Welcome to the Licensing Lawyer Blog!

November 16th, 2017
Welcome to the Licensing Lawyer Blog!

I know we're all inundated with electronic information, whether from "push" emails from various sources, blogs, listservs and other sources.  So why another blog?  Because:

  • It's sharply focused on licensing and IP transactions.  We'll be exploring some of the nitty-gritty issues and challenges that licensing people have to resolve in order to get a deal done  -- things like rights to improvements, patent indemnification, licensor duty to enforce against unlicensed infringers, joint inventions and the like.
  •  It's  about what licensing lawyers do: contracts.  It's about contract and deal structuring, drafting clear and succinct agreements that people can understand, deal strategy and negotiation.  In case you haven't noticed, there are lots of really lousy contracts out there -- so one of our goals is exploring "best practices" for contract drafting and negotiation in licensing and IP transactions.
  •  It's a highly interactive site where everyone can share their thoughts, insights and experience.  There are no right or wrong answers and no "experts" in this space: we can all learn from everybody else's experience.

 So welcome, and please join in!

Larry Schroepfer

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Most Favored Licensee: The Licensor's Clause from Hell

November 17th, 2016
Most Favored Licensee: The Licensor's Clause from Hell

If a licensor broadly licenses a patent or patent portfolio to many licensees who are selling similar (competitive) products, it's quite possibly the clause that the licensor hates the most: the Most Favored Licensee (MFL) clause.

Simply stated, the MFL clause says that if you the licensor ever give another licensee any better (i.e., cheaper) terms than you gave me, you've got to extend those terms to me once you sign the second license.  The licensee's argument is very simple:  I'm the good guy who agreed to pay you for using your patents, so why should you be able to give somebody else a better deal sometime down the road?

Although the licensee's argument has a certain fundamental fairness appeal, no two deals are ever exactly the same -- there are always differences stemming from who the licensee is, what it sells, what market it operates in, etc. etc. etc.  Furthermore, the negotiation dynamic is always different -- some potential licensees may be more willing to fight rather than take a license, they may have better prior art, they may have deeper pockets.

So if the licensor has sufficient leverage, its response to a MFL request should be to "just say no".  But sometimes the licensor can't do that, and an MFL clause is negotiated as part of the deal.  Here are a few thoughts about the provisions of an MFL clause:

  • To trigger the clause, there should be an apples-to-apples (and maybe even a Granny Smith apples-to Granny Smith apples) identity between the two deals.  In other words, the two deals should involve the same (competitive) products, the same field of use, the same territory, the same scope of the license grant.  This can be particularly problematic if "Licensed Products" are defined in the agreement to broadly encompass anything that infringes the claims of the licensed patents.  Despite the same definition, the actual products being sold under the licenses could be very, very different -- is the "Licensed Product" an electronic component, a car's electronic system, or a Mercedes-Benz?  This is why "Licensed Products" should be defined with much, much more precision than merely any product that infringes the claims of the Licensed Patents (but that's another topic for another time).
  • The other (and more difficult) apples-to-apples requirement should be that the two deals involve sales of the licensed products in the same or substantially similar quantities.  "Volume Discounts" are a fact of life in the business world, for very sound financial reasons, and there is no reason that the concept should not apply to licensing.  The problem, however, is that unless there are guaranteed minimum royalties, it's necessary to determine whether the more favorable financial terms extended to the second licensee should be determined based upon projections of the second licensee's sales at the time the license is entered into, or the actual volume of sales at the time that the licensee seeks to invoke the MFL.
  • A fundamental principal of the MFL clause is that, if the licensee elects to invoke it, the Licensee must accept all restrictions and provisions in the later agreement that are less favorable from the Licensee's standpoint.  In other words, the licensee can't cherry-pick; it's all or nothing.
  • The licensor would like to limit the MFL solely to ongoing royalties (percentage of selling price, per-unit royalty, royalty based on throughput, or whatever), and not to other payments made by the second licensee.  The licensee will seek to also include (and seek MFL treatment for) all other payments that the second licensee makes.  For example, if the second licensee's up-front license fee is less than the up-front licensee fee that the licensee paid, it will seek to either refund or (more likely) "rebate" the difference in the form of royalty reductions until the difference is recouped.
  • Regardless of whether the MFL applies just to royalties or to all fees, there are other factors in the second deal that the licensor will want taken into account in determining whether (and to what extent) the MFL applies.  These include:

Payments for past infringement.

Payments for the Licensor's services to the second licensee for technology transfer, support, etc.

The value of any cross-licenses that are included in the second deal.  This is a particularly hard problem to deal with.  The licensor will want the fact that there even is a cross-license to kick the second deal out of the MFL.  The licensee will seek to somehow have the financial value of the cross-licensed intellectual property assessed, or at a minimum make sure the cross-license isn't a sham to try to defeat the MFL altogether.

The value of any equity in the second licensee that the licensor takes.

Reductions in license fees or royalties from the second licensee that the licensor takes for ancillary business reasons.  These might include, for example, a product purchase/supply agreement or other commercial arrangement that is of value to the licensor (but be careful about "tying" issues here).

  • In addition to an MFL going forward, the licensee may also seek a representation and warranty from the licensor that the licensor hasn't granted more favorable terms in any prior licenses that the licensor entered into.  The Licensor may either resist this altogether, or will seek to have certain prior licenses excluded (if, for example, the licensor has given the initial licensees a discount to get somebody under license).
  • Finally, if the agreement includes an MFL, there should be a notice requirement under which the licensor is required to notify the licensee whenever it does a later deal where the MFL may apply, including a summary of the financial terms and conditions (and any other applicable provisions).  The licensee should require either that it be given a redacted copy of the agreement, or that the full agreement be made available to the licensee's counsel for an "eyes only" review.

All of these issues and complications mean that if I'm a licensor, I'd trade off other valuable concessions (even financial ones) not to have to go down the MFL road.  Which means, of course, that if I'm a licensee and I'm willing to forego the MFL (after a decent interval of strenuous negotiation, of course), I'd seek to extract maximum benefit elsewhere for this concession.

1 comment

Comment from: Dave Kingston [Visitor]
Dave Kingston

A great point- cases differ dramatically per case, so it is important to take in factors that affect licensing, such as the selling information, the seller, the market and so on. Indeed, leverage is also an important factor. A great resource I came across that may help to give more information regarding licensing law can be found here http://www.garrattssolicitors.co.uk/business-legal-services/licensing.html

09/22/17 @ 08:40

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Rights to Improvements -- Conclusion

October 19th, 2016
Rights to Improvements -- Conclusion

Last time, we talked about the problem of improvements made by either party to the licensed technology, why I believe allocating rights to each party's improvements is the hardest issue of all, and some potential solutions to the problem.

Before leaving the Improvements topic, here are a few additional thoughts: 

  • Work hard to customize the "Improvements" definition to the specific technology being licensed.  In an earlier post, I said that the line between an "improvement" and a technology development that's "something else" is inherently ambiguous, and that most "Improvements" definitions amount to nothing more than a string of ambiguous words.  While that's true, it's possible to arrive at a more helpful definition if you focus on those aspects of the technology that make it valuable in the first place.  For example:
  • Functionality -- if functionality is important, in the "Improvements" definition, focus on those developments that enhance functionality and enable the technology to perform its functions in a better way.
  • Cost -- if the technology permits something to be produced cheaper, focus on developments that further reduce cost.
  • Performance -- if the technology outperforms other competing technologies, focus on developments that further enhance performance.
  • Features -- If the technology's value resides in its feature set, focus on developments that improve those features or add new features or functions.
  • Technical aspects of the technology -- is the development a modification of the underlying technology itself (as in a re-writing of a portion of software code), or is it something that merely interfaces to the licensed technology?

There are doubtless other considerations, but the point is to focus on the technology, rather than just doing a "string cite" for the "Improvements" definition.

  • Provide very broad improvement rights on license termination.  Regardless of how you decide to deal with improvements during the license term, the agreement should always include a very broad improvements grantback if the license is terminated.  This is especially important in pharma and other life sciences licenses where the licensee discontinues development work.  The licensee's proof of concept, preclinical and clinical data, as well as regulatory filings, can be extremely valuable if the licensor wants to re-license the technology, or to continue development work on its own.  Although big pharma licensees will resist this, there really is no credible argument not to provide it, nor is there any good reason the licensor should have to pay for this data.
  • Consider "pooling" improvements from multiple licensees to enhance the technology's position versus competing technologies.  In those cases where a technology competes with other technologies to accomplish the same result, it may be advisable for the licensor and all of its licensees to "pool" their improvements.  I have seen this technique used most effectively with process technologies:  if all of those who are practicing a given process share their improvements and best practices, this can enhance the technology's performance and  viability versus competing process technologies.  In one case that I'm aware of, the licensor and all licensees had quarterly meetings devoted specifically to this purpose.  Of course, a particular licensee may elect to "opt out" of sharing its improvements, but the consequence would be that this licensee doesn't get access to the other parties' improvements either.  (As a footnote: there could be antitrust /competition law considerations to this that need to be analyzed if the licensor wants to go this route).   
  • Provide notice and process for improvements technology transfer.  Too often, even if the license agreement provides for broad improvement rights, nobody remembers to focus on it once the agreement is signed.  If the parties are serious about improvement rights, they need to establish a disciplined process to make sure improvement sharing happens.  Notice and a regularly scheduled meeting (quarterly, semi-annually, or whatever) should be built into the agreement to accommodate this.

Enough said about the improvements problem?  I doubt it! 

 Please share your thoughts and comments.

 

1 comment

Comment from: drllau [Member]  
Lawrence Lau

so the pooling of improvements is basically an express assignment back to owner with grantback? how would this work on an international scale (set up an IP holding entity in say Netherland Antilles with innovation box?)

10/03/14 @ 12:26

Rights to Improvements -- Part 2

October 1st, 2016
Rights to Improvements -- Part 2
 
Last time, we talked about the problem of improvements made by either party to the licensed technology, and why I believe allocating rights to each party's improvements is the hardest issue of all. 

So what do you do about it?   Here's a few ideas:

  • Make improvement rights reciprocal  -- i.e., each party gets the same rights to the other party's improvements as the rights that it grants that party to its own improvements.    There may be cases where one party has such overwhelming bargaining power that it can force a non-reciprocal  clause ("what's yours is mine and what's mine is mine"), but those situations are rare.  Making rights reciprocal forces each party to candidly assess the four "it's not fair" statements from the Part 1 of this post and recognize that the other party has legitimate concerns in how this issue is handled.
  • Limit rights to only patented improvements (or, more correctly stated, to patent rights applicable to the improvements), but do not require an actual technology transfer of the improvement itself.  This is better than nothing -- it at least assures that each party will have freedom to operate when it comes to improvements that the other party makes.  But it overlooks a central proposition: technology licenses are about technology, not about patents (more on this in a later posting).  So it really doesn't solve the problem or address the "it's not fair" statements from last time.
  • Provide the inventing party with a limited period of exclusivity -- the other party would only be permitted to implement the improvement after an agreed period of time (say, six months or one year) after the inventing party commercializes the improvement.  This can be particularly effective if time-to-market and early adopter considerations are important factors in the relevant market.
  • Set a time limit after which improvements are no longer licensed (say, two or three years).  The whole problem of defining "Improvements" is to distinguish between something that arises from developments made to or based on the existing technology, and "something new" that shouldn't fall within the scope of the improvements license.  It's certainly intuitively correct that after some period of time,  it's more likely to be "something new".  This approach also helps deal with the technical uncertainty we discussed last time -- each party may be more inclined to give its improvements to the other party for a short period of time if the short-term technology and product roadmap is somewhat visible.
  • Separate out the right to practice the other party's improvements versus rights to license or sublicense them.   In general, a licensor obtaining rights to the licensee's improvements also wants the right to sublicense them to its other existing and future licensees.  Even if the principal of reciprocity is applied here so that the licensee would get the right to sublicense the licensor's improvements, proliferation of a party's improvements through further sublicensing  is a very different proposition from merely permitting the other party itself to practice the improvements.  By making rights to improvements completely non-sublicensable, the competitive threat to the inventing party may be significantly minimized.
  • Provide each party with the option to license the other's improvements -- this would generally be upon financial terms and conditions to be negotiated.  It may be possible to set some parameters around the financial term so that it is not completely open-ended -- for example, by limiting the license fees and royalties for an improvement to no more than a given percent of those license  fees and royalties in the initial agreement for the licensed technology.  Another technique would be to require that, if the parties can't agree, the issue of compensation would be subject to an expedited Alternative Dispute Resolution procedure within defined parameters.  At the end of the day, an option to acquire improvements on terms to be negotiated later essentially kicks the problem down the road.  But it may be the only viable approach if one or both parties have strong feelings about the improvements issue.

 I have a few more thoughts about the whole improvements problem -- stay tuned for Improvements part 3.

3 comments

Comment from: rossvesq [Member]  
Ross

As I often represented the licensee my preferred argument was whomever paid for the improvement owns it. If you license to me a Christmas tree, but I pay for the ornaments, I’m taking the ornaments with me when I’m done with the tree. If the licensor is willing to reimburse me for the cost of the ornaments, then he gets to keep them (or at least get a license to use them too). You offer up some good alternatives that work for various situations not amenable to a "whomever pays" rule that I favor.

11/19/14 @ 14:30
Comment from: larry_schroepfer [Member]  

I certainly understand the "whomever pays" rule, and I’ve often seen it argued (and employed), but as a licensor, my argument to you would be that I’ve factored rights to your improvements into the license/royalty price that I’ve set. Using your analogy, I’d say that if I’m the one that gave you the platform (Christmas tree) without which the ornaments would have no value in the first place, I ought to be entitled to share in the value (ornaments) that I enabled. At at a very minimum, I shouldn’t be prevented from creating my own ornaments if you patent "ornaments" as a result of working with my tree!

All of which reinforces my belief that rights to improvements really is the hardest non-financial problem of all!

11/19/14 @ 16:46
Comment from: drllau [Member]  
Lawrence Lau

How do you triage between fixtures, fittings and furnishings? Obviously I’m generalising here but let’s use the analogy of the original licensed/rented property being a apartment with a shared commons area. You can have a sub-tenant either add
- a new lamp fixed quasi-permanently to the wall
- lightbulb (temporary)
- or lampshade at whim

so you can have intangibles in similar categories. Classic example would be 3D games with engine plugins, user-custom items (which only work within game) and skins.

11/22/14 @ 10:18

Rights to Improvements -- Part 1

September 15th, 2016
Rights to Improvements -- Part 1

Okay, so the Terms Sheet has been negotiated, all of the tricky financial issues have been resolved, and you're just a week or so away of inking the deal, right?

Unless the Terms Sheet is much more inclusive that it should be, wrong.  There are still some very difficult issues that need to be resolved.  And in my experience, the hardest one of all is rights to improvements.

To be clear what we're talking about here, the issue is whether, and to what extent, the licensee should have access to improvements that the licensor makes to the licensed technology after the deal is signed, and vice-versa:  whether, and to what extent, the licensor should have access to the licensee's improvements.   Although the issue does arise in pure patent licensing (i.e., a patent license with no technology transfer), it's really much harder in the context of technology transfer licensing.

So why exactly is this issue so tough?   There are a number of somewhat related reasons:

  • Each party has legitimate and very real economic concerns.

When it comes to whether the licensee should have access to the licensor's downstream improvements, the licensor will say (correctly) that the potential value of those improvements hasn't been factored into the license price, and it's not fair to give the licensee a free ride.  The licensee will say (correctly) that that downstream licensor improvements could substantially diminish the value (or even obsolete) the technology that the licensee paid for, and it's not fair to leave the licensee out in the cold.

When it comes to whether the licensor should have access to the licensee's downstream improvements, the licensee will say (correctly) that its investment in improving the technology is what gives it competitive advantage, and it's not fair to just give this value away.  The licensor will say (correctly) that it enabled the opportunity in the first place -- there would be no improvements but for the original license, and it's not fair that the licensor (and potentially its other licensees) should be left out in the cold.

There are four "it's not fair" statements in the last two paragraphs, all of which are true -- which means this really is an important commercial and economic issue.

  • What exactly is an "improvement" anyway?   

Any agreement that includes rights to improvements must distinguish between what is an "improvement' and what's "something else" (i.e., developments related to the licensed technology but not an "improvement" to it.  If you look at most contract definitions of "improvements", you'll see that they contain a very long string of words:  "changes, modifications, enhancements, developments, revisions, additions, updates, adaptations, variations, amendments", and (in a wonderful piece of legal tautology), improvements means "improvements".   Despite lawyers' multiplication of words, it doesn't really make a vague concept less vague, and for better or worse, there is no clear, bright line separating improvements  from other developments.  So the parties cannot be certain when they negotiate the agreement that they know the scope of what will and will not be covered by the improvements clause.

  • Will access to improvements be important? 

Where are the markets and technology going­?  Are improvements likely to be made, and will they be technically or economically important?  The answer, in most cases, is "who knows"?  You never know if the technology will gain market acceptance, if there will be a new, disruptive technology, if there could be new entrants into the market that might have a cost or technologic advantage, and on and on.  So you don't know at the outset whether this will be important or not.

So the bottom line on why Improvements is such a tough issue is that both parties potentially have a lot at stake, and they're dealing with massive layers of uncertainly -- both "contractual" uncertainty and "technical" uncertainty.

So what do you do?  Stay tuned for Part 2....

Larry Schroepfer

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