Technology: The keys to technology licensing

Part 1: Understanding the basics

This series addresses the needs the legal community has for licensing technology knowledge by laying out the basic concepts that one should understand, identifies traps for the unwary and offers drafting and negotiating tips.

Business success increasingly depends on new technologies and the wise use of intellectual property rights. Often, these technologies and IP rights are developed or exploited in collaborative relationships, and having agreements clearly stating each party’s rights is absolutely critical. With the exception of software licensing, in my opinion, the legal community has not kept up. We lack a set of generally understood industry standards for technology licensing agreements. There are surprisingly few lawyers with the necessary combination of intellectual property knowledge and contract drafting/negotiating skills, so an attorney knowledgeable about licensing transactions can add significant value

Technology vs. IP

To distinguish between technology and IP, the term technology can be described as tangibles and intangibles such as software, equipment, know-how, chemical process, while intellectual property represents specific legal rights—the right to prevent others from doing things.

The basic difference between a technology license and a patent license is that with a technology license the licensee is actually getting the technology necessary to make the product. A patent license, by contrast, is merely the owner's grant of authority to infringe the claims of the licensed patent.

The three types of IP rights that are primarily applicable in the context of technology licensing are: copyrights, trade secrets and patents.

1. Copyright protects works of authorship, such as text, art and software, and gives the owner the right to prevent others from, among other things, copying, distributing or making derivative works from the protected work. Note that copyright does not protect ideas, only the particular expressions of those ideas. With the exception of software, copyright often provides weak protection for the owner of a technology.

2. Trade secrets are know-how, information, etc. that are valuable to the owner because they are confidential. Trade secret law gives owners the right to prohibit their misappropriation. Remember when licensing that trade secrets are generally destroyed by public disclosure. So, technologies that are protected primarily by trade secret law are sometimes difficult to market without disclosure, which can therefore destroy their value.

3. Patents, broadly speaking, protect technological developments (the claimed inventions) and give the owner the right to prohibit others from making, using, offering for sale, selling or importing products that embody the claimed inventions. In practice, patent rights are often the strongest protection for technology. This strength arises in part because the patent owner’s rights will not be diminished by disclosure or use of the inventions and independent conception and development of a technology is not a defense to patent infringement.

Possible IP transfers

The types of IP transfers, ranked roughly by amount of rights transferred, are: an assignment, an exclusive license, a non-exclusive license and a covenant not to sue.

The following are some key points practitioners should understand about the nature of these transfers:

1. An assignment is a sale. It is the transfer of the assigning party’s entire right, title and interest in particular personal property (unless the owner is making another party co-owner). Keep in mind that many (but not necessarily all) restrictions, such as attempting to limit future transferability of the assigned rights to third parties, will not be enforceable in the context of an assignment, notwithstanding the general tendency under U.S. law to respect freedom of contract. Courts over the years have concluded that many such restrictions are inconsistent with basic property law and against public policy as being, for example, improper transfers of partial title or improper restraints on alienation.

The name the parties give to the transaction will generally not be dispositive. When faced with inconsistent language, courts have been known to recast transactions so that the language is permissible. This could mean, for example, reforming a purported assignment into an exclusive license so that the intended restrictions would then be permissible, or vice versa. In addition to the obvious implications regarding title, disputes regarding the distinction between assignment and exclusive license may also arise in the context of the recipient’s standing to sue a third party for infringement.

2. An exclusive license may not be as “exclusive” as you think. In general, an exclusive license indicates that the licensor will not grant other licenses that have the same rights within the scope or field covered by the exclusive license. In addition, under U.S. patent law, an exclusive license is generally understood to mean that the licensor cannot itself practice the licensed rights. In other contexts, however, a simple grant of “exclusivity” can be ambiguous as to the rights of the licensor.

The best practice, therefore, is for the license agreement to explicitly state the parties’ intentions regarding any retained rights of the licensor and the licensor’s obligations not to license third parties or otherwise compete with the licensee. Also, be careful using the term “sole”—the unfortunately common phrase “sole and exclusive license” can be a contradictory statement because the concept of a “sole license” in proper usage means that, while the licensor may not make similar grants to other licensees, the licensor may not be limited in its own exercise of the granted rights.

3. License grants (both exclusive and non-exclusive) encumber title and will therefore “run with” any transfer of the underlying intellectual property to a third party. This is a basic element of intellectual property law that seems not to be that well known. A covenant not to sue, while in some aspects identical to a non-exclusive license, is considered personal to the grantor and therefore does not run with the intellectual property.

In subsequent articles we will review the anatomy of a technology license agreement and many of the key provisions such as license grants, financial terms, ownership and IP enforcement. We also will address transferability, change of control and bankruptcy considerations.

Contributing Author

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Mark Malven

Mark Malven is the leader of the technology transactions practice at Dykema Gossett PLLC and immediate past chair of the IT Law Section of the...

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