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Structuring the Patent License Grant

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In the current legal environment, with patent litigation on the decline (especially in the U.S.), patent licensing (and related transactions) are heating up. Experts in patent licensing discuss how to negotiate patent license agreements, review examples of best (and, in some cases, worst) practices, and share current legal developments affecting patent licensing. Practical tips for structuring, negotiating and drafting patent licenses, with strategies for both the licensor and licensee, will be emphasized.

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Structuring the Patent License Grant

  1. 1. Business Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP Matters Attorney-Client Privileged & Confidential 1 Advanced Patent Licensing 2019 Structuring the Patent License Grant September 13, 2019 Kent Richardson Partner Contact Information: +1 (650) 967-6555 info@richardsonoliver.com Gratefully acknowledge the work of Burch Harper in producing the original set of slides for this class
  2. 2. Business Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP Matters A Patent License Agreement – You Are Here Attorney-Client Privileged & Confidential 2 Rambus license to NVIDIA, 2010. https://www.sec.gov/Archives/edgar/data/1045810/000104581010000045/rambuspatentlicense.htm License Grant
  3. 3. Business Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP Matters Subject to the terms of this Agreement and conditioned upon ABC’s timely receipt of the Payment, ABC, on behalf of itself and its subsidiaries, hereby grants to XYZ and its subsidiaries, a license under ABC’s Patents to make, use, sell, offer for sale, and import Licensed Products during the term of this Agreement. Anatomy of a “Simple” Patent License Grant Attorney-Client Privileged & Confidential 3 License Conditions Licensor Licensee Licensed Patents Licensed Products Licensed Activities License Term
  4. 4. Business Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP Matters Patent License Grant Impacts Which Parts of the Agreement? Attorney-Client Privileged & Confidential 4 Rambus license to NVIDIA, 2010. https://www.sec.gov/Archives/edgar/data/1045810/000104581010000045/rambuspatentlicense.htm License Conditions
  5. 5. Business Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP Matters Topics Covered for Each Element of the Grant Attorney-Client Privileged & Confidential 5 Definitions of the term Want licensees/licensors want How to reach resolution Practitioners notes
  6. 6. Business Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP Matters “Licensor” Definition: What the Licensee Wants °The licensee signatory may seek a license from the licensor signatory and all of the members of its corporate family (“affiliates”) °“. . . ABC, on behalf of itself and its affiliates, . . .” °By doing so, the licensee signatory is attempting to ensure that it will not infringe an Affiliate’s patents after entering into the license agreement Parent (Affiliate) ABC (Signatory) Subsidiary (Affiliate) Sibling (Affiliate) XYZ (Licensee)
  7. 7. Business Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP Matters “Licensor” Definition: What the Licensor Wants °In turn, the licensor signatory may insist that it cannot encumber the patents of any future parent and siblings that it may gain via M&A °It may insist that the license be granted only on behalf of itself and its subsidiaries Parent (Affiliate) Sibling (Affiliate) ABC (Signatory) Subsidiary (Affiliate) XYZ (Licensee)
  8. 8. Business Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP Matters “Licensor” Definition: Possible Resolutions °Typical solutions °The Licensor includes entities that are affiliates of the licensor signatory as of the execution date of the agreement °The Licensor includes subsidiaries of the licensor signatory, and the licensor signatory warrants that it is the ultimate parent °Implications °Provide certainty to both parties °But may expose the Licensee to infringement accusations by the future parent and siblings of the licensor signatory
  9. 9. Business Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP Matters “Licensor” Definition: Practitioner’s Note °Ideally, each licensor entity should be bound directly as a signatory to the agreement °If not, the licensor signatory should be obligated to ensure, by contract or by corporate control, the compliance of all other licensor entities (e.g., bound to terms of license grant)
  10. 10. Business Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP Matters “Licensee” Definition: What the Parties Want °What the Licensee Wants: The licensee signatory may seek a license for itself and all of its affiliates, including future subsidiaries, parents, and siblings °What the Licensor Wants: The licensor signatory may be reluctant to forego future licensing opportunities by licensing currently unaffiliated entities
  11. 11. Business Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP Matters “Licensee” Definition: Possible Resolution °Possible resolutions (each based on payment structure): °A running per unit royalty may naturally scale with the number of licensee entities °A fixed royalty may be scaled with appropriate adjustments (see Fees and Royalties below) °A fixed fee may be scaled with additional payments (see Fees and Royalties below)
  12. 12. Business Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP Matters “Licensee” Definition: Practitioner’s Note °Ideally, each licensee entity should be bound directly by the agreement as a signatory °Otherwise, the licensee signatory should be obligated to ensure, by contract or by corporate control, the compliance of all other licensee entities (e.g., reporting, confidentiality)
  13. 13. Business Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP Matters “Licensed Patents” Definition: What the Parties Want °What the Licensee Wants: A license under all patents owned or controlled by the Licensor (“Portfolio License”) °Provides comfort to Licensee that Licensor is not withholding patents for purpose of asserting infringement in the future °What the Licensor Wants: A license under only specifically identified patents. °Exposes Licensee to potential infringement of patents not on the list
  14. 14. Business Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP Matters “Licensed Patents” Definition: Possible Resolution °A license under all patents that are owned or controlled by the Licensor within a defined period of time (“Capture Period”) °Patents licensed under separate agreements between Licensor and Licensee may be carved out of the license
  15. 15. Business Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP Matters Licensed Activities: What the Licensee Wants °A license to perform all activities: °Scope of Possible Licensable Activities. The scope of activities that may be licensed are dictated by the applicable statutes and case law °35 USC §271: “makes, uses, offers to sell, . . . sells . . . or imports” °CAFC: A grant of a right to “make, use, and sell” inherently includes a right to “have made” °SCOTUS: “The authorized sale of an article . . . prevents the patent holder from invoking patent law to control postsale use of the article”
  16. 16. Business Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP Matters Licensed Activities: What the Licensor Wants °The Licensor may be willing to grant a license to perform only a subset of possible activities °Any rights not granted should be expressly excluded to mitigate the possibility that the courts may later determine that such excluded rights are inherent °For example, if Licensor plans to create and maintain an ecosystem of licensees via privity of contract. (This can be tough) °“. . . a license to . . . sell Licensed Products solely to other licensees of Licensor . . .” Licensor Licensee 1 Licensee 2 Licensee 3 license agreement sale of Licensed Product
  17. 17. Business Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP Matters LicensedActivities:ANoteonAuthorizedSalesandPatentExhaustion °Licensor’s patent rights in a Licensed Product is exhausted upon its first authorized sale by the Licensee °As a result: °In order to mitigate channel conflicts and potential accusations of patent misuse due to “double-dipping”, the Licensor should grant its licenses and monetize its patents at a single point in the distribution channel (e.g., component manufacturers, system- level components, OEMs, distributors, retail companies) °If Licensor desires to license its patents at multiple points in the distribution channel, it should have patents claiming separate inventions that are patentably distinct and that are separately directed at each such point °Licensing patents at multiple channel points may pose Quanta challenges if the licensed patents “substantially embody” one another
  18. 18. Business Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP Matters “Licensed Products” Definition: What the Parties Want °What the Licensee Wants: The Licensee may want a license to make, sell, . . . any and all products, including: °Otherwise unlicensed products that it purchases from others °Products that it makes on behalf of others °What the Licensor Wants: Neither, probably °Licensing the sale of purchased, but otherwise unlicensed, products: °Will, upon their sale by Licensee, exhaust the Licensor’s patent rights in such products °May incentivize the Licensee to “launder” products by charging unlicensed entities a fee to purchase and sell back unlicensed products, thus “cleaning” them °Licensing the making of products on behalf of others: °May result in the exhaustion of the Licensor’s patent rights in such products °May incentivize the Licensee to become a patent “foundry” by charging unlicensed entities a fee to make and sell otherwise unlicensed products
  19. 19. Business Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP Matters “Licensed Products” Definition: Possible Resolutions °Limit the scope of Licensed Products to those designed and/or trademarked by Licensee °Address Licensee’s concerns about products it resells and products it makes for others by a covenant-to-sue-last
  20. 20. Business Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP Matters License Term: Life of Patents °License terminates upon the expiration of the last to expire of the licensed patents °If the payments are structured as a running or fixed royalty, a life-of -patents term will provide Licensor with comfort of a guaranteed long-term revenue stream °Provides Licensee with comfort that the parties will not need to renegotiate a license with respect to the licensed patents °Licensor must carefully select the scope of the Licensed Patents in order to avoid forfeiting further licensing opportunities with the Licensee
  21. 21. Business Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP Matters License Term: Term License °License terminates on a fixed date or after a specified capture period (e.g., five years) °Cliff or Guillotine License: All licenses terminate upon expiration of the term. °Opportunity for parties to re-negotiate financial and other terms of license on a periodic basis °Requires frequent negotiations for renewals °Paid-Up License: A subset of licenses survive expiration of the term °Often combined with a capture period for licensed patents so that licensee does not receive a perpetual and royalty-free license to all of licensor’s future patents.
  22. 22. Business Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP Matters License Conditions: What the Parties Want °What the Licensee Wants: The Licensee may want an unconditional and irrevocable license °What the Licensor Wants: Payment: “. . . expressly conditioned upon Licensee’s timely receipt of the Initial Payment, …” Compliance: “Expressly conditioned upon Licensee’s timely compliance with the terms and conditions of this Agreement, …”
  23. 23. Business Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP Matters Fees and Royalties: Typical Structures; Fixed Fees Typical Payment Structures: Fixed Payments (e.g., one-time payment) Fixed Royalties (e.g., fixed quarterly payment) Running Per Unit Royalties Fixed Payments/Fixed Royalties: Each party bears the risk of over/under payment due to the potential increase or decrease of projected sales of Licensed Products Licensor may prefer a fixed payment as total or partial consideration in order to mitigate the consequences of a “Medimmune” challenge by the Licensee Licensor may insist on additional payments for each relevant acquisition made by the Licensee
  24. 24. Business Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP Matters Fees and Royalties: Per Unit Running Royalties °In order to avoid future disputes, royalties should be based on sales of proxy products, not sales of Licensed Products °Typically calculated as a percentage of ASP of proxy products, where ASP is defined as gross sales minus Licensee’s costs of selling the proxy product (e.g., usual trade discounts, taxes, transportation costs, costs of returns) °Licensor may insist that licensee signatory pays on behalf of entire Licensee (“one throat to choke”) °Licensor may also insist on audit rights to verify Licensee’s compliance °Licensor may insist that internal and other non-arms-length sales be included in royalties, typically by using arms-length-sales price
  25. 25. Business Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP MattersBusiness Sense • IP Matters Attorney-Client Privileged & Confidential 25 BUSINESS SENSE • IP MATTERS Contact Information: +1 (650) 967-6555 info@richardsonoliver.com ROL Group has over 60 years of IP strategy and execution experience. We ask the business questions first. We blend in- house and large law firm experience to create clear steps for success. We guide companies through unique IP challenges—like buying and selling patents, developing licensing programs, defending against patent assertions, and creating a value-driven IP portfolio. We give direction to businesses that share our passion for new ideas, creative problem solving and forward motion. Contact Information: +1 (650) 967-6555 info@richardsonoliver.com

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