les Nouvelles July 2017 Article of the Month
Writing Licenses And Other Agreements1—Some Tips2 Based On Over Fifty Years Of Mistakes And Confusion
(Mostly Others', But A Few Of Mine)
Bramson & Pressman, Partner
Philadelphia, PA, USA
The Skills Required for Negotiating and Drafting Contracts
Drafting any sort of agreement requires three skillsets. Just being a smart lawyer isn't enough. The skillsets are:
- Drafting skills—Writing a clear, concise, accurate and comprehensive agreement
- Legal skills—Understanding all of the legal principles which go into negotiating, drafting and enforcing a license agreement—contract law, patent law, labor law and bankruptcy law and, of course, much more
- Business skills—Knowing and understanding the business area for which the agreement is being drafted and the potential business3 implications of the transaction
The major problems in agreement drafting are:
- Such as circular definitions and redundancy— saying the same thing different ways—which create ambiguity
- Undue complexity (creating ambiguity)
- Verbosity (creating ambiguity)
- Just plain sloppy language
- Not understanding all applicable aspects of contract, labor, IP, bankruptcy, (sometimes) international law and many other areas of the law which may apply
- Not understanding all business implications of the agreement terms
In this paper, I will give you some tips and examples to guide you in draft
ing better agreements. However, there is a lot about drafting and negotiating agreements that can only be learned by experience. I hope that this sharing of my experience will help.
The Term Sheet
I often like to start drafting with a Term Sheet, if it is a negotiated agreement (as opposed to starting with one party's form, as is sometimes unavoidable when dealing with a behemoth company). Writing a draft agreement first often loses issues in the verbiage, makes review more complex and therefore harder, and wastes time when you have to change language.
I like to include in the Term Sheet all of the definitions I want to use in the agreement. Once all definitions and basic terms are agreed in the Term Sheet, writing the first draft is more focused, much easier and much less likely to be contentious.
A Term Sheet usually is not intended to create a binding contract. Therefore, the Term Sheet should be stated to be non-binding. See A/S Apothekernes Laboratorium v. I.M.C. Chemicals, 873 F.2d 155 (7th Cir. 1989) (re letters of intent). Caveat: It is not always clear whether a document is a letter of intent or a binding contract, so it is desirable to state that "(t)his letter is a statement of our intent only and is not a binding contract."
If you need a confidentiality provision in the Term Sheet (a separate CDA is often, but not always, used), that clause—plus relevant boilerplate, like governing laws, if included—should be stated to be binding and the Term Sheet should state that. See Addendum A for a sample Term Sheet, which also addresses confidentiality. This Term Sheet will also give you some insights into how I like to draft license agreements, with clean definitions, headings for covenants, short and simple "sound bites," etc.
The First Draft
I like to take control of the first draft. My goal is to draft quickly a comprehensive agreement that is fair to both parties and should be acceptable with minimum negotiating and editing. When I write a first draft, I do not like to make it too one-sided. That's a rookie approach (although sometimes it is just a response to the client's demands).4
Too much one-sidedness invites controversy, insults the other side and is not likely to be productive. When I write the first draft, I think about the issues the other side cares about and what is reasonable to both parties under the circumstances. Assume the other side is competent and experienced; that is usually the case anyhow.
I certainly will include a few provisions that are tilted toward my client and that the other side might (perhaps will) object to; but that is OK and expected. I feel it is easier to get a few tilted provisions (in your client's favor) by the other side than if the first draft is completely one-sided. Also, it's always good to include a few "gimme's," so you have something to give away in the normal give and take of a license negotiation.
I certainly use forms—my own and others'. Forms are great as check lists, to make sure you haven't left anything out, and let you see how another drafter handled the clause you are dealing with—you can often learn from that.
Be careful about the form of agreement or clause you start with—whether in a form book, from the Internet or in a company or law firm file. Each document represents a particular point of view or a negotiated, compromised view, which may not suit your client's need.5
Exchanging Your Comments on Your Counterpart's Draft or Re-draft
Here are a few suggestions concerning comments on the other party's draft:
- Please, don't send pdfs!
- Courtesy requires sending a redlined Word document that shows all changes made (plus a clean copy, if you wish).
- When responding to a draft with a lot of issues, I prefer to send the other side an "issues list" (including an explanation of our position). For an example, see Addendum B.
- I request an issues list when I send out the first draft.
- I find that incorporating changes in a draft, when there are a lot of contentious points or ambiguities, just wastes time and obfuscates the substance.
- Resolve the fundamental issues first, by e-mail or phone then incorporate the changes in your draft.
- Don't hesitate to use the phone or an e-mail to the other party if you're not sure of something in the draft.
Some General Drafting Pointers
- My Drafting Style. The Term Sheet of Addendum A and Option language of Addendum C are good examples of how I draft agreements. I use brief, concise definitions and break the covenants up into easily readable "sound bites," with subparagraphs and sub-subparagraphs. I also like to use headings for each paragraph and sometimes for subparagraphs. Headings make it easier to navigate the license agreement.
- Brevity. Try to be as brief as possible, while stating the covenant or definition clearly and accurately. It is often easier said than done, and I often revisit my drafting and edit it for brevity and clarity.
- –Some lawyers think verbosity is synonymous with legal elegance; it's not—it is unclear (and potentially troublesome) writing.
- Tip: I have—on occasion6—acceded to an ambiguous provision drafted by the other side, when I know that I won't be able to get the other side to re-draft the provision as I would like. It's "half a loaf is better than none." An example is an indemnity clause in a license to a large company. It is often tricky to get the indemnity limited, but if it's ambiguous, that may be acceptable.
- I even delete "in the event that" and substitute "if"; it's pretty anal, but I find it useful. In most (but not quite all) situations, these terms have the same meaning. This may be overkill to some, but it is part of how I discipline myself to be brief.
- Using the "Enter" and "Tab" Button. Addenda D and E show a couple of license provisions, an assignment provision and a "foundry clause,"7 that were originally written as non-stop, unbroken paragraphs and illustrate how they look when simply broken into subparagraphs and sub-subparagraphs, which makes them much easier to read and understand. Often, when reviewing someone else's draft of a lengthy paragraph, I start by hitting the "Enter" key to better read and understand the paragraph and then I edit the paragraph in that form, if necessary.
- Use of Personal Pronouns. It is common to see personal pronouns used in confusing ways. For example, a License Agreement states: "Licensor grants to Licensee a non-exclusive license under the Patents to make, have made…Licensed Products, including the right to sublicense its customers." Does "its" refer to Licensor or Licensee? You can make a good argument that "its" refers to Licensee, but there is no argument when you say "to Licensee's customers."
- Simplicity. Write the agreement in simple, clear 21st century language.
- Avoid 18th century phrases like "witnesseth" and "whereas." They are archaic and add nothing to the contract.
- Remember the ordinary meaning rule. Terms in a contract are given their ordinary meaning unless the context clearly indicates otherwise. Citadel Holding corp. v. Roven, 603 A.2d 818 (Del. 1992).
- Saying the Same Thing Twice. Sometimes an important concept is not easy to express clearly in words. An example is most favored nations (licensees) clauses. An experienced lawyer will simply slog through the mud until he or she gets it right. An inexperienced lawyer will often say the same thing two or three times in different ways,8 I suppose in the (mistaken) belief that this is clarifying. It isn't. It simply creates ambiguity.
- Using the Plural. Be careful when using the plural form of a noun. In one case, use of the plural word "systems" was held to license multiple plants of the licensee, not just one, as contended by the licensor. See Southwire Co. v. ITC, 629 F.2d 1332 (C.C.P.A. 1992).
- Strings. If you must use "strings," e.g. "sell, as sign, transfer and convey," "remise, release, discharge and quitclaim," "claims, demands, actions, lawsuits and causes of action," and so on, be sure you know what each word means. Beware the maxim inclusio unius est exclusio alterius.9
- Strings evolved in the common law days of "searching demurrers," which are not part of our modern legal system. A suit could be thrown out of court for failure to correctly plead a common law cause of action, sometimes by simply using a wrong word or omitting a key word. So it was important to get the words right; hence, the practice of using multiple words for the same thing.
- I don't use "sell, assign and convey" in a patent assignment. I say "hereby assign" the Patents (properly defined to include CIPs, etc.), but I include the needed extra language to include in the assignment the rights to sue and collect damages for past infringements.
- The worst string I can recall was in a settlement agreement,10 in which the author used the string "actions, causes of action, suits, rights, debts, dues, sums of money, accounts, accountings, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, indemnities, liabilities, variances, trespasses, damages, judgments, extents, executions, claims and demands, of every nature and description whatsoever, in law, admiralty or equity, or as a result of arbitration" in the release clause. This language is not made up; it is real. This doc was submitted by an experienced litigator in a large firm in settlement of a pretty significant case.
- Exemplary Words—"such as," "for example" and "including." It is common (and often—if not always—clarifying) in license agreements (and other contracts) to use exemplary terms, thereby creating a string.11 However, in one patent license case, Lawler Mfg. Co., Inc. v Bradley Corp., 280 F.App'x 951 (Fed. Cir. 2008) (non-precedential), the court held that the phrase "such as" (used in connection with a description of the royalty base when the licensed product—a valve—was sold in combination with complementary products—"such as "an emergency shower or eyewash") was limited to the named complementary products and did not apply when the valves were sold with custom cabinets and piping fixtures.12 Although not clear with respect to "including," at least one respected commentator13 suggests that "including without limitation" may be used instead, but even that is not certain from the contrary case law.14
I like to start a license agreement draft or Term Sheet with a "Definitions" section. I find that to be the easiest and best approach, although some put the definitions in an exhibit.
- The definitions should be accurate, clear and concise.
- For ease of access, put the definitions in alphabetical order.
- Exception. If there are only a few definitions, I may put them in order of their flow, e.g. Licensed Patents; Licensed Products; Gross Revenues; Net Sales.
- Avoid circularity between or among definitions.
- For example, do not define Licensed Products in terms of Licensed Patents and then define Licensed Patents in terms of Licensed Products.15
- Do not put covenants in definitions. Covenants belong in the body of the contract.
- For example, in the definition of Net Revenue, do not include a covenant to minimize returns. In Addendum D, the last phrase of the definition of Gross Revenues includes the condition "Licensee uses its commercially reasonable efforts to obtain such recoveries when they become available." I would make this an affirmative covenant in the body of the contract.
- In the definition of Net Revenues, it is common in some industries to include a standard deduction of 10 percent of revenues to take into account returns and allowances. I usually include that in the Net Revenue definition.
- I prefer to put complete definitions in the Definitions section; not "Licensed Product has the meaning set forth in Section 7.5." I don’t like bouncing back and forth.
- Affiliates. When defining "Affiliates" (or similar-meaning terms, like "Subsidiaries"), state whether the definition includes "past, present and future" Affiliates and what happens when an "Affiliate" ceases to be an Affiliate (as in divestitures).
See GTE Wireless v. Cellexis Int'l, Inc., 2002 U.S. Dist. LEXIS 16203 (D. Mass. Aug. 15, 2002) (definition which did not include future "Partnerships" was limited to Partnerships on the date of the license agreement); reversed and remanded to allow introduction of parol evidence, 341 F.3d 1 (1st Cir. 2003).
It goes without saying that a clearly written contract should use proper grammar and punctuation.
- The Last Antecedent Rule. The Last Antecedent Rule is a rule of construction16 used to interpret statutes and often applied by the courts to interpret contracts. The Rule states that modifying or qualifying phrases are only applied to the words or phrases immediately before them, and not to remote phrases, unless a common sense reading clearly dictates that the context or whole of the statute or contract intends it to apply more broadly.
- An example: Employee assigns to Employer "all inventions, improvements or modifications related to employee's employment." Does "related to employee's employment" apply only to "modifications," as the last antecedent rule could suggest? See Freedom Wireless, Inc. v. Boston Communications Group, Inc., 220 F. Supp. 2d 16 (D.Mass. 2002); Pandol Bros. v. Indemnity Marine Assur. Co., 97 F.3d 1460 (9th Cir. 1996) (unpublished).
- One approach to avoid the uncertainty is to write it this way: "each of the following, when related to Employee's employment by Employer: (a) inventions; (b) improvements and (c) modifications."
- General Grammar. As to proper punctuation, read Eats, Shoots and Leaves by Lynn Truss.
- Mind your present and future tenses. This can be important in areas like the definition of "Affiliates" or "Subsidiaries" to ascertain whether past or future companies are included in the license.
Troublesome Words and Phrases
Understand the meaning and application of the language you use.
- Inventions. Every patent lawyer knows that an "invention" consists of two elements,17 "conception" and "reduction to practice" (which may be
an actual reduction to practice or a constructive reduction to practice, i.e. filing a patent application on the invention). But in agreements which grant licenses or assign patent rights based on "inventions made in the ‘Project'," does the grant apply if the invention is only "conceived" (and not reduced to practice) in the Project? Perhaps not (or at least you might have to introduce extrinsic evidence to clarify this ambiguity in the contract). I would write the applicable phrase as "inventions conceived or reduced to practice in the Project."
- Best Efforts and Comparable Terms. One good example of potential confusion is the use of best efforts, best endeavors, reasonable efforts, commercially reasonable efforts and commercially reasonable efforts. In most U.S. courts, they have the same meaning, which is "reasonable efforts (under the circumstances)."18 So, I would use "reasonable efforts" and avoid any uncertainty.
- But the UK language equivalent is "best endeavors" and in the UK this is interpreted to mean a higher standard of performance. Rhodia Int'l Holdings Ltd & Rhodia UK Ltd v. Huntsman Int'l LLC (2007) EWHC 292 (Comm).
- In a British Columbia, Canada, Supreme Court decision, "best efforts" was held to impose a higher obligation than "reasonable efforts." Atmospheric Diving Systems, Inc. v. Hard Suits Inc., 89 B.C.L.R (2d) 356 (S.C. 1994).
- "Shall Grant" vs. "Hereby Grants." Another concern is the use—in Joint Development Agreements, Option Agreements and similar agreements with grants of future license rights—of a "shall grant" covenant (future tense) vs. a "hereby grants" covenant (present tense). This can be important when the licensor is in financial distress and the Trustee wants to void the license grant. Use the present tense.
- See Board of Trustees of the Leland Stanford Junior University v. Roche Molecular Systems, Inc., 583 F.3d 832 (Fed.Cir. 2009) ("agree to assign" is a mere promise to assign future rights). The Leland Stanford case cites IpVenture v., Inc.
v. Prostar Computer, Inc., 583 F.3d 1327 (Fed. Cir. 2007) ("interpreting ‘agree to assign' as "an agreement to assign, requiring a subsequent written instrument"). In contrast, the words "do hereby assign" have been construed as a present assignment of future rights. FilmTec Corp. v. Allied Signal, Inc., 939 F.2d 1568, 1572-3 (Fed. Cir. 1991) (emphasis added). Why say "do here
by assign" when "hereby assigns" will suffice?
- As to licenses, see Imation Corp. v. Koninklijke Philips Electronics N.V., 586 F.3d 980 (Fed. Cir. 2009).
This principle is important because future events, such as breach or bankruptcy, may affect the ability of the licensor to avoid the "future" license grant.
- Representations and Warranties. Do you know the difference between "representation" and "warranty"?19 Be sure to use the terms correctly. And when should reps and warranties be limited "to the best of its20 knowledge?" A "knowledge" rep and warranty should usually be qualified "with no investigation having been made or required to be made," in order to avoid an implied obligation to make inquiry.21
- Indemnify or Hold Harmless. Many contracts have an obligation to "indemnify and hold harmless." Is there a difference between the two terms? Adams22 says no, and that "indemnify" alone is proper and sufficient. However, there is disagreement on this point. Adams suggests using "indemnify" only, but to couple the term with "losses and liabilities."
- –Tip: On the subject of indemnities, if I represent the potential indemnitor, I propose that the indemnitor obtain product liability insurance acceptable to the indemnitee and then insert a clause that limits the scope of the indemnity to the insurance coverage.23
- Guaranty. Is a "guaranty" of a sum of money a guaranty of payment or a guaranty of collection? In the first instance, the guaranty "kicks in" when payment is not made on the due date. In the second, the guaranty does not "kick in" until the debt is reduced to an uncollected judgment and the creditor has unsuccessfully attempted collection. That's a big difference. You prefer to say "guaranty of payment," because then the beneficiary of the guaranty does not have to pursue the collection remedies to exhaustion.
- Insolvent. "Insolvent" has two meanings: "insolvent in the accounting sense" (liabilities exceed assets) and "insolvent in the bankruptcy sense" (inability to pay debts as they come due). Often, "insolvency" is an event of default, giving rise to a right of termination. But which "insolvent" is it? Many companies have liabilities which exceed assets, but are still viable operating businesses. If that licensee is your client, you don't want to have to argue about which meaning of "insolvent" applies, because usually what is intended is "insolvent in the bankruptcy sense" and that is what the license should state.
- Terms of Art. My client, a CPA, wanted to use "standard cost" as a basis for purchasing licensed products in a license and manufacturing agreement. I argued that "standard cost" was subjective and subject to dispute. A year later, there was a dispute, and my client found out that I was right.
- The same problem exists with royalties (or other revenue shares) based on "net profits." As a subjective term, it is subject to a lot of interpretation variations and game-playing.24
The moral of the tale is that, no matter what the "terms of art" are, either be sure you know and understand them or rely on someone who does. And if you rely on someone else, be sure that the file reflects that,25 just in case there's a problem later.
- Most Favored Nations. Most Favored Nations (MFN)26 clauses are troublesome because the financial terms of licenses are highly variable, so that
the definition of "Most Favorable License Terms" (or similar designation) is crucial. Addendum F is a clause I use; it is useful in some situations, but not where the applicable financial terms are different. The clause itself is mostly procedural, dealing with notification and acceptance of the "Most Favorable License Terms."
- Right of First Refusal. "Right of first refusal" is commonly misunderstood. "Right of exclusive negotiation" is usually preferable. In a right of first refusal (see Addendum G), the patent owner must first get a written offer (to license or buy the applicable patents) from a third party and then present that offer to the party that is entitled to the right of first refusal. The third party must negotiate and enter into the applicable license or purchase agreement with the patent owner, but the third party agreement has a clause providing that the patent owner can first present the license or purchase agreement to the party with the right of first refusal, which then has thirty or sixty days to accept or reject the proposed agreement on the identical terms. Getting a third party to negotiate the agreement (with the attendant costs of patent evaluation, counsel, etc.) can be very inhibiting, because it can blow up by the exercise of the right of first refusal.
Most clients do not understand what a right of first refusal is and why it can be a bad deal. Often (perhaps always), after I explain, and tell them they might prefer a six month right of exclusive negotiation (see Addendum H), that is usually what they opt to do.
- Option. There are a number of specific and defined terms that are needed to create an option. See Addendum C. It is easy to draft an option clause, but what most clients (and some lawyers) do not understand is that an option without detailed terms attached is no option, but rather an invitation to negotiate or litigate. No doubt, you can agree to an option with unresolved terms, but if you can't agree on the terms now, why will it be easier later?
Sometimes, the option arises in a development agreement, as to which technology to be developed, its value and the nature and scope of applicable patent and other IP rights, is hard to predict. In that case, all you can agree to is future negotiation of the applicable license terms.27
- Exclusive v. "Sole and Exclusive" Licenses. Know the difference between an "exclusive" license and a "sole" license? A "sole" license is exclusive to the licensee but the licensor retains the right to practice the licensed patents. In an "exclusive license" the licensor retains no rights to practice the patented inventions. A "sole and exclusive" license is the same as an "exclusive license," and therefore "sole and" is redundant.
- When granting an exclusive license, the grant should be "the exclusive license" under the patents, etc., not "an" exclusive license. "An" suggests that the exclusive license is somehow limited and creates ambiguity. Even if the exclusive license is limited to a field of use, it is still "the exclusive license" for the field of use.
- Future Royalty Determinations. If royalties are to be negotiated at a later date:28
- Provide that the license vests upon request of the licensee (not when the license terms are determined, which could involve litigation) and the royalty is then payable ab initio, so that—if there are delays in determining the applicable royalty— there will not be a commercial delay; and
- To give the judge or arbitrator some guidance, specify the parameters on which the royalty is to be determined, such as:
- financial contributions of licensor vs. licensee;
- significance and scope of the IP;
- industry comparables.
- If there is a future license grant (as to inventions not yet developed, which is necessarily important in technology development agreements), use the "hereby grants" form, rather than "shall grant." See Imation Corp. v. Koninklijke Philips Electronics N.V., supra.
- Marvel Clauses. The recent Supreme Court decision in Kimble v. Marvel Entertainment, LLC, 576 U.S. __, 135 S.Ct. 2401 (2015), affirming Brulotte v. Thyss, 379 U.S. 29 (1964), holding it is patent misuse to require payment of a royalty after the patent expires. However, this principle does not apply to trade secret licenses, as to which royalties may be paid indefinitely. See Aronson v. Quik Point, 440 U.S. 257 (1979). So, in a hybrid patent and trade secret license, the royalties may be split between the patent royalty—which ends with the patent expiration—and the trade secret royalty— which can continue indefinitely. But what is an appropriate split? If the aggregate royalty is, say, five percent, can four percent be allocated to the trade secrets and one percent allocated to the patents? Is that a fair allocation, if agreed to by the parties? I cannot be certain, so to deal with this conundrum, I use the "severability clause" of Addendum J, which I call a "Marvel Clause."
- Implied Rights and Obligations. Consider rights that may be implied. For example, in an exclusive patent (or other) license, there is an implied "best efforts" obligation to exploit the licensed technology; "best efforts" means "active exploitation in good faith." Western Geophysical Company of America v. Bolt Associates Inc., 584 F.2d 1164 (2d Cir. 1978). Compare Permanence Corp. v. Kennametal Inc., 11 USPQ2d (E.D. Mich. 1989) (the implied license is negated by up-front or annual minimum payments). As to trademarks, see Wood v. Lucy, Lady Duff Gordon, 222 N.Y. 88, 118 N.E. 214 (1917). The best efforts obligation may be negated or limited. There is a plethora of "best efforts" cases among the states (often in real estate agreements), with slightly different definitions of the term, so it is best to define the term and its obligations.
- Sharing Sublicensing Revenue. I have seen many license agreements which permit sublicensing and provide that the licensor will receive X percent of Net Revenue of the licensee from sublicensees. But the licensee will be receiving a royalty of Y percent of the sublicensee's New Revenue. If X and Y are each 10 percent, the Licensor will receive one percent (10 percent x 10 percent) of the sublicensee's Net Revenue. That's not fair. A more usual formula is that licensor gets 50 percent of licensee's Net Revenue from sublicensees. The 50 percent is obviously negotiable, but it is usually 40 percent to 50 percent to the licensor.
- Apportioning Royalties. Sometimes a license agreement is entered into and there is a possibility that the licensee may need to license other patents from third parties. This often happens in the pharmaceutical industry, in which the licensee licenses compound A, but may sell products that include compound A and one or more other licensed compounds. What happens when a licensee or sublicensee licenses a technology and later licenses other technology to make the product better, faster, cheaper, etc.? It may (or may not) be appropriate to "apportion" the specified royalty rate between or among licensors of different technologies (or improvements to the same technology. Addendum I is an example of a clause I use. But remember, this is favorable to the licensee, because it limits the total royalty payable29 but not
to the licensor, so it is something you can do, not necessarily something you should do.
- The Defend Trade Secrets Act ("DTSA"). On May 11, 2016, the DTSA became law. It includes a requirement that employers notify all employees and consultants with contracts entered into or updated after May 11, 201630 of his or her "whistleblower rights." If the employer does not provide the requisite notice to an employee or consultant, "the employer may not be awarded exemplary damages or attorney fees"31 in a lawsuit for misappropriation of trade secrets by that employee or consultant. This raises the question: "What if the misappropriated trade secrets are those of your company/ client, disclosed (to the employer) under the license (or other) agreement?" It is prudent32 to insert a warranty in your license agreement to the effect that "each Party has complied with 18 U.S.C. §1836(b)(A)." Of course, many agreements have generic "compliance with laws" clauses, but if you don't want a breach claim against your licensor or licensee for failing to comply, you should include this warranty in your agreement, to make clear the need for compliance with this DTSA provision; of course, the clause cuts both ways, so your client needs to comply with the DTSA as well!
The standard clauses at the end of a license agreement are often misunderstood and glossed over. Be sure that you understand and include all relevant boilerplate clauses. Some examples:
- Confidentiality Clauses. It is common to permit Confidential Information to be disclosed to "employees of and consultants to the Receiving Party that have a need-to-know in connection with the performance of the Receiving Party's obligations under this Agreement…" I will often add in that clause the right of access to Confidential Information to "entities that are engaged in due diligence studies in connection with a potential merger or acquisition of the Receiving Party or the purchase of some or all of the Licensed Patents."33 This added language will not always be acceptable34 to your company/client or the other side, but it should always be considered.
- Entire Agreement (Integration) Clauses. When the parties have reduced their agreement to an integrated writing (by the use of a so-called "integration" or "entire agreement" clause), evidence of prior correspondence, statements, drafts and other extrinsic evidence is not admissible to contradict or modify the terms of the agreement, except as necessary to prove fraud. Restatement (Second) of Contracts §215. See, e.g., American Bank and Trust co. of Pennsylvania v. Lied, 487 Pa. 333, 409 A.2d 377 (1979). However, the integration clause does not negate the implied best efforts obligation in an exclusive license. Havel v. Kelsey-Hayes Co., 445 N.Y.S.2d 333 (App. Div. 1981). Extrinsic evidence is admissible to clarify an intrinsic ambiguity in the contract. Mid-West Conveyor Co. v. Jervis B. Webb Co., 39 USPQ 2d 1754 (10th Cir. 1996).
- Successors and Assigns; Assignability (by contract or operation of law) of Exclusive and Non-Exclusive License Agreements. Standard "successors and assigns" language will not allow a successor by merger or acquisition to succeed to a non-exclusive license, unless specifically permitted by the license. See Rhone-Poulenc Agro S.A. v. DeKalb Genetics Corp., 284 F.3d 1323 (Fed. Cir. 2002).
- A non-exclusive license is a "personal" (to the licensee) right and is therefore not assignable (unless assignment is agreed to by the licensor). Hapgood v. Hewitt, 119 U.S. 226 (1886).
- A non-exclusive license is often likened to a "covenant not to sue," except that sale of a product covered by a non-exclusive license exhausts the patent right and therefore "immunizes" the purchaser of the licensed product from infringement of the licensed patent. In the absence of contrary contract language,35 the merger of a non-exclusive licensee with a third party will terminate the license. See Ziff, The Effect of Corporate Acquisitions on the Target Company's License Rights, 57 The Business Lawyer 767 (2002); SQL Solutions, Inc. v. Oracle Corporation, 1991 U.S. Dist. Lexis 21097 (N.D. Ca. 1991). This is even true when the licensee is subject to the Bankruptcy Laws. Everex Systems Inc. v. Cadtrak Corp., 89 F.3d 673 (9th Cir. 1996).
- As to exclusive patent licenses, the trend is toward treating exclusive patent licenses the same as non-exclusive patent licenses as to transferability by merger. See ProteoTech, Inc. v. Unicity Int'l Inc., 542 F.Supp. 1216 (W.D.Wash. 2008) and In re Hernandez, 285 B.R. 435 (Bankr.Ariz. 2002). However, good old California seems to go the other way, Superbrace, Inc. v. Tidwell, 21 Cal. Reptr. 3d 404 (Cal.Ct.App. 2004) and White v. Hitachi Ltd., 2008 WL 782565 (E.D.Tenn 2007).
- The bottom line is to make clear in the successors and assigns clause whether the licenses or the agreement can be transferred to "successors or assigns."
- I have seen successors and assigns clauses which permitted transfer of the rights to successors, "subject to the consent of the licensor, not unreasonably withheld." But then you get into the ambiguity of what constitutes "unreasonably withheld," so it is preferred to avoid that usage.
- Termination for "insolvency" or "financial condition." Prior to the adoption of Section 365(n), a bankruptcy trustee (for a licensor) could "reject" (terminate) an "executory" intellectual property license.36 So, Congress adopted 11 U.S.C. §365(n), under which a licensor in a bankruptcy proceeding may not "reject" a license agreement.
- Also, it appears that a licensee/debtor may not assign a license agreement under "applicable federal law." 11 U.S.C. §§ 365(c)(l)(A) and (B). See Pension Benefit Guaranty Corp. v. Braniff Airways. Inc., 700 F.2d 935 (5th Cir. 1983), reh'g denied, 705 F.2d
- Think about whether a U.S. court will enforce the punitive action of a foreign bankruptcy trustee. See Jaffé v. Samsung Electronics Co., 737 F.3d 14 (4th Cir. 2013), cert. denied 135 S.Ct. 66 (2014) (where the licensee succeeded in sustaining the license, notwithstanding its attempted termination—as permitted by German bankruptcy law—by Jaffé, who was Qimonda's German bankruptcy trustee).
- –In addition, so-called "ipso facto" clauses are not enforceable in bankruptcy under 11 U.S.C.
- For a 365(n) clause, see Addendum J.
- Governing Laws. If the contract is governed by the law of a state other than the one in which you are licensed, note that fact when advising your client. Also, obtaining venue may be important, so include a covenant agreeing to venue for lawsuits and allowing service of process by mail or pre-paid courier service, to avoid the need for personal service.
- Notice. If you do provide for delivery of notice by mail, "certified mail" (the green cards and green numbers) are for domestic mail only (mail with destinations in the United States). When sending foreign mail and you need a "return receipt" to verify receipt of the package or envelope, you will need to send the package or envelope by "registered mail." I prefer "prepaid express delivery service."
- Patent Marking. Patent marking is important to the licensor, if it ever wants to assert its patents against infringers and collect damages for past infringements. 35 U.S.C. §287. For a marking clause, see Addendum L. It is easy for a licensee to forget to use proper marking. The licensee may be in breach of the license agreement if it fails to consistently use proper marking, so when you are on the licensee side, you need to consider whether the licensee will, in fact, comply with the marking clause.
In a License Agreement with a Foreign Company
In international transactions, understand the legal consequences of the parties' rights and actions in the other jurisdiction, notwithstanding governing laws clauses.
- In Germany,37 under the German Employee's Inventions Act (EIA), an employer must obtain an assignment of a patentable invention and the inventor is entitled to compensation for the commercial use of his (or her) invention, even when owned by the employer. If a licensee commercializes an invention made (or, in the case of a Research and Development Agreement, to be made) by a German employee, who pays the employee compensation? The licensor/employer or the licensee? The contract should specify this obligation and identify who pays the employee.
- In Joint Development Agreements, there can often be joint development and therefore joint ownership of patentable inventions. Joint ownership has different consequences in different countries; most countries' laws are not like the U.S. and require sharing among joint owners of each joint owner's sublicensing revenues of jointly owned patents, unless contractually agreed otherwise.
- In a governing laws clause, it is desirable to have the foreign company agree to jurisdiction and venue and to service of process by mail or pre-paid courier service.
- Bankruptcy clauses are subject to questions of public policy when you want to enforce rights of or against a company in reorganization or liquidation. See, for example, Jaffé v. Samsung Electronics Co., supra.
Exclusive License Term Sheet (Abbreviated)
- "Affiliate" means an entity that controls, is controlled by, or is under common control with Licensor or Licensee, as applicable, at any time during the term of this Agreement, before, at or after the Effective Date, but it shall be deemed an Affiliate only for the period that it meets this definition. As used herein, "control" means (i) the power to direct or cause the direction of the management and affairs of the entity, whether by direct or indirect ownership of voting stock, positions on the board of directors, contract, or otherwise; or (ii) ownership of more than fifty percent (50 percent) of the equity or other ownership interest of the entity.
- "Clinical IP" means all protocols, data, reports, regulatory applications and approvals and other materials used in or resulting from any pre-clinical or clinical study or trial of Licensed Products.
- "Confidential Information" means all business, financial and technical information, data, documents and other materials, whether in electronic or physical form or orally disclosed, provided by one party ("Discloser") to the other party ("Receiver"), but excluding any part of the Confidential Information that Receiver can demonstrate:
- was public knowledge at the time of disclosure to Receiver;
- became public knowledge without fault by Receiver;
- was rightfully in the possession of Receiver prior its disclosure by Discloser;
- was disclosed to Receiver on an unrestricted basis from a source not known to be under a duty of confidentiality to Discloser; or
- is required to be disclosed by law, regulation or court order or for filings with the FDA.
- "Licensed Product" means products, the manufacture, use, importation or sale of which is covered by a Valid Claim.
- "Licensee" means and/or its Affiliates, as the context may indicate.
- "Net Sales" means revenues from the sale or other disposition of Licensed Products less:
- payments made or credits allowed for promotional purposes;
- customary allowances, rebates and trade, quantity, or cash discounts, including discounts, rebates or other payments required under Medicaid, Medicare or other governmental medical assistance programs, to the extent allowed and taken;
- amounts repaid or credited for rejections or returns; and
- to the extent separately stated on invoices, taxes and other governmental charges levied on the production, sale, transportation, delivery, or use of a Licensed Product which is paid by or on behalf of Licensee or the applicable Affiliate.
- "Patent Rights" means: (i) EU and U.S. patent applications , entitled " "; (ii) Joint Inventions; (iii) patent applications covering or related to improvements to Inventions covered by (i) or (ii); (iv) reissues, reexaminations, renewals, extensions, divisions, continuations, and continuations-in-part and foreign counterparts of (i), (ii), or (iv); and (v) patents which issue on (i), (ii), (iii) or (iv).
- "Revenues" means all license fees, milestone payments, minimum royalties, running royalty revenues and other sums received by Licensee from Sublicenses, but excluding (i) revenues to support research and development efforts and (ii) reimbursements of out-of-pocket expenses.
- "Sublicense" means any sublicense or other agreement of Licensee permitting the commercial exploitation of any Patent Right(s), Know-how or Clinical IP by a third party.
- "Valid Claim" means: (i) a claim of an issued and unexpired patent of the Patent Rights which has not been disclaimed or held invalid or unenforceable by an unappealed or unappealable decision of a court or governmental body, and
(ii) one or more claims of a patent application being prosecuted in good faith, for two (2) years following the first commercial sale or use of a Licensed Product which is a Licensed Product solely as a result of the claim(s).
- License Grant.
- Grant to Licensee. Exclusive, world-wide, royalty-bearing, right and license under the Patent Rights, Know-how and Clinical IP to develop, make, have made, use, sell, offer to sell, import, export and lease Licensed Products.
- Sublicenses. Licensee may grant Sublicenses. Each Sublicense shall require the Sublicensee to exercise reasonable diligence in developing, commercializing, marketing and selling Licensed Products.
- Annual Payments. Licensee shall pay to Licensors minimum annual payments of , which shall be credited against royalties due under paragraph 4(b), but only for twelve (12) months after each payment is made.
- Royalties. Licensee shall pay Licensors a royalty of:
- X percent (X percent) of Net Sales by Licensee; and
- Fifty percent (50 percent) of Revenues.
Confidential information. For three (3) years from the date hereof, each Receiver will:
- Use commercially reasonable efforts, but no less than the protection given to its own confidential information, to maintain in conconfidence all Confidential Information, including without limitation the financial terms of this Term Sheet; and
- Only disclose Confidential Information to individuals who reasonably need to know such information for Receiver to perform its obligations or otherwise conduct its activities hereunder, including Receiver’s legal, financial and business advisors.
- Non-binding Agreement. This Term Sheet is a
statement of present intent only and is not a binding agreement of the parties, except that paragraph 8 is legally binding upon the parties.
- Governing Laws. The validity and interpretation of paragraphs 8 and 9 shall be governed by Delaware law.
Issues List re Draft Licensor Exclusive License Agreement
- Para. 2.5. "First Commercial Sale" is too broadly defined. Payments for material evaluation purposes or in testing situations would be royalty-bearing. This is over-reaching.
- Para. 2.6. This definition of Licensed Product includes products covered by "one or more claims in a pending patent application." This is quite unusual and is not acceptable. A pending claim is useless until it is granted.
- Para. 2.7. Net Sales Revenue is defined to include revenues of any Sublicensee. This is unusual. It is common for the licensor to charge the Sublicensee a royalty and the royalty gets split 50-50 or 60-40. Also, sales commissions are not allowed to be deducted in the determination of Net Sales Revenue. This is sometimes acceptable and sometimes not. Should be negotiated.
- Para. 4.1. The requirement that Sublicense terms be "not less favorable" is unnecessarily restricting. I would delete. If they want to say "reasonable terms," that could be OK.
License Option Definitions and Clauses
(This example is from a Materials Testing, Evaluation and Option Agreement)
- Definitions. As used in this Agreement:
- "License Agreement" means the License Agreement of Addendum X.38
- "Licensed Materials" means Optionor's proprietary materials and all improvements, modifications and substitutions
thereof made and offered for sale by Optionor during the Term.
- "Licensed Patents" means [identify specific U.S. patents, applications and provisionals] and all other United States and foreign patents and patent applications owned or licensable by Optionor during the Term and related to the Field, including without limitation provisionals, divisionals, continuations, continuations-in-part, reissues, reexaminations and extensions thereof.
- "Licensed Products" means .
- "Optionor Confidential Information" means Confidential Information of Optionor, including without limitation Know-How.
- "Optionor IP" means Optionor Confidential Information and Licensed Patents.
- "Option Period" means the period commencing on the Effective Date and ending on , unless sooner terminated as provided herein.
Option Grant and Exercise.
- Option Grant. Optionor grants to Optionee the right and option, exercisable during the Option Period, to enter into the License Agreement (the "Option").
- Option Fee. In consideration of the Option grant, Optionee shall pay to Optionor for the Option the non-refundable sum of __ Dollars ($____), payable within ten (10) days after the Effective Date.
- Exercise of Option.The Option may be exercised, in whole only and not in part, at any time during the Option Period, by delivery to Optionee of written notice of exercise of option, accompanied by the non-refundable option exercise fee of Dollars ($ ) ("Option Fee"), payable by check (subject to collection) or wire transfer.
- Rights upon Exercise of Option. Upon exercise of the Option and payment of the Option Fee, the parties shall execute and deliver the License Agreement and Optionee shall forthwith have all of the rights and duties set forth in the License Agreement.
- Relinquishment of Option. If, at any time during the Option Period, Optionee decides not to exercise the Option, it shall promptly notify Optionor accordingly in writing.
- Rights and Duties upon Expiration or Relinquishment of the Option. The Option shall expire if not exercised or if relinquished during the Option Period, in which event this Agreement shall terminate forthwith; provided, however, that:
- Optionee shall promptly provide Optionor with:
- a detailed report of the results of its testing and evaluation of Licensed Materials and Licensed Products and its assessment of market opportunities, pricing and production costs for Licensed Products; and
- prototypes of Licensed Products, all of which shall be treated by Optionor as Confidential Information;
- Optionee shall immediately return all personal property of Optionor and all tangible (electronic or other form) Confidential Information, including Licensed Materials;
- If requested by Optionor, Optionee shall sign and deliver the Termination Certificate attached as Addendum A; and
- Paragraphs shall survive expiration or relinquishment of the Option.
Activities during the Option Period.
- Technology Transfer. During the course of the Option Period, Optionor shall transfer and disclose to Optionee all Know-How and other Confidential Information, to the extent necessary or desirable to test and evaluate Licensed Materials and manufacture, test and evaluate Licensed Products.
- Technical Assistance and Training. Optionor will provide Optionee employees with technical assistance and training regarding the Optionor Confidential Information. The initial technical assistance and training shall take place at the Optionor's facility in ; further technical assistance and training, if requested, shall take place at an agreed location in the United States. The terms of the technical assistance and training are:
- Optionee will purchase Licensed Materials from Optionor for use during the Option Period at a discount of fifty percent (50 percent) from Optionor's established prices;
- Each party will pay all travel expenses, room and board of its personnel; and
- All payments are due within thirty (30) days after receipt of invoice.
- Disclosure of Licensed Patents. Promptly after execution of this Agreement, Optionor will provide Optionee's patent counsel with copies and related information regarding all Licensed Patents and license agreements granting rights to Optionor to license the Licensed Patents, for their assessment; provided, however that the financial and other confidential terms of the license agreements shall be redacted.
- Optionee Activities during the Option Period. During the Option Period, Optionee shall exercise reasonable diligence to test and evaluate the Licensed Materials and Licensed Products made with the Licensed Materials and review the files of the Licensed Patents for as long as Optionee deems appropriate, with the goal of determining as soon as practicable whether to exercise the Option.
- Evaluation License. Optionor grants to Optionee a non-exclusive license under the Optionor IP for the Option Period, to be used solely for production, testing and evaluation of Licensed Materials and Licensed Products for use in the Exclusive Field and the Non-Exclusive Field.
- Six Month Status Report. Six (6) months after the Effective Date, Optionee shall provide Optionor with a written report of the status and results of its production, testing and evaluation, including technical and marketing analyses and information.
- Cooperation during the Option Period.
- Cooperation. The parties will cooperate in the continuing transfer of Optionor Confidential Information and the ongoing exchange of information and ideas during the Option Period. In order to facilitate that cooperation, each party shall designate a "Coordinator," by or through whom all contact between Optionor and Optionee shall be coordinated. The initial Coordinators shall be:
For Optionee—[identify coordinator]
For Optionor—[identify coordinator]
- Scheduling. Promptly after the execution of this Agreement and at least monthly during the Option Period, the Coordinators shall meet and confer to set up and adjust suitable program schedules, personnel assignments and requirements for Licensed Materials.
Bad Clauses and Clarifications
[The Original Clause]
"Gross Revenues" means gross revenues to Licensee derived exclusively from commercialization or sale of the Patents, including, without limitation, the Gross Revenues of all licensing and enforcement activities exclusively relating to or in connection with the Patents or the proportionate share thereof attributable to the Patents as determined by Licensee acting reasonably and in good faith. Gross Revenues (a) shall not include (i) the revenues of any equity or debt financing raised by Licensee or (ii) any revenues received as consideration for any license to any Patents or otherwise, (b) shall include only any cash or cash equivalents actually received by, or credited to, Licensee from commercialization of the Patents exclusively or exclusively derived from the sale of any Patents or the proportionate share thereof attributable to the Patents as determined by Licensee acting reasonably and in good faith, including without limitation, any royalties or other fees, payments or income receipts, damages or other compensatory payments received exclusively relating to the licensing, use or enforcement of the Patents or the proportionate share thereof attributable to the Patents as determined by Licenseeacting reasonably and in good faith, and (c) shall expressly exclude non-monetary consideration included in license agreements such as cross licenses, releases, covenants, and the like. Amounts that are withheld or are deducted by a counterparty to a transaction or any other person on account of taxes (e.g., withholding taxes) or otherwise shall be included in Gross Revenues to the extent that and at such time as Licensee or any other person directly or indirectly owning an interest in Licensee, recovers such withheld amounts through tax credits or otherwise; provided that such recoveries are legally available to Licensee and Seller and, if so, that Licensee uses its commercially reasonable efforts to obtain such recoveries when they become available.
(The same clause after using the "Enter" and "Tab" keys to segment it and make it more readable):
"Gross Revenues" means gross revenues to Licensee derived exclusively from commercialization or sale of the Patents, including, without limitation, the Gross Revenues of all licensing and enforcement activities exclusively relating to or in connection with the Patents or the proportionate share thereof attributable to the Patents as determined by Licensee acting reasonably and in good faith. Gross Revenues shall:
- not include:
- the revenues of any equity or debt financing raised by Licensee; or
- any revenues received as consideration for any license to any Patents or otherwise;
- include only any cash or cash equivalents actually received by, or credited to, Licensee from commercialization of the Patents exclusively or exclusively derived from the sale of any Patents or the proportionate share thereof attributable to the Patents as determined by Licensee acting reasonably and in good faith, including without limitation, any royalties or other fees, payments or income receipts, damages or other compensatory payments received exclusively relating to the licensing, use or enforcement of the Patents or the proportionate share thereof attributable to the Patents as determined by Licensee acting reasonably and in good faith; and
- expressly exclude non-monetary consideration included in license agreements such as cross licenses, releases, covenants, and the like.
Amounts that are withheld or are deducted by a counterparty to a transaction or any other person on account of taxes (e.g., withholding taxes) or otherwise shall be included in Gross Revenues to the extent that and at such time as Licensee or any other person directly or indirectly owning an interest in Licensee, recovers such withheld amounts through tax credits or otherwise; provided that such recoveries are
In a Settlement Agreement and Release
Release by Patent Owner. Upon entry by the Court of an Order dismissing the Lawsuits pursuant to the Stipulations, Patent Owner and its parents, subsidiaries, predecessors, successors, affiliates, divisions, assigns and any person or entity claiming by or through them, in consideration of the agreements set forth herein, and intending to be legally bound, irrevocably releases and forever discharges Defendant and its present and former parents, subsidiaries, and affiliates, and their present and former directors, officers, shareholders, attorneys, and employees (solely in their capacities as such) (collectively, the "Defendant Releasees") from all actions, causes of action, suits, rights, debts, dues, sums of money, accounts, accountings, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, indemnities, liabilities, variances, trespasses, damages, judgments, extents, executions, claims and demands, of every nature and description whatsoever, in law, admiralty or equity, or as a result of arbitration, whether known or unknown, asserted or unasserted, and forgives any and all acts of alleged infringement, including any and all claims or counterclaims in the actions for patent infringement in the Lawsuits, alleging, inter alia, that services performed and/or software made, used, sold and/or offered for sale infringed the Asserted Patents, which claims were asserted or could have been asserted, against the Defendant Releasees or any of them for, upon or by reason of any matter, cause or thing whatsoever, of this from the beginning of the world to the Effective Date (collectively, the "Claims"); provided, however, this release shall only apply to Claims that are directly or indirectly related to past manufacture, distribution, sale or use of services, software and products sold under trademarks or trade names owned, used, or held prior to the Effective Date by the Defendant Releasees (as they existed on the Effective Date). (Note: This is a single sentence. Ugh!) This release: (a) is personal to the Defendant Releasees; (b) is not intended to benefit any unnamed third party in any way; (c) shall not release any claims for patent infringement that Patent Owner may have against any third person (including the remaining defendants in the Lawsuits) other than Defendant Releasees; and (d) does not apply to any of the rights and obligations set forth in this Agreement including its exhibits.
Original Confidentiality Provision
Section 6. For purpose of this Section, "Confidential Information" means (a) any business or technical nonpublic information of the Parties, (b) any other information of the Parties that is specifically designated by the disclosing Party as confidential, and (c) the terms and conditions of this Agreement. Confidential Information shall not include information that (i) was in the public domain at the time it was disclosed or becomes part of the public domain after disclosure by or through no action or omission to act of receiving Party or its representatives, (ii) was or becomes known to receiving Party prior to the time of its disclosure without breach of this Agreement or any other obligation of confidentiality to the disclosing Party as proven by the written records of the receiving Party, (iii) is independently developed by receiving Party without using the Confidential Information, (iv) is legally received by receiving Party from a third party, without any obligation to keep it confidential, and/or (v) is approved for disclosure by prior written permission of an authorized signatory of the disclosing Party. Each Party shall maintain the Confidential Information of any other Party in strict confidence. Each Party shall exercise no less than reasonable care with respect to the handling and protection of such Confidential Information. Each Party shall use the Confidential Information of the other Party only as expressly permitted herein, and shall disclose such Confidential Information only to its employees, independent contractors, agents, and counsels as is reasonably required and necessary in connection with the exercise of its rights and obligations under this Agreement (subject to binding use and disclosure obligations as protective as those set forth herein). Notwithstanding the above, the receiving Party may disclose Confidential Information of the disclosing Party pursuant to a valid order or requirement of a court or government agency, provided that the receiving Party shall first give reasonable notice to the disclosing Party to contest such order or requirement and try to obtain confidential treatment for the Confidential Information required to be disclosed. Any such disclosure by the receiving Party of the Confidential Information of the disclosing Party, shall, in no way, be deemed to change, affect or diminish the confidential status of such Confidential Information. The Parties hereby designate the nonpublic information about the Patents delivered to purchaser pursuant to Section 4.1 as Confidential Information of Purchaser, with Seller having the confidentiality obligations imposed by this Section which respect to such information.
The Same Provision, Segmented for Comprehension
Section 6. Confidential Information.
- For purpose of this Section, "Confidential Information" means
- any business or technical nonpublic information of the Parties,
- any other information of the Parties that is specifically designated by the disclosing Party as confidential and
- the terms and conditions of this Agreement.
Confidential Information shall not include information that
- was in the public domain at the time it was disclosed or becomes part of the public domain after disclosure by or through no action or omission to act of receiving Party or its representatives,
- was or becomes known to receiving Party prior to the time of its disclosure without breach of this Agreement or any other obligation of confidentiality to the disclosing Party as proven by the written records of the receiving Party,
- is independently developed by receiving Party without using the Confidential Information,
- is legally received by receiving Party from a third party, without any obligation to keep it confidential and/or
- is approved for disclosure by prior written permission of an authorized signatory of the disclosing Party.
- Each Party shall maintain the Confidential Information of any other Party in strict confidence. Each Party shall exercise no less than reasonable care with respect to the handling and protection of such Confidential Information. Each Party shall use the Confidential Information of the other Party only as expressly permitted herein, and shall disclose such Confidential Information only to its employees, independent contractors, agents, and counsel as is reasonably required and necessary in connection with the exercise of its rights and obligations under this Agreement (subject to binding use and disclosure obligations as protective as those set forth herein).
- Notwithstanding the above, the receiving Party may disclose Confidential Information of the disclosing Party pursuant to a valid order or requirement of a court or government agency, provided that the receiving Party shall first give reasonable notice to the disclosing Party to contest such order or requirement and try to obtain confidential treatment for the Confidential Information required to be disclosed. Any such disclosure by the receiving Party of the Confidential Information of the disclosing Party, shall, in no way, be deemed to change, affect or diminish the confidential status of such Confidential
Information. The Parties hereby designate the nonpublic information about the Patents delivered to Purchaser pursuant to Section 3 as Confidential Information of Purchaser, with Seller having the confidentiality obligations imposed by this Section which respect to such information.
A Clause that is Internally Inconsistent
Consent to License
Furthermore, Licensor agrees to grant such rights directly to Sublicensee on the same, or in any case no less favorable, terms and conditions as set out in its License Agreement with Licensee, without payment of any other sums, until expiration of the last-to-expire of the patents. (Query: If the "license terms" are "the same," how could they possibly be "less favorable"?? The drafter was not very thoughtful.)
Foundry Clause in a Patent Assignment Their Draft
Foundry Rights. With respect to semiconductor components or products that are manufactured by Entities pursuant to foundry or contract manufacturing agreements on behalf of Persons listed on Exhibit X ("Contract Products"), none of Seller and its Affiliates, and to the best of Seller's knowledge formed after reasonable investigation and inquiry, no prior owners of any of the Assigned Patent Rights have granted foundry rights or contract manufacturing rights that extented to portions of Contract Products that are based on designs, specifications and/or requirements attributable to, originating from or supplied by a Person listed on Exhibit X, unless only to the extent such foundry or contract manufacturing agreement was in effect on or before the Effective Date. (Note: This paragraph is a single sentence.)
- "Foundry Rights" means rights, licenses or forbearances granted to a Person under any Assigned Patents to make, have made, use, import or sell semiconductor components or products that are based on designs or specifications provided by an Entity.
- Seller represents and warrants that none of:
- Seller and its Affiliates; and
- To the best of Seller's knowledge, formed after reasonable investigation, any prior owners of any Assigned Patent Rights
have granted Foundry Rights to any Person listed on Exhibit X, except and then only to the extent that such Foundry Rights were granted before the Effective Date.
Most Favored Licensee Clause
"License Agreement" means a license agreement or covenant not to sue executed after the Effective Date between Licensor and any licensee with respect to any Licensed Patents.
"Most Favored Financial Terms"39 means the following terms of any License Agreement, considered in their entirety:
- a per-unit-of-sales amount or a percentage-of-revenue royalty rate; and
- any other related financial conditions and related limitations, including but not limited to upfront payments and lump sum payments which are not:
- royalty advances that offset future royalties payable under the applicable License Agreement; or
- payments in settlement of litigation or otherwise based, in whole or in part, on infringement of any Licensed Patents prior to the execution date of the License Agreement.
The Most Favored Licensee Clause
- Licensee shall be entitled to the benefit of Most Favored Financial Terms.
- To enable Licensee to determine the Most Favored Financial Terms, within ten (10) business days of Licensor's entry into any License Agreement with financial terms that are or may be more favorable than the corresponding terms of this Agreement, Licensor shall:
- provide Licensee with an accurate and detailed summary of the Most Favored Financial Terms; and
- promptly permit Licensee's outside counsel40 to review, at a mutually acceptable location, in confidence, a copy of the License Agreement, for the sole purpose of verification of the accuracy of the summary provided to Licensee.
- Licensee shall have thirty (30) days after receipt of each Most Favored Financial Terms in which to advise Licensor in writing whether or not it chooses to accept the Most Favored Financial Terms. Upon such acceptance, the Most Favored Financial Terms will be retroactive to the date of execution of the applicable License Agreement, and this Agreement will be deemed to incorporate by reference those Most Favored Financial Terms.
- Failure to provide notice as specified in subparagraph
(c) shall be deemed a rejection by Licensee of the tendered Most Favored Financial Terms.
Right of First Refusal
If, at any time during the term of this Agreement, Patent Owner is about to enter into an agreement for the (i) sale of the Licensed Patents or (ii) license of the Licensed Patents outside the Field of Use (an "RFR Agreement"):
- Each RFR Agreement shall contain a provision stating that it is subject to this right of first refusal.
- Upon its receipt of an RFR Agreement executed by a third party, Patent Owner shall promptly provide Licensee with a copy of the RFR Agreement. This tender shall be deemed to be an offer by Patent Owner to enter into the RFR Agreement with Licensee.
- Licensee shall have thirty (30) days from its date of receipt of the RFR Agreement to elect to enter into an agreement with Patent Owner on terms and conditions identical to those of the RFR Agreement, except (i) for the identity of Licensee and (ii) closing shall not be held for at least sixty (60) days after the date of Licensee's receipt of such tender.
- If Licensee notifies Patent Owner, within the thirty (30) day period of paragraph (c), that Licensee wishes to enter into the RFR Agreement:
- Patent Owner shall execute and deliver to Patent Owner a copy of the RFR Agreement, with Licensee substituted for the RFR Party and a closing date which is at least sixty (60) days after the date of Licensee's receipt of the RFR Agreement; and
- Licensee shall execute and deliver to Patent Owner an executed copy the agreement within five (5) business days after its receipt.
- Failure of Licensee to reply to the tender of paragraph (b) shall be deemed a rejection of the offer of Patent Owner to enter into the RFR Agreement with Licensee.
- If Licensee rejects the offer to enter into the RFR Agreement, whether explicitly or pursuant to paragraph (e), Patent Owner shall be free to enter into the RFR Agreement with the RFR Party or any other party.
- If Licensee rejects the offer to enter into the RFR Agreement and Patent Owner does not enter into the RFR Agreement with the RFR Party on the terms specified therein, Patent Owner shall repeat the procedure of this paragraph as to any other proposed RFR Agreement.
Right of Exclusive Negotiation
- Prior to entry by Patent Owner into any discussion with a third party for the (i) sale of the Licensed Patents or (ii) license of the Licensed Patents outside the Field of Use (a "Transaction"), Patent Owner shall notify Licensee of its intention.
- For the six (6) month period following the notice of paragraph (a), Patent Owner negotiate exclusively and in good faith with Licensee for entry into a Transaction.
- Once the six (6) month period shall have expired, Patent Owner shall have no further obligation to Licensee and shall be free to negotiate and enter into Transactions with any parties on any terms and conditions.
- Net Sales. If Licensee licenses from one or more third parties ("Third Parties") intellectual property which covers any Licensed Products or Processes, the royalty rate applied under paragraph 6(b) as to Net Sales of that Licensed Product or Process shall be (i) one (1) divided by (ii) one (1) plus the lesser of (a) the number of third parties to which royalties are payable as to that Licensed Product or Process, and (b) two (2); multiplied by (iii) [the number in 6(b)] percent (_ percent).
- Sublicense Revenues. If Licensee includes in any Sublicense intellectual property sublicensed from one or more third parties which covers any Licensed Product or Process, the percentage of Sublicense Revenues payable by Licensee under paragraph 6(c) as to that Licensed Product or Process will be: (i) one (1) divided by (ii) one (1) plus the lesser of
- the number of Third Parties to which royalties are payable as to that Products or Processes, and
- two (2); multiplied by (iii) [the number in 6(c)] percent ( percent).
- Royalty Payments. Licensee shall pay to Licensor a royalty of X (x percent) percent of Net Revenue. For purposes of paragraph 2 only, one-third (1/3) of the applicable royalty shall be attributable to the Patents and two-thirds (2/3) shall be attributable to the Trademarks, Copyrights, Trade Secrets and Domain Names.
- Severability. If any provision of this Agreement is held to be invalid or unenforceable for any reason whatsoever, that provision shall be interpreted to have the broadest scope that would make it valid and enforceable.
Section 365(n) Clause
All rights and licenses granted under or pursuant to this Agreement by Licensor to Licensee are, for all purposes of paragraph 365(n) of Title 11 of the United States Code ("Title 11") or other relevant bankruptcy or insolvency law (collectively, "Law"), licenses of rights to "intellectual property" as defined in Title 11 or such other Law.
Licensee shall mark all Licensed Products with U.S. Patent No. 7,777,777, in accordance with 35 U.S.C. §287. The parties acknowledge that Licensee will have complied with this paragraph by marking all current and future Licensed Products and providing notice of U.S. Patent No. 7,777,777 on the "about page" of Licensee's principal websites from which Licensed Products are offered for sale, sold or distributed.
- This paper was initially written for “license agreements” only. However, many of the principles applicable to license agreements are also applicable to other agreements, so I have re-written the paper accordingly. However, I have retained exemplary provisions regarding license agreements when that seemed useful. For example, an option as to a patent license has the same basis structure as an option for other rights.
- This paper is an overview, not a scholarly analysis, and is not an exhaustive coverage of all relevant drafting concerns and considerations. That would require a book. The paper does present the principle concerns and observations I have seen and made in my fifty plus years of licensing and corporate practice. For an excellent detailed analysis of general contract drafting principles, see A Manual of Style for Contract Drafting, by Kenneth A. Adams (2013, American Bar Association, Business Law Section).
- And, of course, different legal implications. For example, a pharmaceutical license has many business and legal differences from a semiconductor technology license. And many similarities.
- I once walked into a patent litigation settlement meeting (my client was the plaintiff/potential licensor) with a prepared draft I had written that was based on many similar agreements I had done in the past. It really was fair and should have been acceptable with relatively few changes. The defendant/licensee sent my agreement to its Australian counsel (the suit was in Australia) and they started over and countered with a perfectly horrible draft. We agonized over that for weeks until U.S. counsel was brought in, at which time we easily resolved all open issues in a day or two.
- In one recent situation, patent counsel (with a large general practice firm) for the other party provided a first draft of a license agreement which omitted the royalty audit clause. It had to have been sloppy cutting and pasting.
- One situation I remember, the ambiguous clause was an indemnity clause and the licensee was a very big company. I knew I wouldn’t get that clause—from their form—changed, but it was so ambiguous that I left it alone. In that case, ambiguous was better than awful.
- Common in semiconductor technology agreements.
- You don’t believe it? I have seen it many times.
- The inclusion of one (word in a string) excludes others (that are not in the string).
- See the third paragraph in Addendum D.
- See the previous paragraph re strings.
- So, although a royalty was payable as to the valves, it was not payable as to the “convoyed sales” of custom cabinets and piping fixtures.
- Adams, “A Manual of Style for Contract Drafting,” §§13.270—13.278.
- Ibid. at §§13.277—13.278.
- You’d be surprised how often I see that.
- See LeClerq, “Doctrine of the Last Antecedent,” 2 Journal of the Legal Writing Institute 81 (1996).
- Getting into what is a “conception” and what is a “reduction to practice” is beyond the scope of this paper, but they can be found in any patent law treatise.
- See e.g.
- A “representation” refers to a current fact and a “warranty” refers to a future fact.
- Or “his or her.”
- In a major deal that requires an opinion of counsel, I often will insert unacceptably broad warranties in my form, so that I can understand the sophistication of opposing counsel (and the value of his or her opinion). I call this my “smoke out” strategy (it “smokes out” competence).
- At §§13.324—13.337.
- I negotiated a trademark license and manufacturing agreement with a major company. My client, a small company, would manufacture the food product (this food product was bubble gum) for the big boy. We were willing to give a product liability warranty and indemnity, but limit the scope of the indemnity to a reasonable insurance policy purchased by my client. Counsel for the big company wanted unlimited indemnity. That was crazy. One mistake could have bankrupted my client. I held out on this point—it was too potentially devastating to cave in—and finally won.
- I dealt with this issue in a movie investment deal. My client invested in a movie production company and was entitled to a share of the “Net Profits” from a very successful movie. In that case, the producers incurred costs which they charged to multiple movie projects, thus reducing the “Net Profits” and my client’s share. We needed a lawsuit and discovery to uncover the game-playing and get the client his fair rewards. In patent licensing, it is usually easier (and quite common) just to take (as licensor) a royalty based on “Gross Revenues” or “Net Revenues” (after deduction of limited, easy-to-verify costs, such as “returns and allowances”).
- In the “standard cost” situation, I had put a CYA memo in the file and copied the client. When a problem arose two years later and the client blamed me, I pulled out the memo and covered my A.
- Sometimes called Most Favored Licensee.
- In that situation, I like to provide that the license vests immediately and that the applicable royalty terms are effective “ab initio.” I also like to provide some guidance to the criteria to be used to determine the applicable royalty (like development payments by the prospective licensee).
- This is common in Joint Development Agreements, when the parties don’t know what inventions will be made in the future and their commercial value.
- Contrast “apportionment” with “royalty stacking,” in which multiple patents apply to a product (like a smart phone) and the royalties can be cumulative.
- 18 U.S.C. §1836(b)(A).
- 18 U.S.C. §1836(b)(C).
- Since each party to a license agreement can disclose trade secrets to the other, it may be prudent for each party to favor inclusion of this DTSA warranty.
- A company licensed its patent portfolio to Microsoft as part of a settlement of a patent infringement suit in which Microsoft became a major shareholder of the company. The license agreement had a confidentiality clause which included the “terms and conditions” of the license. When we tried to sell the company’s portfolio, we needed to disclose the Microsoft license, so any prospective purchasers could understand that encumbrance. We asked Microsoft for permission to disclose and it refused. I don’t know why; the license agreement was very standard and its terms could be inferred, but inferring and knowing are very different in a patent sale environment.
- For example, if your company/client is concerned that the potential acquirer is a competitor and could learn its confidential information that way.
- So, the usual solution is to include language in the non-exclusive license agreement—usually in the successors and assigns clause—permitting the assignment of the license agreement “in connection with the merger of licensee or the sale of all or substantially all of the business to which the licensed patents relate.”
- And other “executory” contracts.
- I am advised that Japan and Korea have similar statutory obligations, and there may be other countries. I do not purport to be expert on this point, so you should check with local counsel when dealing with a company which has relevant employees in other countries.
- Addendum X is a complete license agreement, with nothing to fill in but the date. That agreement is then signed by the parties when the option is exercised and the option payment delivered.
- The definition could include “all terms and conditions,” but often the financial terms are what the licensee cares about and other terms may be tailored to the particular licensee and not have a direct application to another licensee.
- Because of the confidentiality of other terms of the agreement. You could also use a redacted agreement, if the redactions are acceptable to both parties to the agreements.
Glossary of Intellectual Property Terms1
Abandonment – Loss of rights in IP.2 Abandonment can occur by (1) an intentional act of abandonment by the IP owner, (2) failure to file an applicable fee or (3) in the case of a Patent Application, failure to respond to an Office Action within the allotted time period.
Accused Device – A product which is alleged to Infringe a Patent.
Active Inducement – Patent Infringement by virtue of active inducement of (aiding and abetting) Direct Infringement by third parties. e.g. by advertising an infringing use. 35 U.S.C. § 271(b). Requires a Direct Infringement by someone else.
ADR – Alternate dispute resolution, namely mediation (which is non-binding) and arbitration (which is binding).
AIA – The Leahy–Smith America Invents Act is a United States federal statute, signed into law on September 16, 2011. It effects the most significant changes to the U.S. patent system since 1952. The AIA changed the U.S. patent system from "first-to-invent" to "first-to-file," to bring it in line with the rest of the world, and revised and expanded post-grant opposition procedures, including inter partes review (IPR).
All Elements Rule – A limitation on the Doctrine of Equivalents, under which each element of a Claim must be found in the Accused Device to constitute Direct Infringement. Therefore, the Doctrine of Equivalents may not be applied to the Claim as a whole, in disregard of the Claim elements.
Analysis of Patents in a Cluster – The analysis of all or certain Patents in a Cluster which has been deemed to have Carrot and/or Stick Licensing potential, to determine, based on computer analysis and research and human input, which patents appear most likely to have substantial revenue-generating potential.
Anticipation – A single Prior Art Patent or publication which is substantially identical to a Claim and thus invalidates the Claim under 35 U.S.C. §102(b).
Anti-Dilution – Statutory provisions and legal doctrines which protect well-known Trademarks in product areas in which they are not in use. See, e.g., 15
Assignee – Buyer.
Assignment – Sale of an IP right.
Assignment in Gross – Assignment of a Trademark without Assignment of the associated goodwill. An Assignment in Gross is invalid.
Assignor – Seller.
Assignor Estoppel – A legal principle under which the Assignor of an IP right (for example, a Patent) is Estopped from denying later the Validity of the assigned right (e.g. the assigned Patent).
Berne Convention – An international Copyright treaty, to which most countries, including the United States, are members. Among its provisions, a Copyrightable work created in one member country is automatically protected (no registration is required) in all member countries. Partial exception: Although the United States does not require Copyright registration by a non-U.S. resident to file a Copyright suit, residents must first obtain a Copyright registration. See 17
Best Efforts – In American parlance, usually a reasonable level of effort, but courts may vary in their interpretations. (It is better to use "reasonable diligence.") See Best Endeavors.
Best Endeavors – The counterpart in England to Best Efforts, but judicially interpreted in England to mean a very high level of effort.
Blocking Patent – A Patent as to which Infringement cannot be avoided for a particular type of product, system or service. Example, the AT&T Shockley transistor patent. See Essential Patent.
Bundling – Selling two separate products as one unit. For example, Windows® software sold with a Dell® computer. See also Unbundling.
"But for" License – A Patent License grant and/or Royalty payment provision in which the License grant or Royalty payment obligation is based on products (or processes) "which would, but for this Agreement, Infringe one or more Claims of Licensed Patents."
CAFC – See Court of Appeals for the Federal Circuit. Carrot License – A technology (and patent) license (exclusive or non-exclusive) of technology (a new, better or cheaper mousetrap) owned or licensable by the Licensor. The new, better cheaper mousetrap is the driver of the transaction, but the patents(s), although ancillary, is/are important in maintaining the competitive advantage of the licensee.
Carrot Mining – Portfolio Mining which seeks to identify valuable "technology" which, in combination with any related Patents, can be revenue-generating.
Carrot-and-Stick Mining – Portfolio Mining which seeks both Carrots and Sticks.
Claim – A numbered paragraph in a Patent which verbally defines the legal rights protected by the Patent. Note: The legal right embodied in a Claim is an Exclusionary Right.
Claim Chart – A two- or three-column chart, comparing all of the words and phrases of a Claim against the features of an allegedly Infringing product or process. 100% correspondence of words and features constitutes Infringement. If there is not 100% correspondence, there may still be Infringement. See Doctrine of Equivalents.
Claim Differentiation Doctrine – A doctrine of Claim interpretation, under which each Claim is interpreted to be different from each other Claim in the same Patent, i.e., a narrower Claim cannot be used to restrict a broader Claim.
Clayton Act. 15 U.S.C. §§ 12-27 – An antitrust statute prohibiting the acquisition of an asset (e.g. Patent) the tendency of which is to substantially lessen competition.
Click Wrap License – A License of software or a database which is accessed and downloaded on-line. The License is created on-line when the potential Licensee is presented with a screen of license terms and agrees to the terms by a click of the cursor.
Cluster – An affinity group of Patents, grouped according to the technology covered by the Patents in the group.
Clustering – The process of organizing a Patent portfolio into different Clusters. Clustering is usually the first step in Portfolio Mining.
Cluster Ranking – The process of ranking different Clusters in a portfolio, in order of the Clusters which are most likely to produce revenue if licensed or sold.
Common Law – The federal and state laws of the U.S. which are not statutory (made by legislatures) but were made by judges and inherited from British law.
Comprising – An "open-ended" term used in a Claim, interpreted to mean "including" (but not limited to) or "containing."
Compulsory License – A non-exclusive License under a Patent required by law or judicial decree to be granted by a Patent owner to third parties. Compulsory Licenses are not required by law in the U.S., but are required by the laws of some countries, often as to pharmaceutical patents.
Conception – The mental part of making a Patentable invention.
Consisting Of – A "closed" term used in a Claim, which closes or limits the Claim to those elements recited in the Claim. Compare with Comprising.
Constructive Notice – An act having the same legal effect as actual notice. (e.g., actual notice of Patent Infringement is telling the infringer that it is infringing a particular Patent.) The same legal result can be achieved (constructive notice is given) when the Patent owner's Patented product or package is marked with (bears) the Patent number, 35 U.S.C. §287. The concept of Constructive Notice also applies to registered Trademarks and Copyrights. Various legal benefits derive from the giving of actual or Constructive Notice.
Constructive Reduction to Practice – Filing a U.S. Patent Application.
Contributory (Patent) Infringement – The act of selling a non-staple article which is an element of an article or is used in a process which Infringes a Patent. See 35 U.S.C. § 271(c). A non-staple article is one which has no substantial non-Infringing uses. There are also Copyright and Trademark doctrines of Contributory Infringement. As to Copyright, see Sony Corp. v. Universal City Studios, Inc., 464 417, 441 (1984); as to Trademark, See Inwood Labs. Inc. v. Ives Labs. Inc., 456 844, 854 (1982).
Continuation – A patent application which has the effective filing date of an earlier-filed application or applications containing the identical specification and all of which have serial co-pendency. It is a vehicle to get an issued patent while continuing to pursue other claims based on the same specification.
Continuation-in-Part or CIP – A patent application which has the effective filing date of an earlier-filed application containing some common specification and some different (usually additional) specification, in which the applications have serial co-pendency. It is a vehicle to incorporate evolutionary developments in an invention in a patent application which has the benefit of the earlier filing date as to that part of the invention that is supported by the original specification. For example, an original pharmaceutical application may only have one or two examples, whereas the CIP may have many more, added as the examples were created and tested.
Convoyed Goods – Unlicensed products which are sold together with or as part of a sale of a Patented product. Example, a Patented DNA probe which is sold with or drives the sale of unpatented reagents. The reagents are Convoyed Goods. See Promega Corp. v. Lifecodes Corp., 53 USPQ 2d 1463 (D.Utah 2000).
Copyright – A federal right granted to the creator of an original work of authorship which is fixed in a tangible medium of expression. 17 USCA §§ 100 et seq.
Court of Appeals for the Federal Circuit – The federal appeals court which is empowered to decide all appeals (from U.S. District Courts around the country) involving Patent rights. Also called the Federal Circuit or CAFC.
Covenant Not to Sue – A personal covenant or promise (express or implied) not to sue a third party for a Tort or contract breach. A non-exclusive License is sometimes considered by the courts to be a Covenant Not to Sue by the Licensor and therefore is deemed not transferable. When a Patent owner grants a Covenant Not to Sue, the grantee cannot pass along its immunity from Infringement of the Patent to its customers (unless expressly permitted by the agreement).
Declaratory Judgment Suit – A lawsuit filed in federal court by an alleged Patent Infringer, seeking a declaration of the court that a Patent is Invalid, not Infringed and/or not enforceable.
Defensive Suspension – A provision of (l) a License agreement or (2) a standards-based undertaking to License an Essential Patent, by which the License or undertaking is suspended if the licensee or prospective licensee sues the Patent owner for Patent Infringement or declaration of Invalidity or non-Infringement.
Dependent Claim – A Claim which "depends from" and incorporates by reference all of the terms of another Claim.
Design Around – A way of avoiding Patent Infringement by using a design of a product or process which is competitive to the patented product or process but does not infringe the patent being considered. Also called "Work Around."
Design Patent – A Patent which protects the aesthetic aspects of a product.
Direct Infringement – Patent Infringement that occurs when an Accused Device or process is (1) Literally Infringed or (2) Infringed under the Doctrine of Equivalents. 35 U.S.C. § 271(a).
Discounted Cash Flow Analysis – An approach used in determining an applicable Royalty, by discounting (to present value) the cash flows that the Licensee would expect to receive from the sale of the Licensed product.
Division or Divisional – A patent application which has the effective filing date of an earlier-filed application or applications containing the identical specification and all of which have serial co-pendency. When one patent application claims more that one invention, the USPTO will "require restriction," because only one patent can be obtained on one invention. The co-pending patent applications than are filed on the other inventions described in the original patent application are Divisions.
DJ Action – Same as Declaratory Judgment Suit.
Doctrine of Equivalents – A rule of Claim construction for establishing Patent Infringement, under which a word or phrase in a Claim may be interpreted to include an "equivalent" element, which performs substantially the same function in substantially the same way to achieve substantially the same result. For example, the word "rivet" in a Claim may cover other elements, such as nuts-and-bolts.
Doctrine of Exhaustion – The first sale of a Patented, Copyrighted or Trademarked item by the owner or Licensee "exhausts" the IP right, so that the owner or Licensee cannot control resales of the item; Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008). See also First Sale Doctrine.
EBITDA – An accounting abbreviation, which stands for "earnings before interest, taxes, depreciation and amortization."
Enhancement – A modification of a computer program to add new or improved features or functionality.
Entire Market Value Rule – A Patent Infringement damages rule that, if a product (e.g. radio) includes a Patented component (e.g. amplifier), and the customer demand for the product is based on the component, the Infringement damages may be based on the market value of the product.
EPO – The European Patent Office. The EPO is located in Munich, Germany.
Equitable Estoppel – A legal principle in patent litigation under which the patent owner (1) created a situation on which an Infringer relied and (2) delayed sufficiently in asserting infringement that the patent owner is Estopped from asserting the patent against the Infringer.
Essential Patent – See Blocking Patent. The term is usually used in Standards Licensing.
Estopped – Barred. See Estoppel.
Estoppel – A legal principle under which a person or company is barred, by its actions, from doing something. In the Patent field, it comes up when an action by a Patent owner in obtaining the Patent, limits or estops the owner from interpreting a Claim broadly. See File Wrapper Estoppel.
European Patent – A utility patent granted by the European Patent Office, an agency of the European Union. It enables a single filing to grant a patent with coverage of one up to all member countries, depending on the fee paid by the applicant.
Exhaustion – See Doctrine of Exhaustion.
Exclusionary Right – The right of a Patent owner to exclude an Infringer of one or more Claims from making, having made, offering for sale, selling, using or importing any Infringing product or process. That is to say, merely having a patent on an invention does not give the Patent owner the right to make, use, sell, etc. that invention if the manufacture, use or sale of the Patented invention Infringes someone else's Patent.
Exclusive License – A License grant by the owner of an IP right of "exclusive" (as opposed to non-exclusive) rights under the IP right. Under U.S. law, an Exclusive License is equivalent to an assignment of the IP rights.
Exhaustion – See Doctrine of Exhaustion.
Fairy Dust Clause – A form of "successors and assigns" clause in a Stick License (that may include a Covenant Not to Sue), that provides some or all of the benefits of the License (and Covenant Not to Sue) (i.e. sprinkles "fairy dust on") successors and assigns of the Licensee. The "fairy dust" provision may be retrospective, prospective or both.
Federal Circuit – See Court of Appeals for the Federal Circuit.
Field of Use or FOU – A particular product area or service market.
Field of Use License – An IP License which is restricted to a Field of Use. For example, a Patent or technology applies to batteries and License A is restricted to the FOU of portable computers and License B is restricted to the FOU of wireless telephones. (Of course, there was a problem when portable computers and wireless telephones integrated, and that problem illustrates the need for careful drafting.)
File Wrapper Estoppel – A legal doctrine under which a Claim is barred (Estopped) from being more broadly interpreted because of a limitation inserted in the Claim by an applicant (or his or her patent attorney) in response to a Rejection of a predecessor to that Claim as Unpatentable over Prior, s/he is estopped (barred) from recapturing the interpretation of the claim to include the prior art element as an equivalent. This rule negates application of the Doctrine of Equivalents. Also called "Prosecution History Estoppel."
First Sale Doctrine – Same as Doctrine of Exhaustion. See 17 U.S.C. § 109(a) as to Copyright. In the Copyright context, the First Sale of a book, CD, etc. exhausts the distribution aspect of the copyright, so that the book, CD, etc. can be re-sold, given away, etc. without violating the Copyright, but does not give the buyer (of the book, CD, etc.) or its successors the right to reproduce (make copies of) the Copyrighted work.
Force Majeure Clause – A contract provision which excuses performance by a party when a specified situation outside the party's control (e.g. an earthquake, fire or strike) when performance is prevented by the situation. For example, a Licensor is obligated to deliver to the Licensee a sample of a Licensed composition, but is prevented by a fire at the plant making the composition.
Forward Citation Analysis – The analysis, with respect to a given Patent, of subsequently issued Patents which cite the given Patent.
Foundry Right – The right, under a Patent license, enabling the Licensee to manufacture (act as a foundry for) Licensed products for a non-licensee which designed the products. This term is usually used in the computer, electronics and telecommunications industries.
Foundry Agreement – An agreement under which the Licensee (owner of the Foundry Right) engages a third party to manufacture a Licensed product. Compare with Tolling Agreement.
FRAND – "Fair, reasonable and non-discriminatory." In accordance with the rules governing Standards Licensing, licenses by participants (in the standards bodies) to Essential Patents must be granted on the basis of FRAND.
GAAP – Generally accepted accounting principles.
GAAPCA – Generally accepted accounting principles, consistently applied.
Georgia Pacific Factors – A comprehensive list of 15 evidentiary facts relevant to the determination of a "reasonable royalty" in the computation of damages in a Patent Infringement lawsuit. Some of the facts are: the established profitability of the product made under the Patent and its commercial success; the extent to which the Infringer made use of the Invention; and the Royalties received by the Patent owner from other Licensees of the Patent. Georgia-Pacific Corp. v. United States Plywood Corp., 318 F.Supp. 1116 (S.D.NY. 1970).
Golden Master – A term used in software licensing, referring to a copy of the licensed software that is authorized to make numerous commercial copies. Example: Microsoft gives Dell a Golden Master license for Windows 8.
Goodwill – An intangible asset, often associated with a Trademark or Service Mark.
Grant-back – A license or assignment (if an assignment, usually subject to a reservation of rights) of IP improvement rights (usually Patents) from a Patent Licensee (of other IP rights) to the Licensor.
Guaranty – An undertaking to pay the obligation of another person. There are two kinds of guarantees:
(1) a guaranty of collection, in which all rights against the creditor must be exhausted before going against the guarantor, and (2) a guaranty of payment, in which the creditor can collect from the guarantor as soon as there is a default in payment by the debtor.
Guillotine License – A License agreement with a finite end date (often for five years), at which time the license terminates and must be renegotiated.
Have Made Right – The right of a Patent Licensee to have a Licensed product manufactured by a third party for sale by the Licensee.
Heads of Agreement – An outline of the proposed terms of a contract, in the form of an outline of essential terms of the contract, and intended not to be legally binding. Used in international transactions. Unless the Heads of Agreement has language negating a binding contract, it might create a binding contract or at least questions about whether or not it is a binding contract (itself troublesome). See Letter of Intent, Term Sheet, Memorandum of Agreement and Memorandum of Understanding.
Human Capital – The collective people and their knowledge, skills, creativity of an organization. The Human Capital create the Intellectual Assets and convert them to products or services and ultimately to revenue and profits.
Implied License – A License under IP which the courts will imply when there is no express (written) License and fairness (equity) suggests that a License should be implied. For example, if a company sells a Patented machine to a customer, there is an Implied License that the customer has under the company's Patents to use the machine for its intended purpose.
Infringement – The violation of an IP right.
Infringer – A violator of an IP right.
Insolvency – There are two kinds of insolvency: (1) insolvency in the accounting sense (liabilities exceed assets), and (2) insolvency in the bankruptcy sense (inability to pay obligations as they become due). It is necessary when using the term "insolvency" to be clear whether aspect (1) or (2) is intended.
Integration Clause – The contract clause stating that "this is the entire agreement between the parties." Its use excludes parol (oral) or other extrinsic evidence to vary the terms of the contract.
Intellectual Assets – Codified, tangible or physical descriptions of specific knowledge to which ownership rights can be asserted. Intellectual Assets are Intellectual Property which has not yet been protected.
Intellectual Capital – The collective Human Capital, Intellectual Assets and Intellectual Property of an organization.
Intellectual Property or IP – Utility patents, design patents, plant patents, copyrights, mask works, trademarks and trade secret rights.
Inter Partes Review or IPR – A proceeding established by 35 U.S.C.
Interference – An inter partes (between two or more parties) lawsuit conducted in the USPTO to determine which of two or more patent applications (or one or more Patent applications and an issued Patent) is entitled to a patent on a single invention which is disclosed in all of the applications (and, where applicable, the Patent).
Inter Partes Review or IPR – A legal proceeding before the PTAB, under 35 U.S.C. §311, used to challenge the validity of patent claims based on patents and printed publications.
Invalid – Not valid. Usually used in reference to a Claim which, for reasons of Anticipation or Unobviousness, is not legally Valid. If a Claim is indeed Invalid it cannot be Infringed.
Inventive Step – The counterpart in many European, Asian and other countries to Unobviousness. The meaning of Unobvious or Inventive Step varies from country-to-country.
IP – See Intellectual Property.
IP Bankruptcy Act – 11 U.S.C. § 365(n).
IPR – Inter partes review. A trial proceeding before the PTAB to review the patentability of one or more claims in a Patent only on a ground that could be raised under §§ 102 or 103, and only on the basis of prior art consisting of patents or printed publications. See 35 USC §§ 311 – 319.
Joint Ownership – Where two or more persons or companies each own an interest (called an "undivided interest") in an IP right. The legal rights and obligations of a Joint Owner will vary, depending on the type of IP involved (Patent or Copyright) and the country. For example, a Joint Owner of a U.S. Patent may grant a non-exclusive license under the Patent for a Royalty and keep the Royalty for her/himself; in many other countries this is not the case.
Joint Venture – A broad term, used to cover a broad range of multi-party relationships. Often (but not always), each party owns 50% of a Joint Venture corporation.
JPO – Japanese Patent Office.
Know-How – Valuable unpatented technical information (e.g. an unpatented manufacturing process).
Know-How and Show-How – Know-How plus the transfer of the Know-How by personal communication.
Knowledge Management – The discipline of collecting, organizing, processing and utilizing information, using computer-based tools, to derive optimum value from the information for the information's owner.
Last Antecedent Doctrine – A doctrine of contract interpretation that a succeeding modifier of more than one noun applies only to the last noun, unless the context otherwise clearly indicates. For example, a License grant to "Licensee and Subsidiaries" and "successors and assigns." Does "successors and assigns" apply only to "Subsidiaries" or to "Licensee and Subsidiaries"? The Last Antecedent Doctrine will determine that.
Letter of Intent – A document (often in letter form) stating (usually in outline form) the fundamental business and financial terms of a proposed contract, but not intended to be legally binding. Unless the Letter of Intent has language negating a binding contract, it might create a binding contract or at least questions about whether or not it is a binding contract (itself troublesome). See Heads of Agreement, Memorandum of Understanding and Term Sheet.
License – A grant of permission to do that which, without the permission, would be a Tort. A right to use IP under defined conditions.
License Agreement – An agreement in which the owner of an IP right grants a License to another party.
Licensee – The grantee of a License.
Licensee Estoppel – A principle under which the Licensee is estopped (barred) to deny the validity of the rights licensed. Licensee Estoppel is negated as to Patent Licenses by Lear v. Adkins, 395 U.S. 653 (1969).
License Monitoring – A program for reviewing License Agreements and Licensee reports, and monitoring Licensee compliance with obligations, such as royalty reporting and payment and Patent Marking, under the License Agreements.
Licensor – The grantor of a License.
Literal Infringement – Patent Infringement (Direct Infringement) that occurs when the elements of an Accused Device or process correspond 100% to the words or phrases of a patent claim.
Maintenance – Correcting errors in software.
Maintenance Fee – A fee required to be paid periodically to maintain an issued Patent in effect.
Marking – Placing a (1) Patent number(s), (2) Trademark notice (®), or (3) Copyright notice (©), as applicable, on a product or its packaging or label, to provide Constructive Notice that the product is respectively Patented, is designated by a registered Mark or is Copyrighted, as applicable.
Marks – Trademarks, Service Marks, etc.
Markman Determination – A proceeding before a judge, in a Patent Infringement jury trial, in which the judge interprets Claims of the Patent for later determinations of Patent Infringement of the Claims by a jury.
Means Plus Statement of Function Claim – Also "Means Plus Function" Claim. A Claim which includes the description of a Claim element by what it does (e.g. "means for fastening") rather than what it is (e.g. "a nut and bolt"). See 35 U.S.C. § 112 ¶6.
Memorandum of Agreement – A statement of the terms of a contract, often intended not to be legally binding. Unless the MOU has language negating a binding contract, it might create a binding contract or at least questions about whether or not it is a binding contract (itself troublesome). See MOA, MOU, Heads of Agreement, Letter of Intent and Term Sheet.
Memorandum of Understanding – A broad statement of the proposed terms of a contract, often intended not to be legally binding. Used in international transactions. Unless the MOU has language negating a binding contract, it might create a binding contract or at least questions about whether or not it is a binding contract (itself troublesome). See MOU, Heads of Agreement, Letter of Intent and Term Sheet.
Misuse – An equitable defense, (unclean hands) to an infringement charge based on a violation of the letter or spirit of the antitrust laws. Purging the wrongful act ends the defense prospectively.
Most Favored Licensee Clause – See Most Favored Nations Clause.
Most Favored Nations Clause (MFN Clause) – Sometimes called a Most Favored Licensee (MFL) clause. A clause granting a Licensee the right to have the same, more favorable terms (usually financial) as may be granted by the Licensor to subsequent Licensees.
MOU – Memorandum of Understanding.
Mutatis Mutandis – A Latin term used in contracts to designate a clause which is identical to a prior clause "with appropriate (obvious) changes."
Net Sales – Gross sales of (or revenue from) a Licensed product minus certain specified deductions. Used to determine a Royalty Base for computing a Royalty payment.
Non-Exclusive License – A personal, non-transferable right to practice an IP right.
Non-Obviousness – See Unobviousness.
Novelty – One of the statutory requirements for a Patent that the Claimed invention is new and was not previously invented by someone else. 35 U.S.C. § 101.
OEM – Original equipment manufacturer. A company (A) that buys a product from another company, (B) to sell under A's Trademark.
Office Action – A formal letter from the Patent Office to an applicant Rejecting Claims of a Patent application on formal or substantive grounds (e.g. "Claim 1 is unpatentable because . . .").
Omitted Elements Test – A Claim is Invalid if it omits an element that someone skilled in the art would understand to be essential to the invention as originally disclosed.
Option – A contractual right (usually for a specific time period) to acquire something (in the IP context, to acquire ownership of or a License to a Patent or other IP right) at a future date, upon exercise of the right by the Option holder. The Option grant, to be meaningful, should specify all of the terms of the Option to be exercised, including the period of the Option, the exercise price, and at least all other relevant business terms. Preferably, there should be a complete Option agreement specifying all terms of the Option grant; otherwise, there can be confusion about what are the terms of the Option.
Paid-Up License – A vested License as to which no further Royalty is payable.
Paris Convention – An international Patent treaty providing that a patent application filed in a member country on a given date (the "Filing Date") and then filed in other member countries within one year after the Filing Date, will be deemed in the other countries to have been filed on the Filing Date. Most industrial countries, including the U.S., are members.
Patent – An Exclusionary Right granted by a government, for a limited period of time, an invention which meets the legal requirements of Statutory Subject Matter. Novelty, Utility and Unobviousness. 35 U.S.C.
§§ 101, 102 and 103. See Principle of Territoriality.
Patentable – Legally capable of being Patented.
Patent Application – An application, filed with the Patent Office of a country, to obtain a Patent granted by that country. See Principle of Territoriality.
Patent Assertion Insurance – "Insurance" for specified Patents which, if Infringed, will pay the legal fees and expenses of Patent infringement litigation. Typically, the "insurance" requires a prepaid premium and has a policy limit on fees and expenses paid. If the Patent owner is successful in the lawsuit, due to a settlement or victory, the Patent owner repays the insurance company the sum advanced plus a "kicker."
Patentee is Her/His Own Lexicographer Doctrine – A rule of Claim interpretation, under which the Patentee may create any word, usage or definition (in the Patent's specification and Claims) s/he chooses, and the word or words of a Claim will be interpreted according to that usage or definition.
Patent Infringement – Infringement of a Patent by either (1) Direct Infringement, (2) Active Inducement, or (3) Contributory Infringement.
Patent Office – The government agency which examines and grants Patents. In the U.S. it is formally called the "Patent and Trademark Office" or "PTO."
Patent Prosecution – The interplay between an applicant for a Patent (or, more often, his or her patent attorney) and the Patent Office, in which a Patent application is alleged (by the Patent Office) to be improper or unpatentable for specified reasons and the responses.
PCT – Patent Cooperation Treaty. An international treaty facilitating the filing and prosecution of Patent applications in various member countries (including the U.S. and most major industrial countries).
Permanent Injunction – A court order, entered in a trial on the merits, permanently barring a defendant in a lawsuit from doing an act, such as importing or distributing an Infringing product.
Pioneer Patent – A patent which represents a major technological advance is called a "pioneer" patent. When the Doctrine of Equivalents is applied to a claim of a Pioneer Patent, the Doctrine of Equivalents is interpreted broadly.
Plain Meaning Doctrine – Words in a Claim are, in the first instance, given their plain meaning.
Portfolio Analysis – The process of analyzing a Patent portfolio, to determine which Patents (or Patents and related technologies) are most likely to be valuable and therefore revenue-generating.
Portfolio Maintenance Analysis – The analysis of the Patents in a Patent portfolio and the Maintenance fees associated with each "family" of Patents (each U.S. Patent and its overseas counterparts), to determine which Patents, because of their limited value, ought to be discontinued by failure to pay Maintenance fees.
Portfolio Mining – The process of (1) Portfolio Analysis and then (2) developing and realizing revenue or other value from Patents in the portfolio or technologies represented by the Patents, by Carrot Mining or Stick Mining.
Portfolio Paring – Eliminating non-productive Patents in a portfolio by sale or by non-payment of Maintenance fees.
Portfolio Valuation by Sampling – A statistical technique for evaluating a Patent portfolio for either Carrot or Stick Mining values, or both, by sampling selected Patents in the portfolio, valuing those Patents and extrapolating to determine the value of the entire portfolio.
Preamble Doctrine – A rule of Claim interpretation, under which, generally, the preamble portion of a Claim will not limit the scope of the Claim, but may shed light on the meaning of the Claim.
Preliminary Injunction – A court order, entered after an evidentiary hearing and before a complete trial on the merits, barring a defendant in a lawsuit from doing an act, such as importing or distributing an Infringing product, until the trial on the merits.
Presumption of Validity – The statutory presumption to which every issued U.S. Patent is entitled, that the Patent is Valid. 35 U.S.C. § 282.
Principle of Territoriality – The principle of international law that an IP right granted by a country (e.g., U.S.) is effective only within the territory of that country. For example, a United States Patent is effective only in the United States and its territories and possessions.
Prior Art – That body of prior patents, patent applications, publications and products which precede an invention or patent application and may be relied on to invalidate or limit a Claim.
Privilege – A legal right that protects certain communications (said to be "privileged") from access to the adversary in a lawsuit. There are several types of Privilege, including attorney-client, priest-penitent and physician-patient.
Provisional Patent Application (PPA) – An informal Patent disclosure (it may be no more than a detailed description of the invention) filed in the PTO, under 35 U.S.C. § 111(b), for a nominal fee (depending on whether the applicant is a Small Business Entity, in which case a lower fee applies). The PPA may be filed without a formal patent claim, oath or declaration, or any information or prior art disclosure. The PPA provides the means to establish an early effective filing date in a patent application and allows the term "Patent Pending" to be used. The PPA is preserved by the PTO for at least one year after it is filed. If, within that year, a Patent Application is filed, which refers to the PPA, the Patent Application will be entitled to the benefit of the earlier filing date of the PPA, but only to the extent that the two applications disclose the same subject matter. A PPA is a very useful way to preserve an inventor's rights for one year without the expense of filing a Patent Application. In any event, a formal Patent Application must be filed to obtain legal rights in an invention.
PTAB – Patent Trial and Appeal Board, a tribunal of the USPTO.
Reach-through Licensing – A term used to designate the use by a Licensee of a patented product to produce another product, in which the other product is the basis of the royalty payment. For example, in the biotech field, if a licensed drug discovery tool is used to discover a new drug, the licensor of the discovery tool seeks a royalty based on sales of the discovered drug.
Reach-through Royalties – Royalties derived from a product or service created or generated with a licensed patent or other IP. See Reach-through Licensing.
Reads On – A term used when each of the words of a Claim of a patent finds complete (one-for-one) correspondence (1) with the description in a single piece of Prior Art (in which case the Claim Reads On the Prior Art and is therefore Anticipated and Invalid) or, (2) in each of the -is Infringed).
Reduction to Practice – Making a model or implementation of a Patentable invention to demonstrate that it will work.
Reexamination – Through ex parte reexamination, the patent owner or a third party may lodge a request for USPTO examination of an already-granted patent based on patents and printed publications that they bring to the USPTO's attention. Such a request can be filed at any time during the enforceability of a patent, and the requester must establish that the submitted prior art establishes a substantial and new question of patentability (SNQ), at which point the USPTO will grant the reexamination request and order examination (i.e., reexamination) of the patent in question. See also Inter Partes Review.
Regular and Established Royalty – An approach used in determining an appropriate Royalty, by determining regular and established Royalties (comparable Royalties) used in the industry (or closely related industries) for similar types of products, processes, etc.
Rejection – A reason given by the PTO, in an Office Action, for refusing to allow the Claim of a pending Patent application.
Return on Investment Analysis – An approach used in determining an appropriate Royalty, by assessing the amount the Patent or technology owner invested to develop the technology and the rate of return that the owner would expect to receive on its investment.
Repair v. Reconstruction Doctrine – A Patent Infringement doctrine that repair of a licensed, Patented article is permitted, but that reconstruction of the article is an Infringement of the Licensed Patent.
Represent – A covenant as to a present event or condition, but is often confused with Warrant, which refers to future events or conditions. See Warrant.
Reverse Doctrine of Equivalents – A rule of Claim interpretation under which, even if Literal Infringement otherwise appears to be present, there is no Patent Infringement because the Accused Device or process is so changed that it performs the function of the Claimed invention in a substantially different way.
Right of First Negotiation – The contractual right, granted by an owner of something (in the IP context, a Patent or other IP right) to negotiate exclusively with the grantee of the right for a specified period of time after the owner decides to sell that right. This is different from (and much less valuable than) a Right of First Refusal, because the grantee has no certainty other than a time advantage.
Right of First Refusal – The contractual right, granted by an owner of a tangible or intangible asset (in the IP context, a Patent or other IP right) to present to the grantee (in the IP context, an exclusive licensee broadly or in a FOU) any third party offer to sell or transfer (as by an exclusive license to an improvement or in another FOU) the right that the owner is about to accept. This means that the owner must first get a complete offer from a third party to buy the asset and, before selling to the third party, must offer to sell to the grantee on terms identical to the offer. This can have a chilling effect on the ability of the owner to get third party offers, because the third party may be reluctant to spend the time and effort to decide whether to buy and then negotiate the deal and be preempted by the grantee. One way to make it more appealing to the third party is to offer a "break-up fee" to compensate the third party for its time and effort if the right is sold to the grantee.
Right of Publicity – An inherent right, recognized in many (but not all) states, of every person to control the commercial use of his or her identity. Protected by statutes in some states and by Common Law in others.
Royalty – A fee paid for use of Licensed IP, usually a specified sum or a percentage for each Licensed unit sold. See Royalty Rate. Some approaches used to determine (or aid in determining) Royalties are: Discounted Cash Flow Analysis; Regular and Established Royalty; Return on Investment Analysis; and Twenty Five Percent of Profits.
Royalty Base – The unit sales to which a percentage Royalty is applied (e.g., sales of widgets).
Royalty Rate – A percentage which is multiplied by a Royalty Base to determine a Royalty.
Royalty Stacking – Multiple royalties payable to multiple Patent owners on a product which Infringes multiple Patents.
Royalty Withholding Tax – See Withholding Tax.
Secondary Considerations – A list of objective considerations which may be considered by the judge or jury (as applicable) to assist in the subjective determination of whether or not an invention is non-obvious, within the meaning of 35 U.S.C. § 103. The Secondary Considerations include commercial success, satisfaction of a long-felt need and others. See Graham
v. John Deere Co., 383 U.S. 1 (1966).
Securitization – A form of lending in which an owner of Licensed IP grants a Security Interest in the IP to a lender in exchange for a loan which represents a portion of the projected value of License revenue from the IP.
Security Interest – A "mortgage" or "lien" on personal property (such as a Patent, Trademark, Copyright or License Agreement) as security for an indebtedness or obligation of the owner of the property. Technically, "mortgages" apply to real estate and "security interests" apply to personal property.
SEP – Standards essential patent. See Essential Patent.
Service Mark – A word or symbol that designates the source or origin of a service.
Set-off – The common law right of A to deduct sums of money that B owes to A from money that A owes to B.
Shop Right – A royalty-free, non-exclusive Patent License that courts will imply to exist, for the benefit of an inventor's employer, when an employee makes a Patentable Invention using the employer's time, materials and/or equipment, and the employer does not own the Patentable Invention (either under an appropriate contract or as a matter of law).
Shrink Wrap License – A non-exclusive software License which is not signed and is included in the software package.
Source Code – A computer program written in human-readable language (e.g., Basic).
Springing License – A License grant (usually non-exclusive) of Patents and Know-How that "springs" into existence without more. An example is when a Force Majeure occurs and a commercial product purchaser obtains a Springing License to the Patents and Know-How relating to the manufacture of the product, to enable the purchaser to obtain product from a second source.
Standards Licensing – A requirement of national or international standards committees (such as IEEE, ANSI, ITU, etc.), that the owner of an Essential Patent to the standard, which participated in the committee deliberations, grant Licenses under its Essential Patents to all companies on "reasonable terms and conditions, demonstrably free of discrimination."
Statutory Bar – Prior Art Invalidating a Claim under 35 U.S.C. § 102 and having an effective date more than one year prior to the filing date of a Patent application.
Statutory Subject Matter – The categories of inventions that are Patentable under 35 U.S.C. § 101, namely "process, machine, (article of) manufacture, or composition of matter, or any new and useful improvement thereof."
Stick License – A patent license (usually non-exclusive) of infringers or would-be infringers of a patent or patents owned by the Licensor.
Stick Mining – Portfolio Mining which seeks out Patents which are infringed and therefore have value to be Licensed to Infringers or sold.
Structural Capital – The support or infrastructure of an organization which allows Intellectual Capital to be utilized productively. Structural Capital includes property, plant and equipment.
Substantial Unlicensed Competition Clause – A clause in a License Agreement which provides for the deferral or forfeiture of royalties for so long as unlicensed competition continues unabated or until an infringement suit is initiated. This clause requires a definition of what is "substantial" (not always easy to do) and what are the conditions after which the royalty is deferred or forfeited, e.g. notice of the competition, and an opportunity for the Licensor either to License or sue the unlicensed competitor.
Support – Answering questions and providing assistance about use of a computer program.
Territoriality – See Principle of Territoriality.
Term Sheet – A document setting forth the basic terms (usually primarily financial terms and fundamental definitions) of a proposed agreement. It is usually not intended to be legally binding. Unless the Term Sheet has language negating a binding contract, it might create a binding contract or at least questions about whether or not it is a binding contract (itself troublesome). See Heads of Agreement, Memorandum of Understanding and Letter of Intent.
Tolling Agreement – An agreement for the manufacture of products, in which the "purchaser" provides and owns (and therefore retains title to) all raw ingredients, materials, compopnents, etc. that go into the manufacture of the product. All that the supplier provides is manufacturing services. Common in the chemical industry. Contrast with Foundry Agreement.
Tort – A civil wrong which does not arise from an express or implied contract. For example, Patent Infringement is a "tort."
Territorial License – A License of IP which is restricted to a particular geographic area. For example, a License relating to a new pharmaceutical, as to which License A is restricted to North and South America, License B is restricted to Europe and Africa, and License C is restricted to Asia, Australia and New Zealand. See Field of Use License. A License may be both a Field of Use License and a Territorial License.
Tolling Agreement – An agreement under which Company A provides Company B with a product or component of Company A, which Company B then modifies or processes and Company B gets paid for the service. For example, Company A makes stents and sends them to Company B to be coated. In a Tolling Agreement, Company A owns the stents at all times and has the risk of loss at all times.
Trade Secret – Any business information of value (technical, financial, marketing) that is treated as secret and is learned as a result of a protected relationship (employee, consultant, etc.).
Trademark – A word or symbol that designates the source or origin of a product.
TRO – Temporary restraining order. A court order for a brief time (e.g. ten days) and without an evidentiary hearing, barring a defendant in a lawsuit from doing an act, such as making, reproducing, importing or distributing an Infringing product.
Twenty-Five Percent Rule – An approach used in determining an appropriate Royalty rate, by estimating a Royalty Rate that would be twenty-five percent of the Licensee's profits for the Licensed product. This "rule of thumb" has largely been discredited in some recent cases.
Tying – Conditioning the purchase of one product or service on the purchase of another product or service.
Unbundling – Selling separately a product (often software) which is usually sold together with another product. For example, the Palm® operating system is usually Bundled with a Palm® PDA. However, it may be Unbundled and licensed to manufacturers of other PDAs, for use with their products.
Unlicensed Competition Clause – See Substantial Unlicensed Competition Clause.
Unobviousness – A statutory requirement of U.S. Patent law (35 U.S.C. § 103) that an Invention, to be Patentable, must be unobvious to a person having ordinary skill in the art (technology) to which the invention pertains. (Also called "Non-Obviousness.")
Unpatentable – Not meeting the statutory requirements for a Patent. i.e. Novelty, Utility, Unobviousness and Statutory Subject Matter, 35 U.S.C. §§ 101, 102 and 103. Not Patentable.
Update – A modification of a computer program to make it current (e.g., modifying a tax return preparation program to accommodate tax law changes).
Utility – One of the statutory requirements for a Patent, 35 U.S.C. § 101, that the Claimed Invention is useful.
Utility Patent – A Patent which protects a method or the functional (rather than aesthetic) aspects (what it is or what it does) of a product. Compare with Design Patent, which protects the aesthetic aspects.
Valid or Validity – Whether a Patent Claim meets the legal requirements of 35 U.S.C.A. §§ 101, 102 and 103 as to Statutory Subject Matter, Novelty, Utility and Non-Obviousness.
Warrant – A covenant as to a future event or condition. Compare Represent.
Willful Infringement – Patent Infringement which continues after actual or Constructive Notice of the Patent and without a legal opinion of non-infringement.
Withholding Tax – A tax imposed by some countries (e.g. Japan and Korea) on Royalties payable under a License Agreement. The tax statutes often require that the Royalty payer (Licensee) must withhold the tax and pay it to the taxing authority.
Working – A requirement of the Patent statutes of some countries (not the major industrial countries) that, if a Patented Invention is not commercially used (worked) in that country within a specified time period, the Patent owner must License the Patent in that country, on a Royalty-bearing basis, to any interested party.
Available at Social Science Research Network (SSRN):
- These definitions are accurate and are based on U.S. law, but were written to be simple and clear, rather than legally perfect. For more legalistic definitions, see “McCarthy’s Desk Encyclopedia of Intellectual Property, 3d Ed.”, published by Bureau of National Affairs.
- Defined terms are referred to in this Glossary with initial capital letters.