This series addresses the needs the legal community has for technology licensing knowledge by laying out basic concepts, identifying traps for the unwary and offering drafting and negotiating tips. Click here to read parts one, two, three and four.
In every licensing transaction, the parties need to address how they will deal with third parties who may be infringing the underlying intellectual property. Both parties usually have an interest in addressing infringement, but the specifics of their interests can sometimes vary significantly. In addition, the case law is filled with alleged third-party infringers challenging a party’s standing to sue them. To avoid uncertainty and the related litigation costs, it is critical for a license agreement to provide clarity regarding the parties’ respective enforcement rights against infringers.
When negotiating these enforcement rights in the context of a license agreement, there are two central, and interdependent, issues—standing and control. The parties also need to address who will pay and how any proceeds will be treated.
As a foundational matter when drafting the enforcement provisions, counsel needs to understand the standing requirements to bring suit against an alleged infringer. In general, standing follows the type of grant (e.g., assignment, exclusive license or non-exclusive license) and the enforcement provisions need to fit within that framework.
The Federal Circuit has been called upon many times to analyze the various bundles of rights granted to a party to determine whether that party can bring an enforcement action. In doing these analyses, the Federal Circuit has identified three general categories:
- Assignees or exclusive licensees who have received “all substantial rights” in the applicable patent (and who therefore have enough rights to sue alone)
- Exclusive licensees who have fewer than “all substantial rights” in the patent (and who therefore have enough rights to sue, but only if they join the patent owner)
- Nonexclusive or “bare” licensees (who do not have sufficient rights to sue even if the patent owner is joined)
The Federal Circuit, in Alfred E. Mann Foundation for Scientific Research v. Cochlear Corp., 604 F.3d 1354 (Fed. Cir. 2010), listed the following factors to consider when doing this categorization:
- The transfer of an exclusive right to make, use and sell products under the patent
- The scope of rights to sublicense
- The nature of the reversion of rights upon breach
- The licensor’s rights to share in the proceeds from enforcement
- The duration of the license
- The licensor’s rights to supervise and control the licensee’s activities
- The licensor’s obligation to continue paying maintenance fees
- The nature of any limits on the licensee’s right to assign its interests in the patent
The court noted, however, that frequently the most important factor is the nature and scope of the parties’ respective enforcement rights as they have attempted to define them in the license agreement.
The Federal Circuit in WiAV Solutions LLC v. Motorola, Inc., 631 F.3d 1257 (Fed. Cir. 2010), added a further gloss to the foregoing analysis by focusing on whether a licensee holds at least one of the “exclusionary rights” granted under the Patent Act. If the party does not hold any exclusionary rights, then it does not suffer any legal injury from infringement and, therefore, has no standing bring suit.
Control and Financial Terms
The control, decision-making and financial terms related to enforcement actions often are overlooked or treated inconsistently in license agreements. The following are some of the questions the parties to a license agreement should answer in their agreement:
- Who decides whether or not to sue? (Sometimes one party will have the first shot, and the other party will have the right to step in if the first party declines)
- Who pays for the litigation?
- If the licensee pays for the litigation, can it recoup/offset costs from royalty payments?
- Who gets the proceeds? Are royalties paid on the award?
- If a party sues, can it name the other? If yes, then who pays that party’s costs?
- If a party sues, what are the other party’s rights to participate? Must the other party consent to a settlement?
Consider a covenant that the parties will cooperate (including by joining as a named party if necessary to confer standing) and will refrain from contrary actions (such as granting a waiver or a license to the alleged infringer).