Patent Licensing: A Checklist

Intellectual property portfolio management is an essential part of any tech company's business strategy. Part of the management strategy must include implementation of an appropriate patent licensing program. An effective licensing program can be the difference between a patent portfolio that churns out profits for your company and one that becomes a profits sinkhole.

The following is a basic checklist summary of various factors that must be considered in determining how to structure your patent licensing program. Considerations that will be addressed include 1) the overall business strategy and how that impacts your company's decisions to license or assign its technologies, 2) factors surrounding assigning vs. licensing your patents, 3) factors surrounding licensing your patents exclusively vs. non-exclusively, 4) dealing with “know-how,” 5) fee structures for your licenses, and 6) factors relating to foreign licensing.

Overall Business Strategy

Considerations in deciding whether to license or assign your patented technology include:

' An assignment can maximize immediate profits and minimize overhead and oversight.

' A license can provide profit in fields you are not exploiting.

' A license can provide profit in regions/countries you are not exploiting.

' A license can maximize profits in regions/fields you are exploiting.

License v. Assignment

An assignment is an outright sale of all or some rights in a technology. In contrast, a license relates to the retention of ownership while extending some rights in the technology.

The benefits of an assignment include:

' Simple and easy transfer with typically no continued relationship.

' No ambiguity as to standing to sue infringers.

' Assignee gets full ownership of rights transferred.

' The benefits of a license include:

' Licensor retains rights and revenue streams (and possibly right to sue).

' Licensee can tailor agreement to obtain only rights beneficial to licensee.

Exclusive v. Non-Exclusive

An exclusive license is a license in which the licensor grants the licensee the exclusive right to make, use or sell an invention within a particular area. A non-exclusive license is a license in which licensor grants the licensee the right to make, use, or sell an invention within a particular area, but reserves the right to further extend the same rights to other licensees. A third option is to extend exclusivity for some initial period of time and then make the license non-exclusive thereafter. The determination whether to extend an exclusive or a non-exclusive license is obviously a major decision in the licensing strategy.

Exclusivity

Looking first at exclusivity, the risks of exclusivity to a licensor include:

' Dependence on one licensee for exploitation of the technology.

' Might be sacrificing some total revenue with only one licensee.

' Less control over the technology.

Certain provisions to protect a licensor extending exclusive rights include:

' Minimum royalty payments.

' Best efforts clause (but difficult to enforce).

' Clause allowing licensor to convert into non-exclusive license.

The benefits of exclusivity to a licensor include:

' Typically higher revenue streams (higher payments and royalty rates).

' Don't have to police several licensees.

' Can give limited exclusives by territory or subject matter.

The benefits of exclusivity to a licensee include:

' The licensee is the only party with a license to the technology.

' More control over technology than a non-exclusive license.

' Possibly have standing to file suit against infringers.

Non-Exclusivity

Turning to non-exclusivity, the benefits of non-exclusivity to a licensor include:

' More control over the technology.

' Ability to grant additional licenses to third parties.

' In general, courts have determined that non-exclusive licensees cannot sublicense without express permission.

The benefits of non-exclusivity to a licensee include:

' While a non-exclusive license affords less protection than an exclusive, the non-exclusive does provide protection against unlicensed competitors and infringement suits by licensor.

' Fewer minimum requirements.

Standing to Sue

Infringers in Litigation

Whether a licensee has standing to sue an infringer of a patent is determined by the type of license held by the licensee. Thus, it is important during the drafting of the license which party should have standing and draft the license carefully to achieve that.

A non-exclusive licensee does not have standing to sue. However, an exclusive licensee can have standing to sue, with the following factors taken into consideration:

' The exclusive licensee must receive “all substantial rights.”

' Standing is determined by intent of parties and substance of conveyance.

' If it is determined by the court that the exclusive licensee does not have standing by itself, the licensor will likely have to be joined in suit.

Holding Companies

Companies use holding companies to obtain tax breaks and to utilize the efficiencies of one entity overseeing patent maintenance and licensing. Typically, the patents are assigned to the holding company and the main company gets a grant-back license.

Issues relating to transferring patents to a holding company include:

' Company may not have standing to sue infringers:

' If the holding company is to grant licenses to third parties, the company may only get a non-exclusive license and may not have standing.

' Company may lose its ability to recover lost profits:

' If damages are determined based on the holding company, the holding company can only seek a reasonable royalty, because it does not make or sell any products.

' Company should retain ownership of patents or obtain a clearly exclusive license that confers standing.

Confidentiality

A confidentiality provision is included in a license agreement to protect confidential information disclosed by the licensor to the licensee.

Especially important when license relates to trade secrets, including know-how (discussed later):

' Must be held confidential to protect their proprietary and economic value.

' If licensor will be exposed to licensee's confidential information, this provision should be bi-lateral.

Know-How

“Know-how” is information in the licensor's control that exceeds the information provided in a patent specification and may be essential for licensee to fully and effectively practice the whole technology. Various considerations relating to “know-how” in the context of a license agreement include:

' Know-how is licensable only if it qualifies as a trade secret, because licensor must have a proprietary interest in order to license it.

' Can be as valuable or more valuable than the technology disclosed in the patent(s).

' Must be identified with specificity:

' To enforce agreement against licensee that continues to use know-how after patent expires.

' To enforce agreement against licensee that claims modified product design falls outside scope of patents (but may fall within scope of know-how).

' To ensure that parties do not forget the exact method used to practice the claimed invention.

' To ensure costs of transfer of physical materials are addressed.

' To address ownership and access of any improvements in know-how developed by licensee.

Technical assistance relating to the know-how may need to be included in the license agreement:

' Obligates the licensor to provide assistance in understanding and implementing the know-how.

' As complexity of know-how increases, so does the need for technical assistance.

' Specificity is important:

' Protects licensee from a licensor that provides little assistance.

' Protects licensor from a licensee that expects an unfair amount of assistance.

Compensation – can be included in license fee or paid separately as it is provided or some combo thereof.

Special issues relating to hybrid licenses (licensing both patent and trade secret rights):

' Patent royalties cannot extend beyond the term of the licensed patent, but trade secret/know how royalties can extend for as long as the trade secret exists.

' Patent applications can be licensed (35 U.S.C. 261) and are often treated as know-how.

Important Considerations:

' Define know-how carefully and precisely.

' Establish a separate, lower license fee or royalty rate for know-how (except in the case of a one-time up front fee).

Fee Structures

There are a wide variety of fee structures available to licensing parties. Generally, the structure is determined in large part by the nature and scope of the grant of the license.

There are two basic types of fee structures:

' Non-sale royalties – based on factors independent of actual sales:

' Examples – up-front fees, milestone payments, minimums, etc.

' Earned royalties – based on actual sales of product:

' Examples – royalties based on # of products sold, sales dollars, etc.

Earned Royalties

Earned royalties are payments tied to the commercial success of the license. The payments can be tied to the number of units sold, gross sales dollars, net revenue, volume produced, cost of materials, etc. The risk to the licensor of tying the royalty rate to profits is that the licensee's business or accounting practices, rather than the market, may control the variance in licensing revenues.

There are various types of earned royalties:

Fixed Royalty Rate:

' A fixed percentage tied to sales during a specified period.

' Does not change regardless of success or failure of product or any other variation.

' Risk to licensor – as efficiencies increase, licensee's revenue may increase while licensor's percentage remains the same.

' Risk to licensee – may underestimate costs and be unable to make a profit.

Increasing Royalty Rate:

' A percentage typically tied to number of units sold or gross sales dollars during a specified period. The percentage increases at predetermined intervals relating to number of units, price, or time.

' Licensee benefits from smaller payments in the early stages of the agreement.

Decreasing Royalty Rate:

' A percentage typically tied to number of units sold or gross sales dollars during a specified period. The percentage decreases at predetermined intervals relating to number of units, price, or time.

' May be appropriate in certain situations, such as if it is expected that the technology profitably will decrease over time (in which case, the percentage should not be tied to number of units).

Fixed Royalty Fee:

' A fixed fee or dollar increment

tied to number of units sold or other varying quantity, but not price, during a specified period.

' Licensor is protected from royalty erosion if the market price goes down.

' Licensee benefits if the market price goes up.

Non-Sale Royalties

Non-sale royalties are payments that are NOT tied to the commercial success of the license. There are various types of non-sale royalties:

Up Front Paid Up License Fee:

' Benefits – easy, simple, no further contact required between parties.

' Risk to Licensor – Low risk, but if product is wildly successful, cannot obtain additional compensation.

' Risk to Licensee – May never receive full value of payment.

Milestone or Recurring Payments:

' Milestone – payments take place upon achievement of certain milestones or events.

' Recurring – payments take place at regular intervals.

' Benefit – relatively simple.

Additional Provisions Often Included in Royalty-Related Structures

Minimum royalties – a minimum payment requirement:

' Licensor ensures that licensee is using its best efforts.

' Particularly important in exclusive licenses, in which the licensor has no other revenue streams from other licensees.

Royalty caps:

' Licensee may be willing to pay a higher royalty rate if its total payment is limited to a certain amount.

Licensee sales to sublicensees – it may be helpful or necessary to provide in the fee structure for licensee sales to sublicensees or related companies:

' If a licensee sells to a related company or sublicensee, there will likely be a reduced sales price.

' If the fee structure is a royalty rate tied to price or units sold, this situation must be addressed in the contract.

' One solution – a separate fee structure for such sales.

' Royalty stacking provision – calls for reduction in the licensing fee if the licensee must obtain further licenses in order to exploit the license:

' Licensor will likely prefer to avoid such a provision – the licensor has no control over what other licenses might be required.

' Licensee may need such a provision to ensure that the product can be profitable regardless of number of licenses that must be obtained.

Foreign Licenses

Foreign licensing creates unique considerations and it is strongly recommended that your company obtain good international counsel to address these considerations. It is important to perform an initial analysis of the value of the agreement vs. increased costs of doing business abroad. Various considerations include:

Licensor must ensure compliance with U.S. export laws and regulations:

' More than a dozen different sets of regulations.

' Two main regimes:

' Export Administration Act.

' Arms Export Control Act.

' Applicability determined by inherent nature of products.

' Party responsible for such exports is required to ensure the applicable set of regulations is correctly applied.

Export of some products requires a license:

' Either obtain license before entering agreement or make agreement conditional upon obtaining license.

' For certain products, provisions required restricting re-export of products to certain countries.

Foreign Legal Considerations:

' Contract law in licensee's country may control at least some portions of the agreement.

Approval by foreign government may be required:

' Risk – approval will not be given.

' Can include provision requiring approval within a reasonable time or the license offer is withdrawn.

Parties must consider requirements related to registration or recordation of the transaction:

' Example – European Union has notification requirements to protect against unduly restrictive practices and restraints on trade.

' Notification/registration requirements triggered by certain provisions.

' Important to obtain appropriate counsel in country of concern.

' Licensor may want provision obligating licensee to assume responsibility for notification/registration.

' Parties must address such issues as service of process and applicability of international conventions or treaties.

' Licensee may require licensor to provide validity opinions in the relevant foreign jurisdictions.

' Where contract is written in more than one language, Licensor should mandate which language controls in case of a dispute.

Parties must consider terminability of agreement in case of:

' Change in status of a party due to governmental action, or

' Fluctuations in exchange control regulations.

Revenue Issues:

' Parties must determine place of payment and rate of exchange mechanism.

Must examine allocation of tax burdens:

' Licensor may require licensee to assume any assessments resulting from foreign government.

' Or, licensor may assume responsibility for its foreign income taxes so long as such taxes are allowable as a credit against U.S. income taxes.

' International tax counsel should be consulted.

Compulsory Licenses:

' Many countries have statutes for compulsory granting of licenses, upon application, in cases where the invention is not being adequately “worked” under the patent in the country.

' Often, the application must include grounds for a license and can only be obtained after a certain period from filing or grant.

In many countries, patentees are permitted to offer a license of right by including a notation to that effect with recordation of the patent:

' Making licenses of right available often results in reduced annuities.

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Intellectual property portfolio management is an essential part of any tech company's business strategy. Part of the management strategy must include implementation of an appropriate patent licensing program. An effective licensing program can be the difference between a patent portfolio that churns out profits for your company and one that becomes a profits sinkhole.

The following is a basic checklist summary of various factors that must be considered in determining how to structure your patent licensing program. Considerations that will be addressed include 1) the overall business strategy and how that impacts your company's decisions to license or assign its technologies, 2) factors surrounding assigning vs. licensing your patents, 3) factors surrounding licensing your patents exclusively vs. non-exclusively, 4) dealing with “know-how,” 5) fee structures for your licenses, and 6) factors relating to foreign licensing.

Overall Business Strategy

Considerations in deciding whether to license or assign your patented technology include:

' An assignment can maximize immediate profits and minimize overhead and oversight.

' A license can provide profit in fields you are not exploiting.

' A license can provide profit in regions/countries you are not exploiting.

' A license can maximize profits in regions/fields you are exploiting.

License v. Assignment

An assignment is an outright sale of all or some rights in a technology. In contrast, a license relates to the retention of ownership while extending some rights in the technology.

The benefits of an assignment include:

' Simple and easy transfer with typically no continued relationship.

' No ambiguity as to standing to sue infringers.

' Assignee gets full ownership of rights transferred.

' The benefits of a license include:

' Licensor retains rights and revenue streams (and possibly right to sue).

' Licensee can tailor agreement to obtain only rights beneficial to licensee.

Exclusive v. Non-Exclusive

An exclusive license is a license in which the licensor grants the licensee the exclusive right to make, use or sell an invention within a particular area. A non-exclusive license is a license in which licensor grants the licensee the right to make, use, or sell an invention within a particular area, but reserves the right to further extend the same rights to other licensees. A third option is to extend exclusivity for some initial period of time and then make the license non-exclusive thereafter. The determination whether to extend an exclusive or a non-exclusive license is obviously a major decision in the licensing strategy.

Exclusivity

Looking first at exclusivity, the risks of exclusivity to a licensor include:

' Dependence on one licensee for exploitation of the technology.

' Might be sacrificing some total revenue with only one licensee.

' Less control over the technology.

Certain provisions to protect a licensor extending exclusive rights include:

' Minimum royalty payments.

' Best efforts clause (but difficult to enforce).

' Clause allowing licensor to convert into non-exclusive license.

The benefits of exclusivity to a licensor include:

' Typically higher revenue streams (higher payments and royalty rates).

' Don't have to police several licensees.

' Can give limited exclusives by territory or subject matter.

The benefits of exclusivity to a licensee include:

' The licensee is the only party with a license to the technology.

' More control over technology than a non-exclusive license.

' Possibly have standing to file suit against infringers.

Non-Exclusivity

Turning to non-exclusivity, the benefits of non-exclusivity to a licensor include:

' More control over the technology.

' Ability to grant additional licenses to third parties.

' In general, courts have determined that non-exclusive licensees cannot sublicense without express permission.

The benefits of non-exclusivity to a licensee include:

' While a non-exclusive license affords less protection than an exclusive, the non-exclusive does provide protection against unlicensed competitors and infringement suits by licensor.

' Fewer minimum requirements.

Standing to Sue

Infringers in Litigation

Whether a licensee has standing to sue an infringer of a patent is determined by the type of license held by the licensee. Thus, it is important during the drafting of the license which party should have standing and draft the license carefully to achieve that.

A non-exclusive licensee does not have standing to sue. However, an exclusive licensee can have standing to sue, with the following factors taken into consideration:

' The exclusive licensee must receive “all substantial rights.”

' Standing is determined by intent of parties and substance of conveyance.

' If it is determined by the court that the exclusive licensee does not have standing by itself, the licensor will likely have to be joined in suit.

Holding Companies

Companies use holding companies to obtain tax breaks and to utilize the efficiencies of one entity overseeing patent maintenance and licensing. Typically, the patents are assigned to the holding company and the main company gets a grant-back license.

Issues relating to transferring patents to a holding company include:

' Company may not have standing to sue infringers:

' If the holding company is to grant licenses to third parties, the company may only get a non-exclusive license and may not have standing.

' Company may lose its ability to recover lost profits:

' If damages are determined based on the holding company, the holding company can only seek a reasonable royalty, because it does not make or sell any products.

' Company should retain ownership of patents or obtain a clearly exclusive license that confers standing.

Confidentiality

A confidentiality provision is included in a license agreement to protect confidential information disclosed by the licensor to the licensee.

Especially important when license relates to trade secrets, including know-how (discussed later):

' Must be held confidential to protect their proprietary and economic value.

' If licensor will be exposed to licensee's confidential information, this provision should be bi-lateral.

Know-How

“Know-how” is information in the licensor's control that exceeds the information provided in a patent specification and may be essential for licensee to fully and effectively practice the whole technology. Various considerations relating to “know-how” in the context of a license agreement include:

' Know-how is licensable only if it qualifies as a trade secret, because licensor must have a proprietary interest in order to license it.

' Can be as valuable or more valuable than the technology disclosed in the patent(s).

' Must be identified with specificity:

' To enforce agreement against licensee that continues to use know-how after patent expires.

' To enforce agreement against licensee that claims modified product design falls outside scope of patents (but may fall within scope of know-how).

' To ensure that parties do not forget the exact method used to practice the claimed invention.

' To ensure costs of transfer of physical materials are addressed.

' To address ownership and access of any improvements in know-how developed by licensee.

Technical assistance relating to the know-how may need to be included in the license agreement:

' Obligates the licensor to provide assistance in understanding and implementing the know-how.

' As complexity of know-how increases, so does the need for technical assistance.

' Specificity is important:

' Protects licensee from a licensor that provides little assistance.

' Protects licensor from a licensee that expects an unfair amount of assistance.

Compensation – can be included in license fee or paid separately as it is provided or some combo thereof.

Special issues relating to hybrid licenses (licensing both patent and trade secret rights):

' Patent royalties cannot extend beyond the term of the licensed patent, but trade secret/know how royalties can extend for as long as the trade secret exists.

' Patent applications can be licensed (35 U.S.C. 261) and are often treated as know-how.

Important Considerations:

' Define know-how carefully and precisely.

' Establish a separate, lower license fee or royalty rate for know-how (except in the case of a one-time up front fee).

Fee Structures

There are a wide variety of fee structures available to licensing parties. Generally, the structure is determined in large part by the nature and scope of the grant of the license.

There are two basic types of fee structures:

' Non-sale royalties – based on factors independent of actual sales:

' Examples – up-front fees, milestone payments, minimums, etc.

' Earned royalties – based on actual sales of product:

' Examples – royalties based on # of products sold, sales dollars, etc.

Earned Royalties

Earned royalties are payments tied to the commercial success of the license. The payments can be tied to the number of units sold, gross sales dollars, net revenue, volume produced, cost of materials, etc. The risk to the licensor of tying the royalty rate to profits is that the licensee's business or accounting practices, rather than the market, may control the variance in licensing revenues.

There are various types of earned royalties:

Fixed Royalty Rate:

' A fixed percentage tied to sales during a specified period.

' Does not change regardless of success or failure of product or any other variation.

' Risk to licensor – as efficiencies increase, licensee's revenue may increase while licensor's percentage remains the same.

' Risk to licensee – may underestimate costs and be unable to make a profit.

Increasing Royalty Rate:

' A percentage typically tied to number of units sold or gross sales dollars during a specified period. The percentage increases at predetermined intervals relating to number of units, price, or time.

' Licensee benefits from smaller payments in the early stages of the agreement.

Decreasing Royalty Rate:

' A percentage typically tied to number of units sold or gross sales dollars during a specified period. The percentage decreases at predetermined intervals relating to number of units, price, or time.

' May be appropriate in certain situations, such as if it is expected that the technology profitably will decrease over time (in which case, the percentage should not be tied to number of units).

Fixed Royalty Fee:

' A fixed fee or dollar increment

tied to number of units sold or other varying quantity, but not price, during a specified period.

' Licensor is protected from royalty erosion if the market price goes down.

' Licensee benefits if the market price goes up.

Non-Sale Royalties

Non-sale royalties are payments that are NOT tied to the commercial success of the license. There are various types of non-sale royalties:

Up Front Paid Up License Fee:

' Benefits – easy, simple, no further contact required between parties.

' Risk to Licensor – Low risk, but if product is wildly successful, cannot obtain additional compensation.

' Risk to Licensee – May never receive full value of payment.

Milestone or Recurring Payments:

' Milestone – payments take place upon achievement of certain milestones or events.

' Recurring – payments take place at regular intervals.

' Benefit – relatively simple.

Additional Provisions Often Included in Royalty-Related Structures

Minimum royalties – a minimum payment requirement:

' Licensor ensures that licensee is using its best efforts.

' Particularly important in exclusive licenses, in which the licensor has no other revenue streams from other licensees.

Royalty caps:

' Licensee may be willing to pay a higher royalty rate if its total payment is limited to a certain amount.

Licensee sales to sublicensees – it may be helpful or necessary to provide in the fee structure for licensee sales to sublicensees or related companies:

' If a licensee sells to a related company or sublicensee, there will likely be a reduced sales price.

' If the fee structure is a royalty rate tied to price or units sold, this situation must be addressed in the contract.

' One solution – a separate fee structure for such sales.

' Royalty stacking provision – calls for reduction in the licensing fee if the licensee must obtain further licenses in order to exploit the license:

' Licensor will likely prefer to avoid such a provision – the licensor has no control over what other licenses might be required.

' Licensee may need such a provision to ensure that the product can be profitable regardless of number of licenses that must be obtained.

Foreign Licenses

Foreign licensing creates unique considerations and it is strongly recommended that your company obtain good international counsel to address these considerations. It is important to perform an initial analysis of the value of the agreement vs. increased costs of doing business abroad. Various considerations include:

Licensor must ensure compliance with U.S. export laws and regulations:

' More than a dozen different sets of regulations.

' Two main regimes:

' Export Administration Act.

' Arms Export Control Act.

' Applicability determined by inherent nature of products.

' Party responsible for such exports is required to ensure the applicable set of regulations is correctly applied.

Export of some products requires a license:

' Either obtain license before entering agreement or make agreement conditional upon obtaining license.

' For certain products, provisions required restricting re-export of products to certain countries.

Foreign Legal Considerations:

' Contract law in licensee's country may control at least some portions of the agreement.

Approval by foreign government may be required:

' Risk – approval will not be given.

' Can include provision requiring approval within a reasonable time or the license offer is withdrawn.

Parties must consider requirements related to registration or recordation of the transaction:

' Example – European Union has notification requirements to protect against unduly restrictive practices and restraints on trade.

' Notification/registration requirements triggered by certain provisions.

' Important to obtain appropriate counsel in country of concern.

' Licensor may want provision obligating licensee to assume responsibility for notification/registration.

' Parties must address such issues as service of process and applicability of international conventions or treaties.

' Licensee may require licensor to provide validity opinions in the relevant foreign jurisdictions.

' Where contract is written in more than one language, Licensor should mandate which language controls in case of a dispute.

Parties must consider terminability of agreement in case of:

' Change in status of a party due to governmental action, or

' Fluctuations in exchange control regulations.

Revenue Issues:

' Parties must determine place of payment and rate of exchange mechanism.

Must examine allocation of tax burdens:

' Licensor may require licensee to assume any assessments resulting from foreign government.

' Or, licensor may assume responsibility for its foreign income taxes so long as such taxes are allowable as a credit against U.S. income taxes.

' International tax counsel should be consulted.

Compulsory Licenses:

' Many countries have statutes for compulsory granting of licenses, upon application, in cases where the invention is not being adequately “worked” under the patent in the country.

' Often, the application must include grounds for a license and can only be obtained after a certain period from filing or grant.

In many countries, patentees are permitted to offer a license of right by including a notation to that effect with recordation of the patent:

' Making licenses of right available often results in reduced annuities.

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Dorsey & Whitney Dorsey & Whitney