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Roach & Hiler: Top 10 technology licensing pitfalls

April 17, 2019
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By Neal R. Roach and Ryan P. Hiler

Many firms can expand their business or grow their revenue by licensing technology — either purchasing the right to use the technology of others (“licensing in”) or selling to others the right to use technology (“licensing out”). While license agreements are often complex, we have seen many common pitfalls in licenses for patents and know-how (trademark and copyright licenses present similar issues, but are beyond the scope of this article). A “top 10” is a somewhat arbitrary list, but here goes:

1. Present grant. The license grant section of technology licenses is the provision that grants the license from licensor to licensee. It is critical to carefully consider all of the terms included in the license grant. For example, courts have held that a promise to grant a license in the future does not accomplish the license grant. Use “hereby grants” instead of “agrees to grant.”

2. Rights being licensed. The U.S. patent statutes provide the rights to exclude others from “making,” “having made,” “using,” “offering for sale,” “selling,” “having sold” and “importing” a patented invention. A grant of these rights gives the licensee a complete defense to a claim of patent infringement. Licensors should consider strategically granting only the patent rights that the licensee needs, rather than all of the statutory rights. When licensing nonpatented know-how, the patent statutory rights could be expanded to include other or different verbs (e.g., a licensor could grant a right to “develop”). Note, however, that a breach of non-patent statute rights in the license might give rise to a breach of contract claim but would not support a claim for patent infringement.

3. Adjectives in the grant. Each adjective in a license grant modifies the license being granted. Should the license be sole, exclusive or non-exclusive — and does the agreement make clear what those terms mean? The adjectives should not be inconsistent with other provisions in the agreement. For example, a “perpetual” license cannot relate solely to patent rights, because all patents ultimately expire; however, a perpetual license is often used with licenses that include both patents and know-how. The adjectives must be consistent with each other — for example, a grant described as “revocable” should not also be described as “perpetual.” Similarly, the parties should ensure that the terms of a grant described as “irrevocable” are consistent with the termination provisions of the agreement, and that the terms of a grant described as “assignable” or “nonassignable” are consistent with the assignment provisions of the agreement.

4. Sublicenses. Most courts have held that a license is not sublicensable without the consent of the licensor. Nevertheless, both parties should avoid ambiguity and describe whether the license is sublicensable, the specific terms that must be included in any sublicense, and whether and how a sublicense changes the financial terms of the license agreement.

5. Field of use. Patent rights are divisible. A patent and know-how license agreement may be limited to one or more technical fields or product markets (for example, many patent licenses relating to pharmaceutical products distinguish between human health and animal health uses). The licensor should only grant the rights the licensee needs, and the licensee should only pay for the rights it intends to use.

6. Implied licenses. Licensors must be careful to explicitly describe what is being licensed. If you grant a license to “all technology relating to” a particular patent or technology, you may be granting more rights than you intend. As noted above, a license grant should be specific, and the agreement should disclaim any implied licenses.

7. Separation of patents and know-how. Often, a company licensing a patent from a third party also needs access to other non-patented technology. Parties should distinguish such know-how from any patents being licensed and should also make sure the know-how is defined accurately. Assuming that royalties will be paid on both patents and know-how, the licensor will want a broad definition of know-how, while licensees will want a more narrowly tailored definition. And licensors should consider whether licensed know-how has trade-secret status and take steps to ensure that status is retained under applicable trade secret law.

8. Step-down royalty rates. A patent licensor cannot legally receive royalties for sales made after a patent expires. To reduce the risk of a license being found unenforceable in violation of this principle, licensors and licensees can negotiate around this principle to commercialize technology by pairing post-expiration payments to a non-patent right (know-how or materials), deferring payments for pre-expiration use of a patent into the post-expiration period or having royalties that run until the latest-running patent covered by the parties’ agreement expires.

9. Patent challenge clauses. One problem for a licensor is the licensee challenging the validity or enforceability of a licensed patent after entering into a license agreement with the licensor. A common strategy is for licensors to include so-called “patent challenge clauses” with provisions serving as a disincentive to the licensee challenging the validity of the licensed patent. One approach is to give the licensor the right to terminate the license (or convert an exclusive license to a non-exclusive license) if the licensee challenges the licensed patent. Another strategy is to increase the royalty rate during and/or after the pendency of a licensee-instituted patent challenge. Other approaches to patent challenge clauses include provisions requiring liquidated damages, reimbursement of legal fees clauses and/or notice of patent challenges.

10. Audit Rights. License agreements typically include audit rights to allow the licensor to verify the accuracy of royalty payments made under the license. In defining audit rights, both parties should consider: the frequency of audits (e.g., no more than once per year); who can audit (e.g., only CPAs); confidentiality obligations around the audit process, and; how any inaccuracies are to be corrected.

A well-defined license should result in a better relationship between the licensor and the licensee. Drafting an agreement that avoids these common pitfalls can save your client time, money and headaches in the future.•

Neal R. Roach — nroach@taftlaw.com — is a partner and Ryan P. Hiler — rhiler@taftlaw.com — is an associate at Taft Stettinius & Hollister LLP. Opinions expressed are those of the authors.

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