Intellectual Property, Technology

When (And Where) Patent Licenses Fail: 3 Subtle Traps For The Unwary

Patent licenses can be some of the more complicated instruments to draft and negotiate.

By  
on

The point is a simple one: getting a patent should always be weighed against the value it can generate.   The concept is almost self-evident, yet you would be surprised at how often enthusiasm over an invention overshadows whether it can actually generate value.

That said, for those inventors fortunate enough to adhere to this maxim and proceed to obtain an issued patent, the potential revenue that can be generated from the fruits of their intellectual labor can be tantalizing. It is thrilling to see an inventor’s startup gain traction for a license to its invention, but what is far less exciting is to see some of these assets fail to reach their potential because the vehicle necessary to reach it — the patent license –misses the mark.

From ambiguous grant language to improperly addressing post-termination rights and restrictions, patent licenses can fail for a host of reasons. Sadly, there are a host of ways a patent license can miss the mark due to poor drafting, but some ways are far more subtle than others. Here are three of the more subtle traps that every practitioner should know and avoid:

All Grants Are Not Created Equal. The grant of rights in a patent license is designed to cover those rights necessary for the licensee to commercialize the invention. The statutory rights to make, have made, use, sell, offer to sell, and import are the most obvious, but the grant may also address other rights, such as the right to “have sold,” export, practice methods, and make improvements.

Not every licensee needs all these rights, and in some cases, a licensor will want to avoid impliedly licensing such rights. For example, the grant of a non-exclusive license inherently includes “have made” rights, unless there is express intent to the contrary within the license agreement. If these rights are to be excluded, the licensor must expressly do so within the license agreement.

Furthermore, the scope of the license grant must not be ignored. In many cases, I have seen patent licenses granting non-exclusive, worldwide rights to patents and patent applications “owned or controlled by” the licensor “and [l]icensee’s Affiliates”. More often than not, such broad grants of rights to present and future patents to be commercialized by a licensee and its affiliated companies are simply unnecessary and, in certain exclusive license cases, commercially questionable. Due care should be taken to understand how the licensee seeks to commercialize the licensed patent(s), and the grant of rights and scope should simply reflect this expectation.

Fields of Use Can Be Fields of Gold. Nothing is more frustrating than seeing patent licenses misconstrue geographic territories or fail to properly reflect a licensed field. In some cases, I have even seen licenses actually treat a licensed “territory” like a licensed field… to detrimental effect.

Sponsored

Territories are geographical limitations on scope (such as “the United States, its territories and possessions”), while a “licensed field” or “field of use” delineates commercial boundaries on the scope of the grant. Given that patent rights are territorial in nature, it should be axiomatic that a “worldwide” license should not be granted to an issued U.S. patent that is not otherwise nationalized in foreign countries.

When dealing with licenses involving future (or after-acquired) patent rights, however, a larger territorial scope may be necessary, but should properly reflect the jurisdictions to which the patents have issued. Although never a given in each case, a licensed-field definition may also be helpful as a guiding principle in negotiations as well as during the license term. For example, a licensee may seek a broad grant of rights to commercialize an invention when, in fact, the licensee may not be best positioned to do so. By defining a “licensed field” that would operate to restrict the grant language to a specified field of use, a licensor can ensure that the licensee is getting the rights it needs to properly commercialize the invention while reserving certain elements that may be best commercialized by the licensor itself or through more qualified third parties. Defining the licensed field can help direct those conversations at the outset, and help set expectations of the parties throughout the term of the license agreement. Remember: You want to maximize the potential of the patent assets, not unknowingly constrain them — non-exclusive licenses do not ameliorate this effect because too broad a grant then creates the potential for competition in the marketplace between licensees that may fracture the market for the invention and hurt (rather than help) both parties.

Use Can Inadvertently Lead to Misuse. Generally, patent misuse refers to a patent owner’s improper assertion of patent rights beyond the scope or term of the patent. In the context of a patent license, this can occur where royalties remain due and payable by licensees beyond the term of the licensed patent. That said, there are a number of other ways that patent misuse can occur… such as requiring royalties for a licensee’s patented and unpatented product sales, requiring the purchase of unpatented materials as a condition of a patent license, or otherwise allowing licensees to veto additional patent licenses. Furthermore, patent rights must cease upon patent invalidity. Failing to address these possibilities when drafting patent licenses can lead to significant problems — and litigation — down the road.

These are just some of the traps that can ensnare overzealous licensors, not to mention unwary practitioners. Rote reliance upon formulaic grant language is just one way such problems occur — but overly aggressive tactics and ill-conceived efforts to gain leverage in an instrument inadvertently produce equally troubling results, just to name a few. From this practitioner’s perspective, patent licenses can be some of the more complicated instruments to draft and negotiate, let alone navigate as outside counsel. This is an area where experienced counsel can be literally worth their proverbial weight in gold. Without question, these problems are evident but avoidable –so it is best to remember some of the subtle ways that such licenses can fail by design, so you and clients can succeed by design in the process.

Sponsored

Tom Kulik is an Intellectual Property & Information Technology Partner at the Dallas-based law firm of Scheef & Stone, LLP. In private practice for over 20 years, Tom is a sought-after technology lawyer who uses his industry experience as a former computer systems engineer to creatively counsel and help his clients navigate the complexities of law and technology in their business. News outlets reach out to Tom for his insight, and he has been quoted by national media organizations. Get in touch with Tom on Twitter (@LegalIntangibls) or Facebook (www.facebook.com/technologylawyer), or contact him directly at tom.kulik@solidcounsel.com.

CRM Banner

Topics

, , , , , , , , ,