recoveries

• Not license “title” but “actual” rights of licensee control. Court found E8 was “bare” licensee with no standing to sue.

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Case Law Update

• Stanford v. Roche (argued before SCOTUS 2/28/11)

• Stanford researcher first signed agreement with Stanford that he “will assign” any future inventions to Stanford. He later signed agreement with Cetus providing that he “hereby assigns” future inventions.

• Under Bayh-Dole university may elect to retain title to gov’t-funded inventions

• Question: could employee/inventor transfer rights in invention to a third party without university’s consent?

• Justices asked why Stanford didn’t use “hereby assign” and pressed Roche why Bayh-Dole should be so easily circumvented by university’s failure to secure an assignment

• Takeaway – Use “I hereby assign” instead of “I agree to assign”…(words matter!)

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Challenge Clauses

• Lear v. Adkins (1969) – licensee estopped from challenging validity of licensed patent

• MedImmune v. Genentech (2007) – SCOTUS held licensee no longer required to stop paying royalties (or otherwise breach license agreement) before starting declaratory judgment that licensed patent is invalid, unenforceable, or not infringed

• Licensor should include consequences/disincentives to patent challenges by or on behalf of a licensee

› Notice of challenge (evidence to be used)?

› License termination or conversion to non-exclusive?

› Increase royalties (2x, 3x)? No recoupment if successful.

› Upfront payment to fund your defense?

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Challenge Clauses (Cont’d)

• Take equity in licensee?

• Identify “know-how” to be licensed at lower royalty for longer term if challenge successful?

• Pre-select favorable forum?

• Require confidential arbitration to try to avoid publicity re invalidity and collateral estoppel?

• Require standstill/delay period before DJ filed?

• Have separate severability clause b/c of risk of unenforceability of some of the foregoing

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Licensing Pitfalls

• Definitions that require a Garmin™; circular definitions

• If gov’t-funded IP, omitting caveat regarding gov’t rights

• Grant of exclusive license overlapping with existing license (while warranting that licensor is able to grant)

• Grant non-exclusive license but commit to not licensing to others (de facto exclusive license)

• Reserve right to perform “non-commercial” research?

• Reserve research right to inventors? (What if they leave?)

• Be careful if “method” license granted; what if method used to make “new” product? Who has rights to it?

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Licensing Pitfalls (Cont’d)

• Omitting “ royalty step down” after patent expiration (to avoid patent misuse) – counter with “know-how”

• Option right extends so long it creates de facto license

• Sublicenses that are perpetual no matter what, so licensor has no recourse re sublicensees

• “Sublicensee may not transfer the entirety of its rights ….”

• “Each party will inform the other of all matters that come to its attention re … patent prosecution.” Good idea?

• “Licensee may settle infringement claims by granting a sublicense under Section 5.X.” Good idea?

• Consequential damages exclusion. Good idea? Piper Jaffray v. SunGuard (D. Minn. 2007) No enhanced infringement damages.

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Over-reaching by Licensor?

• Two examples re patent prosecution

• “Licensee will indemnify and hold Univ. harmless for any action taken by Univ.’s patent counsel.”

• “Licensee will advance to Univ. (to be kept in an escrow account) a dollar amount reasonably estimated to cover all out-of-pocket fees and costs relating to the filing, prosecution, and maintenance of the Licensed Patents, including interferences, oppositions, re-examinations, maintenance, and defense for the upcoming year.”

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Indemnification – food for thought

• Only right patent confers is right to exclude

• Practicing a patent may infringe other patents

• Patent license should contain no warranty other than ownership

• Should be no warranty of non-infringement and no indemnity for infringement of patented IP

• If indemnity necessary, limit to “knowledge” of licensor

• Different from copyright infringement because patent infringement can occur without intentional wrongful act

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Licensee Indemnification (before)

› From and after the date hereof, Licensee shall indemnify, defend and hold harmless Licensor from and against any and all claims resulting from any breach of warranty hereunder or non-fulfillment or nonperformance by Licensee of any agreement, covenant or obligation of Licensee under this Agreement; provided that: (a) Licensor gives Licensee prompt written notice of the claim, (b) Licensee has sole control of the defense, settlement or compromise of the claim, and (c) Licensor provides Licensee with such cooperation, information, and other assistance requested by Licensee in connection with the defense, settlement, or compromise of the claim.

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Licensee Indemnification (after)

– From and after the date hereof, Licensee shall indemnify, defend and hold harmless Licensor, its Affiliates and its and their employees, officers and agents, from and against any and all claims, allegations (whether or not meritorious), losses, liabilities, causes of action, penalties, interest, and expenses, including, without limitation, reasonable attorneys’ fees, disbursements and expenses (whether incurred as the result of a third party claim or a claim to enforce Licensor’s rights under this provision), and other damages (collectively, “Losses”), resulting from, arising out of or related to…

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Indemnification (after) (con’t)

• (a) any breach of warranty hereunder or non-fulfillment or nonperformance by Licensee of any of its agreements, covenants or obligations under this Agreement; (b) Licensee’s exercise or practice of the license rights granted under this Agreement; (c) the development, manufacture, marketing, distribution, sale, or other disposition of Licensed Products by or on behalf of Licensee, and (d) all Losses, including product liability claims, related to any Licensed Product; provided that, in the case of any third-party claim, (i) Licensor gives Licensee prompt written notice of the claim or other Loss, it being agreed that any delay in providing such notice will not relieve Licensee of its obligations hereunder except to the extent that the delay actually prejudices Licensee’s ability to defend, …

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Indemnification (after) (con’t)

– (ii) Licensee has sole control of the defense, settlement or compromise of the claim or other Loss, but Licensee shall not enter into any settlement or compromise without Licensor’s prior written consent, unless such settlement or compromise: (1) includes no finding or admission of any violation of any law or other admission of liability by Licensor, and (2) only provides for payment of monetary damages that are actually paid in full by Licensee, and (iii) Licensor provides Licensee, at Licensee’s cost and expense, with such cooperation, information, and other assistance reasonably requested by Licensee in connection with the defense, settlement, or compromise of the claim or other Loss.

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Indemnification (after) (con’t)

– With respect to any third-party claim or other Loss: (A) Licensor may elect to participate in the action with an attorney of its own choice at its own expense, and (B) Licensee shall not be entitled to assume sole control of the defense, settlement or compromise of the claim (or shall cease to have such control) and, shall pay the reasonable fees, disbursements and expenses of legal counsel retained by the Licensor if: (i)) Licensee has failed or is failing to prosecute or defend such matter diligently and in good faith, or (ii) Licensee fails (when requested) to provide reasonable assurance to Licensor of its financial capacity to defend the claim or other Loss and fulfill its indemnification obligations with respect to the same.

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Termination (before)

• Sublicenses. Upon termination of this Agreement, all Sublicenses shall survive and shall be assigned to Licensor, but Licensor shall not be obligated to perform or incur any obligation to any Sublicensee not already required to be performed or incurred to Licensee by Licensor in this Agreement.

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Termination (after)

• Sublicenses. Upon termination of this Agreement, all Sublicenses shall survive and shall be assigned to and shall be assigned to Licensor, but Licensor shall not be obligated to perform or Licensor, but Licensor shall not be obligated to perform or incur any obligation to any Sublicensee not already incur any obligation to any Sublicensee not already required to be performed or incurred to Licensee by required to be performed or incurred to Licensee by Licensor in this AgreementLicensor in this Agreement only if such Sublicenses include: (i) an automatic assignment to Licensor of any and all beneficial interest of Licensee under such Sublicenses upon the termination of this Agreement; and (ii) provisions for assignment of the Sublicenses to Licensor at Licensor’s sole option.

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Constitutional Base for IP Law

U.S. Constitution, Article I, Section 8

The Congress shall have Power:

…To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive __ __ __ __ __ to their respective Writings and Discoveries;

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