Journal of the Licensing Executives Society

DECEMBER 2016 LES NOUVELLES 2016DECEMBER NOUVELLES LES lleess NNoouvuveelllleess

Translations JOURNAL OF THE LICENSING EXECUTIVES SOCIETY INTERNATIONAL Patent Mapping Strategies Patent MappingCopyright IP Legal advice Renewal Management Descriptions Domain Names Domain Names Attorneys Flat fee prosecution Descriptions Patent Annuities IP Contracts Flat fee prosecution Copyright Domain Names RenewalEP Management - Validation BrandsIP Contracts IP Due Diligence Software Solutions Filings Copyright PCT - Nationalizations PatentPCT - Nationalizations Seminars IP Due Diligence Domain Names Trademark Descriptions Descriptions Filings Mapping Descriptions Strategies Renewals Filings Patent Mapping Copyright Patent Mapping Prior artDescriptions searches Volume LI No. 4 Designs Copyright IP Legal advice December 2016

Brands Software Solutions IP Contracts Trademarks Docketing EP - Validation DIAMS iQ DIAMS iQPatents Trademarks IP Contracts Trademarks Seminars Software EP - Validation Copyright Portfolio Analysis Recordal ServicesDesigns Trademarks Patent Mapping Portfolio Analysis Portfolio Analysis PCT - Nationalizations DIAMS iQ Patents Descriptions Flat fee prosecution

Patent Mapping Solutions Software Solutions searches Prior art Flat fee prosecution Strategies Designs TranslationsDomain NamesMonetization

Patent Filings Mapping IP Legal advice Copyright Translations Copyright Brands Trademarks Seminars Brands Filings Contracts Designs Designs Domains Copyright StrategiesTrademarks Prior art searches

IP Legal advice Descriptions Filings Domain Names Brands Copyright Trademarks Brands

Attorneys Annuity services Diams iQ Diams Descriptions Copyright Trademarks PCT - Nationalizations IP Contracts Strategies Descriptions Prior art searches Filings Descriptions Flat fee prosecution Trademarks Trademark Strategies Renewal IP DocketingEP - Validation Consulting Management Copyright DIAMS iQ Renewals Advancing the Business of Intellectual Property Globally Copyright Filings Patent Annuities Patents Brands IP Contracts Translations EP - ValidationFilings Software Solutions EP - Validation IP Due Diligence Patent Annuities IP Contracts Renewal IPManagement Docketing Copyright Filings Descriptions PCT - Nationalizations Domain Names Translations Designs Filings Writing Licenses And Other Agreements—Some Tips Based On Over Fifty Years Prior art searches Trademark DIAMS iQ IP Contracts Renewals PatentsSolutions Software Strategies Copyright IP Docketing Translations Designs IP Legal advice DIAMS iQ Of Mistakes And Confusion (Mostly Others’, But A Few Of Mine)

Filings Domain Names

Descriptions Copyright Filings Brands SoftwareBrands Solutions EP - Validation Consulting Designs CopyrightFilings Descriptions Patent Patent Annuities Docketing Mapping Brands ROBERT S. BRAMSON — Page 204

IP Contracts Trademarks Prior art searches Prior art

Software Solutions Software Flat fee prosecution PCT - Nationalizations - PCT IP Legal advice

IP Due DiligenceIP Due Patents Consulting Software Solutions Portfolio AnalysisiQ DIAMS DIAMS iQ

Translations An Experience-Based Look At The Licensing Practices That Drive The Cellular Consulting IP DueCopyright Diligence DIAMSStrategies iQ IP Contracts Designs EP - Validation Filings

Patent Mapping Prior art searches Patent Valuation Patents JOURNAL OF THE LICENSING EXECUTIVES SOCIETY INTERNATIONAL INTERNATIONAL SOCIETY EXECUTIVES LICENSING THE OF JOURNAL Communications Industry: Whole Portfolio/Whole Device Licensing

Flat fee prosecution DIAMS iQ Validation - EP PCT - Nationalizations Patents Copyright Patent Annuities Designs Seminars Filings IP MARVIN BLECKER, TOM SANCHEZ AND ERIC STASIK — Page 231 Flat fee prosecution Software Solutions

Descriptions Patents EP - - Validation EP Trademarks

Flat fee prosecution

Strategies

IP Due Diligence Due IP Translations Seminars Trademarks Patents Brands Flat fee prosecution

Domain Names Domain DIAMS iQ IP Legal advice The Practicalities And Pitfalls Of The Smallest Saleable Patent Practicing Unit Brands Domain Names Doctrine: A Review Of Teece And Sherry

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Filings ANNE LAYNE-FARRAR — Page 244 PCT - Nationalizations To What Extent Are University IP Policies Legally Binding? Part 2: Students PHILIP MENDES — Page 249 Application of Enterprise Risk Management (ERM) Principles To Patent Freedom To Operate (FTO) Analysis: A Novel “IP-RM” System GILLIAN M. FENTON — Page 256 NSFW: Naked Licensing And Uncontrolled Trademark Use LUKE S. CURRAN — Page 266 Licensing In Cosmetics: A Practical Approach JEAN-YVES LEGENDRE — Page 269 Opportunities And Challenges For Expanding Technology Transfer In United Arab Emeriates (UAE) AHMED ALOSI, PH.D., JOHN FRASER AND MICHAEL J. MARTIN — Page 274 Allocating Risks And Rewards In Collaborative Agreements Using The Financial Structure MATTHEW W. SAGAL AND GENE SLOWINSKI — Page 282 Bankruptcy-Related IP Valuations:Consider The Use Of Market Approach ROBERT F. REILLY — Page 289 Patent Royalties And Competition Law: The Genentech Judgment Of The Court Of Justice Of The European Union PATRICIA CAPPUYNS AND JOZEFIEN VANHERPE — Page 293 Recent U.S. Court Decisions And Developments Affecting Licensing JOHN PAUL AND D. BRIAN KACEDON — Page 296 $62.50/Issue Order your copy today! Guide to Intangible Asset Valuation by Robert F. Reilly and Robert P. Schweihs

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Writing Licenses And Other Agreements1—Some Tips2 Based On Over Fifty Years Of Mistakes And Confusion (Mostly Others’, But A Few Of Mine) By Robert S. Bramson

The Skills Required for Negotiating and tional law and many other areas of the Drafting Contracts ■ law which may apply Robert S. Bramson, rafting any sort of agreement requires three Bramson & Pressman, skillsets. Just being a smart lawyer isn’t enough. • Not understanding all DThe skillsets are: business implications of Partner, • Drafting skills—Writing a clear, concise, accurate the agreement terms Philadelphia, PA, USA and comprehensive agreement In this paper, I will give E-mail: [email protected] • Legal skills—Understanding all of the legal prin- you some tips and exam- ciples which go into negotiating, drafting and en- ples to guide you in draft- forcing a license agreement—contract law, patent ing better agreements. However, there is a lot about law, labor law and bankruptcy law and, of course, drafting and negotiating agreements that can only be much more learned by experience. I hope that this sharing of my experience will help. • Business skills—Knowing and understanding the business area for which the agreement is being The Term Sheet drafted and the potential business3 implications of I often like to start drafting with a Term Sheet, if the transaction it is a negotiated agreement (as opposed to starting The major problems in agreement drafting are: with one party’s form, as is sometimes unavoidable • Ambiguity when dealing with a behemoth company). Writing a draft agreement first often loses issues in the verbiage, –Such as circular definitions and redundancy— makes review more complex and therefore harder, and saying the same thing different ways—which cre- wastes time when you have to change language. ate ambiguity • Undue complexity (creating ambiguity) I like to include in the Term Sheet all of the definitions I want to use in the agreement. Once all defini- • Verbosity (creating ambiguity) tions and basic terms are agreed in the Term Sheet, • Just plain sloppy language writing the first draft is more focused, much easier and • Not understanding all applicable aspects of con- much less likely to be contentious. tract, labor, IP, bankruptcy, (sometimes) interna- A Term Sheet usually is not intended to create a binding contract. Therefore, the Term Sheet should be stated 1. This paper was initially written for “license agreements” to be non-binding. See A/S Apothekernes Laboratorium only. However, many of the principles applicable to license agree- v. I.M.C. Chemicals, 873 F.2d 155 (7th Cir. 1989) (re ments are also applicable to other agreements, so I have re-writ- letters of intent). Caveat: It is not always clear whether ten the paper accordingly. However, I have retained exemplary a document is a letter of intent or a binding contract, so provisions regarding license agreements when that seemed use- it is desirable to state that “(t)his letter is a statement of ful. For example, an option as to a patent license has the same basis structure as an option for other rights. our intent only and is not a binding contract.” 2. This paper is an overview, not a scholarly analysis, and is not If you need a confidentiality provision in the Term an exhaustive coverage of all relevant drafting concerns and con- Sheet (a separate CDA is often, but not always, used), siderations. That would require a book. The paper does present that clause—plus relevant boilerplate, like governing the principle concerns and observations I have seen and made laws, if included—should be stated to be binding and in my fifty plus years of licensing and corporate practice. For an excellent detailed analysis of general contract drafting principles, the Term Sheet should state that. See Addendum A for see A Manual of Style for Contract Drafting, by Kenneth A. Adams a sample Term Sheet, which also addresses confidenti- (2013, American Bar Association, Business Law Section). ality. This Term Sheet will also give you some insights 3. And, of course, different legal implications. For example, a into how I like to draft license agreements, with clean pharmaceutical license has many business and legal differences definitions, headings for covenants, short and simple from a semiconductor technology license. And many similarities. “sound bites,” etc.

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The First Draft –Courtesy requires sending a redlined Word I like to take control of the first draft. My goal is to document that shows all changes made (plus a draft quickly a comprehensive agreement that is fair to clean copy, if you wish). both parties and should be acceptable with minimum • When responding to a draft with a lot of issues, I negotiating and editing. When I write a first draft, I prefer to send the other side an “issues list” (in- do not like to make it too one-sided. That’s a rookie cluding an explanation of our position). For an ex- approach (although sometimes it is just a response to ample, see Addendum B. the client’s demands).4 –I request an issues list when I send out the Too much one-sidedness invites controversy, in- first draft. sults the other side and is not likely to be productive. –I find that incorporating changes in a draft, When I write the first draft, I think about the issues when there are a lot of contentious points or the other side cares about and what is reasonable to ambiguities, just wastes time and obfuscates the both parties under the circumstances. Assume the substance. other side is competent and experienced; that is usu- –Resolve the fundamental issues first, by e-mail or ally the case anyhow. phone then incorporate the changes in your draft. I certainly will include a few provisions that are • Don’t hesitate to use the phone or an e-mail to tilted toward my client and that the other side might the other party if you’re not sure of something in (perhaps will) object to; but that is OK and expected. the draft. I feel it is easier to get a few tilted provisions (in your client’s favor) by the other side than if the first draft is Some General Drafting Pointers completely one-sided. Also, it’s always good to include • My Drafting Style. The Term Sheet of Adden- a few “gimme’s,” so you have something to give away dum A and Option language of Addendum C are in the normal give and take of a license negotiation. good examples of how I draft agreements. I use Using Forms brief, concise definitions and break the covenants up into easily readable “sound bites,” with subpar- I certainly use forms—my own and others’. Forms agraphs and sub-subparagraphs. I also like to use are great as check lists, to make sure you haven’t left headings for each paragraph and sometimes for anything out, and let you see how another drafter han- subparagraphs. Headings make it easier to navigate dled the clause you are dealing with—you can often the license agreement. learn from that. • Brevity. Try to be as brief as possible, while stating Be careful about the form of agreement or clause you the covenant or definition clearly and accurately. It start with—whether in a form book, from the Internet is often easier said than done, and I often revisit or in a company or law firm file. Each document repre- my drafting and edit it for brevity and clarity. sents a particular point of view or a negotiated, compro- mised view, which may not suit your client’s need.5 –Some lawyers think verbosity is synonymous with legal elegance; it’s not—it is unclear (and Exchanging Your Comments on Your Counter- potentially troublesome) writing. part’s Draft or Re-draft • Tip: I have—on occasion6—acceded to an ambig- Here are a few suggestions concerning comments on uous provision drafted by the other side, when I the other party’s draft: know that I won’t be able to get the other side • Please, don’t send pdfs! to re-draft the provision as I would like. It’s “half a loaf is better than none.” An example is an indemnity clause in a license to a large company. It 4. I once walked into a patent litigation settlement meeting is often tricky to get the indemnity limited, but if (my client was the plaintiff/potential licensor) with a prepared it’s ambiguous, that may be acceptable. draft I had written that was based on many similar agreements I had done in the past. It really was fair and should have been –I even delete “in the event that” and substi- acceptable with relatively few changes. The defendant/licensee tute “if”; it’s pretty anal, but I find it useful. In sent my agreement to its Australian counsel (the suit was in Aus- most (but not quite all) situations, these terms tralia) and they started over and countered with a perfectly hor- have the same meaning. This may be overkill to rible draft. We agonized over that for weeks until U.S. counsel was brought in, at which time we easily resolved all open issues in a day or two. 6. One situation I remember, the ambiguous clause was an 5. In one recent situation, patent counsel (with a large general indemnity clause and the licensee was a very big company. I knew practice firm) for the other party provided a first draft of a license I wouldn’t get that clause—from their form—changed, but it was agreement which omitted the royalty audit clause. It had to have so ambiguous that I left it alone. In that case, ambiguous was been sloppy cutting and pasting. better than awful.

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some, but it is part of how I discipline myself sign, transfer and convey,” “remise, release, dis- to be brief. charge and quitclaim,” “claims, demands, actions, • Using the “Enter” and “Tab” Button. Addenda lawsuits and causes of action,” and so on, be sure D and E show a couple of license provisions, an you know what each word means. Beware the assignment provision and a “foundry clause,”7 that maxim inclusio unius est exclusio alterius.9 were originally written as non-stop, unbroken par- –Strings evolved in the common law days of agraphs and illustrate how they look when simply “searching demurrers,” which are not part of our broken into subparagraphs and sub-subparagraphs, modern legal system. A suit could be thrown out which makes them much easier to read and un- of court for failure to correctly plead a common derstand. Often, when reviewing someone else’s law cause of action, sometimes by simply using draft of a lengthy paragraph, I start by hitting the a wrong word or omitting a key word. So it was “Enter” key to better read and understand the par- important to get the words right; hence, the prac- agraph and then I edit the paragraph in that form, tice of using multiple words for the same thing. if necessary. –I don’t use “sell, assign and convey” in a patent • Use of Personal Pronouns. It is common to see assignment. I say “hereby assign” the Patents personal pronouns used in confusing ways. For (properly defined to include CIPs, etc.), but I example, a License Agreement states: “Licensor include the needed extra language to include grants to Licensee a non-exclusive license under in the assignment the rights to sue and collect the Patents to make, have made…Licensed Prod- damages for past infringements. ucts, including the right to sublicense its custom- –The worst string I can recall was in a settle- ers.” Does “its” refer to Licensor or Licensee? You ment agreement,10 in which the author used the can make a good argument that “its” refers to Li- string “actions, causes of action, suits, rights, censee, but there is no argument when you say “to debts, dues, sums of money, accounts, ac- Licensee’s customers.” countings, reckonings, bonds, bills, spe- • Simplicity. Write the agreement in simple, clear cialties, covenants, contracts, controver- 21st century language. sies, agreements, promises, indemnities, –Avoid 18th century phrases like “witnesseth” liabilities, variances, trespasses, damages, and “whereas.” They are archaic and add noth- judgments, extents, executions, claims and ing to the contract. demands, of every nature and description –Remember the ordinary meaning rule. Terms whatsoever, in law, admiralty or equity, or as in a contract are given their ordinary meaning a result of arbitration” in the release clause. unless the context clearly indicates otherwise. This language is not made up; it is real. This doc Citadel Holding corp. v. Roven, 603 A.2d 818 was submitted by an experienced litigator in a (Del. 1992). large firm in settlement of a pretty significant case. • Saying the Same Thing Twice. Sometimes an important concept is not easy to express clearly in • Exemplary Words—“such as,” “for example” and words. An example is most favored nations (licen- “including.” It is common (and often—if not al- sees) clauses. An experienced lawyer will simply ways—clarifying) in license agreements (and other contracts) to use exemplary terms, thereby creat- slog through the mud until he or she gets it right. 11 An inexperienced lawyer will often say the same ing a string. However, in one patent license case, thing two or three times in different ways,8 I sup- Lawler Mfg. Co., Inc. v Bradley Corp., 280 F.App’x pose in the (mistaken) belief that this is clarifying. 951 (Fed. Cir. 2008) (non-precedential), the court It isn’t. It simply creates ambiguity. held that the phrase “such as” (used in connection with a description of the royalty base when • Using the Plural. Be careful when using the plu- the licensed product—a valve—was sold in com- ral form of a noun. In one case, use of the plural bination with complementary products—“such as word “systems” was held to license multiple plants “an emergency shower or eyewash”) was limited of the licensee, not just one, as contended by the to the named complementary products and did licensor. See Southwire Co. v. ITC, 629 F.2d 1332 not apply when the valves were sold with custom (C.C.P.A. 1992). • Strings. If you must use “strings,” e.g. “sell, as- 9. The inclusion of one (word in a string) excludes others (that are not in the string). 7. Common in semiconductor technology agreements. 10. See the third paragraph in Addendum D. 8. You don’t believe it? I have seen it many times. 11. See the previous paragraph re strings.

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cabinets and piping fixtures.12 Although not clear See GTE Wireless v. Cellexis Int’l, Inc., 2002 U.S. with respect to “including,” at least one respected Dist. LEXIS 16203 (D. Mass. Aug. 15, 2002) (defi- commentator13 suggests that “including without nition which did not include future “Partnerships” limitation” may be used instead, but even that is was limited to Partnerships on the date of the not certain from the contrary case law.14 license agreement); reversed and remanded to Definitions allow introduction of parol evidence, 341 F.3d 1 I like to start a license agreement draft or Term (1st Cir. 2003). Sheet with a “Definitions” section. I find that to be Language Usage the easiest and best approach, although some put the It goes without saying that a clearly written contract definitions in an exhibit. should use proper grammar and punctuation. • The definitions should be accurate, clear and concise. • The Last Antecedent Rule. The Last Anteced- • For ease of access, put the definitions in alphabet- ent Rule is a rule of construction16 used to interpret ical order. statutes and often applied by the courts to interpret –Exception. If there are only a few definitions, contracts. The Rule states that modifying or qualify- I may put them in order of their flow,e.g. Li- ing phrases are only applied to the words or phrases censed Patents; Licensed Products; Gross Reve- immediately before them, and not to remote phras- nues; Net Sales. es, unless a common sense reading clearly dictates that the context or whole of the statute or contract • Avoid circularity between or among definitions. intends it to apply more broadly. –For example, do not define Licensed Products –An example: Employee assigns to Employer in terms of Licensed Patents and then define Li- 15 “all inventions, improvements or modifications censed Patents in terms of Licensed Products. related to employee’s employment.” Does “re- • Do not put covenants in definitions. Covenants be- lated to employee’s employment” apply only long in the body of the contract. to “modifications,” as the last antecedent rule –For example, in the definition of Net Revenue, could suggest? See Freedom Wireless, Inc. v. do not include a covenant to minimize returns. Boston Communications Group, Inc., 220 F. In Addendum D, the last phrase of the definition Supp. 2d 16 (D.Mass. 2002); Pandol Bros. v. of Gross Revenues includes the condition “Li- Indemnity Marine Assur. Co., 97 F.3d 1460 (9th censee uses its commercially reasonable efforts Cir. 1996) (unpublished). to obtain such recoveries when they become –One approach to avoid the uncertainty is available.” I would make this an affirmative cov- to write it this way: “each of the following, enant in the body of the contract. when related to Employee’s employment by –In the definition of Net Revenues, it is com- Employer: (a) inventions; (b) improvements mon in some industries to include a standard and (c) modifications.” deduction of 10 percent of revenues to take • General Grammar. As to proper punctuation, into account returns and allowances. I usually read Eats, Shoots and Leaves by Lynn Truss. include that in the Net Revenue definition. –Mind your present and future tenses. This • I prefer to put complete definitions in the Defi- can be important in areas like the definition nitions section; not “Licensed Product has the of “Affiliates” or “Subsidiaries” to ascertain meaning set forth in Section 7.5.” I don’t like whether past or future companies are included bouncing back and forth. in the license. • Affiliates. When defining “Affiliates” (or sim- Troublesome Words and Phrases ilar-meaning terms, like “Subsidiaries”), state Understand the meaning and application of the lan- whether the definition includes “past, present and guage you use. future” Affiliates and what happens when an “Af- filiate” ceases to be an Affiliate (as in divestitures). • Inventions. Every patent lawyer knows that an “invention” consists of two elements,17 “conception” and “reduction to practice” (which may be 12. So, although a royalty was payable as to the valves, it was not payable as to the “convoyed sales” of custom cabinets and piping fixtures. 16. See LeClerq, “Doctrine of the Last Antecedent,” 2 Jour- 13. Adams, “A Manual of Style for Contract Drafting,” nal of the Legal Writing Institute 81 (1996). §§13.270—13.278. 17. Getting into what is a “conception” and what is a “reduc- 14. Ibid. at §§13.277—13.278. tion to practice” is beyond the scope of this paper, but they can 15. You’d be surprised how often I see that. be found in any patent law treatise.

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an actual reduction to practice or a constructive by assign” when “hereby assigns” will suffice? reduction to practice, i.e. filing a patent applica- –As to licenses, see Imation Corp. v. Koninklijke tion on the invention). But in agreements which Philips Electronics N.V., 586 F.3d 980 (Fed. Cir. grant licenses or assign patent rights based on 2009). “inventions made in the ‘Project’,” does the grant This principle is important because future events, apply if the invention is only “conceived” (and not such as breach or bankruptcy, may affect the ability of reduced to practice) in the Project? Perhaps not the licensor to avoid the “future” license grant. (or at least you might have to introduce extrinsic • Representations and Warranties. Do you know evidence to clarify this ambiguity in the contract). the difference between “representation” and “war- I would write the applicable phrase as “inventions ranty”?19 Be sure to use the terms correctly. And conceived or reduced to practice in the Project.” when should reps and warranties be limited “to • Best Efforts and Comparable Terms. One good the best of its20 knowledge?” A “knowledge” rep example of potential confusion is the use of best and warranty should usually be qualified “with no efforts, best endeavors, reasonable efforts, com- investigation having been made or required to be mercially reasonable efforts and commercially rea- made,” in order to avoid an implied obligation to sonable efforts. In most U.S. courts, they have the make inquiry.21 same meaning, which is “reasonable efforts (under • Indemnify or Hold Harmless. Many contracts the circumstances).”18 So, I would use “reasonable have an obligation to “indemnify and hold harm- efforts” and avoid any uncertainty. less.” Is there a difference between the two –But the UK language equivalent is “best en- terms? Adams22 says no, and that “indemnify” deavors” and in the UK this is interpreted to alone is proper and sufficient. However, there is mean a higher standard of performance. Rhodia disagreement on this point. Adams suggests us- Int’l Holdings Ltd & Rhodia UK Ltd v. Huntsman ing “indemnify” only, but to couple the term with Int’l LLC (2007) EWHC 292 (Comm). “losses and liabilities.” –In a British Columbia, Canada, Supreme Court –Tip: On the subject of indemnities, if I repre- decision, “best efforts” was held to impose a sent the potential indemnitor, I propose that the higher obligation than “reasonable efforts.” At- indemnitor obtain product liability insurance mospheric Diving Systems, Inc. v. Hard Suits Inc., acceptable to the indemnitee and then insert a 89 B.C.L.R (2d) 356 (S.C. 1994). clause that limits the scope of the indemnity to the insurance coverage.23 • “Shall Grant” vs. “Hereby Grants.” Another concern is the use—in Joint Development Agree- • Guaranty. Is a “guaranty” of a sum of money a ments, Option Agreements and similar agree- guaranty of payment or a guaranty of collection? In ments with grants of future license rights—of a the first instance, the guaranty “kicks in” when pay- “shall grant” covenant (future tense) vs. a “hereby ment is not made on the due date. In the second, grants” covenant (present tense). This can be im- the guaranty does not “kick in” until the debt is portant when the licensor is in financial distress and the Trustee wants to void the license grant. 19. A “representation” refers to a current fact and a “warran- Use the present tense. ty” refers to a future fact. –See Board of Trustees of the Leland Stanford 20. Or “his or her.” Junior University v. Roche Molecular Systems, 21. In a major deal that requires an opinion of counsel, I Inc., 583 F.3d 832 (Fed.Cir. 2009) (“agree to as- often will insert unacceptably broad warranties in my form, so sign” is a mere promise to assign future rights). that I can understand the sophistication of opposing counsel The Leland Stanford case cites IpVenture v., Inc. (and the value of his or her opinion). I call this my “smoke out” v. Prostar Computer, Inc., 583 F.3d 1327 (Fed. strategy (it “smokes out” competence). Cir. 2007) (“interpreting ‘agree to assign’ as “an 22. At §§13.324—13.337. agreement to assign, requiring a subsequent 23. I negotiated a trademark license and manufacturing agreement with a major company. My client, a small compa- written instrument”). In contrast, the words “do ny, would manufacture the food product (this food product was hereby assign” have been construed as a present bubble gum) for the big boy. We were willing to give a product assignment of future rights. FilmTec Corp. v. Al- liability warranty and indemnity, but limit the scope of the in- lied Signal, Inc., 939 F.2d 1568, 1572-3 (Fed. demnity to a reasonable insurance policy purchased by my cli- Cir. 1991) (emphasis added). Why say “do here- ent. Counsel for the big company wanted unlimited indemnity. That was crazy. One mistake could have bankrupted my client. I held out on this point—it was too potentially devastating to 18. See e.g. cave in—and finally won.

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reduced to an uncollected judgment and the credi- the definition of “Most Favorable License Terms” tor has unsuccessfully attempted collection. That’s (or similar designation) is crucial. Addendum F is a a big difference. You prefer to say “guaranty of pay- clause I use; it is useful in some situations, but not ment,” because then the beneficiary of the guaran- where the applicable financial terms are different. ty does not have to pursue the collection remedies The clause itself is mostly procedural, dealing with to exhaustion. notification and acceptance of the “Most Favorable • Insolvent. “Insolvent” has two meanings: “insolvent License Terms.” in the accounting sense” (liabilities exceed assets) • Right of First Refusal. “Right of first refusal” is and “insolvent in the bankruptcy sense” (inability commonly misunderstood. “Right of exclusive nego- to pay debts as they come due). Often, “insolven- tiation” is usually preferable. In a right of first refus- cy” is an event of default, giving rise to a right of al (see Addendum G), the patent owner must first termination. But which “insolvent” is it? Many get a written offer (to license or buy the applicable companies have liabilities which exceed assets, patents) from a third party and then present that but are still viable operating businesses. If that li- offer to the party that is entitled to the right of first censee is your client, you don’t want to have to refusal. The third party must negotiate and enter argue about which meaning of “insolvent” applies, into the applicable license or purchase agreement because usually what is intended is “insolvent in with the patent owner, but the third party agree- the bankruptcy sense” and that is what the license ment has a clause providing that the patent owner should state. can first present the license or purchase agreement • Terms of Art. My client, a CPA, wanted to use to the party with the right of first refusal, which “standard cost” as a basis for purchasing licensed then has thirty or sixty days to accept or reject the products in a license and manufacturing agree- proposed agreement on the identical terms. Get- ment. I argued that “standard cost” was subjective ting a third party to negotiate the agreement (with and subject to dispute. A year later, there was a the attendant costs of patent evaluation, counsel, dispute, and my client found out that I was right. etc.) can be very inhibiting, because it can blow up –The same problem exists with royalties (or oth- by the exercise of the right of first refusal. er revenue shares) based on “net profits.” As a Most clients do not understand what a right of subjective term, it is subject to a lot of interpre- first refusal is and why it can be a bad deal. Often tation variations and game-playing.24 (perhaps always), after I explain, and tell them they The moral of the tale is that, no matter what the might prefer a six month right of exclusive negoti- “terms of art” are, either be sure you know and un- ation (see Addendum H), that is usually what they derstand them or rely on someone who does. And if opt to do. you rely on someone else, be sure that the file reflects • Option. There are a number of specific and defined that,25 just in case there’s a problem later. terms that are needed to create an option. See Ad- Troublesome Clauses dendum C. It is easy to draft an option clause, but what most clients (and some lawyers) do not un- • Most Favored Nations. Most Favored Nations 26 derstand is that an option without detailed terms (MFN) clauses are troublesome because the fi- attached is no option, but rather an invitation to nancial terms of licenses are highly variable, so that negotiate or litigate. No doubt, you can agree to an option with unresolved terms, but if you can’t agree on the terms now, why will it be easier later? 24. I dealt with this issue in a movie investment deal. My client invested in a movie production company and was entitled Sometimes, the option arises in a development to a share of the “Net Profits” from a very successful movie. In agreement, as to which technology to be devel- that case, the producers incurred costs which they charged to oped, its value and the nature and scope of applica- multiple movie projects, thus reducing the “Net Profits” and my ble patent and other IP rights, is hard to predict. In client’s share. We needed a lawsuit and discovery to uncover that case, all you can agree to is future negotiation the game-playing and get the client his fair rewards. In patent 27 licensing, it is usually easier (and quite common) just to take of the applicable license terms. (as licensor) a royalty based on “Gross Revenues” or “Net Rev- • Exclusive v. “Sole and Exclusive” Licenses. enues” (after deduction of limited, easy-to-verify costs, such as Know the difference between an “exclusive” li- “returns and allowances”). 25. In the “standard cost” situation, I had put a CYA memo 27. In that situation, I like to provide that the license vests in the file and copied the client. When a problem arose two immediately and that the applicable royalty terms are effective years later and the client blamed me, I pulled out the memo “ab initio.” I also like to provide some guidance to the criteria to and covered my A. be used to determine the applicable royalty (like development 26. Sometimes called Most Favored Licensee. payments by the prospective licensee).

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cense and a “sole” license? A “sole” license is ex- secrets and one percent allocated to the patents? clusive to the licensee but the licensor retains the Is that a fair allocation, if agreed to by the parties? I right to practice the licensed patents. In an “exclu- cannot be certain, so to deal with this conundrum, I sive license” the licensor retains no rights to prac- use the “severability clause” of Addendum J, which I tice the patented inventions. A “sole and exclusive” call a “Marvel Clause.” license is the same as an “exclusive license,” and • Implied Rights and Obligations. Consider rights therefore “sole and” is redundant. that may be implied. For example, in an exclusive –When granting an exclusive license, the grant patent (or other) license, there is an implied “best should be “the exclusive license” under the pat- efforts” obligation to exploit the licensed technolo- ents, etc., not “an” exclusive license. “An” sug- gy; “best efforts” means “active exploitation in good gests that the exclusive license is somehow lim- faith.” Western Geophysical Company of America v. ited and creates ambiguity. Even if the exclusive Bolt Associates Inc., 584 F.2d 1164 (2d Cir. 1978). license is limited to a field of use, it is still “the Compare Permanence Corp. v. Kennametal Inc., 11 exclusive license” for the field of use. USPQ2d (E.D. Mich. 1989) (the implied license is negated by up-front or annual minimum payments). • Future Royalty Determinations. If royalties are to 28 As to trademarks, see Wood v. Lucy, Lady Duff Gor- be negotiated at a later date: don, 222 N.Y. 88, 118 N.E. 214 (1917). The best –Provide that the license vests upon request of efforts obligation may be negated or limited. There the licensee (not when the license terms are de- is a plethora of “best efforts” cases among the termined, which could involve litigation) and the states (often in real estate agreements), with slight- royalty is then payable ab initio, so that—if there ly different definitions of the term, so it is best to are delays in determining the applicable royalty— define the term and its obligations. there will not be a commercial delay; and • Sharing Sublicensing Revenue. I have seen many –To give the judge or arbitrator some guidance, license agreements which permit sublicensing and specify the parameters on which the royalty is to provide that the licensor will receive X percent of be determined, such as: Net Revenue of the licensee from sublicensees. But • financial contributions of licensor vs. licensee; the licensee will be receiving a royalty of Y percent • significance and scope of the IP; of the sublicensee’s New Revenue. If X and Y are each 10 percent, the Licensor will receive one per- • industry comparables. cent (10 percent x 10 percent) of the sublicensee’s –If there is a future license grant (as to inventions Net Revenue. That’s not fair. A more usual formula not yet developed, which is necessarily important is that licensor gets 50 percent of licensee’s Net in technology development agreements), use the Revenue from sublicensees. The 50 percent is obvi- “hereby grants” form, rather than “shall grant.” ously negotiable, but it is usually 40 percent to 50 See Imation Corp. v. Koninklijke Philips Electron- percent to the licensor. ics N.V., supra. • Apportioning Royalties. Sometimes a license agree- • Marvel Clauses. The recent Supreme Court de- ment is entered into and there is a possibility that cision in Kimble v. Marvel Entertainment, LLC, 576 the licensee may need to license other patents from U.S. __, 135 S.Ct. 2401 (2015), affirmingBrulotte third parties. This often happens in the pharmaceu- v. Thyss, 379 U.S. 29 (1964), holding it is patent tical industry, in which the licensee licenses com- misuse to require payment of a royalty after the pound A, but may sell products that include com- patent expires. However, this principle does not pound A and one or more other licensed compounds. apply to trade secret licenses, as to which royal- What happens when a licensee or sublicensee licens- ties may be paid indefinitely. See Aronson v. Quik es a technology and later licenses other technology Point, 440 U.S. 257 (1979). So, in a hybrid patent to make the product better, faster, cheaper, etc.? It and trade secret license, the royalties may be split may (or may not) be appropriate to “apportion” the between the patent royalty—which ends with the specified royalty rate between or among licensors of patent expiration—and the trade secret royalty— different technologies (or improvements to the same which can continue indefinitely. But what is an ap- technology. Addendum I is an example of a clause I propriate split? If the aggregate royalty is, say, five use. But remember, this is favorable to the licensee, 29 percent, can four percent be allocated to the trade because it limits the total royalty payable but not

28. This is common in Joint Development Agreements, when 29. Contrast “apportionment” with “royalty stacking,” in the parties don’t know what inventions will be made in the fu- which multiple patents apply to a product (like a smart phone) ture and their commercial value. and the royalties can be cumulative.

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to the licensor, so it is something you can do, • Entire Agreement (Integration) Clauses. When not necessarily something you should do. the parties have reduced their agreement to an in- • The Defend Trade Secrets Act (“DTSA”). tegrated writing (by the use of a so-called “integra- On May 11, 2016, the DTSA became law. It tion” or “entire agreement” clause), evidence of includes a requirement that employers notify prior correspondence, statements, drafts and oth- all employees and consultants with contracts er extrinsic evidence is not admissible to contra- entered into or updated after May 11, 201630 dict or modify the terms of the agreement, except of his or her “whistleblower rights.” If the em- as necessary to prove fraud. Restatement (Second) ployer does not provide the requisite notice to of Contracts §215. See, e.g., American Bank and an employee or consultant, “the employer may Trust co. of Pennsylvania v. Lied, 487 Pa. 333, 409 not be awarded exemplary damages or attorney A.2d 377 (1979). However, the integration clause fees”31 in a lawsuit for misappropriation of trade does not negate the implied best efforts obligation secrets by that employee or consultant. This in an exclusive license. Havel v. Kelsey-Hayes Co., raises the question: “What if the misappropri- 445 N.Y.S.2d 333 (App. Div. 1981). Extrinsic evi- ated trade secrets are those of your company/ dence is admissible to clarify an intrinsic ambigui- client, disclosed (to the employer) under the ty in the contract. Mid-West Conveyor Co. v. Jervis license (or other) agreement?” It is prudent32 B. Webb Co., 39 USPQ 2d 1754 (10th Cir. 1996). to insert a warranty in your license agreement • Successors and Assigns; Assignability (by con- to the effect that “each Party has complied tract or operation of law) of Exclusive and with 18 U.S.C. §1836(b)(A).” Of course, many Non-Exclusive License Agreements. Standard agreements have generic “compliance with “successors and assigns” language will not allow a laws” clauses, but if you don’t want a breach successor by merger or acquisition to succeed to a claim against your licensor or licensee for fail- non-exclusive license, unless specifically permitted ing to comply, you should include this warranty by the license. See Rhone-Poulenc Agro S.A. v. DeKa- in your agreement, to make clear the need for lb Genetics Corp., 284 F.3d 1323 (Fed. Cir. 2002). compliance with this DTSA provision; of course, –A non-exclusive license is a “personal” (to the the clause cuts both ways, so your client needs licensee) right and is therefore not assignable to comply with the DTSA as well! (unless assignment is agreed to by the licensor). Boilerplate Hapgood v. Hewitt, 119 U.S. 226 (1886). The standard clauses at the end of a license –A non-exclusive license is often likened to a “cov- agreement are often misunderstood and glossed enant not to sue,” except that sale of a product over. Be sure that you understand and include all covered by a non-exclusive license exhausts the relevant boilerplate clauses. Some examples: patent right and therefore “immunizes” the pur- • Confidentiality Clauses. It is common to per- chaser of the licensed product from infringement mit Confidential Information to be disclosed to of the licensed patent. In the absence of contrary “employees of and consultants to the Receiving contract language,35 the merger of a non-exclu- Party that have a need-to-know in connection with the performance of the Receiving Party’s 33. A company licensed its patent portfolio to Microsoft obligations under this Agreement…” I will as part of a settlement of a patent infringement suit in which often add in that clause the right of access to Microsoft became a major shareholder of the company. The license agreement had a confidentiality clause which included Confidential Information to “entities that are the “terms and conditions” of the license. When we tried to sell engaged in due diligence studies in connection the company’s portfolio, we needed to disclose the Microsoft with a potential merger or acquisition of the license, so any prospective purchasers could understand that Receiving Party or the purchase of some or all encumbrance. We asked Microsoft for permission to disclose of the Licensed Patents.”33 This added language and it refused. I don’t know why; the license agreement was will not always be acceptable34 to your compa- very standard and its terms could be inferred, but inferring and ny/client or the other side, but it should always knowing are very different in a patent sale environment. be considered. 34. For example, if your company/client is concerned that the potential acquirer is a competitor and could learn its confidential information that way. 30. 18 U.S.C. §1836(b)(A). 35. So, the usual solution is to include language in the non-exclusive license agreement—usually in the successors and 31. 18 U.S.C. §1836(b)(C). assigns clause—permitting the assignment of the license agree- 32. Since each party to a license agreement can disclose ment “in connection with the merger of licensee or the sale trade secrets to the other, it may be prudent for each party to of all or substantially all of the business to which the licensed favor inclusion of this DTSA warranty. patents relate.”

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sive licensee with a third party will terminate the –In addition, so-called “ipso facto” clauses are license. See Ziff, The Effect of Corporate Acquisi- not enforceable in bankruptcy under 11 U.S.C. tions on the Target Company’s License Rights, 57 §365(e)(1). The Business Lawyer 767 (2002); SQL Solutions, –For a 365(n) clause, see Addendum J. Inc. v. Oracle Corporation, 1991 U.S. Dist. Lexis • Governing Laws. If the contract is governed by 21097 (N.D. Ca. 1991). This is even true when the law of a state other than the one in which you the licensee is subject to the Bankruptcy Laws. are licensed, note that fact when advising your cli- Everex Systems Inc. v. Cadtrak Corp., 89 F.3d 673 ent. Also, obtaining venue may be important, so in- (9th Cir. 1996). clude a covenant agreeing to venue for lawsuits and –As to exclusive patent licenses, the trend is to- allowing service of process by mail or pre-paid cou- ward treating exclusive patent licenses the same rier service, to avoid the need for personal service. as non-exclusive patent licenses as to transfera- • Notice. If you do provide for delivery of notice by bility by merger. See ProteoTech, Inc. v. Unicity mail, “certified mail” (the green cards and green Int’l Inc., 542 F.Supp. 1216 (W.D.Wash. 2008) numbers) are for domestic mail only (mail with des- and In re Hernandez, 285 B.R. 435 (Bankr.Ariz. tinations in the United States). When sending for- 2002). However, good old California seems to go eign mail and you need a “return receipt” to verify the other way, Superbrace, Inc. v. Tidwell, 21 Cal. receipt of the package or envelope, you will need Reptr. 3d 404 (Cal.Ct.App. 2004) and White v. to send the package or envelope by “registered Hitachi Ltd., 2008 WL 782565 (E.D.Tenn 2007). mail.” I prefer “prepaid express delivery service.” –The bottom line is to make clear in the succes- • Patent Marking. Patent marking is important to the sors and assigns clause whether the licenses or licensor, if it ever wants to assert its patents against the agreement can be transferred to “successors infringers and collect damages for past infringe- or assigns.” ments. 35 U.S.C. §287. For a marking clause, see –I have seen successors and assigns clauses Addendum L. It is easy for a licensee to forget to use which permitted transfer of the rights to suc- proper marking. The licensee may be in breach of cessors, “subject to the consent of the licensor, the license agreement if it fails to consistently use not unreasonably withheld.” But then you get proper marking, so when you are on the licensee into the ambiguity of what constitutes “unrea- side, you need to consider whether the licensee will, sonably withheld,” so it is preferred to avoid in fact, comply with the marking clause. that usage. In a License Agreement with a Foreign • Termination for “insolvency” or “financial con- Company dition.” Prior to the adoption of Section 365(n), a In international transactions, understand the legal bankruptcy trustee (for a licensor) could “reject” consequences of the parties’ rights and actions in (terminate) an “executory” intellectual property li- 36 the other jurisdiction, notwithstanding governing cense. So, Congress adopted 11 U.S.C. §365(n), laws clauses. under which a licensor in a bankruptcy proceeding may not “reject” a license agreement. Some Examples: 37 –Also, it appears that a licensee/debtor may not as- • In Germany, under the German Employee’s Inven- sign a license agreement under “applicable federal tions Act (EIA), an employer must obtain an assign- law.” 11 U.S.C. §§ 365(c)(l)(A) and (B). See Pension ment of a patentable invention and the inventor is Benefit Guaranty Corp. v. Braniff Airways. Inc., 700 entitled to compensation for the commercial use F.2d 935 (5th Cir. 1983), reh’g denied, 705 F.2d of his (or her) invention, even when owned by the 450 (1983). employer. If a licensee commercializes an invention made (or, in the case of a Research and Develop- –Think about whether a U.S. court will enforce the ment Agreement, to be made) by a German em- punitive action of a foreign bankruptcy trustee. See ployee, who pays the employee compensation? The Jaffé v. Samsung Electronics Co., 737 F.3d 14 (4th licensor/employer or the licensee? The contract Cir. 2013), cert. denied 135 S.Ct. 66 (2014) (where should specify this obligation and identify who the licensee succeeded in sustaining the license, pays the employee. notwithstanding its attempted termination—as permitted by German bankruptcy law—by Jaffé, who was Qimonda’s German bankruptcy trustee). 37. I am advised that Japan and Korea have similar statutory obligations, and there may be other countries. I do not purport to be expert on this point, so you should check with local counsel when dealing with a company which has relevant employees 36. And other “executory” contracts. in other countries.

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• In Joint Development Agreements, there can often (3) was rightfully in the possession of Receiver be joint development and therefore joint owner- prior its disclosure by Discloser; ship of patentable inventions. Joint ownership has (4) was disclosed to Receiver on an unrestricted different consequences in different countries; most basis from a source not known to be under a countries’ laws are not like the U.S. and require duty of confidentiality to Discloser; or sharing among joint owners of each joint owner’s (5) is required to be disclosed by law, regulation sublicensing revenues of jointly owned patents, un- or court order or for filings with the FDA. less contractually agreed otherwise. d) “Licensed Product” means ______products, • In a governing laws clause, it is desirable to have the manufacture, use, importation or sale of the foreign company agree to jurisdiction and ven- which is covered by a Valid Claim. ue and to service of process by mail or pre-paid courier service. e) “Licensee” means ______and/or its Affiliates, as the context may indicate. • Bankruptcy clauses are subject to questions of public policy when you want to enforce rights of f) “Net Sales” means revenues from the sale or oth- or against a company in reorganization or liquida- er disposition of Licensed Products less: tion. See, for example, Jaffé v. Samsung Electron- i) payments made or credits allowed for promo- ics Co., supra. tional purposes; ii) customary allowances, rebates and trade, quan- Addenda tity, or cash discounts, including discounts, re- Addendum A bates or other payments required under Medicaid, Medicare or other governmental medical assis- Exclusive License Term Sheet (Abbreviated) tance programs, to the extent allowed and taken; 1.) Parties. iii) amounts repaid or credited for rejections or 2.) Definitions. returns; and a) “Affiliate” means an entity that controls, is con- iv) to the extent separately stated on invoices, trolled by, or is under common control with Li- taxes and other governmental charges levied on censor or Licensee, as applicable, at any time the production, sale, transportation, delivery, or during the term of this Agreement, before, at or use of a Licensed Product which is paid by or after the Effective Date, but it shall be deemed on behalf of Licensee or the applicable Affiliate. an Affiliate only for the period that it meets this g) “Patent Rights” means: (i) EU and U.S. pat- definition. As used herein, “control” means (i) ent applications ______, entitled the power to direct or cause the direction of the “______”; (ii) Joint Inventions; management and affairs of the entity, whether (iii) patent applications covering or related to by direct or indirect ownership of voting stock, improvements to Inventions covered by (i) or positions on the board of directors, contract, or (ii); (iv) reissues, reexaminations, renewals, ex- otherwise; or (ii) ownership of more than fifty tensions, divisions, continuations, and continua- percent (50 percent) of the equity or other own- tions-in-part and foreign counterparts of (i), (ii), ership interest of the entity. (iii) or (iv); and (v) patents which issue on (i), b) “Clinical IP” means all protocols, data, reports, (ii), (iii) or (iv). regulatory applications and approvals and other h) “Revenues” means all license fees, milestone materials used in or resulting from any pre-clini- payments, minimum royalties, running royalty cal or clinical study or trial of Licensed Products. revenues and other sums received by Licensee c) “Confidential Information” means all business, from Sublicenses, but excluding (i) revenues to financial and technical information, data, docu- support research and development efforts and ments and other materials, whether in electron- (ii) reimbursements of out-of-pocket expenses. ic or physical form or orally disclosed, provided i) “Sublicense” means any sublicense or other by one party (“Discloser”) to the other party agreement of Licensee permitting the commer- (“Receiver”), but excluding any part of the Con- cial exploitation of any Patent Right(s), Know- fidential Information that Receiver can demon- how or Clinical IP by a third party. strate: j) “Valid Claim” means: (i) a claim of an issued and (1) was public knowledge at the time of disclo- unexpired patent of the Patent Rights which sure to Receiver; has not been disclaimed or held invalid or un- (2) became public knowledge without fault by enforceable by an unappealed or unappealable Receiver; decision of a court or governmental body, and

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(ii) one or more claims of a patent application defined. Payments for material evaluation purposes or being prosecuted in good faith, for two (2) years in testing situations would be royalty-bearing. This is following the first commercial sale or use of a over-reaching. Licensed Product which is a Licensed Product 2. Para. 2.6. This definition of Licensed Product solely as a result of the claim(s). includes products covered by “one or more claims in 3) License Grant. a pending patent application.” This is quite unusual a) Grant to Licensee. Exclusive, world-wide, royal- and is not acceptable. A pending claim is useless until ty-bearing, right and license under the Patent it is granted. Rights, Know-how and Clinical IP to develop, 3. Para. 2.7. Net Sales Revenue is defined to in- make, have made, use, sell, offer to sell, import, clude revenues of any Sublicensee. This is unusual. It export and lease Licensed Products. is common for the licensor to charge the Sublicensee b) Sublicenses. Licensee may grant Sublicenses. a royalty and the royalty gets split 50-50 or 60-40. Each Sublicense shall require the Sublicensee Also, sales commissions are not allowed to be deduct- to exercise reasonable diligence in developing, ed in the determination of Net Sales Revenue. This commercializing, marketing and selling Li- is sometimes acceptable and sometimes not. Should censed Products. be negotiated. 4) Compensation. 4. Para. 4.1. The requirement that Sublicense terms a) Annual Payments. Licensee shall pay to Licensors be “not less favorable” is unnecessarily restricting. I minimum annual payments of ____, which shall would delete. If they want to say “reasonable terms,” be credited against royalties due under para- that could be OK. graph 4(b), but only for twelve (12) months after 5. Etc. each payment is made. b) Royalties. Licensee shall pay Licensors a royalty of: Addendum C i) X percent (X percent) of Net Sales by Licen- License Option Definitions and Clauses see; and (This example is from a Materials Testing, Evaluation ii) Fifty percent (50 percent) of Revenues. and Option Agreement) 5) Confidential information. For three (3) years 1)Definitions. As used in this Agreement: from the date hereof, each Receiver will: a) “License Agreement” means the License Agree- 38 a) Use commercially reasonable efforts, but ment of Addendum X. no less than the protection given to its own b) “Licensed Materials” means Optionor’s pro- confidential information, to maintain in con- prietary ______materials and all fidence all Confidential Information, includ- improvements, modifications and substitutions ing without limitation the financial terms of thereof made and offered for sale by Optionor this Term Sheet; and during the Term. b) Only disclose Confidential Information to c) “Licensed Patents” means [identify specific U.S. individuals who reasonably need to know patents, applications and provisionals] and all such information for Receiver to perform its other United States and foreign patents and obligations or otherwise conduct its activi- patent applications owned or licensable by Op- ties hereunder, including Receiver’s legal, tionor during the Term and related to the Field, financial and business advisors. including without limitation provisionals, divi- 6) Non-binding Agreement. This Term Sheet is a sionals, continuations, continuations-in-part, restatement of present intent only and is not a bind- issues, reexaminations and extensions thereof. ing agreement of the parties, except that para- d) “Licensed Products” means ______. graph 8 is legally binding upon the parties. e) “Optionor Confidential Information” means 7) Governing Laws. The validity and interpretation Confidential Information of Optionor, including of paragraphs 8 and 9 shall be governed by Dela- without limitation Know-How. ware law. f) “Optionor IP” means Optionor Confidential In-

Addendum B 38. Addendum X is a complete license agreement, with noth- Issues List re Draft Licensor Exclusive ing to fill in but the date. That agreement is then signed by the License Agreement parties when the option is exercised and the option payment 1. Para. 2.5. “First Commercial Sale” is too broadly delivered.

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formation and Licensed Patents. and deliver the Termination Certificate at- g) “Option Period” means the period commenc- tached as Addendum A; and ing on the Effective Date and ending on (4) Paragraphs ______shall survive expi- ______, unless sooner terminated as pro- ration or relinquishment of the Option. vided herein. 3) Activities during the Option Period. 2) Option Grant and Exercise. a) Technology Transfer. During the course of the a) Option Grant. Optionor grants to Optionee the Option Period, Optionor shall transfer and dis- right and option, exercisable during the Option close to Optionee all Know-How and other Con- Period, to enter into the License Agreement fidential Information, to the extent necessary or (the “Option”). desirable to test and evaluate Licensed Materi- b) Option Fee. In consideration of the Option als and manufacture, test and evaluate Licensed grant, Optionee shall pay to Optionor for the Products. Option the non-refundable sum of __ Dollars b) Technical Assistance and Training. Optionor will ($____), payable within ten (10) days after the provide Optionee employees with technical assis- Effective Date. tance and training regarding the Optionor Con- c) Exercise of Option. The Option may be exercised, fidential Information. The initial technical assis- in whole only and not in part, at any time during tance and training shall take place at the Option- the Option Period, by delivery to Optionee of or’s facility in _____; further technical assistance written notice of exercise of option, accompa- and training, if requested, shall take place at an nied by the non-refundable option exercise fee agreed location in the United States. The terms of ____ Dollars ($____) (“Option Fee”), payable of the technical assistance and training are: by check (subject to collection) or wire transfer. (1) Optionee will purchase Licensed Materials d) Rights upon Exercise of Option. Upon exercise of from Optionor for use during the Option the Option and payment of the Option Fee, the Period at a discount of fifty percent (50 per- parties shall execute and deliver the License cent) from Optionor’s established prices; Agreement and Optionee shall forthwith have (2) Each party will pay all travel expenses, room all of the rights and duties set forth in the Li- and board of its personnel; and cense Agreement. (3) All payments are due within thirty (30) days e) Relinquishment of Option. If, at any time dur- after receipt of invoice. ing the Option Period, Optionee decides not to c) Disclosure of Licensed Patents. Promptly after exercise the Option, it shall promptly notify Op- execution of this Agreement, Optionor will tionor accordingly in writing. provide Optionee’s patent counsel with copies f) Rights and Duties upon Expiration or Relinquish- and related information regarding all Licensed ment of the Option. The Option shall expire if Patents and license agreements granting rights not exercised or if relinquished during the Op- to Optionor to license the Licensed Patents, tion Period, in which event this Agreement shall for their assessment; provided, however that terminate forthwith; provided, however, that: the financial and other confidential terms of (1) Optionee shall promptly provide Optionor the license agreements shall be redacted. with: d) Optionee Activities during the Option Period. (A) a detailed report of the results of its test- During the Option Period, Optionee shall ex- ing and evaluation of Licensed Materials and ercise reasonable diligence to test and evaluate Licensed Products and its assessment of mar- the Licensed Materials and Licensed Products ket opportunities, pricing and production made with the Licensed Materials and review costs for Licensed Products; and the files of the Licensed Patents for as long as (B) prototypes of Licensed Products, all of Optionee deems appropriate, with the goal of which shall be treated by Optionor as Con- determining as soon as practicable whether to fidential Information; exercise the Option. (2) Optionee shall immediately return all per- e) Evaluation License. Optionor grants to Optionee a sonal property of Optionor and all tangible non-exclusive license under the Optionor IP for (electronic or other form) Confidential Infor- the Option Period, to be used solely for produc- mation, including Licensed Materials; tion, testing and evaluation of Licensed Materials and Licensed Products for use in the Exclusive (3) If requested by Optionor, Optionee shall sign Field and the Non-Exclusive Field.

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f) Six Month Status Report. Six (6) months after acting reasonably and in good faith, and (c) shall ex- the Effective Date, Optionee shall provide Op- pressly exclude non-monetary consideration included tionor with a written report of the status and in license agreements such as cross licenses, releases, results of its production, testing and evalua- covenants, and the like. Amounts that are withheld or tion, including technical and marketing analy- are deducted by a counterparty to a transaction or any ses and information. other person on account of taxes (e.g., withholding tax- 4) Cooperation during the Option Period. es) or otherwise shall be included in Gross Revenues a) Cooperation. The parties will cooperate in the to the extent that and at such time as Licensee or any continuing transfer of Optionor Confidential other person directly or indirectly owning an interest Information and the ongoing exchange of infor- in Licensee, recovers such withheld amounts through mation and ideas during the Option Period. In tax credits or otherwise; provided that such recoveries order to facilitate that cooperation, each party are legally available to Licensee and Seller and, if so, shall designate a “Coordinator,” by or through that Licensee uses its commercially reasonable efforts whom all contact between Optionor and Op- to obtain such recoveries when they become available. tionee shall be coordinated. The initial Coordi- (The same clause after using the “Enter” and “Tab” keys nators shall be: to segment it and make it more readable): For Optionee—[identify coordinator] “Gross Revenues” means gross revenues to Licen- For Optionor—[identify coordinator] see derived exclusively from commercialization or sale of the Patents, including, without limitation, the Gross b) Scheduling. Promptly after the execution of this Revenues of all licensing and enforcement activities Agreement and at least monthly during the Op- exclusively relating to or in connection with the Pat- tion Period, the Coordinators shall meet and ents or the proportionate share thereof attributable to confer to set up and adjust suitable program the Patents as determined by Licensee acting reasona- schedules, personnel assignments and require- bly and in good faith. Gross Revenues shall: ments for Licensed Materials. (a) not include: Addendum D (i) the revenues of any equity or debt financing Bad Clauses and Clarifications raised by Licensee; or In Definitions. (ii) any revenues received as consideration for [The Original Clause] any license to any Patents or otherwise; “Gross Revenues” means gross revenues to Li- (b) include only any cash or cash equivalents actually censee derived exclusively from commercialization received by, or credited to, Licensee from commer- or sale of the Patents, including, without limitation, cialization of the Patents exclusively or exclusively the Gross Revenues of all licensing and enforcement derived from the sale of any Patents or the propor- activities exclusively relating to or in connection with tionate share thereof attributable to the Patents as the Patents or the proportionate share thereof attrib- determined by Licensee acting reasonably and in utable to the Patents as determined by Licensee act- good faith, including without limitation, any roy- ing reasonably and in good faith. Gross Revenues (a) alties or other fees, payments or income receipts, shall not include (i) the revenues of any equity or debt damages or other compensatory payments received financing raised by Licensee or (ii) any revenues re- exclusively relating to the licensing, use or enforce- ceived as consideration for any license to any Patents ment of the Patents or the proportionate share or otherwise, (b) shall include only any cash or cash thereof attributable to the Patents as determined equivalents actually received by, or credited to, Licen- by Licensee acting reasonably and in good faith; and see from commercialization of the Patents exclusive- (c) expressly exclude non-monetary consideration in- ly or exclusively derived from the sale of any Patents cluded in license agreements such as cross licens- or the proportionate share thereof attributable to the es, releases, covenants, and the like. Patents as determined by Licensee acting reasonably Amounts that are withheld or are deducted by a and in good faith, including without limitation, any counterparty to a transaction or any other person on royalties or other fees, payments or income receipts, account of taxes (e.g., withholding taxes) or otherwise damages or other compensatory payments received shall be included in Gross Revenues to the extent that exclusively relating to the licensing, use or enforce- and at such time as Licensee or any other person di- ment of the Patents or the proportionate share thereof rectly or indirectly owning an interest in Licensee, re- attributable to the Patents as determined by Licensee covers such withheld amounts through tax credits or

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otherwise; provided that such recoveries are terms and conditions of this Agreement. Confidential In a Settlement Agreement and Release Information shall not include information that (i) was Release by Patent Owner. Upon entry by the in the public domain at the time it was disclosed or Court of an Order dismissing the Lawsuits pursuant to becomes part of the public domain after disclosure the Stipulations, Patent Owner and its parents, sub- by or through no action or omission to act of receiv- sidiaries, predecessors, successors, affiliates, divi- ing Party or its representatives, (ii) was or becomes sions, assigns and any person or entity claiming by known to receiving Party prior to the time of its or through them, in consideration of the agreements disclosure without breach of this Agreement or any set forth herein, and intending to be legally bound, other obligation of confidentiality to the disclosing irrevocably releases and forever discharges Defendant Party as proven by the written records of the receiv- and its present and former parents, subsidiaries, and ing Party, (iii) is independently developed by receiv- affiliates, and their present and former directors, ing Party without using the Confidential Information, officers, shareholders, attorneys, and employees (iv) is legally received by receiving Party from a third (solely in their capacities as such) (collectively, the party, without any obligation to keep it confidential, “Defendant Releasees”) from all actions, causes of and/or (v) is approved for disclosure by prior written action, suits, rights, debts, dues, sums of money, permission of an authorized signatory of the disclos- accounts, accountings, reckonings, bonds, bills, ing Party. Each Party shall maintain the Confidential specialties, covenants, contracts, controversies, Information of any other Party in strict confidence. agreements, promises, indemnities, liabilities, var- Each Party shall exercise no less than reasonable care iances, trespasses, damages, judgments, extents, with respect to the handling and protection of such executions, claims and demands, of every nature Confidential Information. Each Party shall use the and description whatsoever, in law, admiralty or Confidential Information of the other Party only as equity, or as a result of arbitration, whether known expressly permitted herein, and shall disclose such or unknown, asserted or unasserted, and forgives any Confidential Information only to its employees, inde- and all acts of alleged infringement, including any and pendent contractors, agents, and counsels as is rea- all claims or counterclaims in the actions for patent sonably required and necessary in connection with infringement in the Lawsuits, alleging, inter alia, that the exercise of its rights and obligations under this services performed and/or software made, used, sold Agreement (subject to binding use and disclosure and/or offered for sale infringed the Asserted Patents, obligations as protective as those set forth herein). which claims were asserted or could have been assert- Notwithstanding the above, the receiving Party may ed, against the Defendant Releasees or any of them disclose Confidential Information of the disclosing for, upon or by reason of any matter, cause or thing Party pursuant to a valid order or requirement of a whatsoever, of this from the beginning of the world court or government agency, provided that the re- to the Effective Date (collectively, the “Claims”); pro- ceiving Party shall first give reasonable notice to the vided, however, this release shall only apply to Claims disclosing Party to contest such order or requirement that are directly or indirectly related to past manufac- and try to obtain confidential treatment for the Con- ture, distribution, sale or use of services, software fidential Information required to be disclosed. Any and products sold under trademarks or trade names such disclosure by the receiving Party of the Con- owned, used, or held prior to the Effective Date by the fidential Information of the disclosing Party, shall, Defendant Releasees (as they existed on the Effective in no way, be deemed to change, affect or diminish Date). (Note: This is a single sentence. Ugh!) This the confidential status of such Confidential Informa- release: (a) is personal to the Defendant Releasees; (b) tion. The Parties hereby designate the nonpublic in- is not intended to benefit any unnamed third party in formation about the Patents delivered to purchaser any way; (c) shall not release any claims for patent in- pursuant to Section 4.1 as Confidential Information fringement that Patent Owner may have against any of Purchaser, with Seller having the confidentiality third person (including the remaining defendants in obligations imposed by this Section which respect the Lawsuits) other than Defendant Releasees; and (d) to such information. does not apply to any of the rights and obligations set The Same Provision, Segmented forth in this Agreement including its exhibits. for Comprehension Original Confidentiality Provision Section 6. Confidential Information. Section 6. For purpose of this Section, “Confiden- (a) For purpose of this Section, “Confidential Informa- tial Information” means (a) any business or techni- tion” means cal nonpublic information of the Parties, (b) any other (a) any business or technical nonpublic information information of the Parties that is specifically designat- of the Parties, ed by the disclosing Party as confidential, and (c) the (b) any other information of the Parties that is

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specifically designated by the disclosing Party as A Clause that is Internally Inconsistent confidential and Consent to License (c) the terms and conditions of this Agreement. Furthermore, Licensor agrees to grant such rights Confidential Information shall not include informa- directly to Sublicensee on the same, or in any case no tion that less favorable, terms and conditions as set out in its (i) was in the public domain at the time it was dis- License Agreement with Licensee, without payment of closed or becomes part of the public domain after any other sums, until expiration of the last-to-expire of disclosure by or through no action or omission to the patents. (Query: If the “license terms” are “the act of receiving Party or its representatives, same,” how could they possibly be “less favorable”?? (ii) was or becomes known to receiving Party pri- The drafter was not very thoughtful.) or to the time of its disclosure without breach of Addendum E this Agreement or any other obligation of confidentiality to the disclosing Party as proven by the Foundry Clause in a Patent Assignment written records of the receiving Party, Their Draft (iii) is independently developed by receiving Par- Foundry Rights. With respect to semiconductor ty without using the Confidential Information, components or products that are manufactured by En- (iv) is legally received by receiving Party from tities pursuant to foundry or contract manufacturing a third party, without any obligation to keep it agreements on behalf of Persons listed on Exhibit X confidential and/or (“Contract Products”), none of Seller and its Affiliates, and to the best of Seller’s knowledge formed after rea- (v) is approved for disclosure by prior written sonable investigation and inquiry, no prior owners of permission of an authorized signatory of the dis- any of the Assigned Patent Rights have granted found- closing Party. ry rights or contract manufacturing rights that extent- (b) Each Party shall maintain the Confidential Informa- ed to portions of Contract Products that are based on tion of any other Party in strict confidence. Each Par- designs, specifications and/or requirements attributa- ty shall exercise no less than reasonable care with ble to, originating from or supplied by a Person listed respect to the handling and protection of such Con- on Exhibit X, unless only to the extent such foundry fidential Information. Each Party shall use the Confi- or contract manufacturing agreement was in effect on dential Information of the other Party only as expressly or before the Effective Date. (Note: This paragraph is permitted herein, and shall disclose such Confidential a single sentence.) Information only to its employees, independent con- My Re-Draft tractors, agents, and counsel as is reasonably required and necessary in connection with the exercise of its Foundry Rights. rights and obligations under this Agreement (subject a) “Foundry Rights” means rights, licenses or forbear- to binding use and disclosure obligations as protective ances granted to a Person under any Assigned Pat- as those set forth herein). ents to make, have made, use, import or sell semi- (c) Notwithstanding the above, the receiving Party may conductor components or products that are based disclose Confidential Information of the disclosing on designs or specifications provided by an Entity. Party pursuant to a valid order or requirement of b) Seller represents and warrants that none of: a court or government agency, provided that the i. Seller and its Affiliates; and receiving Party shall first give reasonable notice to ii. To the best of Seller’s knowledge, formed af- the disclosing Party to contest such order or re- ter reasonable investigation, any prior owners of quirement and try to obtain confidential treatment any Assigned Patent Rights for the Confidential Information required to be disclosed. Any such disclosure by the receiving Party have granted Foundry Rights to any Person listed of the Confidential Information of the disclosing on Exhibit X, except and then only to the extent Party, shall, in no way, be deemed to change, affect that such Foundry Rights were granted before the or diminish the confidential status of such Confi- Effective Date. dential Information. The Parties hereby designate Addendum F the nonpublic information about the Patents delivered to Purchaser pursuant to Section 3 as Confi- Most Favored Licensee Clause dential Information of Purchaser, with Seller having Applicable Definitions. the confidentiality obligations imposed by this Sec- “License Agreement” means a license agreement tion which respect to such information. or covenant not to sue executed after the Effective

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Date between Licensor and any licensee with respect Addendum G to any Licensed Patents. Right of First Refusal 39 “Most Favored Financial Terms” means the fol- If, at any time during the term of this Agreement, lowing terms of any License Agreement, considered in Patent Owner is about to enter into an agreement for their entirety: the (i) sale of the Licensed Patents or (ii) license of (a) a per-unit-of-sales amount or a percentage-of-reve- the Licensed Patents outside the Field of Use (an “RFR nue royalty rate; and Agreement”): (b) any other related financial conditions and related a) Each RFR Agreement shall contain a provision stat- limitations, including but not limited to upfront ing that it is subject to this right of first refusal. payments and lump sum payments which are not: b) Upon its receipt of an RFR Agreement executed by (i) royalty advances that offset future royalties a third party, Patent Owner shall promptly provide payable under the applicable License Agree- Licensee with a copy of the RFR Agreement. This ment; or tender shall be deemed to be an offer by Patent (ii) payments in settlement of litigation or other- Owner to enter into the RFR Agreement with Li- wise based, in whole or in part, on infringement censee. of any Licensed Patents prior to the execution c) Licensee shall have thirty (30) days from its date date of the License Agreement. of receipt of the RFR Agreement to elect to enter The Most Favored Licensee Clause into an agreement with Patent Owner on terms (a) Licensee shall be entitled to the benefit of Most Fa- and conditions identical to those of the RFR Agree- vored Financial Terms. ment, except (i) for the identity of Licensee and (ii) closing shall not be held for at least sixty (60) days (b) To enable Licensee to determine the Most Favored after the date of Licensee’s receipt of such tender. Financial Terms, within ten (10) business days of Licensor’s entry into any License Agreement with d) If Licensee notifies Patent Owner, within the thir- financial terms that are or may be more favorable ty (30) day period of paragraph (c), that Licensee than the corresponding terms of this Agreement, wishes to enter into the RFR Agreement: Licensor shall: a. Patent Owner shall execute and deliver to Pat- (i) provide Licensee with an accurate and de- ent Owner a copy of the RFR Agreement, with Licensee substituted for the RFR Party and a tailed summary of the Most Favored Financial closing date which is at least sixty (60) days Terms; and after the date of Licensee’s receipt of the RFR 40 (ii) promptly permit Licensee’s outside counsel Agreement; and to review, at a mutually acceptable location, in b. Licensee shall execute and deliver to Patent confidence, a copy of the License Agreement, Owner an executed copy the agreement within for the sole purpose of verification of the accura- five (5) business days after its receipt. cy of the summary provided to Licensee. e) Failure of Licensee to reply to the tender of para- (c) Licensee shall have thirty (30) days after receipt of graph (b) shall be deemed a rejection of the offer each Most Favored Financial Terms in which to ad- of Patent Owner to enter into the RFR Agreement vise Licensor in writing whether or not it chooses with Licensee. to accept the Most Favored Financial Terms. Upon such acceptance, the Most Favored Financial Terms f) If Licensee rejects the offer to enter into the RFR will be retroactive to the date of execution of the ap- Agreement, whether explicitly or pursuant to paragraph (e), Patent Owner shall be free to enter into the plicable License Agreement, and this Agreement will RFR Agreement with the RFR Party or any other party. be deemed to incorporate by reference those Most Favored Financial Terms. g) If Licensee rejects the offer to enter into the RFR Agreement and Patent Owner does not enter into (d) Failure to provide notice as specified in subparagraph the RFR Agreement with the RFR Party on the (c) shall be deemed a rejection by Licensee of the terms specified therein, Patent Owner shall repeat tendered Most Favored Financial Terms. the procedure of this paragraph as to any other pro- 39. The definition could include “all terms and conditions,” posed RFR Agreement. but often the financial terms are what the licensee cares about and other terms may be tailored to the particular licensee and Addendum H not have a direct application to another licensee. Right of Exclusive Negotiation 40. Because of the confidentiality of other terms of the agreement. You could also use a redacted agreement, if the redactions a) Prior to entry by Patent Owner into any discussion are acceptable to both parties to the agreements. with a third party for the (i) sale of the Licensed Pat-

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ents or (ii) license of the Licensed Patents outside All rights and licenses granted under or pursuant to the Field of Use (a “Transaction”), Patent Owner this Agreement by Licensor to Licensee are, for all pur- shall notify Licensee of its intention. poses of paragraph 365(n) of Title 11 of the United b) For the six (6) month period following the notice States Code (“Title 11”) or other relevant bankrupt- of paragraph (a), Patent Owner negotiate exclusive- cy or insolvency law (collectively, “Law”), licenses of ly and in good faith with Licensee for entry into a rights to “intellectual property” as defined in Title 11 Transaction. or such other Law. c) Once the six (6) month period shall have expired, Patent Owner shall have no further obligation to Addendum L Licensee and shall be free to negotiate and enter Marking Clause into Transactions with any parties on any terms Licensee shall mark all Licensed Products with U.S. and conditions. Patent No. 7,777,777, in accordance with 35 U.S.C. §287. The parties acknowledge that Licensee will have Addendum I complied with this paragraph by marking all current Apportionment Clause and future Licensed Products and providing notice of a) Net Sales. If Licensee licenses from one or more U.S. Patent No. 7,777,777 on the “about page” of Li- third parties (“Third Parties”) intellectual property censee’s principal websites from which Licensed Prod- ■ which covers any Licensed Products or Processes, ucts are offered for sale, sold or distributed. the royalty rate applied under paragraph 6(b) as to Net Sales of that Licensed Product or Process shall Glossary of Intellectual Property Terms1 be (i) one (1) divided by (ii) one (1) plus the lesser 2 of (a) the number of third parties to which royalties Abandonment – Loss of rights in IP. Abandonment are payable as to that Licensed Product or Process, can occur by (1) an intentional act of abandonment by and (b) two (2); multiplied by (iii) [the number in the IP owner, (2) failure to file an applicable fee or (3) 6(b)] ___ percent (_ percent). in the case of a Patent Application, failure to respond to an Office Action within the allotted time period. b) Sublicense Revenues. If Licensee includes in any Sublicense intellectual property sublicensed from Accused Device – A product which is alleged to In- one or more third parties which covers any Licensed fringe a Patent. Product or Process, the percentage of Sublicense Active Inducement – Patent Infringement by virtue Revenues payable by Licensee under paragraph 6(c) of active inducement of (aiding and abetting) Direct as to that Licensed Product or Process will be: (i) Infringement by third parties. e.g. by advertising an one (1) divided by (ii) one (1) plus the lesser of infringing use. 35 U.S.C. § 271(b). Requires a Direct (a) the number of Third Parties to which royalties Infringement by someone else. are payable as to that Products or Processes, and ADR – Alternate dispute resolution, namely medi- (b) two (2); multiplied by (iii) [the number in 6(c)] ation (which is non-binding) and arbitration (which ____ percent (__ percent). is binding). AIA – The Leahy–Smith America Invents Act is a Addendum J United States federal statute, signed into law on Sep- Marvel Clauses tember 16, 2011. It effects the most significant chang- 1. Royalty Payments. Licensee shall pay to Licensor es to the U.S. patent system since 1952. The AIA a royalty of X (x percent) percent of Net Revenue. changed the U.S. patent system from “first-to-invent” For purposes of paragraph 2 only, one-third (1/3) to “first-to-file,” to bring it in line with the rest of the of the applicable royalty shall be attributable to the world, and revised and expanded post-grant opposition Patents and two-thirds (2/3) shall be attributable to procedures, including inter partes review (IPR). the Trademarks, Copyrights, Trade Secrets and Do- All Elements Rule – A limitation on the Doctrine main Names. of Equivalents, under which each element of a Claim 2. Severability. If any provision of this Agreement is held to be invalid or unenforceable for any reason 1. These definitions are accurate and are based on U.S. law, whatsoever, that provision shall be interpreted to but were written to be simple and clear, rather than legally have the broadest scope that would make it valid perfect. For more legalistic definitions, see “McCarthy’s Desk and enforceable. Encyclopedia of Intellectual Property, 3d Ed.”, published by Bu- reau of National Affairs. 2. Defined terms are referred to in this Glossary with initial Addendum K capital letters. Section 365(n) Clause December 2016 220 Tips on Writing Licenses And Agreements

must be found in the Accused Device to constitute Di- or Royalty payment obligation is based on products (or rect Infringement. Therefore, the Doctrine of Equiva- processes) “which would, but for this Agreement, In- lents may not be applied to the Claim as a whole, in fringe one or more Claims of Licensed Patents.” disregard of the Claim elements. CAFC – See Court of Appeals for the Federal Circuit. Analysis of Patents in a Cluster – The analysis Carrot License – A technology (and patent) license of all or certain Patents in a Cluster which has been (exclusive or non-exclusive) of technology (a new, bet- deemed to have Carrot and/or Stick Licensing poten- ter or cheaper mousetrap) owned or licensable by the tial, to determine, based on computer analysis and re- Licensor. The new, better cheaper mousetrap is the search and human input, which patents appear most driver of the transaction, but the patents(s), although likely to have substantial revenue-generating potential. ancillary, is/are important in maintaining the competi- Anticipation – A single Prior Art Patent or publica- tive advantage of the licensee. tion which is substantially identical to a Claim and thus Carrot Mining – Portfolio Mining which seeks to invalidates the Claim under 35 U.S.C. §102(b). identify valuable “technology” which, in combination Anti-Dilution – Statutory provisions and legal doc- with any related Patents, can be revenue-generating. trines which protect well-known Trademarks in prod- Carrot-and-Stick Mining – Portfolio Mining which uct areas in which they are not in use. See, e.g., 15 seeks both Carrots and Sticks. U.S.C. §1125(c). Claim – A numbered paragraph in a Patent which Assignee – Buyer. verbally defines the legal rights protected by the Pat- Assignment – Sale of an IP right. ent. Note: The legal right embodied in a Claim is an Assignment in Gross – Assignment of a Trademark Exclusionary Right. without Assignment of the associated goodwill. An As- Claim Chart – A two- or three-column chart, com- signment in Gross is invalid. paring all of the words and phrases of a Claim against Assignor – Seller. the features of an allegedly Infringing product or pro- Assignor Estoppel – A legal principle under which cess. 100% correspondence of words and features con- the Assignor of an IP right (for example, a Patent) is Es- stitutes Infringement. If there is not 100% correspond- topped from denying later the Validity of the assigned ence, there may still be Infringement. See Doctrine of right (e.g. the assigned Patent). Equivalents. Berne Convention – An international Copyright Claim Differentiation Doctrine – A doctrine of treaty, to which most countries, including the United Claim interpretation, under which each Claim is in- States, are members. Among its provisions, a Copy- terpreted to be different from each other Claim in the rightable work created in one member country is au- same Patent, i.e., a narrower Claim cannot be used to tomatically protected (no registration is required) in restrict a broader Claim. all member countries. Partial exception: Although the Clayton Act. 15 U.S.C. §§ 12-27 – An antitrust United States does not require Copyright registration statute prohibiting the acquisition of an asset (e.g. Pat- by a non-U.S. resident to file a Copyright suit, resi- ent) the tendency of which is to substantially lessen dents must first obtain a Copyright registration. See 17 competition. U.S.C. §411(a). Click Wrap License – A License of software or a da- Best Efforts – In American parlance, usually a rea- tabase which is accessed and downloaded on-line. The sonable level of effort, but courts may vary in their License is created on-line when the potential Licensee interpretations. (It is better to use “reasonable dili- is presented with a screen of license terms and agrees gence.”) See Best Endeavors. to the terms by a click of the cursor. Best Endeavors – The counterpart in England to Cluster – An affinity group of Patents, grouped ac- Best Efforts, but judicially interpreted in England to cording to the technology covered by the Patents in mean a very high level of effort. the group. Blocking Patent – A Patent as to which Infringe- Clustering – The process of organizing a Patent ment cannot be avoided for a particular type of prod- portfolio into different Clusters. Clustering is usually uct, system or service. Example, the AT&T Shockley the first step in Portfolio Mining. transistor patent. See Essential Patent. Cluster Ranking – The process of ranking different Bundling – Selling two separate products as one Clusters in a portfolio, in order of the Clusters which unit. For example, Windows® software sold with a are most likely to produce revenue if licensed or sold. Dell® computer. See also Unbundling. Common Law – The federal and state laws of the “But for” License – A Patent License grant and/or U.S. which are not statutory (made by legislatures) but Royalty payment provision in which the License grant were made by judges and inherited from British law.

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Comprising – An “open-ended” term used in a Convoyed Goods – Unlicensed products which are Claim, interpreted to mean “including” (but not limit- sold together with or as part of a sale of a Patented ed to) or “containing.” product. Example, a Patented DNA probe which is sold Compulsory License – A non-exclusive License un- with or drives the sale of unpatented reagents. The der a Patent required by law or judicial decree to be reagents are Convoyed Goods. See Promega Corp. v. granted by a Patent owner to third parties. Compulsory Lifecodes Corp., 53 USPQ 2d 1463 (D.Utah 2000). Licenses are not required by law in the U.S., but are Copyright – A federal right granted to the creator of required by the laws of some countries, often as to an original work of authorship which is fixed in a tan- pharmaceutical patents. gible medium of expression. 17 USCA §§ 100 et seq. Conception – The mental part of making a Patenta- Court of Appeals for the Federal Circuit – The ble invention. federal appeals court which is empowered to decide all Consisting Of – A “closed” term used in a Claim, appeals (from U.S. District Courts around the country) which closes or limits the Claim to those elements re- involving Patent rights. Also called the Federal Circuit cited in the Claim. Compare with Comprising. or CAFC. Constructive Notice – An act having the same legal Covenant Not to Sue – A personal covenant or effect as actual notice. (e.g., actual notice of Patent In- promise (express or implied) not to sue a third party fringement is telling the infringer that it is infringing a for a Tort or contract breach. A non-exclusive License is particular Patent.) The same legal result can be achieved sometimes considered by the courts to be a Covenant (constructive notice is given) when the Patent owner’s Not to Sue by the Licensor and therefore is deemed Patented product or package is marked with (bears) the not transferable. When a Patent owner grants a Cov- Patent number, 35 U.S.C. §287. The concept of Con- enant Not to Sue, the grantee cannot pass along its structive Notice also applies to registered Trademarks immunity from Infringement of the Patent to its cus- and Copyrights. Various legal benefits derive from the tomers (unless expressly permitted by the agreement). giving of actual or Constructive Notice. Declaratory Judgment Suit – A lawsuit filed in Constructive Reduction to Practice – Filing a U.S. federal court by an alleged Patent Infringer, seeking Patent Application. a declaration of the court that a Patent is Invalid, not Contributory (Patent) Infringement – The act of Infringed and/or not enforceable. selling a non-staple article which is an element of an Defensive Suspension – A provision of (l) a License article or is used in a process which Infringes a Pat- agreement or (2) a standards-based undertaking to Li- ent. See 35 U.S.C. § 271(c). A non-staple article is one cense an Essential Patent, by which the License or un- which has no substantial non-Infringing uses. There are also Copyright and Trademark doctrines of Contrib- dertaking is suspended if the licensee or prospective li- utory Infringement. As to Copyright, see Sony Corp. v. censee sues the Patent owner for Patent Infringement Universal City Studios, Inc., 464 417, 441 (1984); as or declaration of Invalidity or non-Infringement. to Trademark, See Inwood Labs. Inc. v. Ives Labs. Inc., Dependent Claim – A Claim which “depends from” 456 844, 854 (1982). and incorporates by reference all of the terms of an- Continuation – A patent application which has the other Claim. effective filing date of an earlier-filed application or Design Around – A way of avoiding Patent Infringe- applications containing the identical specification and ment by using a design of a product or process which all of which have serial co-pendency. It is a vehicle to is competitive to the patented product or process but get an issued patent while continuing to pursue other does not infringe the patent being considered. Also claims based on the same specification. called “Work Around.” Continuation-in-Part or CIP – A patent application Design Patent – A Patent which protects the aes- which has the effective filing date of an earlier-filed appli- thetic aspects of a product. cation containing some common specification and some Direct Infringement – Patent Infringement that oc- different (usually additional) specification, in which the applications have serial co-pendency. It is a vehicle to incurs when an Accused Device or process is (1) Literally corporate evolutionary developments in an invention in Infringed or (2) Infringed under the Doctrine of Equiv- a patent application which has the benefit of the earlier alents. 35 U.S.C. § 271(a). filing date as to that part of the invention that is support- Discounted Cash Flow Analysis – An approach ed by the original specification. For example, an original used in determining an applicable Royalty, by dis- pharmaceutical application may only have one or two counting (to present value) the cash flows that the examples, whereas the CIP may have many more, added Licensee would expect to receive from the sale of the as the examples were created and tested. Licensed product.

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Division or Divisional – A patent application which European Patent – A utility patent granted by the has the effective filing date of an earlier-filed applica- European Patent Office, an agency of the European tion or applications containing the identical specifica- Union. It enables a single filing to grant a patent with tion and all of which have serial co-pendency. When coverage of one up to all member countries, depend- one patent application claims more that one invention, ing on the fee paid by the applicant. the USPTO will “require restriction,” because only one Exhaustion – See Doctrine of Exhaustion. patent can be obtained on one invention. The co-pend- Exclusionary Right – The right of a Patent owner ing patent applications than are filed on the other in- to exclude an Infringer of one or more Claims from ventions described in the original patent application making, having made, offering for sale, selling, using are Divisions. or importing any Infringing product or process. That is DJ Action – Same as Declaratory Judgment Suit. to say, merely having a patent on an invention does not Doctrine of Equivalents – A rule of Claim con- give the Patent owner the right to make, use, sell, etc. struction for establishing Patent Infringement, under that invention if the manufacture, use or sale of the which a word or phrase in a Claim may be interpreted Patented invention Infringes someone else’s Patent. to include an “equivalent” element, which performs Exclusive License – A License grant by the owner substantially the same function in substantially the of an IP right of “exclusive” (as opposed to non-exclu- same way to achieve substantially the same result. For sive) rights under the IP right. Under U.S. law, an Ex- example, the word “rivet” in a Claim may cover other clusive License is equivalent to an assignment of the elements, such as nuts-and-bolts. IP rights. Doctrine of Exhaustion – The first sale of a Patent- Exhaustion – See Doctrine of Exhaustion. ed, Copyrighted or Trademarked item by the owner or Fairy Dust Clause – A form of “successors and as- Licensee “exhausts” the IP right, so that the owner or signs” clause in a Stick License (that may include a Licensee cannot control resales of the item; Quanta Covenant Not to Sue), that provides some or all of the Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 benefits of the License (and Covenant Not to Sue) i.e.( (2008). See also First Sale Doctrine. sprinkles “fairy dust on”) successors and assigns of the EBITDA – An accounting abbreviation, which stands Licensee. The “fairy dust” provision may be retrospec- for “earnings before interest, taxes, depreciation and tive, prospective or both. amortization.” Federal Circuit – See Court of Appeals for the Fed- Enhancement – A modification of a computer pro- eral Circuit. gram to add new or improved features or functionality. Field of Use or FOU – A particular product area or Entire Market Value Rule – A Patent Infringement service market. damages rule that, if a product (e.g. radio) includes a Field of Use License – An IP License which is re- Patented component (e.g. amplifier), and the customer stricted to a Field of Use. For example, a Patent or demand for the product is based on the component, technology applies to batteries and License A is re- the Infringement damages may be based on the market stricted to the FOU of portable computers and License value of the product. B is restricted to the FOU of wireless telephones. (Of EPO – The European Patent Office. The EPO is lo- course, there was a problem when portable computers cated in Munich, Germany. and wireless telephones integrated, and that problem Equitable Estoppel – A legal principle in patent lit- illustrates the need for careful drafting.) igation under which the patent owner (1) created a File Wrapper Estoppel – A legal doctrine under situation on which an Infringer relied and (2) delayed which a Claim is barred (Estopped) from being more sufficiently in asserting infringement that the patent broadly interpreted because of a limitation inserted owner is Estopped from asserting the patent against in the Claim by an applicant (or his or her patent at- the Infringer. torney) in response to a Rejection of a predecessor to Essential Patent – See Blocking Patent. The term is that Claim as Unpatentable over Prior, s/he is estopped usually used in Standards Licensing. (barred) from recapturing the interpretation of the Estopped – Barred. See Estoppel. claim to include the prior art element as an equivalent. Estoppel – A legal principle under which a person This rule negates application of the Doctrine of Equiv- or company is barred, by its actions, from doing some- alents. Also called “Prosecution History Estoppel.” thing. In the Patent field, it comes up when an action First Sale Doctrine – Same as Doctrine of Exhaus- by a Patent owner in obtaining the Patent, limits or tion. See 17 U.S.C. § 109(a) as to Copyright. In the estops the owner from interpreting a Claim broadly. Copyright context, the First Sale of a book, CD, etc. See File Wrapper Estoppel. exhausts the distribution aspect of the copyright, so

223 les Nouvelles Tips on Writing Licenses And Agreements that the book, CD, etc. can be re-sold, given away, etc. Guaranty – An undertaking to pay the obligation without violating the Copyright, but does not give the of another person. There are two kinds of guarantees: buyer (of the book, CD, etc.) or its successors the right (1) a guaranty of collection, in which all rights against to reproduce (make copies of) the Copyrighted work. the creditor must be exhausted before going against Force Majeure Clause – A contract provision which the guarantor, and (2) a guaranty of payment, in which excuses performance by a party when a specified situ- the creditor can collect from the guarantor as soon as ation outside the party’s control (e.g. an earthquake, there is a default in payment by the debtor. fire or strike) when performance is prevented by the Guillotine License – A License agreement with a situation. For example, a Licensor is obligated to deliv- finite end date (often for five years), at which time the er to the Licensee a sample of a Licensed composition, license terminates and must be renegotiated. but is prevented by a fire at the plant making the com- Have Made Right – The right of a Patent Licensee position. to have a Licensed product manufactured by a third Forward Citation Analysis – The analysis, with re- party for sale by the Licensee. spect to a given Patent, of subsequently issued Patents Heads of Agreement – An outline of the proposed which cite the given Patent. terms of a contract, in the form of an outline of es- Foundry Right – The right, under a Patent license, sential terms of the contract, and intended not to be enabling the Licensee to manufacture (act as a foundry legally binding. Used in international transactions. Un- for) Licensed products for a non-licensee which designed less the Heads of Agreement has language negating a the products. This term is usually used in the computer, binding contract, it might create a binding contract or electronics and telecommunications industries. at least questions about whether or not it is a bind- Foundry Agreement – An agreement under which ing contract (itself troublesome). See Letter of Intent, the Licensee (owner of the Foundry Right) engages a Term Sheet, Memorandum of Agreement and Memo- third party to manufacture a Licensed product. Com- randum of Understanding. pare with Tolling Agreement. Human Capital – The collective people and their FRAND – “Fair, reasonable and non-discriminato- knowledge, skills, creativity of an organization. The ry.” In accordance with the rules governing Standards Human Capital create the Intellectual Assets and con- Licensing, licenses by participants (in the standards vert them to products or services and ultimately to bodies) to Essential Patents must be granted on the revenue and profits. basis of FRAND. Implied License – A License under IP which the GAAP – Generally accepted accounting principles. courts will imply when there is no express (written) GAAPCA – Generally accepted accounting princi- License and fairness (equity) suggests that a License ples, consistently applied. should be implied. For example, if a company sells a Patented machine to a customer, there is an Implied Georgia Pacific Factors – A comprehensive list of License that the customer has under the company’s 15 evidentiary facts relevant to the determination of a Patents to use the machine for its intended purpose. “reasonable royalty” in the computation of damages in a Patent Infringement lawsuit. Some of the facts are: Infringement – The violation of an IP right. the established profitability of the product made under Infringer – A violator of an IP right. the Patent and its commercial success; the extent to Insolvency – There are two kinds of insolvency: (1) which the Infringer made use of the Invention; and insolvency in the accounting sense (liabilities exceed the Royalties received by the Patent owner from other assets), and (2) insolvency in the bankruptcy sense Licensees of the Patent. Georgia-Pacific Corp. v. Unit- (inability to pay obligations as they become due). It ed States Plywood Corp., 318 F.Supp. 1116 (S.D.NY. is necessary when using the term “insolvency” to be 1970). clear whether aspect (1) or (2) is intended. Golden Master – A term used in software licens- Integration Clause – The contract clause stating ing, referring to a copy of the licensed software that that “this is the entire agreement between the paris authorized to make numerous commercial copies. ties.” Its use excludes parol (oral) or other extrinsic Example: Microsoft gives Dell a Golden Master license evidence to vary the terms of the contract. for Windows 8. Intellectual Assets – Codified, tangible or physical Goodwill – An intangible asset, often associated descriptions of specific knowledge to which owner- with a Trademark or Service Mark. ship rights can be asserted. Intellectual Assets are In- Grant-back – A license or assignment (if an assign- tellectual Property which has not yet been protected. ment, usually subject to a reservation of rights) of IP Intellectual Capital – The collective Human Capi- improvement rights (usually Patents) from a Patent Li- tal, Intellectual Assets and Intellectual Property of an censee (of other IP rights) to the Licensor. organization.

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Intellectual Property or IP – Utility patents, de- value from the information for the information’s owner. sign patents, plant patents, copyrights, mask works, Last Antecedent Doctrine – A doctrine of contract trademarks and trade secret rights. interpretation that a succeeding modifier of more than Inter Partes Review or IPR – A proceeding estab- one noun applies only to the last noun, unless the con- lished by 35 U.S.C. text otherwise clearly indicates. For example, a License Interference – An inter partes (between two or grant to “Licensee and Subsidiaries” and “successors more parties) lawsuit conducted in the USPTO to de- and assigns.” Does “successors and assigns” apply only termine which of two or more patent applications (or to “Subsidiaries” or to “Licensee and Subsidiaries”? one or more Patent applications and an issued Patent) The Last Antecedent Doctrine will determine that. is entitled to a patent on a single invention which is Letter of Intent – A document (often in letter form) disclosed in all of the applications (and, where applica- stating (usually in outline form) the fundamental busi- ble, the Patent). ness and financial terms of a proposed contract, but Inter Partes Review or IPR – A legal proceeding not intended to be legally binding. Unless the Letter before the PTAB, under 35 U.S.C. §311, used to chal- of Intent has language negating a binding contract, it lenge the validity of patent claims based on patents might create a binding contract or at least questions and printed publications. about whether or not it is a binding contract (itself Invalid – Not valid. Usually used in reference to a troublesome). See Heads of Agreement, Memorandum Claim which, for reasons of Anticipation or Unobvious- of Understanding and Term Sheet. ness, is not legally Valid. If a Claim is indeed Invalid it License – A grant of permission to do that which, cannot be Infringed. without the permission, would be a Tort. A right to use Inventive Step – The counterpart in many Europe- IP under defined conditions. an, Asian and other countries to Unobviousness. The License Agreement – An agreement in which the meaning of Unobvious or Inventive Step varies from owner of an IP right grants a License to another party. country-to-country. Licensee – The grantee of a License. IP – See Intellectual Property. Licensee Estoppel – A principle under which the Li- IP Bankruptcy Act – 11 U.S.C. § 365(n). censee is estopped (barred) to deny the validity of the IPR – Inter partes review. A trial proceeding before rights licensed. Licensee Estoppel is negated as to Pat- the PTAB to review the patentability of one or more ent Licenses by Lear v. Adkins, 395 U.S. 653 (1969). claims in a Patent only on a ground that could be raised License Monitoring – A program for reviewing Li- under §§ 102 or 103, and only on the basis of prior art cense Agreements and Licensee reports, and monitor- consisting of patents or printed publications. See 35 ing Licensee compliance with obligations, such as roy- USC §§ 311 – 319. alty reporting and payment and Patent Marking, under Joint Ownership – Where two or more persons or the License Agreements. companies each own an interest (called an “undivided interest”) in an IP right. The legal rights and obliga- Licensor – The grantor of a License. tions of a Joint Owner will vary, depending on the type Literal Infringement – Patent Infringement (Di- of IP involved (Patent or Copyright) and the country. rect Infringement) that occurs when the elements of For example, a Joint Owner of a U.S. Patent may grant an Accused Device or process correspond 100% to the a non-exclusive license under the Patent for a Royalty words or phrases of a patent claim. and keep the Royalty for her/himself; in many other Maintenance – Correcting errors in software. countries this is not the case. Maintenance Fee – A fee required to be paid peri- Joint Venture – A broad term, used to cover a odically to maintain an issued Patent in effect. broad range of multi-party relationships. Often (but Marking – Placing a (1) Patent number(s), (2) Trade- not always), each party owns 50% of a Joint Venture mark notice (®), or (3) Copyright notice (©), as appli- corporation. cable, on a product or its packaging or label, to provide JPO – Japanese Patent Office. Constructive Notice that the product is respectively Know-How – Valuable unpatented technical infor- Patented, is designated by a registered Mark or is Cop- mation (e.g. an unpatented manufacturing process). yrighted, as applicable. Know-How and Show-How – Know-How plus the Marks – Trademarks, Service Marks, etc. transfer of the Know-How by personal communication. Markman Determination – A proceeding before a Knowledge Management – The discipline of col- judge, in a Patent Infringement jury trial, in which the lecting, organizing, processing and utilizing informa- judge interprets Claims of the Patent for later determi- tion, using computer-based tools, to derive optimum nations of Patent Infringement of the Claims by a jury.

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Means Plus Statement of Function Claim – Also Omitted Elements Test – A Claim is Invalid if “Means Plus Function” Claim. A Claim which includes it omits an element that someone skilled in the art the description of a Claim element by what it does (e.g. would understand to be essential to the invention as “means for fastening”) rather than what it is (e.g. “a originally disclosed. nut and bolt”). See 35 U.S.C. § 112 ¶6. Option – A contractual right (usually for a specific Memorandum of Agreement – A statement of the time period) to acquire something (in the IP context, terms of a contract, often intended not to be legally to acquire ownership of or a License to a Patent or oth- binding. Unless the MOU has language negating a er IP right) at a future date, upon exercise of the right binding contract, it might create a binding contract or by the Option holder. The Option grant, to be mean- at least questions about whether or not it is a binding ingful, should specify all of the terms of the Option to contract (itself troublesome). See MOA, MOU, Heads be exercised, including the period of the Option, the of Agreement, Letter of Intent and Term Sheet. exercise price, and at least all other relevant business Memorandum of Understanding – A broad state- terms. Preferably, there should be a complete Option ment of the proposed terms of a contract, often in- agreement specifying all terms of the Option grant; tended not to be legally binding. Used in international otherwise, there can be confusion about what are the transactions. Unless the MOU has language negating terms of the Option. a binding contract, it might create a binding contract Paid-Up License – A vested License as to which no or at least questions about whether or not it is a bind- further Royalty is payable. ing contract (itself troublesome). See MOU, Heads of Agreement, Letter of Intent and Term Sheet. Paris Convention – An international Patent treaty providing that a patent application filed in a member Misuse – An equitable defense, (unclean hands) to country on a given date (the “Filing Date”) and then an infringement charge based on a violation of the let- filed in other member countries within one year after ter or spirit of the antitrust laws. Purging the wrongful the Filing Date, will be deemed in the other countries act ends the defense prospectively. to have been filed on the Filing Date. Most industrial Most Favored Licensee Clause – See Most Favored countries, including the U.S., are members. Nations Clause. Patent – An Exclusionary Right granted by a govern- Most Favored Nations Clause (MFN Clause) – ment, for a limited period of time, an invention which Sometimes called a Most Favored Licensee (MFL) clause. meets the legal requirements of Statutory Subject A clause granting a Licensee the right to have the same, Matter. Novelty, Utility and Unobviousness. 35 U.S.C. more favorable terms (usually financial) as may be granted §§ 101, 102 and 103. See Principle of Territoriality. by the Licensor to subsequent Licensees. Patentable – Legally capable of being Patented. MOU – Memorandum of Understanding. See Patent. Mutatis Mutandis – A Latin term used in contracts to designate a clause which is identical to a prior clause Patent Application – An application, filed with the “with appropriate (obvious) changes.” Patent Office of a country, to obtain a Patent granted by that country. See Principle of Territoriality. Net Sales – Gross sales of (or revenue from) a Li- censed product minus certain specified deductions. Patent Assertion Insurance – “Insurance” for Used to determine a Royalty Base for computing a Roy- specified Patents which, if Infringed, will pay the legal alty payment. fees and expenses of Patent infringement litigation. Typically, the “insurance” requires a prepaid premium Non-Exclusive License – A personal, non-transferable right to practice an IP right. and has a policy limit on fees and expenses paid. If the Patent owner is successful in the lawsuit, due to Non-Obviousness – See Unobviousness. a settlement or victory, the Patent owner repays the Novelty – One of the statutory requirements for a insurance company the sum advanced plus a “kicker.” Patent that the Claimed invention is new and was not Patentee is Her/His Own Lexicographer Doc- previously invented by someone else. 35 U.S.C. § 101. trine – A rule of Claim interpretation, under which OEM – Original equipment manufacturer. A compa- the Patentee may create any word, usage or definition ny (A) that buys a product from another company, (B) (in the Patent’s specification and Claims) s/he chooses, to sell under A’s Trademark. and the word or words of a Claim will be interpreted Office Action – A formal letter from the Patent Of- according to that usage or definition. fice to an applicant Rejecting Claims of a Patent appli- Patent Infringement – Infringement of a Patent by cation on formal or substantive grounds (e.g. “Claim 1 either (1) Direct Infringement, (2) Active Inducement, is unpatentable because . . .”). or (3) Contributory Infringement.

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Patent Office – The government agency which ex- Preliminary Injunction – A court order, entered amines and grants Patents. In the U.S. it is formally after an evidentiary hearing and before a complete tri- called the “Patent and Trademark Office” or “PTO.” al on the merits, barring a defendant in a lawsuit from Patent Prosecution – The interplay between an doing an act, such as importing or distributing an In- applicant for a Patent (or, more often, his or her pat- fringing product, until the trial on the merits. ent attorney) and the Patent Office, in which a Patent Presumption of Validity – The statutory presump- application is alleged (by the Patent Office) to be tion to which every issued U.S. Patent is entitled, that improper or unpatentable for specified reasons and the Patent is Valid. 35 U.S.C. § 282. the responses. Principle of Territoriality – The principle of in- PCT – Patent Cooperation Treaty. An international ternational law that an IP right granted by a country treaty facilitating the filing and prosecution of Patent (e.g., U.S.) is effective only within the territory of that applications in various member countries (including country. For example, a United States Patent is effec- the U.S. and most major industrial countries). tive only in the United States and its territories and possessions. Permanent Injunction – A court order, entered in a trial on the merits, permanently barring a defendant Prior Art – That body of prior patents, patent appli- in a lawsuit from doing an act, such as importing or cations, publications and products which precede an distributing an Infringing product. invention or patent application and may be relied on to invalidate or limit a Claim. Pioneer Patent – A patent which represents a ma- Privilege – A legal right that protects certain com- jor technological advance is called a “pioneer” patent. munications (said to be “privileged”) from access to When the Doctrine of Equivalents is applied to a claim the adversary in a lawsuit. There are several types of of a Pioneer Patent, the Doctrine of Equivalents is in- Privilege, including attorney-client, priest-penitent and terpreted broadly. physician-patient. Plain Meaning Doctrine – Words in a Claim are, in Provisional Patent Application (PPA) – An infor- the first instance, given their plain meaning. mal Patent disclosure (it may be no more than a de- Portfolio Analysis – The process of analyzing a Pat- tailed description of the invention) filed in the PTO, ent portfolio, to determine which Patents (or Patents under 35 U.S.C. § 111(b), for a nominal fee (depend- and related technologies) are most likely to be valuable ing on whether the applicant is a Small Business Entity, and therefore revenue-generating. in which case a lower fee applies). The PPA may be Portfolio Maintenance Analysis – The analysis of filed without a formal patent claim, oath or declara- the Patents in a Patent portfolio and the Maintenance tion, or any information or prior art disclosure. The fees associated with each “family” of Patents (each U.S. PPA provides the means to establish an early effective Patent and its overseas counterparts), to determine filing date in a patent application and allows the term which Patents, because of their limited value, ought “Patent Pending” to be used. The PPA is preserved by to be discontinued by failure to pay Maintenance fees. the PTO for at least one year after it is filed. If, within that year, a Patent Application is filed, which refers to Portfolio Mining – The process of (1) Portfolio the PPA, the Patent Application will be entitled to the Analysis and then (2) developing and realizing revenue benefit of the earlier filing date of the PPA, but only to or other value from Patents in the portfolio or technol- the extent that the two applications disclose the same ogies represented by the Patents, by Carrot Mining or subject matter. A PPA is a very useful way to preserve Stick Mining. an inventor’s rights for one year without the expense Portfolio Paring – Eliminating non-productive Pat- of filing a Patent Application. In any event, a formal ents in a portfolio by sale or by non-payment of Main- Patent Application must be filed to obtain legal rights tenance fees. in an invention. Portfolio Valuation by Sampling – A statistical PTAB – Patent Trial and Appeal Board, a tribunal of technique for evaluating a Patent portfolio for either the USPTO. Carrot or Stick Mining values, or both, by sampling Reach-through Licensing – A term used to desig- selected Patents in the portfolio, valuing those Pat- nate the use by a Licensee of a patented product to ents and extrapolating to determine the value of the produce another product, in which the other prod- entire portfolio. uct is the basis of the royalty payment. For example, Preamble Doctrine – A rule of Claim interpreta- in the biotech field, if a licensed drug discovery tool tion, under which, generally, the preamble portion of is used to discover a new drug, the licensor of the a Claim will not limit the scope of the Claim, but may discovery tool seeks a royalty based on sales of the shed light on the meaning of the Claim. discovered drug.

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Reach-through Royalties – Royalties derived from a Patent or other IP right) to negotiate exclusively with product or service created or generated with a licensed the grantee of the right for a specified period of time patent or other IP. See Reach-through Licensing. after the owner decides to sell that right. This is differ- Reads On – A term used when each of the words of ent from (and much less valuable than) a Right of First a Claim of a patent finds complete (one-for-one) corre- Refusal, because the grantee has no certainty other spondence (1) with the description in a single piece of than a time advantage. Prior Art (in which case the Claim Reads On the Prior Right of First Refusal – The contractual right, Art and is therefore Anticipated and Invalid) or, (2) in granted by an owner of a tangible or intangible asset each of the --is Infringed). (in the IP context, a Patent or other IP right) to present Reduction to Practice – Making a model or imple- to the grantee (in the IP context, an exclusive licensee mentation of a Patentable invention to demonstrate broadly or in a FOU) any third party offer to sell or that it will work. transfer (as by an exclusive license to an improvement or in another FOU) the right that the owner is about Reexamination – Through ex parte reexamination, to accept. This means that the owner must first get a the patent owner or a third party may lodge a request complete offer from a third party to buy the asset and, for USPTO examination of an already-granted patent before selling to the third party, must offer to sell to based on patents and printed publications that they the grantee on terms identical to the offer. This can bring to the USPTO’s attention. Such a request can be have a chilling effect on the ability of the owner to get filed at any time during the enforceability of a patent, third party offers, because the third party may be re- and the requester must establish that the submitted luctant to spend the time and effort to decide whether prior art establishes a substantial and new question of to buy and then negotiate the deal and be preempted patentability (SNQ), at which point the USPTO will by the grantee. One way to make it more appealing to grant the reexamination request and order examina- the third party is to offer a “break-up fee” to compen- tion (i.e., reexamination) of the patent in question. See sate the third party for its time and effort if the right is also Inter Partes Review. sold to the grantee. Regular and Established Royalty – An approach Right of Publicity – An inherent right, recognized used in determining an appropriate Royalty, by deter- in many (but not all) states, of every person to control mining regular and established Royalties (comparable the commercial use of his or her identity. Protected by Royalties) used in the industry (or closely related in- statutes in some states and by Common Law in others. dustries) for similar types of products, processes, etc. Royalty – A fee paid for use of Licensed IP, usually Rejection – A reason given by the PTO, in an Office a specified sum or a percentage for each Licensed unit Action, for refusing to allow the Claim of a pending sold. See Royalty Rate. Some approaches used to deter- Patent application. mine (or aid in determining) Royalties are: Discounted Return on Investment Analysis – An approach Cash Flow Analysis; Regular and Established Royalty; used in determining an appropriate Royalty, by assess- Return on Investment Analysis; and Twenty Five Per- ing the amount the Patent or technology owner invest- cent of Profits. ed to develop the technology and the rate of return Royalty Base – The unit sales to which a percentage that the owner would expect to receive on its invest- Royalty is applied (e.g., sales of widgets). ment. Royalty Rate – A percentage which is multiplied by Repair v. Reconstruction Doctrine – A Patent In- a Royalty Base to determine a Royalty. fringement doctrine that repair of a licensed, Patented Royalty Stacking – Multiple royalties payable to article is permitted, but that reconstruction of the arti- multiple Patent owners on a product which Infringes cle is an Infringement of the Licensed Patent. multiple Patents. Represent – A covenant as to a present event or Royalty Withholding Tax – See Withholding Tax. condition, but is often confused with Warrant, which Secondary Considerations – A list of objective refers to future events or conditions. See Warrant. considerations which may be considered by the judge Reverse Doctrine of Equivalents – A rule of Claim or jury (as applicable) to assist in the subjective deter- interpretation under which, even if Literal Infringe- mination of whether or not an invention is non-obvi- ment otherwise appears to be present, there is no ous, within the meaning of 35 U.S.C. § 103. The Sec- Patent Infringement because the Accused Device or ondary Considerations include commercial success, process is so changed that it performs the function of satisfaction of a long-felt need and others. See Graham the Claimed invention in a substantially different way. v. John Deere Co., 383 U.S. 1 (1966). Right of First Negotiation – The contractual right, Securitization – A form of lending in which an granted by an owner of something (in the IP context, a owner of Licensed IP grants a Security Interest in the

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IP to a lender in exchange for a loan which represents Stick Mining – Portfolio Mining which seeks out a portion of the projected value of License revenue Patents which are infringed and therefore have value from the IP. to be Licensed to Infringers or sold. Security Interest – A “mortgage” or “lien” on per- Structural Capital – The support or infrastructure sonal property (such as a Patent, Trademark, Copyright of an organization which allows Intellectual Capital to or License Agreement) as security for an indebtedness be utilized productively. Structural Capital includes or obligation of the owner of the property. Technically, property, plant and equipment. “mortgages” apply to real estate and “security inter- Substantial Unlicensed Competition Clause – A ests” apply to personal property. clause in a License Agreement which provides for the SEP – Standards essential patent. See Essential Patent. deferral or forfeiture of royalties for so long as unli- Service Mark – A word or symbol that designates censed competition continues unabated or until an the source or origin of a service. infringement suit is initiated. This clause requires a Set-off – The common law right of A to deduct sums definition of what is “substantial” (not always easy to of money that B owes to A from money that A owes to B. do) and what are the conditions after which the royalty is deferred or forfeited, e.g. notice of the competition, Shop Right – A royalty-free, non-exclusive Patent and an opportunity for the Licensor either to License License that courts will imply to exist, for the benefit or sue the unlicensed competitor. of an inventor’s employer, when an employee makes a Patentable Invention using the employer’s time, ma- Support – Answering questions and providing assis- terials and/or equipment, and the employer does not tance about use of a computer program. own the Patentable Invention (either under an appro- Territoriality – See Principle of Territoriality. priate contract or as a matter of law). Term Sheet – A document setting forth the basic Shrink Wrap License – A non-exclusive software terms (usually primarily financial terms and fundamen- License which is not signed and is included in the soft- tal definitions) of a proposed agreement. It is usually ware package. not intended to be legally binding. Unless the Term Source Code – A computer program written in hu- Sheet has language negating a binding contract, it man-readable language (e.g., Basic). might create a binding contract or at least questions about whether or not it is a binding contract (itself Springing License – A License grant (usual- troublesome). See Heads of Agreement, Memorandum ly non-exclusive) of Patents and Know-How that of Understanding and Letter of Intent. “springs” into existence without more. An example is when a Force Majeure occurs and a commercial Tolling Agreement – An agreement for the man- product purchaser obtains a Springing License to the ufacture of products, in which the “purchaser” pro- Patents and Know-How relating to the manufacture of vides and owns (and therefore retains title to) all raw the product, to enable the purchaser to obtain prod- ingredients, materials, compopnents, etc. that go into uct from a second source. the manufacture of the product. All that the supplier provides is manufacturing services. Common in the Standards Licensing – A requirement of national or international standards committees (such as IEEE, chemical industry. Contrast with Foundry Agreement. ANSI, ITU, etc.), that the owner of an Essential Patent Tort – A civil wrong which does not arise from an to the standard, which participated in the committee express or implied contract. For example, Patent In- deliberations, grant Licenses under its Essential Pat- fringement is a “tort.” ents to all companies on “reasonable terms and condi- Territorial License – A License of IP which is re- tions, demonstrably free of discrimination.” stricted to a particular geographic area. For example, a Statutory Bar – Prior Art Invalidating a Claim under License relating to a new pharmaceutical, as to which 35 U.S.C. § 102 and having an effective date more License A is restricted to North and South America, Li- than one year prior to the filing date of a Patent appli- cense B is restricted to Europe and Africa, and License cation. C is restricted to Asia, Australia and New Zealand. See Statutory Subject Matter – The categories of in- Field of Use License. A License may be both a Field of ventions that are Patentable under 35 U.S.C. § 101, Use License and a Territorial License. namely “process, machine, (article of) manufacture, or Tolling Agreement – An agreement under which composition of matter, or any new and useful improve- Company A provides Company B with a product or ment thereof.” component of Company A, which Company B then Stick License – A patent license (usually non-exclu- modifies or processes and Company B gets paid for the sive) of infringers or would-be infringers of a patent or service. For example, Company A makes stents and patents owned by the Licensor. sends them to Company B to be coated. In a Tolling

229 les Nouvelles Tips on Writing Licenses And Agreements

Agreement, Company A owns the stents at all times and Statutory Subject Matter, 35 U.S.C. §§ 101, 102 and has the risk of loss at all times. and 103. Not Patentable. Trade Secret – Any business information of value Update – A modification of a computer program to (technical, financial, marketing) that is treated as se- make it current (e.g., modifying a tax return prepara- cret and is learned as a result of a protected relation- tion program to accommodate tax law changes). ship (employee, consultant, etc.). Utility – One of the statutory requirements for a Trademark – A word or symbol that designates the Patent, 35 U.S.C. § 101, that the Claimed Invention source or origin of a product. is useful. TRO – Temporary restraining order. A court order Utility Patent – A Patent which protects a method for a brief time (e.g. ten days) and without an eviden- or the functional (rather than aesthetic) aspects (what tiary hearing, barring a defendant in a lawsuit from do- it is or what it does) of a product. Compare with De- ing an act, such as making, reproducing, importing or sign Patent, which protects the aesthetic aspects. distributing an Infringing product. Valid or Validity – Whether a Patent Claim meets Twenty-Five Percent Rule – An approach used in the legal requirements of 35 U.S.C.A. §§ 101, 102 determining an appropriate Royalty rate, by estimat- and 103 as to Statutory Subject Matter, Novelty, Util- ing a Royalty Rate that would be twenty-five percent ity and Non-Obviousness. of the Licensee’s profits for the Licensed product. This “rule of thumb” has largely been discredited in Warrant – A covenant as to a future event or condi- some recent cases. tion. Compare Represent. Tying – Conditioning the purchase of one product or Willful Infringement – Patent Infringement which service on the purchase of another product or service. continues after actual or Constructive Notice of the Unbundling – Selling separately a product (often Patent and without a legal opinion of non-infringement. software) which is usually sold together with another Withholding Tax – A tax imposed by some coun- product. For example, the Palm® operating system is tries (e.g. Japan and Korea) on Royalties payable under usually Bundled with a Palm® PDA. However, it may a License Agreement. The tax statutes often require be Unbundled and licensed to manufacturers of other that the Royalty payer (Licensee) must withhold the PDAs, for use with their products. tax and pay it to the taxing authority. Unlicensed Competition Clause – See Substantial Working – A requirement of the Patent statutes Unlicensed Competition Clause. of some countries (not the major industrial coun- Unobviousness – A statutory requirement of U.S. tries) that, if a Patented Invention is not commer- Patent law (35 U.S.C. § 103) that an Invention, to be cially used (worked) in that country within a speci- Patentable, must be unobvious to a person having ordi- fied time period, the Patent owner must License the nary skill in the art (technology) to which the invention Patent in that country, on a Royalty-bearing basis, to pertains. (Also called “Non-Obviousness.”) any interested party. Unpatentable – Not meeting the statutory require- Available at Social Science Research Network (SSRN): ments for a Patent. i.e. Novelty, Utility, Unobviousness https://ssrn.com/abstract=2855026

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An Experience-Based Look At The Licensing Practices That Drive The Cellular Communications Industry: Whole Portfolio/Whole Device Licensing By Marvin Blecker, Tom Sanchez and Eric Stasik

I. Introduction world’s population is covered by mobile radio servic- A. A Success Story es and globally there are 93 mobile cellular subscriptions per 100 people.1 As users acquire more and more ellular communications technologies have un- devices, many companies have availed themselves of dergone dramatic changes during the last 25 the industry’s standardized technologies, and entered Cyears, as major technological improvements the market for cellular communications equipment by revolutionized the way the world communicates, and focusing on developing sleek and sophisticated hand- both consumes and creates digital content. Significant sets. Many of these companies were not substantively investments in research and development (“R&D”), involved in creating the foundational communications combined with efficient standardization and patent technology. Additional advances in cellular communi- licensing practices, brought about these changes and cations standards and technologies are likely to further enabled successive generations of cellular communica- reduce prices, enabling even more people around the tion standards to be implemented quickly and widely. world to acquire advanced wireless devices and more The high data rates and lower prices achieved through companies to enter the competitive handset market. third generation (3G) standards ushered in many of these changes, and created innumerable benefits at all B. Calls for Change levels of the industry, as mobile devices became viable The technological revolution briefly summarized platforms for internet browsing, sharing photographs, above has taken place in the context of a set of social networking, and even watching videos. The long-standing industry standard licensing practices, broad deployment of advanced devices and high-speed which we discuss in some detail in this paper. Today, cellular communications networks has also supported some industry participants, along with some voic- the development of entirely new businesses—from es in academia and within government agencies, are Uber to ApplePay to mobile streaming video from Net- demanding fundamental changes to those licensing flix, Amazon, DirecTV, CBS, NBC and others—based mechanisms. In particular, some influential voices have entirely on high-speed cellular communications infra- challenged the notion that whole-portfolio licenses cov- structure. With even faster data rates and more effi- ering and protecting whole devices (“whole-portfolio/ cient use of wireless spectrum, the fourth generation whole-device” licensing) are efficient, fair, reasonable, (4G) ecosystem promises to be larger and even more sensible or desirable. Recently, this viewpoint achieved successful than the 3G standard it is replacing. Those a success in modifying the IEEE’s intellectual property improvements will undoubtedly continue as fifth gen- rights policy in a manner intended to force changes in eration (5G) standards are developed, which will fur- the licensing practices of innovators who contribute ther increase performance and efficiency of cellular their patented technologies to standards, including communications for the benefit of all. by defining “fair and reasonable” in a new way that may preclude portfolio owners from licensing on a Not only have the performance and functionality of 2 cellular technology rapidly improved, but also prices whole-portfolio/whole-device basis. Similar changes of equipment and services have sharply decreased. are being advocated within other standards-devel- Cellular phones—particularly smartphones—and other wireless devices (e.g., tablets) are now available at 2. Press Release, IEEE Statement Regarding Updating of its prices billions of users around the world can afford. Standards-Related Patent Policy (Feb. 8, 2015), available at The World Bank estimates that 96 percent of the https://www.ieee.org/about/news/2015/8_february_2015.html. This new policy has been roundly criticized as harmful to innovation and intellectual property rights, including by former 1. The World Bank, “World Development Indicators: Power Commissioner of the U.S. Federal Trade Commission Joshua and Communications,” http://wdi.worldbank.org/table/5.11. Of Wright. FTC Commissioner Wright Criticizes DOJ IEEE Let- course, statistics on the number of subscriptions per capita do ter, ABA Intellectual Property Committee tidBITS, available at not account for people who have multiple phones, or a phone http://www.americanbar.org/content/dam/aba/publications/anti- plus a tablet, eReader, or PC with a cellular connection. trust_law/at315000_tidbits_20150315.authcheckdam.pdf.

231 les Nouvelles Cellular Communications Industry opment organizations (SDOs), and to regulators and responsible for patenting and licensing within Erics- courts around the world. son’s GSM and UMTS infrastructure business. From We are concerned that such changes are being pro- 2000 Stasik was Director of IPR & Licensing for Tele- posed and debated in a historical vacuum. The changes fonaktiebolaget LM Ericsson, the corporate entity for that some are advocating would be fundamental depar- all of Ericsson where he was primarily responsible for tures from the licensing practices that have been wide- negotiating in-licenses. In 2002, Stasik left Ericsson ly used in the cellular communications industry from and became an independent consultant advising and its inception to the present. Despite the importance of representing chipset vendors, handset manufactures, licensing to creating a healthy ecosystem and continu- infrastructure manufacturers, and network operators ing innovation, discussion about changes to those long- in the mobile communica- standing licensing practices in SDOs, courts and gov- tions industry negotiating ■ Marvin Blecker, ernment agencies is being largely conducted without both in- and out-licenses. Retired-Formerly consideration of how and why the challenged practices Since 2011 Stasik has also Qualcomm, Inc., developed, received widespread acceptance within the been the managing direc- cellular industry, have persisted for at least 20 years, tor for MKA Gruppen KB President Qualcomm and have contributed to the widely acknowledged suc- which acts as the exclu- Technology Licensing, cessful growth and innovation of the wireless industry. sive broker for the sale San Diego, CA, USA We believe that making policy in this intellectual vacu- of patents owned by the E-mail: marvinblecker@ um is unwise, and potentially highly detrimental to the Swedish-Finnish Telecoms gmail.com industry and ultimately to consumers. operator Telia Sonera AB. ■ Tom Sanchez, C. Historical and Market Experience Collectively, we have Kelly & Krause, L.P., Each of the authors of this paper has participated been involved in all man- Partner, ner of licensing negotia- intensively in portfolio licensing in the cellular in- Dallas, TX., USA dustry for at least 20 years—that is, since the very tions from the early days of the industry through E-mail: tom.sanchez@ early days of the industry. Specifically, in 1990, Tom Kelly-Krause.com Sanchez was put in charge of the licensing program at the present. Indeed, in Motorola Cellular Subscriber, the predecessor to Mo- years past we have even ■ Eric Stasik, torola Mobility, and was responsible for licensing out sat across the table from Avvika AB, Motorola’s significant patent portfolio, which grew to one another in hard-fought Director, include numerous SEPs for the GSM standard. While negotiations. Based on our extensive experience, we Stockholm, Sweden at Motorola, Sanchez developed a template for what E-mail: [email protected] would later be termed FRAND licensing, which gen- provide real-world per- erally included a license to Motorola’s entire patent spectives on the history portfolio using the device price as the royalty base. In and continued utility of the longstanding practice of 2001, Sanchez joined Research in Motion (RIM), now whole-portfolio/whole-device licensing. In our view, the known as Blackberry. When he joined RIM/Blackberry, historical background behind whole-portfolio/whole-de- Sanchez was primarily responsible for patent licensing vice licensing, and the importance of this practice to the and litigation, and later took on responsibility for all success of the industry is essential to understanding the patent activities until he left in 2012 as a Senior Vice legal and policy issues being debated today. President of Patents and Licensing. Marvin Blecker In this article we focus on licensing of major port- joined Qualcomm in 1992 and immediately became folios by companies that have made significant invest- involved in developing Qualcomm’s licensing pro- ments in high-risk R&D.3 Most of the major techno- gram, including key early agreements with Panasonic, logical developments underpinning the success of the LG, Samsung and Hyundai. He continued negotiating wireless telecommunications industry have come from out-licenses for Qualcomm as its licensing business a relatively few, innovative companies that have made rapidly expanded, and served as Qualcomm Technology very large investments in R&D and, as a result, have Licensing (QTL) Division President until he “semi-re- vast portfolios of relevant patents. This continues to tired” in 2008. Thereafter, he continued supporting be true even for the latest development of the 4G the activities of QTL part-time until his full retirement LTE standards. According to one estimate based on IP in 2014. Eric Stasik began as a Senior Patent Engineer declarations made to ETSI as of November 2012, nine in 1992 for Ericsson-GE Mobile Communications responsible for obtaining patents on D-AMPS (IS-54) and 3. This paper does not discuss small-scale licensing by GSM handsets and negotiating SEP in-licenses. From non-practicing entities and other entities that may own only a 1995 he was Manager of IPR activities for the UMTS small number of patents, and represent a limited portion of the and GSM Systems division of Ericsson Radio Systems patent holdings in the industry.

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companies (Ericsson, Huawei, InterDigital, LG, Mo- nificant resources to developing the innovations nec- torola, Nokia, Qualcomm, Samsung and ZTE) account- essary to solve those engineering problems. Some of ed for 71.4 percent of all patents declared essential to those innovators have developed portfolios with tens the LTE or LTE-Advanced standards.4 of thousands of patents, many of which are essential to Confidentiality obligations preclude us from pointing the standard or otherwise practiced by cellular equip- to as many specific, real-world examples in the course ment. Below, we provide a brief high-level overview of of our discussions as we would prefer. However, giv- standards development in the cellular communications en the extent, depth, and diversity of our respective industry and the patent portfolios held by major inno- experiences in licensing, where the three of us are in vators, before giving a brief practical overview of the agreement as to the facts concerning or reasons for mechanics of licensing negotiations. historical industry practice, this gives us high confi- A. Standards Setting in the Cellular Communica- dence that our consensus understanding is accurate. tions Industry In this article we: (i) provide an overview of stand- Telecommunication standards are remarkably com- ards setting in the cellular communications industry plex engineering creations. The modern cellular phone and how license negotiations are typically conducted, is undoubtedly by far the most complex consumer de- (ii) look at the prevalence of whole-portfolio or free- vice that has ever existed. The paper documentation dom-of-operation licenses; (iii) discuss the standard of the 4G LTE standard occupies thousands of pages, practice of using the price of a whole device as the describing in great detail everything from overall sys- royalty base; and (iv) consider the extent to which tem architecture through every detail of interaction technical advances in wireless devices, and additional between a device and a network, down to what each features found in present-day smartphones, have (or bit in each block of data means. have not) impacted licensing practices. Standards projects typically start out with defined In our view, the widespread availability of high-per- performance goals. For example, the goal for the 3G formance cellular handsets and numerous new busi- standard was a 10-times increase in capacity over nesses that have sprung up around this technology, second generation (2G) cellular.5 Once the goals are testify to the tremendous dynamism and vigorous established, the process of determining requirements competition in the cellular industry. Although licens- and developing technologies to achieve those require- ing all of the patented technology that goes into mod- ments begins.6 The necessary inventions do not come ern communication devices is necessarily complex, easily or inevitably; participating innovators pour bil- the whole-portfolio/whole-device licensing model has lions of dollars into R&D and contribute the result- functioned well, simplified the process for both the ing technical solutions to the standard-development licensee and licensor, and enabled the cellular commu- efforts. Once participants reach agreement that they nications industry to become a historic success story have a fully functional, fully detailed set of specifica- and a triumph of technological development, standard- tions, the standard is frozen and published.7 ization, and dissemination through licensing. We write The difficult problems that need to be solved, and to explain how and why the practice of whole-portfo- the level of detail contained in standards so that all de- lio/whole-device licensing developed, which we hope vices are interoperable, makes this a laborious process. and believe can usefully inform current debates about As an example, more than 200 companies from 13 licensing policy for the future of the cellular industry. countries spent approximately 886,000 person hours II. Standards Setting, Patent Portfolios and Li- over 15 years developing 2G-related standard releas- censing Negotiations in the Cellular Commu- es.8 Standards for subsequent generations have been nications Industry released more quickly, but have taken even greater in- The cellular communications industry is built vestments of time and resources by more companies. around standards and has flourished in part because Developing 4G LTE releases is ongoing and has already newcomers can implement standardized technologies, and make and sell competitive devices that are inter- 5. Boston Consulting Group, “The Mobile Revolution,” at 29 operable with existing networks, without significant (Jan. 2015); Kirti Gupta, “Technology Standards and Competi- investments in R&D. The efficient and high-perfor- tion in the Mobile Wireless Industry,” 22 Geo. Mason L. Rev. mance standards used in the industry must overcome 865, 871-72 (2015). numerous challenges, and major innovators devote sig- 6. Boston Consulting Group, “The Mobile Revolution,” at 29- 30 (Jan. 2015). 7. Boston Consulting Group, “The Mobile Revolution,” at 30 4. Cyber Creative Institute, “Evaluation of LTE Essential Pat- (Jan. 2015). ents Declared to ETSI,” at 9, available at http://cybersoken.com/ 8. Boston Consulting Group, “The Mobile Revolution,” at 30 research/pdf/lte03EN.pdf. (Jan. 2015).

233 les Nouvelles Cellular Communications Industry taken more than nine years, and more than a million licensee, outside of ETSI.”12 If those commercial li- person hours from participants from more than 320 censing terms had to be resolved during the course companies.9 These figures reflect only the time spent of standardization, standardization—and further tech- in actual SDO meetings. They do not account for the nological innovation in the entire industry—would be time engineers spent outside SDO meetings actually greatly slowed. Once a standard is adopted (perhaps developing the innovations necessary to meet the goals with some bilateral licenses completed and others still and requirements set for the standard. That engineer- pending), wireless operators and implementers can ing time, for the major innovators, amounts to many start to develop their plans for implementing equip- multiples of the SDO meeting time. ment, devices and services that utilize the standard. If Many of the innovations incorporated into standards they had to wait for final negotiation of license terms have been patented, and must be licensed by anyone with all patent holders, that could result in drawing wishing to build fully standards compliant equipment. out the process by additional years and delaying the SDOs place great emphasis on developing the best pos- implementation of new technologies. sible technological solutions. At the same time, partic- B. Major Patent Portfolios in the Cellular Industry ipants are prohibited from discussing licensing terms and conditions for the patented technologies used in Major R&D contributors in the cellular communica- standards.10 Instead, most SDOs request that partici- tions industry invest heavily in high-risk R&D that may pants disclose any patents they have for technologies or may not succeed and, even if successful, may or included in the standard and agree to license those may not be adopted by the industry, whether through patents on fair, reasonable and non-discriminatory standardization or in practice. One study estimates (FRAND) terms.11 This procedure limits the ability of that, worldwide, companies invested over $1.8 trillion 13 patent holders to exercise their statutory right to ex- in cellular R&D between 2009 and 2013. As a re- clude or prevent other entities from implementing the sult of those investments, major innovators typically standard, and avoids bogging down SDOs with what have patent portfolios with large numbers of declared would otherwise surely be long and drawn out discus- SEPs for cellular and other standards used by handsets, sions over licensing terms. and significant numbers of non-SEPs as well. Their de- Deferring licensing discussions is central to the ef- clared SEPs and non-SEPs cover inventions used in 3G ficient process of quickly designing new standards be- and 4G air interface standards, WiFi, GPS, video co- cause licensing negotiations are complicated and often dec technologies, radio chips, baseband processors, absorb significant resources, both in terms of time and software and user interfaces, among other technolo- money. Most SDOs in the cellular communications in- gies. Major portfolios include patents on inventions dustry intentionally put licensing matters to the side used in products ranging from small components, so they can focus on developing new standards. For to complete handsets, to base stations, to protocols example, ETSI members specifically do not have a duty governing the interactions among handsets and base to disclose commercial terms, which are “a matter for stations in a network. discussion between the IPR holder and the potential In an effort to develop the most efficient and highest performing cellular communications equipment, SDOs develop standards that incorporate many differ- 9. Boston Consulting Group, “The Mobile Revolution,” at 30 ent inventions and, as a result, thousands of declared (Jan. 2015). SEPs. For example, nearly 6,000 patents or patent fam- 10. ETSI’s guidelines state: “Specific licensing terms and ne- ilies have been declared as essential to the 4G LTE and gotiations are commercial issues between the companies and LTE-Advanced standards.14 shall not be addressed within ETSI. Technical Bodies are not the appropriate place to discuss IPR Issues. Technical Bodies C. Licensing Negotiations in the Cellular Commu- do not have the competence to deal with commercial issues. nications Industry Members attending ETSI Technical Bodies are often technical To operate with cellular networks, handsets need experts who do not have legal or business responsibilities with to comply with the relevant communications stand- regard to licensing issues. Discussion on licensing issues among competitors in a standards making process can significantly com- 12. ETSI Guide on Intellectual Property Rights § 2.2 (Adopt- plicate, delay or derail this process.” ETSI Guide on Intellectual ed by Board #94 on September 19, 2013), available at http:// Property Rights § 4.1 (Adopted by Board #94 on September www.etsi.org/images/files/IPR/etsi-guide-on-ipr.pdf. 19, 2013), available at http://www.etsi.org/images/files/IPR/etsi- guide-on-ipr.pdf. 13. Boston Consulting Group, “The Mobile Revolution,” at 5 (Jan. 2015). 11. Some SDOs use the term RAND for “reasonable and non-discriminatory” instead of FRAND. Within the industry, 14. Cyber Creative Institute, “Evaluation of LTE Essential Pat- FRAND and RAND are generally understood to have the same ents Declared to ETSI,” at 4, available at http://cybersoken.com/ meaning. research/pdf/lte03EN.pdf.

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ards, which means that handset manufacturers must cases, the parties reach an amicable agreement for a use technologies covered by SEPs for those standards. whole-portfolio license, which necessarily includes a SEPs or “standard essential patents” are patents on license to all of the patent holder’s SEPs and often to technologies that must be practiced in order to comply the patent holder’s whole-portfolio, including all of with a standard.15 They need licenses, at a minimum, the patent holder’s SEPs and many, if not all, of its to all of those SEPs, or else they will be liable for in- non-SEPs. As discussed below, in our experience this fringement. Generally, handsets also practice patented type of broad “freedom of action” license to the patent technologies that are non-SEPs, but are as a practical holder’s entire portfolio is desired by both parties and matter “commercially necessary” because they cover is the most efficient, and most common, result. functionalities that customers typically demand, such While the process of negotiating a patent license has as operating system functionalities, cameras, video co- always been arduous, in the past, parties were generally decs, WiFi or GPS. So, handset manufacturers need able to negotiate license agreements, and it was relative- licenses not only to SEPs, but also to many non-SEPs. ly rare to reach an impasse and seek court intervention. Because of the potentially large number of pat- Recent developments in law and policy have somewhat ents involved, the transaction costs associated with altered the landscape. Although the European Court of licensing patent-by-patent, country-by-country, prod- Justice recently confirmed, inHuawei v. ZTE,16 that SEP uct-by-product would be astronomical. In the cellular holders can seek and obtain injunctions, as a practical communications industry, patent licensing—whether matter, that right has been constrained. Infringers of for SEPs, non-SEPs or both—generally follows the same SEPs now have greater incentives to try their luck with course. With the exception of a few major innovators, litigation by challenging the validity of patents and, if patent holders will generally have to convince imple- unsuccessful, arguing over damages. menters that their patents are valid and interesting to While weakening IP rights may be beneficial for im- (or, more commonly, are infringed by) the implement- plementers in the short-term, we believe that this trend er. Implementers may already be using this technology poses serious risks for the future health of the mobile without paying royalties, and will have to be convinced communications industry as a whole. The royalty fees to pay for a license. These are often serious discus- generated by licensing patents are important to the en- sions that take place over numerous meetings among tire industry because they compensate innovators for patent attorneys and technical experts, who analyze their successful investments in high-risk R&D that en- the patent claims and products in laborious detail. It able the industry’s progress and encourage continued can take months or years to negotiate a patent license investments. If IP rights are devalued, (i) new market and, as anyone who has sat through a long afternoon entrants will get a “free ride” by being able to use such discussing claim charts knows, parties cannot discuss IP “on the cheap” without making any comparable in- thousands or even hundreds of patents in detail if vestment in standardized technologies, thereby creat- they hope to reach an agreement within a reasonable ing an inequitable market, and (ii) innovators will be amount of time. As such, the parties generally agree less likely to make significant investments in high-risk to discuss a subset of representative patents from the R&D and less inclined to contribute valuable patented whole portfolio. Depending on the size of the portfolio technology for use in standards, slowing technological and patent holder, this may be anywhere from 20 to progress in the industry. Courts, government agen- 100 individual patents. cies and others interested in the competitive health Once the licensee is convinced that a license is of the industry should be wary of attacks on patents necessary, commercial negotiations begin. In most and licensing practices that seek to further weaken IP rights and encourage use of proprietary technolo- 15. For example, the European Telecommunications Standards gy without fair and reasonable compensation to the Institute (“ETSI”), explains a patent is essential if it is “not pos- owner of the technology. sible on technical (but not commercial) grounds, taking into account normal technical practice and the state of the art gener- III. In the Wireless Communications Industry, ally available at the time of standardization, to make, sell, lease, Whole-Portfolio Licenses are Efficient and otherwise dispose of, repair, use or operate EQUIPMENT or Desirable METHODS which comply with a STANDARD without infring- Whole-portfolio licenses, which give access to a li- ing that IPR [intellectual property right]. For the avoidance of doubt in exceptional cases where a STANDARD can only be implemented by technical solutions, all of which are infringe- 16. Huawei Technologies Co. Ltd. v. ZTE Corp., Case No. ments of IPRs, all such IPRs shall be considered ESSENTIAL.” C-170/13 (Court of Justice of the European Union, July 16, ETSI Rules of Procedure, Nov. 19, 2014, ¶ 15.6, http://www. 2015), available at http://curia.europa.eu/juris/document/ etsi.org/images/files/IPR/etsi-ipr-policy.pdf. Non-SEPs are pat- document.jsf?doclang=EN&text=&pageIndex=1&part=1&- ents that are not SEPs. mode=lst&docid=165911&occ=first&dir=&cid=3858.

235 les Nouvelles Cellular Communications Industry censor’s entire relevant portfolio of patents,17 are effi- 1. Minimizing Transaction Costs cient and beneficial to all players in light of the broad Whole-portfolio licensing is practical and efficient patent portfolios held by many licensors in the cellular because it minimizes the transaction costs of nego- communications industry. We believe that it is for this tiating and enforcing license agreements for patents reason that they are the historical norm throughout in major portfolios. As a practical matter, licensing this industry. From the earliest years of the industry, on a patent-by-patent, country-by-country, and de- major licensors, negotiated licenses to their entire pat- vice-by-device basis is completely unworkable for ent portfolios, rather than on a patent-by-patent basis. the complex technologies that power the telecom- In a publicly available 1995 agreement, Ericsson grant- munications industry, and the large portfolios held ed to NEC Corporation a portfolio patent license to by major innovators. 18 all of Ericsson’s patents—a “whole-portfolio” license. For licensees, obtaining a whole-portfolio license We are aware that this was the routine out-licensing avoids burdens and risks that would otherwise be as- practice of Ericsson and also Alcatel, Bosch, Motorola, sociated with attempting to identify, in advance, the Nokia, Qualcomm, and others by that date or earlier. particular patents that read on a device, or component While almost all such licenses are non-public, we can thereof, and then negotiating licenses specific to that say from our knowledge and experience that almost all device and those patents. It is not unusual for major patent licenses in the industry (at least those granted portfolios to contain tens of thousands of patents in by industry participants) have been whole-portfolio li- jurisdictions around the world, and the sheer number censes, and that this remains true up to the present. of patents makes it a daunting task for licensees to Certain trends in the law and in the industry are en- obtain à-la-carte licenses to all of the numerous pat- couraging some actors to challenge this model and in- ents they need. Not only is the size of the portfoli- stead attempt to conduct licensing on a patent-by-pat- os a significant issue for licensees to grapple with, ent, country-by-country, and device-by-device basis. but this is an extremely dynamic industry. Device However, there are strong reasons why whole-portfolio makers’ product offerings are continually changing licensing has been the durable model used by both in- and standards are being amended and updated with novators and implementers to license large portfolios new revisions and technologies. Negotiating license of SEPs (and non-SEPs) for more than two decades. We agreements on a device-by-device, patent-by-patent, review these reasons below. and revision-by-revision basis would be a never-end- A. Whole-Portfolio Licenses are the Most Efficient ing and impractical task that would expose handset and Practical Way to License Major Portfolios manufacturers to continuous risks, with expensive Given the breadth of major portfolios and the com- consequences whenever they fail to obtain all of the plexity of the devices being produced, whole-portfolio necessary licenses. With relatively short product life licenses are efficient, generally desirable to both licen- cycles (one to two years), the resulting licensing un- sors and licensees, and promote competition and in- certainty and risk would keep total device cost uncer- novation. Whole-portfolio licensing is consistent with tain, potentially throughout its life cycle. the goals of licensing and standardization programs— For licensors, licensing on a whole-portfolio basis to encourage the development and efficient licensing avoids not only the same drawn-out, impractical ne- of the best possible technology, and seeing to it that gotiations, but also costly and burdensome efforts to the technological innovations incorporated into stand- monitor and manage compliance with a partial license. ards are implemented widely and quickly. In particular, If a licensee did not have a whole-portfolio license, the whole-portfolio licenses promote competition (includ- licensor would need to expend resources scrutinizing ing introduction of new market entrants) and innova- the licensee’s products to determine whether they tion by minimizing transaction costs, avoiding litigation read on any patents that are not licensed, and then costs, and providing parties with predictability about negotiate new agreements each time it found an unli- revenues and costs. censed patent being practiced. Given the complexity of both the patents and the devices, the pace at which new devices are released, and the number of patents 17. Throughout this paper, we use the terms “entire portfolio at issue, this would be a gargantuan task. of patents” or “whole portfolio” to mean a licensor’s entire (or 2. Avoiding Litigation Costs nearly entire) portfolio of patents in existence at the time of the agreement. Many whole-portfolio licenses also include future pat- Whole-portfolio licenses permit freedom of action ents, at least for a period of time. Some licensors may withhold a and help parties to avoid litigation costs. Whenever small subset of patents that are not essential (non-SEPs) to imple- a licensee fails to obtain a whole-portfolio license, it mentation of the wireless/cellular standard from a license. leaves its business exposed to an infringement suit for 18. This agreement was filed as Plaintiff’s Exhibit 74 inHarris any or all of the unlicensed patents and constrains its Corp. v. Ericsson, Inc., No. 98 Civ. 2903 (N.D. Tex.). design freedom. It is costly and risky for a licensee to

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attempt to analyze, in advance, which of the thou- B. Licensors and Licensees Generally Prefer sands of patents in a major portfolio read on a par- Whole-Portfolio Licenses ticular device. Leaving potentially applicable patents Because whole-portfolio licenses are efficient and unlicensed would inevitably lead to more disputes give manufacturers freedom to focus on designing and and, likely, litigation. building the best and most efficient devices without This is hardly a hypothetical concern. HTC’s deal- concern of infringing any of the licensor’s patents, ings with Nokia provide a real-world example. HTC they are generally desired by both licensors and licen- was founded in 1997, and entered into a license agree- sees. Licensees making fully functional devices that ment with Nokia. But it licensed only Nokia’s wireless comply with a particular standard will clearly want SEPs, not Nokia’s entire portfolio. Predictably enough, (and need) a license to all of a licensor’s SEPs for that Nokia then sued for infringement of some of the un- standard. Under the IP policy for the SDO that created licensed patents in the U.S. International Trade Com- the standard, licensors generally have an affirmative mission, a U.S. federal court, Germany, the United obligation to offer to grant licenses to all of their SEPs Kingdom, Italy, the Netherlands, France and Japan.19 on FRAND terms and conditions. If a device manufac- Nokia obtained injunctions in the United Kingdom turer is to design, make or have made, and/or sell a and Germany, and HTC ultimately agreed to settle all fully standard-compliant device, it must by definition suits and to take a license to Nokia’s non-SEPs for an use all of the licensor’s SEPs. To the extent that a li- additional royalty on top of the royalty for the SEPs. censee thinks some of the patents a licensor claims are If HTC had taken a license to Nokia’s entire portfolio essential are invalid or not infringed—in other words, in the first place, it would have avoided litigation, and not SEPs—it can certainly raise those issues during ne- the attendant costs and business disruption, as well gotiations to attempt to secure more favorable terms. as uncertainty surrounding HTC’s device business. A However, even if the licensee believes that some of similar situation led to litigation between Nokia and those patents are, for whatever reason, invalid or not Apple, with the same result: Apple took a license to infringed, it would be foolhardy to license only some additional Nokia patents and made a substantial pay- SEPs. Taking a license to only some of the SEPs in a ment to Nokia.20 In our view, those lawsuits, ultimate- major portfolio would be a ticket to litigation and addi- ly resulting in whole-portfolio licenses, were a fore- tional licensing costs. gone conclusion from the moment that the licensees For many of the same reasons, in practice, licensees agreed to license only some of Nokia’s patents. Clearly, find it efficient to license not only all SEPs, but also all whole-portfolio licenses from the outset would have non-SEPs, to guarantee freedom of operation. Major been more efficient for all parties. portfolios often include many non-SEPs that are impor- 3. Predictable Revenues and Costs tant and widely practiced in various aspects of cellular Whole-portfolio licenses have the additional benefits communications equipment. Even though the non- of providing certainty about license costs and predict- SEPs may compete with other technologies protected ability for forecasting financial results. Licensees know by patents held by other companies, any benefit that the royalties that they have to pay and do not have might be obtained by carving out such patents is vastly to worry about negotiating additional licenses, at addi- outweighed by the increased transaction costs to do so, tional costs, for rights to use certain patents that they and the risk of litigation if, despite the manufacturer’s did not initially license. Similarly, licensors can better belief, unlicensed patents are nevertheless infringed. predict the license revenue that they will receive be- Consequently, manufacturers will generally want to cause they know the royalties in advance and do not secure a whole-portfolio license to guarantee that they have to speculate about additional revenues that they have freedom of operation to make devices without might (or might not) receive through further negotia- concern of infringing a licensor’s patent rights. tions or litigation. In our experience, in order to better In fact, in some instances where patent holders have manage their overall businesses, all parties to license attempted to offer partial portfolio licenses, licensees negotiations value the certainty and predictability that have resisted. They were concerned about ending up come with whole-portfolio licenses. in litigation with the licensor, and having to make additional royalty payments, as a result of a partial license. Consequently, licensees insisted on whole-portfolio licenses. Qualcomm consistently heard such concerns 19. See Michael Calia, “Nokia and HTC Settle Patent Litiga- tion,” Wall St. J., (Feb. 7, 2014), http://www.wsj.com/articles/SB from licensees; Qualcomm did offer whole-portfolio li- 10001424052702304680904579369141759210688. censes and no more than a handful of licensees (out of 20. See Kevin J. O’Brien, “Nokia Settles 2-Year Fight With approximately 250) ever requested a SEP-only license Apple on Patents,” N.Y. Times, (June 14, 2011), http://www.ny- from Qualcomm. Instead, licensees generally wanted times.com/2011/06/15/technology/15nokia.html?_r=0. whole-portfolio licenses and even objected when Qual-

237 les Nouvelles Cellular Communications Industry comm attempted to withhold some non-SEPs, raising investments in research and development, and need to similar concerns about potentially needing to make be able to earn a return on those investments. In the additional royalty payments. Ericsson’s experience as cellular communications industry, not only do patent licensor and licensee was similar. holders face the usual risk of failure associated with Our experiences negotiating in-licenses are consist- development of new technologies, but they also face ent. In our experience, it has been consistently true the additional risks (a) that their technologies will not over the last 20 years that major innovators negotiat- be incorporated into standards or used in products and ing cross-licenses overwhelmingly want a license to (b) that even if incorporated in a standard, that stand- their counter party’s entire portfolio, and not a partial ard will not be widely adopted within the industry. license, so that they have freedom of action to make Therefore, despite significant investments and effort, and sell devices without concern for potential infringe- the number of “successful” R&D projects is low. One ment claims. Indeed, Qualcomm generally sought way to earn a return on the few successful investments whole-portfolio licenses in its in-licensing. It was also is by licensing the patents. Historically, Ericsson, Mo- Ericsson’s policy to obtain freedom of action by negoti- torola, Nokia, Qualcomm and other significant innova- ating broad, whole-portfolio licenses including all SEPs tors in the cellular communications industry generally and non-SEPs. For both companies, the only licenses kept the patents for their inventions, and also acquired taken to individual patents were in cases where the patents from others. They then licensed their entire patent owner had only a small number of individual, portfolios to companies manufacturing cellular devic- relevant patents to license. es, as well as other equipment. The industry has flour- As a simple matter of commercial reality, licensees ished under that system, introducing highly innovative are motivated to negotiate whole-portfolio licenses products and services, and new device manufacturers instead of SEP-only licenses. In the same way that it have repeatedly been able to quickly enter the mar- costs much less to buy a whole car than to assemble ket and gain market share under this licensing system one from parts purchased separately, the best way to while paying their fair share of the cost of prior de- obtain a license to the large number of patents that velopment of standardized technologies through their innovators need is to negotiate a license for all of them payment of fair and reasonable royalties to patent hold- 21 at the same time. Moreover, for most licensees, paying ers. If regulators were to interfere with the common more to take a voluntary license to non-SEPs and gain- practice of negotiating whole-portfolio licenses—for ing freedom of action is a better value than paying less example by encouraging piecemeal licensing—they for a SEP-only license and proceeding at risk of suit for would risk doing harm to the entire industry by stifling infringement of unlicensed non-essential patents. innovation and disrupting the fair, competitive balance In light of the serious downsides of a partial license, in the market. and based on our experience in the industry, licen- Consider the following unintended consequence of sees almost always demand whole portfolio licenses. such regulatory interference. If additional restrictions Generally, licensees who say that they do not want a were placed on the ability to license entire portfoli- whole-portfolio license do so as a negotiation position os, large patent holders might instead find it more in an attempt to drive down the price of a license or advantageous to sell off pieces of their portfolios to to drive up the patent holder’s costs (in terms of ex- other companies. In fact, this has already been hap- tended negotiations and repeated patent-by-patent and pening in recent years. For example, Nokia sold off country-by-country litigation until the whole portfolio small portions of its enormous portfolio of SEPs and of patents is tested in litigation). This shortsighted ap- non-SEPs to non-practicing entities including Sisvel,22 proach, if followed through, will likely lead to costly, inefficient and repeated disputes. In our experience, good-faith negotiators do not engage in this tactic, but 21. For example, numerous companies have entered the we recognize that some licensees seek to exploit these market for cellular handsets, and have rapidly gained market tactics in an effort to secure better commercial terms share from more established rivals, which had made substan- in license agreements. Nevertheless, we believe that a tial contributions to developing the patented technologies used in the industry and controlled numerous SEPs. In particular, portfolio-wide license consistent with the needs of all companies like Apple, HTC, Huawei, LG, RIM/Blackberry, Sam- parties has historically proven to be be, and remains, sung, Xiomei, and ZTE all entered the market and rapidly gained the most appropriate, efficient, and common license meaningful market share prior to developing or owning any structure in the industry. meaningful SEPs for cellular communications standards. C. Interference with Whole-Portfolio Licens- 22. Sisvel International, “Sisvel Acquires Over 450 Nokia ing May Lead Patent Holders To Sell Patents, Patents, Including Over 350 Patents Essential to Wireless Standards”(Jan. 12, 2012), http://www.sisvel.com/index.php/sis- Making Licensing More Complex and Costly vel-news/257-sisvel-acquires-over-450-nokia-patents-including- Patent holders generally make significant, high-risk over-350-patents-essential-to-wireless-standards2.

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Vringo,23 Conversant,24 and others. Nokia has also trans- portion of its SEP and non-SEP portfolio (roughly 2,000 ferred tens of thousands of patents, including (presum- patents in total in approximately 400 patent families, ably) both SEPs and non-SEPs, into a Delaware trust 100 of which were declared essential to 2G, 3G, and called the “2011 Intellectual Property Asset Trust.”25 4G standards) to Core Wireless Licensing s.a.r.l. Core The trust records further assignments to Sisvel, Core Wireless then sued Apple for infringement of “eight Wireless s.a.r.l., and others. Nokia is not alone. In Janu- patents related to wireless communications in multi- ary 2013, Ericsson transferred to Unwired Planet 2,185 ple versions of its iPhone and iPad.”29 Less than a year U.S. and international patents and patent applications after the settlement of all patent litigation between related to 2G, 3G and 4G LTE technologies.26 And, LG, Apple and Nokia, Apple found itself again being sued Panasonic, and Ericsson (by way of Highbridge Principle for the infringement of Nokia patents (or more pre- Strategies LLC) appear to have provided Optis Wireless cisely, patents that originated with Nokia). Technology, LLC and PanOptis Patent Management LLC ZTE faced a similar situation after it signed a global with a large number of patents.27 cross-licensing agreement with Ericsson in 2012 that Those sales are already affecting the efficient oper- resolved all pending litigation between the compa- ation of the industry. Not so long ago, implementers nies.30 However, as noted above, Ericsson had sold off could obtain a license to all of the SEPs and non-SEPs part of its portfolio to Optis Cellular, which then sued that resulted from Nokia’s large R&D investments by ZTE for infringement of some of the patents it acquired entering into a single, whole-portfolio license with from Ericsson. This serial litigation illustrates precisely Nokia. Licensing what had been Nokia’s entire portfo- why licensees demand whole portfolio licenses, and lio will now require several license negotiations with the challenges that result when large patent owners completely separate entities. Policies that make it hard- like Nokia and Ericsson fragment their portfolios or do er for innovators to reap rewards for their innovation not provide whole-portfolio licenses. through licensing will encourage such fragmentation. Not only does fragmentation increase transaction The resulting inefficiencies can already be seen in costs and cause greater uncertainty about whether de- publicly available information regarding two different vices are properly licensed or are infringing, but also it patent litigations. For example, in 2011, Apple con- will likely increase the total cost of obtaining licenses. cluded a license agreement with Nokia “in settlement Implementers already complain about an alleged “roy- of all patent litigation between the companies”28 for a alty stack” as they need to obtain licenses from many one-time payment and on-going royalties from Apple to different SEP holders. Whatever the actual “stack” Nokia. However, because Nokia had transferred a por- paid by implementers today may be (this is a contro- tion of its patent portfolio to an entity not covered by versial question about which little hard information the license agreement, Apple did not receive a license is publicly available),31 dividing up portfolios may add to all patents that originated with Nokia as part of the layers to that stack. And it may add more non-practic- settlement. As noted above, Nokia had transferred a ing entities (NPEs, which do not make or sell products implementing a standard) to the stack, because they are likely candidates to purchase such patents. Unlike 23. Business Wire, “Vringo and Nokia Execute Patent the original patent owner, which may need to obtain Purcahse Agreement” (Aug. 9, 2012), http://www.business- a reciprocal license, NPEs are in a position to convert wire.com/news/home/20120809005600/en/Vringo-Nokia-Exe- cute-Patent-Purchase-Agreement#.VgpmrrRt7UI. the need for a reciprocal license into cash compensation, which may drive up the cash component of royal- 24. Conversant Intellectual Property Management, “Core Wireless Licensing, http://www.conversantip.com/patent-catego- ty compensation. ry/core-wireless/. 25. PlainSite, “2011 Intellectual Property Asset Trust,” 29. John Letzing, “Apple Sued by Firm in Patent Deal with http://www.plainsite.org/flashlight/2011-intellectual-property-as- Microsoft,” Wall St. Journl, March 5, 2012, available at http:// set-trust/. www.wsj.com/articles/SB100014240529702033706045772637 26. Eric Savitz, “Litigation Ahead! Unwired Planet Buys 2,185 70072976042. Ericsson Patents,” Forbes (Jan. 14, 2013), http://www.forbes. 30. Fierce Wireless Europe, “Ericsson, ZTE Settle Global Pat- com/sites/ericsavitz/2013/01/14/litigation-ahead-unwired-plan- ent Dispute” (Jan. 20, 2012), http://www.fiercewireless.com/eu- et-buys-2185-ericsson-patents/. rope/story/ericsson-zte-settle-global-patent-dispute/2012-01-20. 27. PlainSite, “Optis Cellular Technology,” LLC, http://www. 31. An analysis of royalty revenues by major licensors sug- plainsite.org/flashlight/optis-cellular-technology-llc/page-2/ta- gests that total mobile-SEP royalties on handsets are about five ble-patents. percent. Keith Mallinson, Cumulative Mobile-SEP Royalty Pay- 28. Nokia, “Nokia Enters Into Patent License Agreement with ments No More Than Around five percent of Mobile Handset Apple” (June 14, 2011), http://company.nokia.com/en/news/ Revenues, IP Finance (Aug. 19, 2015), http://www.wiseharbor. press-releases/2011/06/14/nokia-enters-into-patent-license- com/pdfs/Mallinson%20on%20cumulative%20mobile%20SEP%20 agreement-with-apple. royalties%20for%20IP%20Finance%202015Aug19.pdf.

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Selling off patents to NPEs or other innovators is, and it would make licensing far more burdensome and of course, perfectly permissible and common in all inefficient than the existing practice of licensing at the industries. Nevertheless, it presents an already grow- device level. ing challenge for the cellular communications in- A. Device Price Has Traditionally Been Used as dustry, and policies and regulations that discourage the Royalty Base whole-portfolio licensing, particularly the licensing of From the start of the cellular communications in- whole portfolios of SEPs, threaten to exacerbate the dustry, the device (handset) price has been the wide- situation. In our view, this would substantially increase ly used royalty base in license agreements. All of the patent licensing costs in the industry with little—if early innovators in the wireless communications in- any—corresponding benefit. dustry that made significant investments to develop We are now in the fourth generation of stand- the fundamental technologies that support wireless ards-based digital cellular networks and services in less communications—including Alcatel, Ericsson, Lu- than 20 years. This could not have been accomplished cent, Nokia, Qualcomm, and Siemens—used the “box without an efficient system of standard development price” or “net selling price,”32 as the royalty base in and patent licensing within the industry. The result their early license agreements. For convenience, this has been less costly devices and services, using an as- article uses the term “device price” to refer to either tounding number of innovative technologies that de- the “box price” or the “net selling price.” Regardless of liver an amazing array of cellular telephone and digital the specific contract terms, the important point is that services delivered efficiently to the consumer. nearly all agreements are based on the price received IV. Whole-Device Licensing is an Efficient and by the manufacturer from the sale of a fully-functional, Universally Accepted Norm end-user device (e.g., handset), and not the individual The longstanding practice from the first licensing components, subassemblies or combinations of com- programs in the cellular communications industry has ponents contained in it. been to license complete handsets, not the compo- In some of the earliest license agreements in this nents of which they are constructed. This is the logi- industry, Motorola used the “box price” as the royalty cal and natural thing to do. Many of the same reasons base, which included the cost of the handset as well for utilizing whole-portfolio licensing apply equally to as other items, such as the charger. Later Motorola licensing the whole devices rather than trying to de- agreements continued to use the device price as the termine which patents read on each of the numerous royalty base, but subtracted the cost of certain accesso- and changing components within, or subassemblies of, ries included in the “box.” For example, a 1992 license devices. Indeed, typical licenses in the cellular indus- between Motorola and Ericsson set the royalty rate at try provide that any complete handset made by the li- 2.25 percent “of the price (or greater Fair Market Val- censee that complies with a specified set of standards ue, FMV)” of the “subscriber equipment,” excluding (e.g., 3G or 4G LTE) is licensed under the licensor’s “externally connected power sources and externally entire patent portfolio—a highly efficient approach connected devices having other substantial non-radio that obviates all the potential device-by-device and pat- uses (e.g., facsimile and computer peripherals).”33 Qual- ent-by-patent wrangling referred to above. comm’s earliest bi-lateral license agreements with Mo- Nevertheless, some are currently advocating that torola and with ATT in 1990 followed this model using SEP owners should be required to grant licenses to the “net selling price” (or greater FMV). component manufacturers, rather than only to the Other companies followed Motorola’s lead, and manufacturers of complete devices. The motivation for used the device price as the royalty base when estab- this is multiplication: Because components are neces- lishing their licensing programs and setting royalty sarily cheaper than complete devices, the total royalty rates.34 In our experience, all significant patent holders payments would be reduced if the royalty rate stayed the same but was multiplied by the cost of the compo- 32. The “net selling price” is usually specified in the relevant nents. Of course, a change in royalty base would not license agreement to be the box price less specified deductions mean that the value of the licensed intellectual proper- for ancillary costs such as taxes, shipping, insurance and includ- ty in the handset has been reduced, but clearly these ed accessories. The “box price” is usually specified as including advocates expect that a requirement to grant licenses the price of everything in the box with the device or handset. at the component level will result in overall lower roy- 33. This agreement was filed as Plaintiff’s Exhibit 72 inHarris alty payments to innovators. Corp. v. Ericsson, Inc., No. 98 Civ. 2903 (N.D. Tex.). However, putting to one side the question of wheth- 34. Although Qualcomm may have initially “followed Motoro- la’s lead,” Qualcomm soon came to understand that licensing er a reduction in total return to innovators would be complete end user devices on the basis of the “net selling price” healthy for the industry, based on our experience, com- of those devices is the most efficient and pragmatic way to li- ponent-level licensing would be a significant change, cense its broad patent portfolio.

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in the cellular communications industry use the device munications. They are likely to have patents covering price as the royalty base in license agreements. Based chipsets, handsets, network infrastructure, protocols, on a review of publicly available disclosures, including and entire networks. The practical and efficient way regulatory filings, documents produced in litigation and to license such a broad portfolio is to license, and de- press releases, the following 29 major licensor compa- termine the royalty based upon the price of, the hand- nies (listed in order of the number of declared SEPs) set—which uses all those features. continue to license their 3G and 4G SEPs at the device Indeed, major portfolios will generally have patents level and use the device price as the royalty base: Qual- that read on an entire device, and for those patents, comm, InterDigital, Nokia, Ericsson, Motorola, Sam- the device price is the only natural and appropriate roy- sung, Huawei, Panasonic, NEC, Sharp, NTT, Siemens, alty base. Because any such patents should be licensed ZTE, Apple, Alcatel-Lucent, Nortel Networks, Mitsub- using the device price as the royalty base, it is practical ishi Electric, Dolby Laboratories, Fujitsu, Toshiba, In- and efficient to also use the device price as the roy- fineon, Wi-Lan, Thomson Licensing, AT&T, Deutsche alty base for other patents that are licensed from the Telekom, Vringo, Hewlett-Packard, SK Telecom, Telecom same portfolio. Even if a major portfolio contained no Italia. Additionally, the Sipro, Sisvel and Viva Licensing patents that read on a whole device—an exceeding- patent pools—which include patents for a number of ly unlikely possibility in our experience—the device other innovators—also license at the device level and price would nevertheless still be the most appropriate use the device price as the royalty base.35 royalty base for portfolios that include a diverse array B. Benefits of Using the Device Price as the of patents. The portfolio will invariably include patents Royalty Base with claims that read on various components and com- Using the device price as the royalty base has many binations of components. It would not be practical to advantages for licensors and licensees in the cellular determine a separate royalty base and rate for each of communications industry. In particular, based on our those patents and the price of the handset is the only experience, using the device price as the royalty base is logical and appropriate royalty base.36 appropriate because it (i) best accounts for the diverse Because many patents have claims reading on entire patents in major portfolios, (ii) best reflects the value handsets and combinations of components, if patents created by the licensed patents, (iii) provides freedom were instead licensed separately to the manufacturers of operation to licensees to develop new devices and of various components, handset manufacturers would change component suppliers, and (iv) simplifies rela- still need a license to many patents in most portfoli- tionships between licensors and licensees, helping to os. This would create an additional layer of complexity avoid disputes. and additional transaction costs without providing any 1. The Device Price Accounts for the Diverse Pat- clear benefit to the handset manufacturer, component ents in Major Portfolios. supplier or patent holder. Of course, the negotiated Major portfolios typically have a broad array of pat- composite royalty rate takes into account the value of ents that read on (i) various components alone, (ii) var- the licensed intellectual property and the fact that the ious components in combination, (iii) complete hand- various patents in the portfolio have varying scopes. sets alone, and (iv) complete handsets in networks. 2.The Device Price Best Reflects the Value Creat- This is because, as noted above, cellular communica- ed by the Licensed Patents. tion standards cover everything from the general ar- The device price is the appropriate royalty base for chitecture of the network, to the operational features licensing a major portfolio because it most accurately of fully functional infrastructure equipment working represents the value of the licensed patent rights. Even alone or together with other devices, to algorithms if one could determine the specific components of a carried out by baseband processors (chipsets), to the device to which particular patents apply and the cost meaning of one bit in one block of information, and a of those components, such cost does not necessarily myriad of other issues in between. Those operations represent the significant value that high-speed cellular and features of the standard often are the result of a connectivity brings to those devices. For example, con- patented invention contributed by one of the partici- sider the cost of an iPhone compared to an iPod Touch. pants to development of the standard. In our collective The iPhone 5S 16GB and iPod Touch 6th Generation experience, major innovators in the cellular communi- 16GB both possess front- and rear-facing cameras, the cations industry frequently hold patents on numerous same display with touch screen functionalities and different kinds of technologies used in cellular com- 36. For similar reasons, the Smallest Saleable Patent Practicing 35. In the case of cellular handsets, the device price is gen- Unit (SSPPU) theory espoused by certain advocates would not be erally the price of a handset, less certain specified deductions. feasible in the context of negotiating a license agreement. And, In other contexts, for example, when a car is equipped with even if it were applied, when considering a major portfolio, the cellular connectivity, it may be appropriate for the royalty base SSPPU would undoubtedly be the device, which is the smallest to be defined to be a cellular communications module. unit that implements all licensed patents in the portfolio.

241 les Nouvelles Cellular Communications Industry have the same video and audio playback capabilities. do, change from generation to generation of a device The main difference between them is that the iPhone maker’s products. Baseband chip supplier A may win has cellular connectivity and the iPod Touch has only a socket in a phone for the 2015 product lineup, but WiFi. The iPhone sells for $450 (unsubsidized, as sold may lose out to supplier B in the 2016 lineup.38 Thus, without service contract), while the iPod touch sells with component level licensing, new crops of compa- for $199—less than half the price. Clearly, the addi- nies would likely need to be licensed for successive tional value generated by adding a cellular modem to generations of devices, creating unnecessary delays in an iPhone Touch cannot be measured by just the cost design and manufacturing of new products. of the additional electronics, which are considerably Second, the nature of the components included in less than the $250 price differential.37 The price of the devices changes over time. To take just one example, device sold on the open market represents the value to GPS and WiFi capabilities were not included in the consumers of that device, and largely reflects the value earliest handsets, but are standard now. In their earli- of the cellular communications technology. est incarnations, GPS and WiFi were implemented in 3. Using the Device Price as the Royalty Base Sim- cellular phones by unique components; now they are plifies Relationships and Avoids Disputes. generally integrated into chipsets that perform other Using the device price as the royalty base simplifies functions as well (e.g., cellular baseband components). relationships and avoids potential disputes by permitting As those new capabilities and components are added straightforward and auditable royalty calculations based to the handset and/or to other components in the on the price at which the licensee actually sells the prod- handset, IP holders would have to negotiate licenses— uct. Third party market research firms provide data on potentially with new companies—to cover those addi- device sales, which licensors can use to confirm royalty tional features. To be certain that they are making and reports and verify that licensees are complying with their selling non-infringing products with respect to each obligations to pay royalties. In contrast, licensors gener- licensor’s patent portfolio, handset manufacturers ally will not have access to accurate and verifiable pric- would need to investigate the license status of each es for various components used in a device (particularly of their component suppliers on an ongoing basis—an because different device manufacturers may receive dif- arduous task. ferent pricing from the component supplier dependent Each of these variables multiplies the complexities upon many factors, including payment terms, warranty, for both licensors and licensees in making sure that all quantities, lead times, and other commercial details). The the technologies used in a device are licensed for that lack of independent information would surely lead to ne- device. The whole-device licensing approach solves gotiations that are more contentious, require complicated this problem completely, while providing freedom of monitoring, and invite gamesmanship and disputes over operation, simplifying relationships and reducing the royalty payments. These added costs would need to be potential for disputes. considered in setting royalty rates and prices charged by C. SDO Members Adopted Standards Knowing the licensee for its devices. Those inefficiencies are all That the Device Price Would Be the Royalty Base avoided when the device price is used as the royalty base, It should be noted that the 3G and 4G cellular which benefits the entire industry and consumers. communications standards that are widely used today 4. Licensing the Whole Device Is Appropriate were adopted with all players knowing that the key for Major Portfolios and Promotes Freedom SEP holders licensed their patents using the device of Operation. price as the royalty base. No one was surprised by this Licensing the whole device has the added benefit of arrangement. It was part of the basis of the bargain providing licensees with the freedom of operation that made among innovators and implementers during the they desire. Licensees want freedom to make and sell development of the standards. devices without concerns about infringing a licensor’s patents, and the best way to achieve that is simply to 38. For example, as companies such as Samsung and Apple license the whole device under all the patents. Natu- prepare to release new handsets, the baseband and application processers that will be used in those new models, and poten- rally, when the whole device is licensed, the royalty tial shifts to different chip suppliers, are widely reported. See base should be the price of that whole device. Jungah Lee, “Samsung’s Galaxy S6 Isn’t About the Phone, It’s Freedom of action is particularly important for two About the Chips,” Bloomberg (Feb. 26, 2015), available at http:// reasons. First, there is the completely practical mat- www.bloomberg.com/news/articles/2015-02-26/samsung-looks- ter that the component suppliers can, and frequently beyond-apple-to-challenge-qualcomm-with-next-phone; “Intel Inside the iPhone: LTE Modem and Camera?,” Seeking Alpha 37. Based on estimates of the bill of materials in the iPhone (Mar. 16, 2015), http://seekingalpha.com/article/3003076-intel- 5C, the cost of the cellular connectivity components was around inside-the-iphone-lte-modem-and-camera. Changing chip suppli- $32 at the time it was released. See https://technology.ihs. ers is likely to become increasingly prevalent as Huawei, Intel, com/451425/groundbreaking-iphone-5s-carries-199-bom-and- Mediatek, Qualcomm, Samsung, Spreadtrum, Via and other manufacturing-cost-ihs-teardown-reveals. manufacturers all compete vigorously for market share.

December 2016 242 Cellular Communications Industry

The relevant SDOs are open to all who wish to par- tional features that rely on the core cellular commu- ticipate. Their members include innovators, imple- nications technology, whole-portfolio licensing at the menters, and hybrids between the two. Many of the device level is increasingly important. members have been involved through prior genera- The additional complexity in present-day smart- tions of cellular communications technologies. Conse- phones makes it more complicated to determine, in quently, the relevant standards were adopted with full advance, the patents that read on (or potentially read knowledge of the licensing landscape, including the on) devices, subassemblies or components thereof. fact that many SEPs were owned by companies that The number of technologies (and patents) incorporat- license them on a whole-device basis, using the de- ed into smartphones continues to grow. So too, the vice price as the royalty base. Other players who chose number of patents held by the major innovators has not to participate in the work of standard development expanded. As noted above, any attempt to identify were (or certainly could, and should, have been) aware all the SSPPUs for all the patents in a major portfo- of that fact. lio would be unreasonably difficult and costly. The There were extensive discussions before the 3G increasing complexities of technologies and patents UMTS standard was adopted. That standard was devel- only make that task harder to complete and less re- oped with full knowledge that the device price would alistic to achieve. Correspondingly, it is all the more be used as the royalty base, at least for licenses from important for manufacturers to have broad protec- Ericsson, Motorola, Nokia, and Qualcomm. tion from claims of infringement for their increasing- The same holds true for the 4G LTE standard. In ly complex devices, and all the more attractive for that round of standards development, an industry or- patent holders to license on a whole-portfolio and ganization called Next Generation Mobile Networks whole-device basis. (NGMN) set up an IP Policy Committee to explore VI. Conclusion potential licensing issues. Largely instigated by those meetings, many of the expected significant licensors Whole-portfolio/whole-device licenses have been voluntarily and publicly stated, prior to adoption of the the standard practice through four generations of standard, their anticipated license terms on their web- wireless communications technologies. There are sites. Significant SEP holders, including Alcatel, Erics- excellent reasons for this. For major patent portfo- son, Huawei, Motorola, Nokia, Nortel, Qualcomm, and lios, whole-portfolio licenses are efficient, desirable ZTE, all stated that they would use the device price as and promote competition and innovation. Similarly, the royalty base in their license agreements.39 Numer- licensing fully-functional, whole devices, using the ous agreements were then negotiated and signed using device price as the royalty base, best addresses the the device price as the royalty base. value created by the cellular communications tech- Whole-device licensing was well known. It was part nology being licensed, and is the most efficient and of the bargain that all participants relied on. practical approach for both licensors and licensees. Whole-portfolio/whole-device licensing has been V. Whole-Portfolio/Whole-Device Licensing the foundation of the bargain between innovators has Proven Itself to be, and Remains, the and implementers since the beginning of the indus- Best Way to License IP Rights for Present-Day try, and it has served the industry and consumers Smartphones spectacularly well, as demonstrated by the unprece- We have been involved with this industry from the dented growth and dynamism of cellular communica- beginning, and have witnessed the transformation of tions. Any government agency or other organization cellular handsets from large, clunky analog boxes that asked to limit the flexibility to form these types of could barely manage voice communications in limit- agreements should consider the background behind ed areas to sleek, sophisticated, multi-media smart- and reasons for current licensing practices in the phones (digital devices more powerful than comput- cellular communications industry, and should pro- ers were just a few years ago) that work around the ceed cautiously so as not to harm the industry by world. As smartphones grow increasingly advanced restricting efficient and appropriate licensing. Ill-ad- and integrate features like high-resolution screens vised policymaking at the behest of the implementer and advanced video processing, critics have argued segment of the industry risks (i) elevating the cost that the longstanding practice of licensing whole of license maintenance and enforcement, (ii) gen- portfolios with the device price as the royalty base erating unnecessary additional legal disputes, (iii) no longer makes sense. We strongly disagree. In fact, disincentivizing investment in innovation, and (iv) as phones grow more complex and incorporate addi- providing unfair advantages to market participants that have not invested in industry development. ■ 39. Erik Stasik, “Royalty Rates And Licensing Strategies For Essential Patents on LTE (4G) Telecommunication Standards,” Available at Social Science Research Network (SSRN): les Nouvelles, Sept. 2010 at 114, 115-16. https://ssrn.com/abstract=2855078

243 les Nouvelles Smallest Saleable Patent Practicing Unit

The Practicalities And Pitfalls Of The Smallest Saleable Patent Practicing Unit Doctrine: A Review Of Teece And Sherry By Anne Layne-Farrar

I. Introduction ruling for CSIRO v. Cisco, n early 2016, David Teece and Edward Sherry the Federal Circuit reaf- ■ firmed its stance, arguing Anne Layne-Farrar, released a new paper assessing the economics Charles River Associates, of the “Smallest Saleable Patent Practicing Unit” that “[t]he rule Cisco ad- I 1 vances—which would re- (SSPPU) doctrine. The doctrine was first espoused Vice-President, and an in 2009 by Judge Randall Rader in Cornell v. Hewl- quire all damages models Adjunct Professor at ett Packard.2 In the simplest terms, the SSPPU doc- to begin with the small- Northwestern University est salable patent-practic- trine calls for setting the revenue base for reasonable School of Law, royalty patent infringement damages at the smallest ing unit—is untenable. It possible product level that still reflects the patented conflicts with our prior Chicago, IL invention. For example, if patented feature A is sold approvals of a methodolo- E-mail: alayne-farrar@ in two products, ABCDE and ABC, then product ABC gy that values the asserted crai.com patent based on compa- (not including features D and E) would likely form the 6 SSPPU (it is a rare instance that product A would be rable licenses.” Thus far, sold on a standalone basis). however, the Federal Circuit has not expressed any views on use of the SSPPU doctrine outside of jury cases. Since Cornell, two courts have explicitly required the SSPPU approach in the assessment of damages.3 In their new paper, Teece and Sherry walk through In 2014, in Ericsson v. D-Link, the Federal Circuit up- the justifications expressed in support of applying the held a damages award based on end product revenues, SSPPU doctrine and discuss the assumptions embed- establishing that following an SSPPU approach is not ded within those justifications. The authors also ex- mandatory nor is it the only means of achieving rea- plain a number of the limitations of the doctrine, both sonable damages tied to the value of the asserted pat- logical and practical. In this brief review, I summarize ents. Rather, the Ericsson ruling clarified that SSPPU is the key findings reported in the Teece and Sherry pa- “an important evidentiary principle” used “to help per and highlight the policy implications. our jury system reliably implement the substantive My review proceeds as follows. Section II provides a statutory requirement of apportionment of royalty succinct summary of each argument made in support damages to the invention’s value.”4 (The “statuto- of the application of SSPPU and evaluates their logi- ry requirement of apportionment” referred to here is cal underpinnings. Section III then covers some of the Garretson, the seminal case establishing the need to practical difficulties that arise in applying the SSPPU apportion revenues to reflect the accused technolo- doctrine. Section IV concludes with the policy impli- gy in damages calculation.)5 The following year, in its cations. The bottom line: Teece and Sherry argue that a compelling case has not been made in support of automatic or broad application of the SSPPU evidentiary 1. David J. Teece, and Edward F. Sherry, “On the ‘Small- rule in damages calculations, and the rule’s limitations est Saleable Patent Practicing Unit’: An Economic and Pub- imply that in some cases it could do more harm than lic Policy Analysis,” Tusher Center, U.C. Berkeley Working good to social welfare.7 Paper, January 2016, available online at http://innovation-archives.berkeley.edu/businessinnovation/documents/Tush- II. The Pros and Cons of SSPPU er-Center-Working-Paper-11.pdf. Three justifications appear to support the emer- 2. Cornell University v. Hewlett-Packard Company, 609 F. Supp. 2d 279 (N.D.N.Y. 2009). 6. Commonwealth Scientific and Industrial Research Organi- 3. In re. “Innovatio IP Ventures,” LLC Patent Litigation, 1:11- sation v. Cisco Systems, Inc., No. 6:11-cv-00343-LED (Fed. Cir. cv-09308 (N.D.Ill. 2012); and Apple Inc. v VirnetX Inc. et al, 2015), at 14. U.S. Federal Circuit Court of Appeals, No. 2013-1489. 7. The social welfare shortcomings of the SSPPU doctrine is 4. Ericsson, Inc. v. D-Link Sys., Inc., 773 F.3d 1201, 1226 the focus of another recent publication as well; see Froeb, Luke (Fed. Cir. 2014). and Mikhael Shor, “Innovators, Implementers, and Two-sided 5. Garretson v. Clark, 111 U.S. 120, 121 (1884). Hold-up,” The Antitrust Source, August 2015.

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gence and development of the SSPPU doctrine: cor- nation, Teece and Sherry question why proponents of recting cognitive bias among juries, facilitating reve- an SSPPU approach have only considered one side of nue apportionment, and (relatedly) restricting damag- the issue. The SSPPU approach deals only with upward es to the footprint of the patented technology. While bias and may, in fact, exacerbate downward bias. But each of these arguments has its appeal, each also has why should we, as a general matter, be worried only its shortcomings. about overcompensating patent holders, and not about A. Does Cognitive Bias Run Only in One Direction? undercompensating them? While the courts certainly The most frequent argument made in support of a had concerns regarding overcompensation in the cas- broad application of the SSPPU doctrine has a basis es explicitly calling for the use of SSPPU, there is no in juries’ psychological limitations, referred to as cog- empirical evidence establishing that patent holders are commonly or systematically overcompensated (to the nitive biases. Two such biases are of particular inter- 9 est in assessing damages: “framing” and “anchoring.” best of Teece and Sherry’s, or my, knowledge). With- Framing refers to the tendency of people to respond out such evidence, there is no justification for courts to a particular choice in differing ways depending on to take regular (instead of case-by-case) corrective ac- how that choice is presented. Anchoring refers to the tion to lower damages on the whole. Recognizing that tendency of people to rely too heavily on the first piece framing and anchoring biases matter does not lead to of information they receive (the “anchor”) when mak- support of an automatic application of SSPPU; rather, ing decisions. Thus, the concern in patent litigation is recognition of cognitive biases suggests that courts that if a jury is presented with revenues on a complex should carefully choose which frame to use in any giv- (multi-component) end product when the patented en patent damages matter, a question that needs to be technology at issue in the case reads only on a narrow addressed on a case-by-case basis. subset of that product’s features, then the jury is likely B. Can the Smallest Component Fully Capture or to award damages that are “too large,” exceeding the Reflect Patent Value? value that the patented technology provides to the in- The second argument that appears to buttress the fringer. Put differently, juries may anchor damages on use of an SSPPU approach for damages relates to ap- the infringer’s overall revenues, pushing damages up- portioning the accused product’s selling price to the wards and presumably past any reasonable level given patented features in relation to other features not the patents in suit. covered by the patent but that contribute to product As Teece and Sherry point out, however, framing value. Using a component, as opposed to the end prod- and anchoring work in both directions; a jury can be uct, can narrow the feature set to more closely tailor biased upwards, toward excessive damages that over- the accused revenues to the patented invention. For compensate the patent holder, or biased downwards, instance, in the Cornell case, the patented technology toward too low damages, so that the patent holder is contributed to computer processors, which are inputs undercompensated for its technical contribution. An into “CPU bricks,” which themselves are inputs into experiment published in the cognitive science and computers. When extraneous features are removed behavioral economics literature illuminates this point: from the damages base, apportioning the remaining One group of high school students were given five sec- revenues may be easier or more straightforward. onds to assess the value of 1 × 2 × 3 × 4 × 5 × 6 × This argument is appealing, but incomplete. The first 7 × 8, while a second group of high school students complication is what the asserted patent claims. If the was given five seconds to assess the value of the same asserted patent covers system claims (and those claims expression, but in reverse order (8 × 7 × 6 × 5 × 4 are found to be valid and infringed), then sub-system × 3 × 2 × 1).8 The median estimate for the ascending components will not infringe the patent (at best, there sequence was 512 and the median estimate for the de- might be contributory infringement). In this case, the scending sequence was over four times larger at 2,250, system revenues would be most closely tied to the but the correct answer is 40,320. In other words, the footprint of the technology, and any concerns about reported results reflected framing/anchoring—but both overcompensation due to the narrow contribution of estimates fell well below the correct answer. the patented technology could be dealt with through Since framing and anchoring can work to either in- the royalty rate applied to the base, as opposed to the crease or decrease an individual’s damages determi-

9. Overcompensation appears to be a key concern behind Judge Rader’s creation of the SSPPU, but that one case says nothing of 8. See A. Tversky, and D. Kahneman, “Judgment under Uncer- systemic overcompensation in patent infringement cases warrant- tainty: Heuristics and Biases,” 185 Science, New Series, No. 4157 ing wholesale application of the SSPPU doctrine. Moreover, it is (September 27, 1974), 1124–1131, available at http://www.hss. unclear why the royalty base is the best tool for correcting risks of caltech.edu/~camerer/Ec101/JudgementUncertainty.pdf. overcompensation when they arise (as discussed further below).

245 les Nouvelles Smallest Saleable Patent Practicing Unit base itself. Teece and Sherry observe that, at least These market features mean that chipset prices and mathematically, “one can perform the apportionment revenues will not reflect the value of the patented required under Garretson by either adjusting the base technology used within the chipset, let alone the value or adjusting the rate (or some combination of the of using the patented technology further downstream. two).”10 Keeping potential jury bias in mind, it is nev- As Teece and Sherry explain, “the value that the chip- ertheless crucial to understand that both the base and set supplier puts on being able to use the patented rate work together to determine appropriate damages, technology is likely to be only a small fraction of ei- tied to the footprint of the technology. As such, both ther (a) the cumulative value, at all levels of the value the rate and the base should be set in conjunction with chain, of being able to use the patented technology one another; a relatively small base might call for a rel- rather than the available alternatives; or (b) the value atively higher rate, and vice versa, in order to arrive at ‘downstream’ from the chipset supplier, at the cellular appropriate compensation for the use of the patented device/cellular service/end-user level.” technology, as different combinations of rates and bas- 11 C. Do Royalties Set on Product Prices Necessarily es can yield the same damages payment. Overreach the Value of the Patent? The second complication is the value of the particular A third argument in support of taking the SSPPU use of the patented technology at issue. In short, val- approach to damages is a variation of the overcompen- ue depends on context. Teece and Sherry explain that sation concern described above. In brief, the idea is entities at different levels in the production chain will that patent holders should not charge different roy- capture different portions of the overall value of using a given patented technology, as ultimately reflected in alties for the “same amount of use” of the patented the end product: “The farther ‘downstream’ in the value technology. Percentage running royalties lead to higher chain one goes, the greater the cumulative fraction of damages for higher priced products, even though the the total value of using the patented technology that is higher price may be driven by features unrelated to captured in sales at that level and ‘higher’ levels in the the patented technology. Sticking with the Teece and value chain.” As a result, relying on the price of some Sherry smartphone example, Apple sells its iPhone 6s small upstream component as the damages base may dis- with several different levels of memory, with higher tort the calculation of damages for use of the patented memory costing more: a 16GB handset has sold for technology further down the production chain. $649, 64GB for $749, and 128GB for $849. Suppose the patent in suit covers mobile radio connectivity To illustrate this point, Teece and Sherry discuss technology unrelated to storage and memory technol- semiconductor chipsets within end user mobile com- ogies. If the patent holder calculates damages using munication products, like smartphones and tablets. a 4 percent royalty rate applied to the product price, The chipset market is highly competitive and commod- itized, and few chipset makers pay royalties for the the accused infringer would pay $4 more for the 64GB intellectual property incorporated into their chips.12 handset as compared to an otherwise identical 16GB handset, despite the fact that the connectivity technology remained constant across the two products. 10. See also the Federal Circuit’s Ericsson ruling: “Making real Suppose, on the other hand, that a court applying the world, relevant licenses inadmissible on the grounds D-Link urges SSPPU doctrine set the royalty base as the price of the (that they are based on multi-component products) would often make it impossible for a patentee to resort to license-based ev- 16GB handset as applied to the total number of units idence. Such evidence is relevant and reliable, however, where (regardless of those unit’s memory capacity). This ap- the damages testimony regarding those licenses takes into ac- proach would strip out at least some variation in price count the very types of apportionment principles contemplated in due to unrelated features (e.g., memory differences). Garretson. In short, where expert testimony explains to the jury Again, this argument has much appeal and could the need to discount reliance on a given license to account only for the value attributed to the licensed technology, as it did here, make sense under certain circumstances, but it is in- the mere fact that licenses predicated on the value of a multi-com- complete. What the argument misses is the possibility ponent product are referenced in that analysis—and the district of synergies across features. Even though a feature may court exercises its discretion not to exclude such evidence—is be technically distinct from the patented technology, not a reversible error.” Ericsson, 2014, at 128. commercial links might lead to synergies that imply a 11. Teece and Sherry point out that the Cornell ruling “com- higher value for the patents in the presence of the oth- mitted a significant conceptual error” in lowering the royalty base er features. Teece and Sherry again use smartphones without considering whether any changes were needed in the to illustrate the point: royalty rate as well. 12. Common industry practice in the high tech sector is for …having more memory in a cellphone enables the all royalties to be paid at the end product and thus as a general cellphone to handle larger files in a way that en- matter patent holders have not sought licenses from chipset mak- hances the value of cellular connectivity, and hav- ers. The result is that chipset prices are unlikely to incorporate or ing cellular connectivity likewise enhances the val- reflect the patented technologies they embody. ue of having additional memory, because the user

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can do more with the information contained in the interpreting the SSPPU doctrine. These ambiguities memory if the device is capable of cellular connec- in turn lead to difficulties in applying the SSPPU ap- tivity than if it is not. proach in practice. In another example showing the potential for rela- A. What is the “Smallest” Unit? tionships across what might appear to be even more As an initial problem with implementing the SSPPU, disparate technologies, Teece and Sherry observe that: Teece and Sherry point out that the courts have not …adding a camera to a cellphone increases the provided any guidance on how to identify a “smallest” range of ways that the owner can make use of the unit. In some cases there may be multiple choices for cellphone; the owner can now take photos and units “smaller” than the end product. For example, share them with others over cellular connections suppose that a patent holder is asserting a patent that in a way that the owner of a camera-less cellphone covers feature A in the complex end product ABCDE. cannot. This increases the value to the owner of Further suppose that the maker of ABCDE also sup- having cellular connectivity. Similarly, the ability to plies less complex products or components in the form share photos with others over a cellular network of ABD, ACD, ACE, ABE, and ADE. If the value A con- enhances the value of the camera functionality, tributes differs in each of these smaller units, which as compared to the value of a stand-alone camera should we select as the basis for determining the val- without cellular connectivity that is not capable of ue that A contributes to the larger product ABCDE? such sharing. In other words, even though the two Should some average across products/components features are technologically unrelated, adding the be used instead? Moreover, with any of these small- camera functionality enhances the value of cellular er units, the task of apportionment will still remain; connectivity, and vice versa. SSPPU does not necessarily avoid apportionment, nor Because the patented feature does not “drive de- necessarily makes it easier. mand” in either of these examples, neither would clear Alternatively, a proposed smaller unit may be an in- the bar set by the entire market value rule (EMVR),13 put for the accused infringer’s end product, in which even though synergies are present. Since it ignores case it will buy the component for use in production commercial interrelationships, limiting the royalty but will not price it for sale. In this case, the smaller base to a narrow component, like the chipset, is likely unit “price” reflects the cost to the end product mak- to bias the damages calculation downward whenever er of using the input (and the value the input maker synergies are present. Chipset revenues will not re- obtains from the patented technology, if it pays for the flect the enhanced value the smartphone maker may patent), but we cannot assume that the input maker’s receive through the combination of the patented tech- price fully captures the value of the patented technol- nology with the other features that it affects. Thus, ogy for the end product maker. The Wi-Fi chipsets re- applying the SSPPU approach when the patented tech- lied upon by the district court in In Re Innovatio fall nology in suit involves synergies, like those illustrated into this input category. As explained above, the value above, will likely lead to under-compensation for the contributed by a patented technology is likely to differ patent holder. along the production chain, so it is unclear why an in- III. Practical Complications in Applying SSPPU put cost for the accused infringer would form a more In addition to the above inherent limitations, Teece relevant damages base than an output price, particu- and Sherry also highlight a number of problems in larly when damages are traditionally understood to be based on some portion of the accused infringer’s sales. B. Does Saleable Mean Actually Sold? 13. According to the Rite-Hite decision, damages can be based The second “s” in SSPPU stands for “saleable.” on the value of unpatented features only if the “patent-related feature is the basis for consumer demand.” Rite-Hite Corp. v. Kel- What, exactly, does that mean? Must the smaller prod- ley Co. Inc., 56 F.3d 1538, 1549-50 (Fed. Cir. 1995) at 1549. The uct or component be sold separately in a market so more recent Ericsson ruling softens the Federal Circuit’s EMVR that objective prices are available? Or is it enough that stance: “When the accused infringing products have both patent- the smaller unit could be sold, even though it is not ac- ed and unpatented features, measuring this value requires a de- tually sold? A hybrid scenario held in the Cornell case: termination of the value added by such features… The essential the district court chose to use computer processors requirement is that the ultimate reasonable royalty award must as the damages base, though of the eight processors be based on the incremental value that the patented invention accused of infringing the patented technology, only adds to the end product.” Ericsson, 2014, at 1226. For an interesting discussion of the history and evolution of EMVR, see three had market prices and were sold independently, Fahrenkrog, Aaron R., John K. Harting, Christine Yun Sauer and so “prices” for the other five models that were not sold Logan Drew, “Farewell, Entire Market Value Rule,” Law360, April had to be imputed. Teece and Sherry observe that in 16, 2015, available at http://www.law360.com/articles/634837/ this case, “reducing the ‘framing bias’ comes only at a farewell-entire-market-value-rule. cost in accuracy.” If the goal of employing an SSPPU

247 les Nouvelles Smallest Saleable Patent Practicing Unit approach is to arrive at a damages calculation that bet- a method claim applicable to “a data communication ter reflects the value the patented technology brings network having a plurality of mobile transceiver units to the accused infringer, is pushing that calculation to selectively communicative with a plurality of base imputed, as opposed to actual, price and revenue data transceiver units.” Since a chip is not a system and really achieving the desired end goal? does not have either a plurality of mobile transceivers As a further problem, Teece and Sherry argue that or a plurality of base transceiver units, a Wi-Fi chip will pushing the SSPPU doctrine and at the same time not satisfy Claim 1 of the asserted patent. Instead, the maintaining the “hypothetical negotiation” damages court reasoned that “Because the purpose of a Wi-Fi framework established under Georgia Pacific has led to chip is, by definition, to provide 802.11 functionality, “internal schizophrenia” in patent damages law.14 The determining the importance of Innovatio’s patents to the 802.11 standard also determines the importance hypothetical negotiation framework calls for paying 16 close attention to real-world licensing considerations of those patents to the Wi-Fi chip.” and assessing what the parties could actually have Teece and Sherry note that patent claims can be agreed to, had they negotiated willingly prior to any written in a myriad of ways, so requiring the SSPPU infringement. But in practice, the vast majority (if not to infringe each of the claims could lead to patent all) available licensing agreements are likely to be on holders “gaming the system” through creative claims the basis of the end product prices for the goods that drafting. That being said, the further the SSPPU doc- licensees sell incorporating the patented technologies, trine strays from the precise claims language in the not on components that the licensees purchase as in- asserted patent, the less guidance we will have on puts and not on sub-products that are never sold in any identifying and applying appropriate SSPPUs for cal- marketplace. Furthermore, in the real-world, the par- culating reasonable damages. ties care not only about reasonableness but also about IV. Concluding Remarks administrability, a concern that precludes the use of Teece and Sherry (2016) calls into question both the imputed prices or the use of any royalty base with no fundamental underpinnings of the SSPPU doctrine and objectively reported data.15 In short, real-world negoti- the practical application of the doctrine in real-world ations tend to limit royalty bases to products tracked in litigation cases. They clarify that cognitive biases, like the normal course of business, but these practical con- framing and anchoring, can run in both directions so cerns have thus far gained little to no traction among courts should be considering which frame or anchor proponents of the use of the SSPPU doctrine, leading makes the most sense for a given set of case facts, to the schism Teece and Sherry point out. rather than single-mindedly focusing on overcompen- C. What Does “Practicing” Mean? sation. Teece and Sherry also calls into question the use of input costs as a royalty base, in light of the fact As a third and final pragmatic concern, how should that the value of patented technology will differ along “patent practicing” be interpreted? At least two alter- a production chain. When commercial synergies exist, natives are possible: the literal interpretation, meaning the use of component costs, as opposed to output pric- the smallest unit that satisfies all of the asserted claims es, can be even more problematic. Finally, they discuss of the patents in suit, or a less stringent interpretation, a number of practical concerns that make implement- such as the smallest unit that simply contains the “in- ing the SSPPU doctrine in a sensible way a challenging ventive element” of the asserted patent claims. endeavor. The many limitations raised by Teece and In the In Re Innovatio case, the district court fol- Sherry caution against a broad, automatic application lowed the latter course. More specifically, the court of the SSPPU doctrine, and suggest a more careful use used the Wi-Fi chip selling price as the damages base of the doctrine when it is applied. ■ for the accused wireless network access, though Claim Available at Social Science Research Network (SSRN): 1 of the asserted patent (U.S. Patent 5,844,893) lists https://ssrn.com/abstract=2855148

14. Georgia-Pacific Corp. v. United States Plywood Corp., 318 F. Supp. 1116, 166 U.S.P.Q. (BNA) 235 (S.D.N.Y. 1970). 15. Basing damages on profits pose the same problem. Because profits are calculated by firms in many different ways, they can be manipulated, loaded with all manner of overhead in order to 16. In re. “Innovatio IP Ventures,” LLC Patent Litigation, 1:11- report lower profits as a means of reducing royalties. cv-09308 (N.D.Ill. 2012).

December 2016 248 University IP Policies

To What Extent Are University IP Policies Legally Binding? Part 2: Students

By Philip Mendes

Introduction IP Policies With a Contractual Basis—Incor- n Part 1 the extent to which a university IP policy is poration by Reference legally binding upon a university’s staff was consid- An IP policy that seeks to divest a student of the Iered. In this part we consider that question in rela- ownership of the IP created by the student, may be tion to students, both undergraduate and postgraduate. effective to do so if it has a contractual effect. This The IP policies of universities and research organi- can be accomplished by “incorporating it by reference” zations (for brevity, the term “university” is employed, into a contract between the student and the university. and refers not just to a university, but to all forms of a For most students, the only contract that they will ever non-for-profit research organization) seek, by force of have with their university, is the student enrollment the policy alone, to change where the ownership of IP contract, as contained in the enrollment applications lies. The university, by the force of its IP policy alone, completed by students. seeks to expropriate the ownership of the IP, either by: It is not uncommon for university enrollment applica- 1. The policy itself divesting a student of that owner- tions to include an obligation upon the student to com- ship, and vesting it in the university, or ply with the university’s policies, or the university hand- 2. The policy creating an obligation upon a student to book, which in turns contains the university’s policies. execute an assignment of IP to the university at a In Part 1 the question of the effectiveness of such future date. an “incorporation by reference” was considered in the The university IP policy seeks therefore to have a context of university staff. In Kucharczyk and Mosely legal effect, just as a contract has legal effect, by cre- v. Regents of University of California 946 F.Supp. 1419 ating legal rights and obligations. But unlike a contract (1996), which concerned the incorporation by refer- which is consensual in nature, an IP policy, by itself, is ence of a university IP policy, the Court quoted the a unilateral non-consensual document. following passage with approval: A policy document, being a unilateral document, “For the terms of another document to be incor- cannot of itself be legally binding upon a student. porated into the document executed by the par- Something more is needed for such a unilateral policy ties the reference must be clear and unequivocal, document to have a legal status and a binding legal the reference must be called to the attention of effect. This Part 2 considers what that “something the other party and he must consent thereto, and more” is okay in the United States, Canada, the United the terms of the incorporated document must be Kingdom, and Australia, in relation to students. It also known or easily available to the contracting par- considers how successful this “something more” is to ties. Williams Const. Co. v. Standard-Pacific Corp., make an IP policy legally effective in those countries in 254 Cal.App.2d 442, 61 Cal.Rptr. 912 (1967).” relation to students. In Kucharczyk, the University of California’s IP poli- Often, a university will need to own the IP created cy was duplicated on a document that each staff mem- by a student in order to avoid the fragmentation of the ownership of the IP, and to have the power to do ber signed upon employment at the university com- something meaningfully with the IP. It is therefore im- mencing, called a “University of California State Oath portant that there is a legally effective mechanism to of Allegiance and Patent Agreement.” The fact that the ensure that when needed, the IP created by students IP policy was duplicated on that document persuad- vests in the university. ed the Court that it was sufficiently “incorporated by A Legal Basis for IP Policies reference” into the document for the university staff member to be contractually bound by the IP Policy. There are two ways that an IP policy can be legally The same was held in two later cases where the same binding, and that is if: document was considered: Shaw v. The Regents of the 1. It forms part of a legally binding contract, or University of California, 58 Cal. App. 4th, 67 Cal. Rep- 2. It has legislative force. tr. 2d 850 (3d Dist., 1997) and Singer v. The Regents

249 les Nouvelles University IP Policies of the University of California 1997 WL 34594173. All In the United States, the law was on unconscionable three cases concerned university staff members. contracts and was succinctly stated in Williams v. Walk- Unlike Kucharczyk, Shaw and Singer, students do er-Thomas Furniture Company 350 F.2d 445 (D.C. Cir. not sign a document that duplicates the university’s IP 1965). The Court held: policy, and which states that the student agrees to be “We hold that where the element of unconsciona- bound by it. Having regard to the principles in Williams bility is present at the time a contract is made, the Const. Co. v. Standard-Pacific Corp., 254 Cal.App.2d contract should not be enforced. Unconscionabili- 442, 61 Cal.Rptr. 912 (1967) approved in Kucharczyk, ty has generally been recognized to include an ab- it is doubtful that in the United States a student’s sign- sence of meaningful ing or completion of an enrollment application that re- choice on the part of fers to the university’s policies or handbook, would be one of the parties to- ■ Philip Mendes, sufficient to incorporate the university’s IP policy by gether with contract reference. According to Williams what is required is: terms which are un- Opteon, 1. The reference to the IP policy is clear reasonably favorable Principal, and unequivocal; to the other party. Brisbane, Australia Whether a meaning- 2. The reference is called to the attention of E-mail: [email protected] ful choice is present the student; in a particular case 3. The student has consented to the IP policy, which can only be deter- suggests that the student must have the opportu- mined by consideration of all the circumstances nity to read it, and to consider its contents; and surrounding the transaction. In many cases the 4. The terms of the IP policy must either: meaningfulness of the choice is negated by a gross (a) Already be known to the student, or inequality of bargaining power. The manner in (b) Easily available to the student. which the contract was entered is also relevant to this consideration. Did each party to the con- It is much easier for these requirements to be met tract, considering his obvious education or lack of where compliance with an IP policy is contained in it, have a reasonable opportunity to understand the employment contract between a university and a the terms of the contract, or were the important staff member. terms hidden in a maze….” It is much harder, if not impossible, for a student That passage refers to the following indicators of un- enrollment application that refers to compliance with conscionability: the university’s policies or handbook to satisfy these requirements. 1. Absence of choice. When a student signs an enrollment form or other document that incorporates The same is so in relation to the similar requirements an IP policy by reference, the student is not given in the United Kingdom, Australia, and Canada for there a choice about the contents of the IP policy. In to be a successful “incorporation by reference.” fact, a student would not even appreciate that the That being so, it is most unlikely that an IP policy enrollment form is a contract, nor appreciate that that seeks to divest a student of ownership of the IP contract incorporates an IP policy by reference, let created by the student in the future would be success- alone that the IP policy contains provisions pur- fully “incorporated by reference” into the enrollment porting to divest a student from ownership of the contract, and in turn, unlikely that the student would IP created by the student. be bound by the university’s IP Policy. 2. Terms that are unreasonably favorable. The fact IP Policies With a Contractual Basis— that a student undertakes a course of study at a Unconscionable Contract university would not normally of itself be con- But let’s assume that a student enrollment contract, sidered sufficient justification for the divestment or some other document between a student and the from a student of the ownership of IP created by university does adequately incorporate by reference the student. compliance with the university’s IP policy. There is The fact that a student will share in commer- another impediment to any contract that incorporates cialization revenue cannot necessarily be regarded the university’s IP policy by reference, being binding a sufficient consideration to make the terms bal- upon a student. anced. A student might be entitled to one third In each of the United States, Canada, United King- of commercialization revenue under an IP policy, dom, and Australia, the law relating to unconscionable but that is not the same as 100 percent of com- transactions will impact upon any such contract. mercialization revenue if the student owned the

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whole of the IP. refuse to enforce the contract, or it may enforce 3. Inequality of bargaining power. There is probably the remainder of the contract without the uncon- no better example of a relationship with unequal scionable clause, or it may so limit the application bargaining power, that of a young and inexperi- of any unconscionable clause as to avoid any un- enced student, and that of an institution such as conscionable result.” a university. When a student is presented with an § 2-302(a) has limited application to the sale of enrollment form, the student can hardly negotiate goods. But is reproduced in near identical terms in Re- its terms, or the terms of the IP policy sought to statement (Second) of Contracts at §208. be incorporated by reference, nor would any at- “If a contract or term thereof is unconscionable at tempt by a student to do so be accepted, or even the time the contract is made a court may refuse tolerated. to enforce the contract, or may enforce the re- 4. Understanding the terms. Entering into an en- mainder of the contract without the unconscion- rollment agreement with a university would not able term, or may so limit the application of any normally be understood as entering into an agree- unconscionable term as to avoid any unconscion- ment to divest oneself of the ownership of IP. able result.” As the Court continued to say in Williams v. Walk- In the Technology Transfer Practice Manual pub- er-Thomas Furniture Company 350 F.2d 445 (D.C. lished by the Association of University Technology Cir. 1965): Managers, its chapter Managing Student Intellectual “When a party of little bargaining power, and Property Issues at Institutions of Higher Education: An hence little real choice, signs a commercially un- AUTM Primer, warns (at pages 5-6): reasonable contract with little or no knowledge of its terms, it is hardly likely that his consent, “With students unlikely to regard academic en- or even an objective manifestation of his consent, rollment as contractual and unable to meaning- was ever given to all the terms. In such a case the fully negotiate the terms involved, any ambig- usual rule that the terms of the agreement are not uous or unduly burdensome IP provisions risk to be questioned should be abandoned and the invalidation…” court should consider whether the terms of the The risk of a student enrollment contract, if it seeks contract are so unfair that enforcement should be to incorporate by reference a university’s IP policy, be- withheld.” ing unconscionable, is indeed a very high risk. At the time that the contract in Williams was formed, This risk is not confined to just a student enroll- § 2-302(a) of the Uniform Commercial Code was not ment contract. It extends to any contract between a yet enacted. Its enactment by the time of the Court’s student and a university. It will include a document decision assisted the Court: by which a student assigns IP to the university. A “Congress has recently enacted the Uniform Com- university that presents a student IP assignment to a mercial Code, which specifically provides that the student for signing, and refers to its IP policy as oblig- court may refuse to enforce a contract which ing the student to execute the assignment document it finds to be unconscionable at the time it was runs the risk of the assignment being struck down as made. 28 D.C.CODE § 2-302 (Supp. IV 1965). an unconscionable transaction. The enactment of this section, which occurred subsequent to the contracts here in suit, does not In the same year that Williams v. Walker-Thomas Fur- mean that the common law of the District of Co- niture Company 350 F.2d 445 (D.C. Cir. 1965) was de- lumbia was otherwise at the time of enactment, cided in the United States, Morrison v. Coast Finance nor does it preclude the court from adopting a Ltd (1965), 55 D.L.R. (2d) 710 was decided in Canada similar rule in the exercise of its powers to devel- by the British Columbia Court of Appeal. The Canadian op the common law for the District of Columbia. Court felt the same way about unconscionability as the In fact, in view of the absence of prior authority on U.S. court did: the point, we consider the congressional adoption “A plea that a bargain is unconscionable invokes of § 2-302 persuasive authority for following the relief against an unfair advantage gained by an rationale of the cases from which the section is unconscientious use of power by a stronger par- explicitly derived.” ty against a weaker. On such a claim the material § 2-302(a) of the Uniform Commercial Code ingredients are proof of inequality in the position provides: of the parties arising out of the ignorance, need or “If the court as a matter of law finds the contract distress of the weaker, which left him in the power or any clause of the contract to have been uncon- of the stronger, and proof of substantial unfairness scionable at the time it was made the court may of the bargain obtained by the stronger.”

251 les Nouvelles University IP Policies

As in the United States, a Canadian court that finds “In general, universities have no automatic right an agreement tainted with unconscionability may de- to the intellectual property (IP) generated by stu- cline to enforce the terms of the agreement. dents, given that they are not employees. A term In the United Kingdom the principle of unconscion- that allows a university to claim all IP generated ability was famously summarized by Lord Denning by all students during their studies—for example, MR in Lloyd’s Bank Limited v. Bundy [1975] QB 326, all written work, creations, inventions and discov- [1974] 3 All ER 757 in the following way: eries, regardless of the circumstances of study or “Gathering all together, I would suggest that type of course—may be unfair.” through all these instances there runs a single Given the laws on unfair contracts and unconscion- thread. They rest on “inequality of bargaining able contracts, it is difficult to have confidence that a power.” By virtue of it, the English law gives relief student in the United Kingdom can be contractually to one who, without independent advice, enters bound by the terms of an IP policy, even one that is into a contract upon terms which are very unfair successfully incorporated by references into an enroll- or transfers property for a consideration which is ment contract. grossly inadequate, when his bargaining power is In Australia the law on unconscionable contracts grievously impaired by reason of his own needs or is fundamentally the same. In Commercial Bank of desires, or by his own ignorance or infirmity.” Australia Ltd. v. Aniadio (1983), 151 C.L.R. 447 the In the United Kingdom, the unconscionability prin- Court said: ciple has been broadened by the Consumer Rights Act “Relief on the ground of unconscionable conduct 2015, section 62(1) of which provides: will be granted when unconscientious advantage is “An unfair term of a consumer contract is not bind- taken of an innocent party whose will is overborne so ing on the consumer.” that it is not independent and voluntary, just as it will A student is a consumer for the purposes of that also be granted when such advantage is taken of an in- provision. nocent party who though not deprived of an independent and voluntary will, is unable to make a worthwhile In the United Kingdom there have been a number judgment as to what is in his best interests.” of publications that refer to the sensitive relationship between students and universities in relation to IP pol- The unconscionability principle has also been broad- icies, contracts that seek to incorporate them by refer- ened in Australia by legislation. Section 21 of the Aus- ence, and IP assignments. tralian Consumer Law provides: In 2006 Praxis/UNICO, the association in the United “A person must not, in trade or commerce, in con- Kingdom that represents technology transfer offices, nection with: said in its publication Practical Guide—Students and IP (a) the supply or possible supply of goods or ser- (at paragraph 3.7): vices to a person… engage in conduct that is, in “Terms may also be unfair if they do not strike a all the circumstances, unconscionable.” fair balance between your [that is, the student’s] An enrollment contract between a university and a rights and obligations and those of the universi- student is a contract in trade or commerce in connec- ty—for example, if they…assign all intellectual tion with the supply of services, namely education, property rights (IP) for any of your work to the and a “person” includes a university. university, regardless of the circumstances.” Section 22 of the Australian Consumer Law sets In 2007 the JISC Legal Investigation into Student out matters that the Court may consider to determine Work and IPR made a similar comment: whether they has been any unconscionability. The very “Although an assignment may be appropriate and first one is “the relative strengths of the bargaining fair in some circumstances, a blanket requirement positions” of the parties. of assignment is unlikely to meet the test of fair- In Australia, as in the other countries considered, an ness in the Unfair Terms in Consumer Contracts attempt to incorporate by reference an IP policy that Regulations 1999.” seeks to divest a student of the IP created by the stu- The Unfair Terms in Consumer Contracts Regu- dent, is likely to be unconscionable. lations 1999 was the forerunner of the Consumer IP Policies With a Legislative Basis Rights Act 2015. An IP policy might be binding, not because it forms More recently in 2015, the English Competition part of a contract, but because the IP policy is en- and Markets Authority said in its Undergraduate Stu- shrined in legislation or subordinate legislation. State dents—Your Rights Under Consumer Law (at para- universities in the United States that are formed by graph 3.16): statute sometimes have their IP policy part of that stat-

December 2016 252 University IP Policies

ute. In those cases, it is therefore not just a policy, but United States, a joint owner of a patent can grant a a law as well. license without the consent of the other.1 A university In other countries, as was described in Part 1, the can therefore grant a license without the student joint courts have been reluctant to give effect to statutory owner’s consent. But so can the student, and that de- provisions that divest a person of property. values the IP to each of them. It also impedes commer- In the United States, when an IP policy is effectively cialization as a licensee would normally seek all of the a law, either as legislation or as subordinate legislation, rights, and not just rights from one joint owner, leaving a student is bound by it. Such legislation will overrule the other joint owner free to grant a license to a com- the common law or general law described in Williams petitor. In other countries, an exclusive license of a patent cannot be granted by one joint owner without v. Walker-Thomas Furniture Company, as well as any 2 statue that reflects §208 of the Restatement (Second) the consent of the other joint owner. This effectively of Contracts. confers on each joint owner a power of veto over the grant of a license. It does seem incongruous that at universities whose IP polices do not have a legislative sanction, an attempt A university in the United States, or in any other by the IP policy to divest the student from ownership country, is therefore precluded from granting a world- of IP created by the student is highly likely to be un- wide exclusive license of a patent, without a student conscionable and void, but that at universities whose joint owner’s consent. IP policies do have a legislative sanction, they are valid. In these circumstances, it is important that the uni- The law should not treat students unequally, de- versity secure ownership of the IP created by the stu- pending on whether they are enrolled in a university dent. If the university is to achieve its mission of its whose IP policies are enshrined in legislation or subor- research outputs benefiting the community, it is nec- dinate legislation, or a university whose IP policy is not essary that the university be able to commercialize enshrined in that way. those research outputs without impediment. Where those research outputs were mostly created by uni- IP Policies and Students—Conclusion versity staff, and partly created by a student working In relation to students in the United States, Canada, with its staff, it will usually be the university that is United Kingdom, and Australia, it is highly doubtful best placed to commercialize the research outputs. It that IP policies that seek to expropriate IP created by has a technology transfer office, as well as the exper- them can be successfully incorporated by reference tise and resources to protect the IP, to find potential into their enrollment contracts. This is because firstly commercial partners for the IP, and to successfully of the difficulty of seeking to incorporate by reference commercialize the IP. an IP policy into the enrollment contract between Where a student is part of a research team carrying the student and the university, and secondly because out research under a sponsored research agreement, the law of unfair or unconscionable contracts in each the university will have obligations in relation to the country is a major obstacle to the unilateral IP policy research outputs of that research team, to the industry being contractually binding, even if successfully incor- sponsor of research. Under the terms of the sponsored porated by reference. research agreement the industry sponsor may have a When IP policies have a legislative basis, a difficult right of first refusal, a license, or in exceptional cir- question of principle needs to be addressed in relation cumstances, ownership of the research outcomes. to students: should IP policies enshrined as state laws In these circumstances, the university needs to divesting students of the ownership of their IP prevail, own all the IP produced under the sponsored research when, had the same IP policy been based on contract, questions of unconscionability make it doubtful that 1. Schering Corp v. Roussel 104 F.3d 341 at 343 (1997). the IP policy would have been effective? 2. See for example: Australia—Section 16(2) “Patents Act” Does a University Need to Own the IP Created 1990, Brazil—Article 1314 “Brazilian Civil Code,” Canada— by a Student? Forget v. Specialty Tools of Canada Inc. (1995) 62 CPR (3d) Sometimes a university needs to own the IP created 537; China—Article 15 “Patent Law”; France—Article L. 613- 29 “Intellectual Property Code,” Great Britain—Section 36(3) by its students. “Patents Act” 1977; Hong Kong—Section 54(3) “Patents Ordi- Where a student is a member of a research team, nance”; India—Section 50(3) “Patents Act” 1970; Japan—Ar- which produces commercializable IP, that IP will be ticle 73(3) “The Patent Law”; Malaysia—Section 40 “Patents jointly owned by the student, and the university, as the Act” 1983; New Zealand—Section 63(3) “Patents Act” 1953; Russia—Article 1229(3) Part IV “Russian Federation Civil employer of the remaining members of the research Code”; Singapore—Section 46(3) “Patents Act”; South Afri- team. The joint ownership of IP in this way fragments ca—Section 49(2)(b) “Patents Act” 1978; South Korea—Article ownership, and impedes commercialization. In the 99(4) “Patent Act.”

253 les Nouvelles University IP Policies agreemen, to be able to perform its obligations under the case that it needs to divest all its students of the the sponsored research agreement. If a student has ownership of the all the IP created by them. part of the ownership of the IP, the university is with- A university that in its IP policy does seek to own out the capacity to confer on the industry research all the IP created by all its students, whether it needs sponsor the rights that it purported to grant. That will it or not, invites controversy and disputes. These are expose the university to legal liabilities. not necessarily litigated, and therefore reported. But In both these situations therefore: that does not mean that disputes do not occur. They 1. Research that leads to commercializable IP. do occur, and needing resolution, they are resolved. 2. Research undertaken under a contract that is there- But as with disputes involving staff, that happens only fore subject to contractual obligations. after much anxiety, and often, only after a commercialization transaction has been delayed, or put at risk, It is important that the university own the IP. In each and rarely but occasionally, after a commercialization case, any ownership of the IP by a student will either transaction has been abandoned. It also needlessly impede commercialization, and impede the university in the achievement of its mission, or expose the uni- takes up the time and resources of the technology versity to legal liabilities. transfer office, for which handling these disputes is a wasteful distraction. But does a university need to own the IP created by students on other occasions? Obtaining an IP Assignment From a Student The vast quantity of IP created by students will not There are two situations when a university will need be commercializable. It will not even be the subject of to own the IP created by its students. The first is where an invention disclosure. A university does not need to the research project in which a student is included is own this IP. expected to give rise to commercializable IP. The second is where the research project in which a student is A student might create IP with the use of university included is subject to contractual obligations. equipment, laboratories, and other facilities. The fact that a student may use these in creating that IP may In the first case the university will need to own the not of itself be a sufficient justification for the univer- IP created by the student to achieve its mission, and in sity to own the IP. IP policies that refer to “significant” the second to meet its contractual obligations. use of a university’s equipment, laboratories, and other An assignment of IP by the student, to the univer- facilities as triggering the vesting of IP in the university sity, will on these occasions be necessary. Such an beg the question of what amounts to “significant” use. assignment by a student needs to be the student’s Even if there is what can be described as “significant” informed, intentional and voluntary act, untainted by use there is likely to be a disproportionate relationship unconscionability. between the value of the use made, which most of- Any “standard form” procedure by which students ten is modest, and the value of the IP created. Even assign the IP created by them, whether upon enroll- if the use is more than modest, which has the greater ment, or in some other “standard” way, is at high risk value—the use of the equipment to conduct an ex- of being an assignment that is unconscionable, and periment, or the innovation that created the IP before therefore void. the experiment was conducted? In these circumstances, seeking to divest a student of the ownership of IP This represents a major risk to a university. solely created by the student, just because the student If a university acts on an assignment of IP from a used university facilities, may be subject to the laws on student and, for example, enters into a license of that unconscionability described earlier. IP, the university is exposed if the student should later A student may have the assistance of a supervisor to successfully challenge the validity of the assignment. create the IP. If a supervisor or other university staff If such an assignment is declared void, it would mean member contributes to the creation of IP, the result that the university did not own that IP which it believed is that the IP is jointly owned by the student, and the it owned as a result of that assignment. That will breach university, as the employer of that staff member. If the express or implied warranties in the license that the jointly owned IP is commercializable, or subject to a university owned the IP the subject of the license, and contract, it should be owned by the university, as de- was entitled to grant the license. The resulting damages scribed above. But if it is neither commercializable, nor claim from a licensee could be significant. subject to a contract, it does not necessarily matter For a university to confidently obtain an assignment that its ownership remains joint between the student of IP from a student, the student must assign the IP and the university. voluntarily, on a fully informed basis, and without any It is not the case that a university needs to own all taint of unconscionability. As well, the assignment the IP created by all its students, and therefore not needs to be on equitable financial terms.

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When it is sought to divest a student of the student’s Conclusion IP under the terms of an enrollment contract, which It is important that universities own the IP creat- refers to compliance with an IP policy, on the face of ed by their students in the circumstances described. it, the divestment of IP may not appear to be on equi- However, casting a wide net over all IP created by all table financial terms. Under the IP policy, the student students, as IP policies seek to do, will involve the may participate in the university’s commercialization revenue sharing policy, and along with other inventors university in time consuming and distracting disputes share in for example one third of the net commercial- about the ownership of IP. ization revenue. However, but for the assignment, the An IP policy casting such a wide net also sits uncom- student might have been entitled to 100 percent of all fortably with student entrepreneurship. Many univer- revenue, or 50 percent if the IP was jointly owned with sities teach entrepreneurship, often with a student’s the university. That, with the circumstances of the di- own innovations being part of the courses of study that vestment amounting to an involuntary divestment on the students undertake. As well, universities operate the part of the student, together make the transaction incubators and entrepreneurship centers, which have unconscionable, and liable to be set aside as void. the aim of fostering and nurturing innovation and en- However, an intentional and voluntary assignment trepreneurship amongst not just the university’s staff, by the student, made with the student being fully but its students as well. informed, where the student is treated in the same When a university needs the IP created by a student, manner as the university’s staff in relation to the the assignment of that IP to the university needs to be sharing of net commercialization revenue, is less like- obtained in circumstances untainted by unconsciona- ly to be considered an unconscionable transaction. bility. Without that, a university that deals with the IP Allowing a student a reasonable period of time to such as by way of license can never know whether it consider the terms of an assignment document and all will have a potential legal liability arising from a suc- the information provided by the university in relation cessful challenge by a student to the assignment, and to the assignment, and if the student so chooses, to its being found to be void. ■ obtain independent legal advice, will also help negate Available at Social Science Research Network (SSRN) any appearance of any unconscionability. https://ssrn.com/abstract=2855159

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Application Of Enterprise Risk Management (ERM) Principles To Patent Freedom-To-Operate (FTO) Analysis: A Novel “IP-RM” System By Gillian M. Fenton

ntellectual property (IP) is an integral component level executive manage- of business strategy in many industries, and for ment, and with colleagues ■ Imany types of enterprises ranging from startups, to in corporate legal func- Gillian M. Fenton, Esq, CLP emerging companies in growth phase, to mature com- tions and corporate com- Fenton IP Solutions LLC, panies that may be considered an attractive target for pliance. The objective in Managing Director, IP litigation. Certainly this is true in life science fields, each case is to facilitate Potomac, MD, USA particularly for biotechnology and pharmaceutical in- informed decision-mak- E-mail: gfenton@ novator companies, where IP is often a significant coming about IP issues, both fentonipsolutios.com ponent of corporate value. A robust IP strategy should opportunities and risks. encompass at least three dimensions of activity: It is not realistic for IP 1. Asset management, including capture or harvest- counsels to expect that ing of newly created IP rights and portfolio devel- colleagues from a broad diversity of other professions opment, maintenance and alignment to business will become fluent in the language and concepts of IP; objectives; rather, IP counsels must learn to communicate using 2. Freedom-to-operate (FTO), including the investiga- terms and concepts that are more broadly understood across business functions. One such conceptual sys- tion, identification and management of third-party 1 proprietary rights that present risks of blocking or tem is Enterprise Risk Management (ERM). ERM is a hampering achievement of business objectives; and systematic approach to identifying, triaging, and managing all identified risks to a commercial enterprise 3. Value extraction, or the use of IP assets to attract and/or business strategy. In a typical ERM campaign, or secure investment in the form of financing, cap- the organization conducts one or more workshops, to ital raises, licensing, and monetization. which managers in diverse business functions are in- There is, however, a wide variation in the skillfulness vited and participate in identifying risks and concerns with which businesses harness the potential value of that affect their business activities. Workshop partic- IP, and this is critically dependent on the abilities of in- ipants then vote on the relative magnitude of each house IP counsel to communicate complex and nuanced risk, the likelihood of encountering the risk, and the concepts of IP law to colleagues in other disciplines. urgency of addressing it before further executing on This article proposes a framework for cross-disciplinary the business plan or corporate strategy. What emerges communication and management of FTO issues to bet- is a risk map, in which identified risks are plotted on ter align IP strategy with overall business objectives. The a grid according to their likelihood of occurrence (the present model system has been developed for use in the x-axis) and materiality; i.e., the magnitude of potential biotechnology and pharmaceutical industries, where harm (the y-axis). An example risk map is shown in product development typically takes years, sometimes Figure 1.2 Risk maps enable the intelligent allocation even a decade or more, and commercialization is sub- of resources to address the most pressing threats to ject to licensure by a regulatory authority, such as the the business. Management of each risk, which may in- U.S. Food and Drug Administration (FDA). Nonetheless, clude proactive mitigation, a change in business prac- many of the principles utilized will be relevant to other tices, or simply periodic monitoring for a change in industries and other types of products. Need for a Systematic Framework 1. For a general overview, see https://en.wikipedia.org/wiki/ In-house IP counsels must be prepared to tackle a Enterprise_risk_management (last visited 22 May 2016). For broad range of IP issues, and to communicate these a primer on the relevance of ERM to in-house legal practices, in a meaningful manner to executive management, as see “Enterprise Risk Management & Assessments Add to Legal well as to colleagues in different disciplines, ranging Department Arsenal,” by Hilton and Jenkins, ACC Docket, pp. from research and development, to manufacturing, 35-41 (January/February 2016). finance, marketing and compliance. It is particularly 2. Based on an Excel tool kindly provided by Core Risks Ltd. important to communicate meaningfully with C-suite (http://www.corerisksltd.com/ (last visited 22 May 2016).

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framework then assumes a Figure 1: Example 2-Dimensional Risk Map For A central role throughout the Hypothetical Biological Product Showing 6 Risks, risk management phase. In- One Of Which (Number 3) Has Been Mitigated house counsels should find that applying ERM principles and terminology will facilitate an understanding of IP strategy and in par- Impact 1 ticular, foster alignment 6 and approval by executive $25,000,000 management of risk mitigation projects and expendi- 2 tures that support key commercialization objectives. $10,000,000 Let’s next consider the main activities of patent FTO strategy using the example of a biologic therapy 5 4 that is subject to U.S. FDA $1,000,000 licensure. FTO Investigative Activities 3 The investigative phase Low Moderate High Very High of patent FTO is normally performed using applicable Less than 10% 10% ≤ X ≤ 50% 50% ≤ X ≤ 75% 75% < X public and proprietary sub- Likelihood scription databases of patent information. A variety of searching and data ana- circumstances, is then assigned to a risk owner. In the lytical platforms have been developed in recent years.3 case of IP FTO risks, in-house IP counsels are ideally The goal, generally, is to identify third party patent suited to be risk owners. Risk owners report in regu- rights that are relevant to the product or technology larly to executive management, which facilitates long under investigation. There are practical benefits to sep- term strategic planning and periodic reassessment. arating the activities—and budgets—for conducting Because ERM is broadly cross functional and seeks to searches from the activities and investments needed provide a commonly understood set of defined terms to address the identified risks. FTO searching and FTO and concepts, it is a valuable tool for IP counsels to use risk management should be separate line items in the in communicating across in-house business disciplines. in-house IP budget. This permits flexibility in the tim- So how does ERM intersect with the FTO aspect ing and handling of business investments to support IP of IP strategy? Broadly speaking, FTO should be un- strategy. For example, the business may enter into a derstood to encompass two distinct types of activities: collaborative development agreement in which part or investigation and risk management. FTO investigative all of the FTO investment may be shared, or assumed activities are conducted for the purpose of identifying by the development partner. Also, tracking searching third party patent rights that are potentially relevant and risk management separately may help to “smooth as risks (threats) to the pursuit and realization of busi- out” year over year fluctuations, which may be useful ness goals for the commercialization of technologies in meeting internal financial expectations. and products. FTO risk management activities have Many businesses seek to scale their investment in the goal of reducing the likelihood and/or impact of a particular product or technology in a manner reflec- the identified risks so that commercial goals can be tive of its stage of development or prominence in the achieved with little to no adverse impact being ex- product pipeline. While this is not often feasible when perienced from the assertion of third party patent investing in patent assets (for the obvious reason that rights. ERM principles and communication tools can be used to support both phases of FTO activities, but first become relevant when communicating the results 3. For a curated listing of available offerings, see http://piug. of FTO searches to executive management. The ERM org/vendors#Database_Producers (last visited 22 May 2016).

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U.S. and international patent laws strongly incentivize achieve overall FTO clearance of the product candi- early patent filing, which then triggers a cascade of due date, searches of biologic therapeutic agents are often dates for investment in foreign filing, etc.), it is both grouped into four modules. Since the identity of the feasible and desirable to do so when conducting patent biologically active component(s) and of its structure FTO strategies. Searching activities can be aligned in and function are selected very early in the course of terms of scope and timing to the development stage development, searches covering these aspects of the and progress of the underlying product or technology. product will be referred to as “Module One.” This Ideally, management’s decision to progress a product module typically includes the active biologic or phar- candidate through a development stage gate that calls maceutical ingredient(s), the biologic target or path- for a significant discontinuity in investment in the way that is affected by the active ingredient(s), the pri- product/technology should be informed by a current mary indication for use, any platform technology that FTO search. Thus, a patent FTO investigation program was used to create the active ingredient, the general should commence with a preliminary landscape search structural class to which the ingredient belongs, any early in development, followed by a cascade of progres- ancillary active ingredients (e.g., a vaccine adjuvant), sively more rigorous and comprehensive searches as and any other features, components, or methods that the product progresses through the development pipe- are envisioned to be practiced by the end-user of the line. Spreading out patent FTO searching activities in product when commercialized. The scope of Module time provides several benefits. First, it reflects the fact One should reflect the desired Target Product Profile that not all aspects of a single pipeline product will be used in defining the development project when pro- “ripe” for searching at the same time. Second, it ad- posed to executive management for approval of the dresses management’s questions on why the business investment in early stage development. should invest in FTO searching on early stage products Module Two: Construction and Provenance that may fail in development: the overall FTO search A second area of subject matter that can be defined program is scaled in terms of scope, rigor, and timing early in development and forms a distinct module for such that major expenditures will only be made on suc- search purposes encompasses source materials, re- cessful pipeline products that have the greatest chance search tools and construction methodologies that may of surviving to achieve commercialization. have been used to create the product candidate but The typical FTO search program for a novel biologic will not be actively practiced throughout development therapeutic agent will include the following types of or commercialization. This Module Two may include, searches: for example, proprietary source materials such as cell Patent Landscape lines, viruses, bacteria; gene, transcript or protein A patent landscape search is a simple, subject mat- sequences e.g., of the biological target of the active ter specific query designed to identify clusters of in- ingredient(s); phage display or other libraries of biolog- novative activity relevant to, for example, a research ical materials or information; molecular biology tools lead selected for exploratory development. Within the and techniques; expression systems; assay technolo- world of FTO searching, landscapes are suitable only gies; in vitro and animal model systems, and the like. for early-stage development, and may be carried out as Ideally, Module Two covers all upstream obligations to soon as a meaningful search string can be formulated. providers of proprietary starting materials and research Landscape search results can be used to help prioritize tools. There are several practical and legal reasons why among different research leads or proposed develop- it is useful to separate Module Two from Module One ment projects, and to optimize development strategies. searches; for example, because statutory protections At the early stage of development where landscapes against patent infringement liability may not apply, or are used, third parties active in patenting technology may apply differently, to subject matter within Module in the field may be as likely to be development part- Two versus Module One. The safe harbor from patent ners (opportunities) as they are to be obstacles (risks). infringement liability provided in 35 U.S.C. § 271(e) Only the most exceedingly risk averse companies will (1) will be discussed more fully below. abandon promising research based upon the results of Module Three: Commercial Formulation a landscape search. and Presentation Module One: Product Active Components Pharmaceutical and biologic formulations can be As noted above, not all aspects of a specific product complex, and it is customary to design and test sev- candidate become ripe for FTO searching at the same eral in parallel for suitability with a particular active time. The aspect(s) that are typically ready for search- ingredient. Tests may include stability, solubility, bio- ing at a particular time are, for convenience, referred availability, biocompatibility and other desired proper- to as modules. While there is no rigid definition of a ties, and may include a battery of in vitro and in vivo specific module, or the number of modules needed to studies. While formulations may offer scope to ‘design

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around’ third party patent rights, FTO searching can tion and indication for use, without requiring substan- become unduly complex (and therefore expensive). tial additional investment in clinical trials; thus, the Multiple components, combinations and recipes fre- innovator has little scope for using a ‘design around’ quently require investigation, as do processes geared strategy to manage patent FTO risks. Finally, the inno- to produce different physical forms of the formulat- vator’s risk exposure culminates upon receipt of reg- ed composition. For example, a typical formulation ulatory approval by FDA as this event typically signals search might include candidate excipients, stabilizers, the end of applicability of 35 U.S.C.§ 271(e)(1), collo- liquid and lyophilized forms, spray or foam drying quially known as the Bolar Exemption,4 which provides techniques, etc. The same is true of candidate drug bio- and pharmaceutical drug developers with a Safe presentations, which might include pills, capsules, Harbor from patent infringement that accommodates lozenges, drinkable liquids, injectable or infusible liq- the regulatory oversight and approval process by FDA. uids, injection devices, transdermal patches, inhalers, For these reasons, it is considered customary best creams, or ointments. In the face of such complexity, practice to conduct a thorough patent FTO investigation it may be best to defer Module Three FTO searches prior to commercial launch of a new drug or biologic. until the formulations development team has selected This pre-launch clearance search is typically the most the top three-five candidates for in-depth evaluation. rigorous and comprehensive search carried out on the Module Four: Commercial Manufacturing Process candidate drug or biologic, and encompasses all sub- Normally the last module to be defined in biologic ject matter previously explored in the modular search- drug development is that covering all material aspects es carried out earlier during development. Indeed, of the manufacturing process that is proposed for FDA many firms will outsource the searching responsibility approval. This Module Four should include all steps to a professional searcher who has not previously con- and processes required for manufacture of the com- ducted the modular searches in hopes that a ‘fresh pair mercial product, including if applicable, host cells, cell of eyes’ will uncover any FTO risks that may have been culture steps and conditions, downstream purification missed. The pre-launch clearance search is conducted steps, and analytical techniques and criteria that will prior to encountering the first anticipated commer- be used to support release of lots for commercial sale. cial activity with the new product, i.e., the first event As with drug formulation and presentation, early man- that is reasonably believed to fall outside the scope ufacturing development often involves testing a num- of the Bolar Exemption. The pre-launch search should ber of different approaches that may not be found suit- encompass each key feature or component of the prod- able for the commercial process; thus, it is important uct (active and inactive ingredients), key starting ma- to liaise closely with the manufacturing development terials, manufacturing technologies and intermediates, team to understand the nature and status of decision release assays, research tools, clinical indications and making in selecting the final commercial process. methods of use, formulation and presentation, prob- Pre-Launch Clearance Search able combinations with other drugs or biologics, and the like. This search should also cover key compet- In the biopharmaceutical industry, risks associated itors, collaborators, prominent investigators in the with patent FTO are normally highest when a candidate field, and potentially dominant technologies. The pat- biologic has reached late clinical development through ent assertion/litigation histories and prior licensing regulatory approval, product launch and early adoption practices of key third party patentees should also be in the commercial marketplace. Several factors oper- investigated. Assignment history and maintenance ate to magnify risk during this period: the innovator fee payment records should be checked for the most company has made significant financial investments in significant identified patent risks. These factors are the product, which may by now be deemed material representative, not exhaustive, as every drug/biologic to enterprise value by investors and market analysts. candidate and its circumstances are unique. If the innovator company is publicly traded, rules of the U.S. Securities Exchange Commission (SEC) or Timing and Updating FTO Searches a foreign equivalent agency will require disclosure Patent counsel will find that it is important to com- of certain information about the product, potentially municate to business leaders and decision makers that attracting the interest of third party patentees. Infor- establishing patent FTO for a new drug or biologic is mation concerning the new product is typically also not a ‘one and done’ type of exercise; rather, it is an published at scientific and biomedical conferences and ongoing activity that requires vigilance throughout the in scientific literature in order to develop a positive arc of new product development and commercializa- product reputation and facilitate future commercial tion. Once a specific FTO search has been performed adoption. Also, at this point in the regulatory approval process, FDA is unlikely to accept significant changes 4. From Roche Products, Inc. v. Bolar Pharmaceutical Co., in the product, its manufacture, formulation, presenta- Inc., 733 F.2d 858, 221 USPQ 937 (C.A.Fed., 1984).

259 les Nouvelles A Novel “IP-RM” System for the first time, it should be periodically updated un- dow-closing events are separated by a longer period til superseded or until the corresponding product is than that actually required to carry out the search ac- no longer of interest to the business. Thus, landscape tivities, and occur in different fiscal years. This permits searches should be updated at regular intervals until in-house counsel discretion to conduct some searches superseded by one or more of the modular searches early in the corresponding windows while deferring described above. Each modular search should be up- other searches. In this manner, establishing patent dated throughout development, until superseded by a FTO for product candidates that are of greater impor- comprehensive pre-launch clearance search. Even after tance or prominence in the pipeline can be prioritized, an initial product launch, commercial expansion into while smaller-market or strategically marginal products new indications for use, use in new combination ther- can be deferred. This also allows counsel scope for apies, and geographic expansion into new markets will managing FTO costs to a consistent, predictable level likely require supplemental FTO searching. The fre- over consecutive annual budgets. The search windows quency of updates may vary depending on the speed can even be included in product management GANTT of development, competitive pressure, prominence charts, which facilitates interactions with project man- of the product in the company’s portfolio, maturity of agement, as well as with the product, formulations and the market, and other factors. Annual updates may be manufacturing development teams. sufficient for most circumstances where the subject Table 1 sets out an example set of FTO search win- drug or biologic candidate is in the company’s active dow-opening and window-closing events for a novel pipeline. Flagship products may merit more frequent biologic being developed under FDA’s normal path updates, e.g., every six months. for a Biologic License Approval (BLA). Also shown are When managing FTO investigative activities for a di- exemplary alternative window-opening and -closing versified product pipeline, it is important to consider events. Alternative events can be used, for example, if the timing (and therefore cost) for each search activity. an accelerated FTO strategy is required for a flagship It is conventional for project managers in biopharma- product, or for a product to be developed in collabo- ceutical product development to define ‘stage gates’ ration with a business partner (e.g., under a license at significant decision-points throughout the develop- or JV) for which the innovator expects the partner to ment process. While it may be appealing to simply use conduct due diligence. Defensively accelerating some product development stage gates as due dates for con- or all FTO searches can enhance a licensor’s (or licen- ducting FTO searches, this approach can be unduly rig- see’s) negotiating position. Alternative events will also id and result in uneven spending year-over-year, which be required for product candidates that are subject to may be inconsistent with the innovator company’s nontraditional development trajectories, such as FDA’s goals for steady-state or predictable general and admin- Animal Rule,6 an alternative development path applica- istrative (G&A) expenses over time. A better approach ble to products for which it would be unethical to con- is to define windows of time throughout product devel- duct efficacy tests via randomized, controlled human opment in which it should be acceptable, from a risk clinical trials. Such products are often developed for management perspective, to carry out landscape, mod- government procurement in anticipation of emergen- ular and pre-launch searches. Passage through a first cy preparedness needs, e.g., vaccines or therapeutics product development stage gate opens a search win- for emerging infectious diseases, countermeasures for dow, and passage through a later stage gate closes the health impacts of CBRN7 threats, etc. window. The window-opening event should coincide Results of the FTO Investigation with the earliest point at which a meaningful search A well-conducted campaign of patent FTO investiga- strategy can be formulated. The window-closing event tions permits the innovator to discover and identify po- should be the latest point in development at which a tential third-party patent risks to its novel biopharma- reasonably prudent innovator company would contin- ceutical product well in advance of commercialization. ue developing the product ‘at risk’ of patent infringe- 5 “Commercialization” for present purposes means any ment liability. Ideally, the window-opening and win- activity that could, unless authorized by law or by the patentee, result in exposure to patent infringement li- 5. For purposes of selecting the window-closing event, inability. Commercial acts thus include making, using, house counsel should disregard the artificial risk-suppressing importing, offering for sale, or selling a patented prod- effect of the Bolar Exemption, codified at 35 U.S.C. § 271(e) (1). Instead, counsel should consider the amount of investment uct in the U.S. or importing a product made abroad made by the innovator company cumulatively up to the selected event, the future amount of investment to be made after that event and up to the point of first commercial sale, the poten- 6. For an overview, see http://www.fda.gov/EmergencyPre- tial consequences of ceasing further development (in terms of paredness/Counterterrorism/MedicalCountermeasures/MCM- reputation, opportunity cost, and the like), and the innovator’s RegulatoryScience/ucm391604.htm (last visited 22 May 2016). overall level of risk tolerance. 7. Chemical, biological, radiological or nuclear weapons.

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Table 1: Exemplary Correspondence Between Product Development Stage-gates And FTO Search Windows Pre-Launch Event Landscape Module One Module Two Module Three Module Four Clearance Definition/ Preliminary Biologically Provenance, Formulation & Commercial Comprehensive Scope View Active Tools & Presentation Manufacture Search Ingredients Construction Window Opens Target Identified Pre-IND Concurrent with Identification One year Upon last Meeting Module One of formulation prior to subject, first to be used in Engineering Lot dose in Pivotal Pivotal Trial manufacture Trial Window Opens Decision to IND Submission Decision to -- One year prior One year prior (alternatives) Collaborate Collaborate to manufacture to eligibility for of Phase III Emergency or Material Compassionate Use Authorization;

Window Closes Commence IND Submission Concurrent with Use of Commencement Pre-BLA Animal Model Module One formulation in of manufacture Meeting with for Proof of manufacture of Consistency FDA Concept of material for Lots Pivotal Trial Window Closes -- Release of Decision to -- --- Filing of BLA (alternatives) Phase I Trial Collaborate or EUA/CUA if Study Report; applicable Release of Animal Proof of Concept Study Report

using a process patented in the U.S.8 While the Bolar dashboards and other reports. To avoid confusion and Exemption9 immunizes development activities that are facilitate the tracking and reporting processes, the relevant to the FDA approval process, there has been same identifier should be used for a particular patent uncertainty around exactly when a novel product exits throughout the FTO campaign. It is usually sufficient the safe harbor provided by this exemption. In the bi- (and efficient) to group a simple patent family under opharmaceutical industry, the first commercial activity one identifier where an FTO investigation uncovers a may be product launch, manufacture or stockpiling of significant number of third party patents. Consecutive product for commercial sale, sale of product under a numbering may be sufficient (1, 2, 3, etc.) or if de- procurement contract, award of an advance market sired a short reference to the search module may be commitment for sales, or pre-launch sales under an included (1m1, 2m1, 3m4, etc.). Whatever convention emergency use or compassionate use authorization. It is developed should be short enough to enable the behooves in-house counsel to consider all potentially production of clear risk maps. It goes without saying relevant candidates for the first commercial act and to that any table, spreadsheet, dashboard or other report complete all patent FTO investigative activities in good listing FTO search results will constitute attorney-cli- time for that first commercial act to take place in a risk ent and work-product privileged information. Access environment that is acceptable to the innovator. and distribution should be limited in accordance with In accordance with ERM principles, each third party established principles. patent or patent application that is identified as be- Creating and Using Risk Maps ing sufficiently relevant to commercialization to mer- As emphasized earlier, communication between in- it further action should be assigned a short, unique house IP counsel and decision-making executives is identifier. The identifier is used for plotting the re- key to the success of an IP FTO strategy. An impor- sults on a risk map and for long-term tracking and re- tant communication tool for this purpose is the ERM- porting purposes, e.g., in status tables, spreadsheets, style risk map, in which identified risks are plotted according to their potential materiality (magnitude) 8. 35 U.S.C. § 271(a). and likelihood of occurrence (probability). An exam- 9. 35 U.S.C. § 271(e)(1). ple risk map for a hypothetical pipeline product is

261 les Nouvelles A Novel “IP-RM” System shown in Figure 1. The first step in setting up a risk impact,” which can be shown as a z-axis or another map is to calibrate the scales to be used for the x-axis means of introducing depth to standard ERM graphic (probability or likelihood of occurrence) and y-axis (ma- tools. The true position of each risk along the x-axis teriality). In a standard ERM risk assessment exercise, can then be assessed as of the date of first commercial it is customary and of practical value to also select the activity using other relevant measures of probability of risk planning period, i.e., the period running forward patent assertion, such as whether the patent holder is from the present time in which likelihood is estimat- a competitor, a startup, a business partner, a universi- ed. Depending on the needs of the business (in our ty, or a patent assertion entity. One can also consider example, an innovator biopharmaceutical company), whether the patent holder has granted prior licenses, this may be one, three, five, or ten years. Positions engaged in litigation, etc. The “time to impact” indica- along the x-axis thus represent likelihood that the risk tor is then useful to show the time period available for will materialize before the end of the planning period, mitigating the risk. Depending on one’s graphic pref- ranging from near 0% (impossibility) to near 100% (cer- erences and ease of comprehension for the audience, tainty). While this works well for most risks envisioned this can be a z-axis or a change in size, shape or color by an innovative business, it is confounded by the ef- of the icons used for each risk identifier. fects of the Bolar Exemption, which provides a Safe Turning to the y-axis—materiality—the standard Harbor from patent infringement, especially when the ERM approach is to assess impact of the risk, if encoun- development trajectory from discovery to regulatory tered, on the innovator business as a whole. The maxi- licensure under a BLA is longer than the risk planning mum y-value would thus correspond to a level of harm period. Because the Safe Harbor protects products that sufficient to consume the entire business. Many types are subject to FDA approval from patent infringement of harm can be envisaged, even if the focus is limited to litigation until the regulatory process is complete, the IP risks: an award of infringement or other damages, a likelihood of encountering an IP FTO risk is legally zero permanent injunction, prohibitive cost/terms required if the ERM planning period is too short to include the by the patent owner to license its technology, cost or projected date of licensure, and it suddenly jumps up difficulty of moving operations to a non-patent jurisdic- in a subsequent ERM planning cycle that includes time tion, designing around a technology, opportunity cost and activities that are not within the Bolar Exemption. to abandoning the product, etc. Each of these can be In other words, the effect of the Bolar Exemption is to translated into a financial impact scale. For risk mapping artificially suppress the likelihood of encountering an purposes, a correspondence is set up between the dif- identified risk within the applicable planning period. ferent impact scales so that a single relative scale can be This effect can be compensated for by including a third used for plotting the specific identified FTO risks. An dimension in the ERM risk map for IP risks: “time to example impact scale is shown in Table 2. The standard Table 2: Corresponding Scales Of Materiality (Impact Of Encountering An FTO) Risk)

Type of Impact Low Medium High Extreme Claim for Infringement < $1M $1 – 10M $10-25M > $25M Damages Injunction TRO only Preliminary Injunction Permanent Injunction Permanent Injunction Only in an Important Market in two or more Major Markets Cost to Design Around < $1M $1 – 3M $3-5M > $5M Abandonment < $25M $25 – 50M $50-100M > $100M (Opportunity Cost) Cost of Business No impact on NPV Acceptable impact on NPV Negative in an Product not Solution (License) NPV Important Market Commercially Viable (NPV Negative) Other Impact Factors TBD (varies) TBD (varies) TBD (varies) TBD (varies) -Related Legal Claims -Regulatory Body Investigation -Business Reputation/ Public Image -Employee Retention/ Morale

December 2016 262 A Novel “IP-RM” System

ERM approach of calibrating impact against enterprise dressed prior to the innovator’s engaging in its first com- value is useful when assessing FTO risks to an entire mercial activity. The goal of the in-house IP counsel(s) business, or to an entire product pipeline. However, as FTO risk owner(s) will be to take actions intended to it is also possible to use a smaller scale when analyz- cause the prioritized risks to shift away from their starting risks to a specific candidate product. In this case, ing positions on the risk map, toward more acceptable, the maximum impact should correspond to a “product lower levels of materiality and/or likelihood prior to the killing” event—one that extinguishes the value thesis expected date of “impact.” Ideally, all of the risk icons for developing and commercializing the product. It is should become clustered in the lower left quadrant of important to be very clear, when communicating IP the risk plot (low materiality, low likelihood) in advance FTO risks, to alert the audience to the impact scale of the first commercial activity. being used. IP Risk Mitigation Activities Once the x- and y-axis scales are selected, and a con- Once all identified FTO risks have been calibrated vention chosen to illustrate “time to impact,” risk map- in a risk map, the next logical question is to consider ping becomes a fairly straightforward exercise: each of whether whatever is being done already is sufficient to the third party patent risks identified in the course of address the potential impact of the risk on the innova- FTO investigations is plotted according to its estimat- tor’s business, or on the commercial prospects for the ed likelihood and impact. The resulting scatter plot is specific product. In ERM parlance, an activity under- a compelling “at a glance” view of the overall field of taken to address a risk is termed a ‘control.’ If current FTO risks under consideration. For an example IP FTO controls are sufficient, the risk in question is said to be risk map illustrating “time to impact,” see Figure 2. It ‘in retention’ and no active steps should be required becomes a relatively easy exercise for executive man- to change its position on the risk map. If current con- agement, together with in-house IP counsel, to use IP trols are not sufficient, the identified risk is subject to risk maps to prioritize the most pressing risks to be ad- ‘mitigation’ or active steps undertaken with the goal of driving the risk’s position Figure 2: Example 3-Dimensional Risk Map Showing lower along the scales of materiality and likelihood Relative “Time To Impact”: The Hypothetical Product Is In of occurrence. An example Early Clinical Development, And Risk 3 Has Been Mitigated of an FTO risk that is in re- By Taking A License. Risks 5 And 6 Are Platform Patents tention is a patent or appli- Shared With A More Mature Product. cation for which the innovator has already entered into a license agreement with the patent owner, and the license agreement is 1 in good standing. Another Impact 6 example is an automated $25,000,000 patent monitor of a pending application: the monitor alerts the risk owner 2 to changes in prosecution status, which enables him $10,000,000 or her to decide whether to keep the risk in retention, or institute any active risk 5 4 mitigation activities. $1,000,000 The menu of potential IP FTO risk mitigation activities (controls) is large and diverse. As IP counsels well 3 understand, the choice of Low Moderate High Very High which risk mitigation meas- Less than 10% 10% ≤ X ≤ 50% 50% ≤ X ≤ 75% 75% < X ures to take varies widely with the circumstances and Likelihood the ends to be achieved. Specific strategies areout -

263 les Nouvelles A Novel “IP-RM” System side the scope of this article. In general, in-house vents Act11 and the formation of the U.S. Patents Tri- counsel risk owners can choose an avoidance or ‘deal and Appeals Board (PTAB).12 The innovator facing a sign-around’ strategy, a variety of business resolutions, patent FTO risk may now elect to file an inter partes litigation, or one of the relatively new U.S. Patent and review (IPR), post-grant review (PGR), or covered busi- Trademark Office administrative law proceedings.10 ness method review (CBM) proceeding, depending on There are many options within each category: the technology presenting the FTO risk and the age Avoidance Strategies and Business Solutions (priority date) of the third party patent in question. An FTO risk may be avoided by adopting an alterna- Even before grant of a patent on a third party patent tive technology if the alternative is acceptable techni- application (again, depending on priority date), the cally and economically (considering, for example, the innovator may consider making a submission of third party observations in accordance with current USPTO changeover cost and terms of access). Avoidance can 13 also be accomplished geographically, by moving com- rules. Of course, administrative law remedies have mercial operations to a non-patent jurisdiction and/or long been available in other commercially important by targeting non-patent markets. Likewise, there are jurisdictions, the primary example being the availability of third party observations and post-grant opposition many potential strategies within the category of busi- 14 ness resolution: the innovator may negotiate access via proceedings in the European Patent Office. a license from the patent owner, acquire the desired Considerations Influencing Risk Mitigation Strategies technology rights, or if applicable, rely upon an indem- Just as with identifying search windows, there are nification clause in a separate licensing or collaboration a number of factors to be considered when selecting agreement with another third party having the resourc- control strategies. One factor is whether the strategy es to reach accommodation with the patent owner. Of in question requires action to be taken at a specific course, the ultimate avoidance strategy and business time, or in light of a specific event. For administrative solution is to adjust the organization’s goals and ob- law strategies in particular, it is necessary to monitor jectives based on an understanding of the risk (and and docket key dates by which action must be taken in opportunity) landscape. This may involve a shift in em- order to deploy a desired risk mitigation strategy. Eu- phasis within a product pipeline, or a new initiative to ropean patent oppositions and U.S. post-grant reviews explore additional or different development opportuni- must be initiated within nine months of the date of ties. Conversely, even a significant patent risk may be issue of a third party patent; thus, the risk owner must tolerated if it is offset by opportunities outside of the monitor third party patent prosecution for issuances scope of IP freedom-to-operate, leading to an explo- and docket opposition due dates accordingly. Similarly, ration of litigation and/or administrative law measures one can only file third party observations at specific to reduce—even partially—the potential magnitude or points in prosecution, again necessitating proactive probability of harm to the business. monitoring and docketing of due dates. It follows that Litigation Based Strategies control strategies that rely on triggering events arising Turning to litigation approaches, the innovator may from the third party’s progress through patent prose- seek relief via declaratory judgement (DJ) of non-in- cution cannot be deferred for convenience, or for pur- fringement, invalidity or unenforceability. If the innova- poses of managing costs and expenses. tor does not desire to take proactive action, or if the Other types of IP FTO control strategies can be de- jurisdictional requirements for DJ action are not (yet) ferred, or initiated when desired by executive manage- fulfilled, the innovator may instead prepare itself for ment of the innovator company. For these strategies, defending against future litigation by the owner of the a prime consideration for the in-house IP counsel as FTO risk. Often the first step in such a defensive strat- risk owner is to understand the anticipated date of the egy is to procure an opinion of counsel as to invalidity, innovator company’s first arguably commercial activi- unenforceability or non-infringement of the identified ty (the critical date) and how long one should expect FTO risk. It is important to remember that opinions of a desired control activity to take for implementation counsel, taken alone, are not risk mitigation strategies; rather, they are valuable tools for developing the overall mitigation strategy and in assessing available options. 11. Public Law 112—29, the Leahy-Smith America Invents Act (effective September 16, 2012). Administrative Law Strategies 12. http://www.uspto.gov/patents-application-process/patent- Administrative law remedies have recently been trial-and-appeal-board-0 (last visited 22 May 2016). expanded considerably as a result of the America In- 13. http://www.uspto.gov/patent/initiatives/third-party-preis- suance-submissions (last visited 22 May 2016). 10. For a comprehensive overview, see Patent Office Litiga- 14. https://www.epo.org/applying/european/oppositions.html tion, http://www.skgf.com/book (last visited 22 May 2016). (last visited 22 May 2016).

December 2016 264 A Novel “IP-RM” System

and/or completion. For example, the PTAB must de- ward achieving a global business solution in the form cide whether to initiate a U.S. inter partes review of a license, cross-license, acquisition of IP rights, or (IPR) proceeding within six months after a petition settlement with the third party owner of the IP FTO has been filed, and once instituted, the IPR must be risks in question. Litigation and administrative law ac- concluded within 12 months. The latest date for filing tivities in specific countries may be viewed as tactics or a petition is therefore 18 months prior to the criti- leverage for achieving a robust global solution. cal date, assuming that the innovator’s risk appetite is Additional Uses of the IP-Risk Management such that an appeal can be pending once commercial Framework activity commences. It is important to engage executive management early in discussions concerning what The foregoing discussion illustrates the utility of level of certainty of IP freedom to operate constitutes adapting enterprise risk management concepts and an acceptable risk environment: final resolution of all communication tools for use in IP freedom-to-operate prioritized risks? Including appeals? The outcome of planning, activities and investments for a specific can- this discussion informs not only the time frames for in- didate product in development. Creative in-house IP itiating specific control measures, but also the budget counsels will see that there are other uses for such an and other resources necessary to achieve the desired IP risk management framework: rather than generating outcomes. Maintaining a dashboard showing current a risk map of specific third party IP FTO risks to a spe- progress and investments made versus anticipated in cific product, one can, for example visualize the overall the risk mitigation activities for each identified FTO IP FTO risk of different products in a pipeline by sum- risk facilitates management’s understanding of the ming or averaging individual risks to create a risk score process. IP counsel should, of course, also liaise with for each product. Executive management may find this finance colleagues to keep abreast of the potential im- a useful tool in deciding which among several product pact of control activities on overall development costs candidates is the more desirable investment prospect. and economic attractiveness of the product. Or, rather than considering candidate products, a risk Beyond the investment of resources and time frame map may be applied to a platform technology or to the for implementing a desired control strategy, it is also choice of different platform technologies for designing necessary to consider the geographic scope of the de- a desired new product. sired solution. Litigation and administrative law pro- Overall, the management and strategy of achieving ceedings will be by definition limited to specific coun- IP freedom to operate benefits from the application of tries or regional jurisdictions (e.g., in the case of the enterprise risk management tools and concepts. It is European Patent Convention). However, the innovator hoped that in-house IP counsels will find these con- may desire access to a broad regional or global market, cepts useful in facilitating interactions with executive and IP FTO risks may exist in multiple countries within management and in demonstrating the business value the desired market. It may be necessary to work to- of IP strategies.15 ■ Available at Social Science Research Network (SSRN): https://ssrn.com/abstract=2855189

15. The author wishes to thank Kenneth Piña and Andrew Tait of Core Risks Ltd., and Colleen Larson of Emergent Bio- Solutions Inc., for their helpful comments and suggestions on the manuscript.

265 les Nouvelles Naked Licensing

NSFW: Naked Licensing And Uncontrolled Trademark Use By Luke S. Curran

he nucleus of trademark owners’ post-registra- ments, usage guidelines, approval mechanisms, and tion operations centers on protecting and en- compliance monitoring Tforcing those rights against unauthorized use by efforts. Your trademark third parties. Conversely, much less attention is afford- may be your company’s ■ Luke S. Curran, ed to addressing the potential for inadvertent loss of most valuable asset. You rights when employed by authorized third parties. should ensure that it is Banner & Witcoff, Ltd., Businesses are continually under pressure to gen- treated that way. The fol- Associate Attorney, erate new revenue streams from existing intellectual lowing catalogues several Chicago, IL, USA property assets. In turn, licensing agreements offer non-exhaustive consid- E-mail: lcurran@ brand owners the ability to expand or even exploit erations when entering bannerwitcoff.com. new markets with lower financial barriers to entry. into such arraignments When confronting the daunting task of generating with third parties. mark recognition, companies often welcome the op- Roadmap to Avoid Indecent Exposure: Level of portunity to pay considerable royalty rates for the Quality Control ability to offer their goods or services in connection The Lanham Act provides no guidance regarding the with a renowned brand. Likewise, the licensee’s mar- adequate level of quality control necessary to avoid keting campaign ultimately benefits the licensor’s a naked license.4 So how much control is enough? A goodwill. This proposition, on its face, appears to be sufficient level of control has been found when the a win-win as these agreements are the essence of any licensee’s goods or services satisfy the “expectations merchandising program. created by the presence of the mark.”5 Thus, there is However, a trademark licensing agreement, absent no bright line rule as “[i]t is difficult, if not impossi- adequate quality control provisions, offers no guaran- ble to define in the abstract exactly how much control tee precluding the risk of abandonment. Here, the op- and inspection is needed to satisfy the requirement of erative word is “control.” In the context of trademark quality control” over licensees in the modern market- licensing, avoid getting caught streaking with your place.6 business partner. Naked licensing occurs when the li- In order to avoid a judicial declaration of trademark censor fails to exercise adequate quality control over abandonment for naked licensing, courts commonly the licensee.1 consider: This careless practice may result in the mark no 1) Whether a mark owner retained contractual rights longer representing the quality of a product or ser- over quality of the use of the mark; 2 vice that consumers expect. The safest road to aban- 2) Whether a mark owner actually controlled quality donment is the gradual one. Moreover, the necessary of the mark’s use by licensee; and amount of authority exercised over the licensee cannot be answered in general terms.3 Accordingly, it is critical for mark owners to develop and implement a strategic plan to map licensing agree- 4. 15 U.S.C. § 1127 (stating that “[a] mark shall be deemed to be abandoned. . . [w]hen any course of conduct of the owner, including acts of omission as well as commission, causes the 1. See FreecycleSunnyvale v. Freecycle Network, 626 F.3d mark to become the generic name for the goods or services on 509, 515–16 (9th Cir. 2010) (emphasizing that naked licensing or in connection with which it is used or otherwise to lose its is “inherently deceptive” and constitutes abandonment of “any significance as a mark.”). rights to the trademark by the licensor.”). 5. Eva’s Bridal, 639 F.3d at 790. 2. See J. Thomas McCarthy, McCarthy on Trademarks and Un- 6. Fuel Clothing Co. v. Nike, Inc., 7 F. Supp. 3d 594, 606 fair Competition § 18:48, at 18–79 (4th ed. 2001). (D.S.C. 2014) (quoting Barcamerica Int’l USA Trust v. Tyfield 3. Eva’s Bridal, Ltd. v. Halanick Enters., 639 F.3d 788, 790–91 Importers, Inc., 289 F.3d 589, 595–96) (9th Cir. 2002)) (em- (7th Cir. 2011) (emphasizing that the level of authority exercised phasizing that “the standard of quality control and the degree over the licensee “can’t be answered generally” and the “licen- of necessary inspection and policing by the licensor will vary sor’s self-interest largely determines the answer” when examin- with the wide range of licensing situations in use in the modern ing the nature of the business and customers’ expectations). marketplace”).

December 2016 266 Naked Licensing

3) Whether a mark owner reasonably relied on the the affirmative duty to confirm that the products and licensee to maintain the quality.7 services offered in connection with its brand are of Fortunately, a party seeking to prove abandonment equal or greater quality. As a result, comprehensive is confronted by a rather stringent burden of proof.8 and express quality control provisions establish the re- Absent a clear showing of failure to exercise control, lationship in effective licensing arrangements—this is courts are simply averse to stripping a mark owner of the first part of the court’s analysis.15 These provisions its valuable rights on the grounds of naked licensing.9 must safeguard the value of the mark while affording Alternatively, when the licensor fails to adequately the licensee with freedom to operate. exercise control over the licensee, the mark owner Recognizing the importance of a mark’s source iden- may be estopped from asserting rights in the mark; tifying function and related goodwill, the licensor must for instance, for trademark infringement and related incorporate strict guidelines outlining any use of its claims.10 Such abandonment is an “involuntary forfei- marks. These standards should employ unambiguous ture” of rights and does not require a “subjective in- language defining exactly how the mark will appear, tent” to abandon the mark.11 where the mark will be used, and when. Trademark law requires the mark owner to exercise Quality is key. Provide the licensee with electronic “decision-making authority over quality.”12 It has been versions of all the licensed marks—especially when found that where no authority is exercised over the a design is involved—in order to avoid reproductions appearance, nature of the business operations, cus- and dissection. Include in the agreement that only the tomers’ expectations, and even inventory of the licen- marks provided by the licensor can be used in connec- see—this is the extreme paradigm of a naked license.13 tion with the licensee’s goods and services. This pre- Accordingly, examine the course of conduct between serves the marks’ integrity. Foreclose the opportunity the parties to determine whether adequate quality for the licensee to create modifications and memori- control exists. The absence of both an express pro- alize these terms in the agreement. The mark should vision in the agreement and exercising actual control never be modified (without prior approval) and include over the licensee’s operations exposes the licensor.14 clear quality specifications so the graphical representa- I. Usage Guidelines For Licensees: Nature & tions are of high resolution. Quality of Goods and Services The arrangement should also include express pro- From a business perspective, the balance between visions detailing the manner in which the mark will inadequate control and excessively interfering with be used. For instance, it is advisable to include provi- the licensee’s operations is delicate. The licensor has sions emphasizing that the mark cannot be used with other trademarks without express approval. Moreover, include instructions in the agreement requiring the 7. FreecycleSunnyvale, 626 F.3d at 511 n.1 (citing Barcamer- licensee to use appropriate registration notice sym- ica, 289 F.3d at 596–98) (noting that by failing to enforce the bols. Finally, the license should clearly outline how the terms of the mark’s use, the licensor may forfeit its rights to enforce the exclusive nature of the mark). goods will appear—the packaging, advertising, promo- 8. Exxon Corp. v. Oxxford Clothes, Inc., 109 F.3d 1070, tional materials, and service environment if a service 1075–76 (5th Cir. 1997) (citing Moore Business Forms, Inc. v. mark is at play. Ryu, 960 F.2d 486, 489 (5th Cir.1992)). II. Approval By Licensor: Exercise 9. FreecycleSunnyvale, 626 F.3d at 514 (stressing that the Actual Control person who asserts insufficient control of a trademark must Exercising actual control over the quality of the mark meet a high burden of proof). is the second part of the court’s analysis.16 The agree- 10. Barcamerica International USA Trust v. Tyfield Importers ment should also incorporate a clear pre-approval pro- Inc., 289 F.3d 589, 596 (9th Cir. 2002). gram for all trademark use. Either give approved use as 11. Id. (finding no express contractual right to inspect and su- attachment to the license or develop a procedure for pervise the use of the marks in addition to licensor’s infrequent wine tastings and unconfirmed reliance on the winemaker’s ex- approval, or both. A sophisticated licensor commonly pertise as inadequate evidence of control to survive summary requires the licensee to submit a specific number of judgment). production samples of proposed uses of the marks. 12. Eva’s Bridal, 639 F.3d at 791. These are then subject to written approval before use. 13. Id. 14. Fuel Clothing, 7 F. Supp. 3d at 606 (quoting Freecy- cleSunnyvale, 626 F.3d at 516) (considering “whether the li- 15. FreecycleSunnyvale, 626 F.3d at 516 (noting that “the ab- cense contained an express contractual right to inspect and su- sence of an agreement with provisions restricting or monitoring pervise the licensee’s operations,” or, if such contractual rights the quality of goods or services produced under a trademark are absent, whether the licensor has exercised sufficient quality supports a finding of naked licensing.”). control over license). 16. Id. at 511 n.1 (citing Barcamerica, 289 F.3d at 596–98).

267 les Nouvelles Naked Licensing

Eliminate any uncertainties by establishing a reason- may prove useful when developing future versions of able timeframe for approval or rejection of the pro- the goods based on customers’ expectations. posed trademark uses. And if approval is not provided, Moreover, be cognizant that adding excessive qual- expressly require that the materials affixed with the ity control provisions into the license may make it licensor’s mark be sent to the licensor, or in the alter- appear as if it is a franchise agreement. Strike a bal- native, destroyed. ance. It is equally as important to note that the quality III. Best Practices for Periodic Compliance control requirement may mean that parties injured by Monitoring the product may drag you into litigation under product Finally, periodically demonstrate control through in- liability theories where the operations of the licensee spection or supervision, which must be detailed in the have resulted in harm. For this reason, ensure strong agreement.17 While the court also examines whether indemnification and insurance provisions are in place. the licensor reasonably relied on the licensee to main- Lastly, while some countries have no legal requirement tain quality—the final factor of analysis—periodically for recordals of licenses (e.g., U.S. and U.K.), it is best monitoring compliance helps mitigate the risk of naked practice to record the agreement to place others on licensing.18 Sole reliance on a licensee’s own quality ef- notice. In other countries, a license must be recorded forts is simply not enough to overcome a finding of na- to be effective. ked licensing without other indicia of control.19 Courts Closing Remarks have even excused the lack of a contractual right to Ultimately, when licensing a mark, 1) ensure that control quality in the event the licensor demonstrates you retain contractual rights over quality of the use of actual control.20 the mark, 2) actually control the quality of the mark’s It is best practice to routinely conduct on-site in- use, and 3) periodically inspect and supervise. Quali- spections to ensure compliance with the license agree- ty control will always play a critical role because the ment, quality standards, and all applicable laws. Just brand represents the company’s reputation and con- ensure notice provisions are included and refrain from sumers rely on this reputation when confronted with disrupting business operations. Likewise, monitor de- purchasing decisions. ■ velopments with the brand’s reputation and review Available at Social Science Research Network (SSRN): customer service comments and complaints, which https://ssrn.com/abstract=2855219

17. Id. at 518 (finding inadequate quality controls when they were not enforced and were not effective in maintaining the consistency of the trademarks); see, e.g., Barcamerica, 289 F.3d at 596–97 (finding no contractual right to inspect and monitor the use of the marks coupled with licensor’s infrequent inspec- tions and unconfirmed reliance on licensee’s expertise as inadequate evidence of quality controls to survive summary judgment); Stanfield v. Osborne Indus., Inc., 52 F.3d 867 (10th Cir. 1995) (granting summary judgment to licensee where license agreement lacked a right to inspect operations, and alleged actual controls were that licensor examined a few products, occasionally reviewed promotional materials, and gave licensee sole discretion to design the mark). 18. FreecycleSunnyvale, 626 F.3d at 511 n.1 (citing Barcamer- ica, 289 F.3d at 596–98). 19. Id. at 519 (citing Transgo, Inc. v. Ajac Transmission Parts Corp., 768 F.2d 1001, 1017–18 (9th Cir. 1985)) (noting that licensor did not rely solely on his confidence in the licensee, but exercised additional control by, inter alia, periodically inspecting goods and was consulted regarding any changes in product). 20. Barcamerica, 289 F.3d at 596 (holding that a licensor may overcome the lack of a formal agreement if it exercises actual control over its licensees).

December 2016 268 Licensing In Cosmetics

Licensing In Cosmetics: A Practical Approach By Jean-Yves Legendre

he worldwide cosmetic market is estimated point of view, these products have very little in com- around 180 billion € (sell-in price) and is dom- mon. Each cosmetic product is a combination of differ- Tinated by historical, large international corpo- ent active materials embedded in a formulation aimed rations (L’Oréal, Unilever, Coty, Procter & Gamble, at facilitating their application, as well as providing an Shiseido, Johnson & Johnson, Estee Lauder). However, immediate wellness sensation. Moreover, the product despite a global, steady growth of about three percent texture frequently results from a sophisticated manu- per year, this market covers many diverse regional and facturing process and needs a suitable, well-designed local situations. Indeed, the rising of the middle-class packaging. The recent years have also seen the emer- category in the developing countries is leading to gence of energy-based cosmetics making use of devic- new consumer expectations and demands, as well as es, such as the rotating brush for skin deep-cleansing, to the emergence of new players. Among the latter, light-emitting instruments or the steam flat iron for many have gained sizeable market positions for certain hair styling. Last but not least, the cosmetic product categories of products or in specific channels of dis- is a strictly regulated product which must comply with tribution. Furthermore, new consumer behaviors such international regulations on ingredient quality, stabili- as e-business, web-blog publishing, product personal- ty and traceability. Overall, a cosmetic product is the ization and digitalization or sustainable consumption sum of many technologies which all contribute to the have led to a fast changing market for which the cos- final performance and client satisfaction. metic brands need to quickly adapt, yet keeping their Another characteristic of the cosmetic product is the genuine and historical roots. large range of scales at which it can be produced. The Although beauty is a universal value, ancestral and L’Oréal group facilities manufacture more than six bil- cultural habits have modeled beauty to infinite rou- lion units per year, representing a huge variety of ref- tines across the world. To offer cosmetic products to erences. Therefore, large discrepancies exist between women and men worldwide, there is a need to ful- products. Each product reference for the mass market ly integrate this extraordinary diversity of habits and may be produced well-above several million units per trends, while proposing products meeting the highest year. Conversely, niche or highly-selective products standards of quality and sustainable development. This as well as products for local markets may be manu- is what is called by L’Oréal “Universalization,”( i.e. how factured in the range of thousands. Volumes may also to develop innovative technology-based products and greatly vary from year to year to adapt to the market adapt them to the local needs.) situation and the consumer needs; some products have Considering both the market speed of change and a short market life whereas others have been on the the “Universalization” strategy, the search for product markets for a decade or more. innovation is a key driver for success. Open innovation All these features make the cosmetic product a represents a huge opportunity to fulfill consumer un- kind of hybrid between a fast moving consumer good met needs and all kinds of partnerships and alliances (FMCG) and a health product. have emerged in the field of cosmetics. The In-Licensing Perspective The present paper highlights the main features of a From an in-licensing perspective, any profit-split license in cosmetics and proposes a possible approach analysis has to cope with the product profitability. to structure it. It shows how licensing can facilitate As widely accepted, the profit-split analysis consists open innovation transactions in the field of cosmetics, in allocating the profit of the business to the differ- for which very little data about licensing have been ent assets that contribute to it, which is an uneasy published so far. Only the in-licensing perspective will task. Furthermore, regarding the cosmetics area, the be illustrated in this study. high variety of products, the diversity of markets, the Cosmetics: A Huge Variety of Products packing of technologies in a single product and the What is common between a shampoo, a lipstick, a highly-variable manufacturing forecast clearly rep- perfume and a topical cream against itchy skin? They resent a true challenge to establish the relative and all contribute to the beauty, wellness and self-reassur- absolute values of each asset. Indeed, when consid- ance of their user; however, from a strict technology ering a technology to be licensed in cosmetics, the

269 les Nouvelles Licensing In Cosmetics licensing manager is rarely able to embrace its full Step 0: IP assets analysis potential and readily assess its impact on the inno- The analysis of the quality of the IP assets involved in vation pipeline of the company. Very often, many the transaction is based on standard, commonly-used products may benefit from the licensed technology. procedures. Therefore, this step will not be detailed in In order to extract the maximum value from the li- the present paper. Simply, the analysis will focus on the censed material it is crucial to set up the possible, quality of the exclusivity yet realistic opportunities it can bring. Unlike the (i.e. scope of the patent- ■ Jean-Yves Legendre, pharmaceutical field where the commercial target able claims, patent status for a licensed chemical entity is usually well-known, and remaining enforce- Pharm.D., Ph.D., the situation in the cosmetic field could be much ment time, geographical L’Oréal Research & less defined. A film forming polymer could very well coverage, infringement Innovation, be incorporated into a lipstick as well as in a hair detection) as well as on Senior Licensing & Business care product, both opportunities leading to two dif- the global patent environ- Development Manager, ferent commercial realities. Therefore, a stepwise ment. Obviously, a good approach associated to a continuous assessment of IP asset rating is a pre-req- Clichy, France the licensing opportunity potential is strongly ad- uisite to move the process E-mail: [email protected] visable. This is what is called the Value Extraction forward. Analysis (VEA): See Figure 1. Step 1: The technology rating matrix First, to initiate the VEA, two Figure 1: Value Extraction Analysis (VEA) basic questions must be addressed prior to any financial value assess- Step 0 Step 1 Step 2 Step 3 Step 4 ment: Which product will benefit from the licensed technology? To Licensing which extent the patented technol- IP assets Technology Preliminary deal analysis rating matrix analysis Valuation ogy will contribute to the product options performance? It might be rather Product Market Development difficult to answer both questions, target potential plan especially when the Technology 1 Contribution to Preliminary Manufacturing Readiness Level (TRL) is low. performance COG analysis options Performance should be under- Benchmark Final product stood in its broad sense, i.e. all the analysis cost structure key drivers making the product suc- Market cessful. It might be translated into, analysis for example, the technical performance, the consumer benefit, the product uniqueness, a cheaper pro- Figure 2: Technology Rating Matrix duction process, a favorable impact on sustainability or any similar fea- Fully A4 B4 C4 D4 ture. contributes The following matrix may facilitate Strongly A3 B3 C3 D3 the technology rating, according to contributes the criteria of the contribution to per- Somehow A2 B2 C2 D2 formance and the product definition: contributes For example, a screening test meth- Marginally A1 B1 C1 D1 od will only marginally contribute to

Contribution performance to contributes the performance of the final, commercialized product, whereas it potential- Many A defined A defined A defined possible application or product product products performance category 1. The Technology Readiness Level is aimed to map the progression of the tech- Product benefiting from the technology nology from basic properties (TRL1) to actual applications and reported use (TRL9).

December 2016 270 Licensing In Cosmetics

ly could be applied to a very large range of products itability robustness of the licensed material. The (box A1). On the other side of the spectrum, one can benchmark will favorably be an internal one, sup- find a ready-to-launch technology for the treatment of porting no licensing fees and for which the full dry skin which will fully contribute to the performance cost structure and profitability roots are under- of a specific product (box D4). stood. Alternatively, it could be an external refer- Such a matrix helps to define how the licensing-in ence, such as a competitor’s product. In that case, opportunity will contribute to the innovation pipeline care must be taken to ensure that the benchmark of the company. For example, in the case D1 (the is relevant and useful. technology marginally contributes to a very specific Of course, Step 2 can include several hypothesis, product), one should ask himself whether it is worth such as different channels of distribution (e.g. mass to enter into a licensing deal. The output of the rat- market and selective) or different routes of commer- ing matrix may therefore be a “No go.” Conversely, cialization (e.g. local market than worldwide). At the the case A4 certainly represents an opportunity that end of Step 2, the viability of the licensing approach cannot be missed. Obviously, such positions will also has to be established. Should the maturity level of the take into account the development level of the tech- opportunity be sufficient (TRL ≥ 7) and the launch plan nology (the TRL). finalized, Step 2 may be skipped and Step 3 analysis Therefore, taking into consideration the competing done readily. technologies and the alternative opportunities, the Step 3: The licensed technology valuation rating matrix will ease discriminating between “Must At this stage, additional information needs to be Have” and “Nice to Have” technologies. included in the licensing model. This information in- Furthermore, as development and TRL progress, the cludes both internal data as well as data generated by matrix may evolve with time. Indeed, development or with the licensor: teams may focus their effort on a narrower product 1. A finalized development plan including all the el- category or technology contribution may be revisited ements impacting the product cost and nature, thanks to a deeper evaluation. such as the regulatory constraints and pathway It is important to share this matrix with the licen- according to the territories of commercialization, sor and explain how the licensed technology will be the full evaluation plan, the scope of the product assessed accordingly. This will define the scope of the claims, the packaging options, if applicable. It assets involved in the deal and subsequently, their val- must be noted that the regulatory strategy is a key uation. Although it may be one of the most difficult component in the valuation. Indeed, regulations tasks to achieve, a common understanding of the tech- strongly restrict the possibility for a product to nology rating at an early stage of the process, is key to exist under different regulatory status (e.g. phar- pave the way to a successful licensing deal. maceutical and cosmetic), which might lead to an Step 2: The preliminary analysis exclusive deal and forbid the use of the technolo- The second step of the VEA relates to the business gy under another regulatory pathway. environment into which the technology will be em- 2. The industrial options: the manufacturer of the bedded. The aim of the preliminary analysis is to es- licensed material and of the licensed material-con- tablish whether the technology and the associated IP taining product (will it be the licensor, the licen- will induce a probable profitability for the licensee. To see or a third party?), any manufacturing invest- this end, based on the technology rating matrix, three ment, the international manufacturing strategy, facets are investigated: including a description of the supply chain. 1. A preliminary market analysis, based on the target 3.The product cost structure must be defined as products identified in Step 1. precisely as possible. At this stage, the impact of 2. A preliminary cost of goods analysis of the products the licensed material cost of goods on the final in which the technology will be embedded. De- commercialized product cost must be perfectly pending on the maturity level of the technology (i.e. understood. how far the technology from implementation by the 4. A comprehensive market analysis featuring the licensee is), such an analysis may be somehow hy- possible options of commercialization, including pothetical. However, finding out the contour of the territories and channels of distribution. cost structure will indicate whether the licensing At the end of Step 3, the total value extracted from project is viable. the licensed material is fully characterized. According 3. Identifying a relevant benchmark which will be to the possible options of commercialization, available used as the market reference to establish the prof- data can be displayed in a Table 1.

271 les Nouvelles Licensing In Cosmetics

royalty based on net sales and (2) a lump-sum price, Table 1. i.e. a fixed fee. As underlined by D. Kidder et al. (les Nouvelles, L (4) 217-220, (2015), there is no straight- Option 1 Option 2 Option 3 forward relationship between both, although a con- Market A Market B Market A ceptual link exists. worldwide USA 1 region The initial approach is to look at whether a licensing Product fee on net sales can be applied to the licensed prod- development uct to maintain at least the same profitability as the constraints benchmark product. The maximum licensing fee can Industrial be calculated according to: constraints MLF=100 (MPB SIPL-MPL SIPB) SIPB SIPL Product cost Where: structure (COG, sell-in, sell-out) -MLF: maximum licensing fee (% of sell-in price) -MP : manufacturing price of the benchmark product Expected B volumes -MPL: manufacturing price of the licensed product (launch, Y1-3) (or licensed material-containing product)

Licensing -SIPB: sell-in price of the benchmark product options -SIPL: expected sell-in price of the licensed product (or licensed material-containing product)

Obviously, a time dimension can be incorporated If SIPL is unknown, one can simply consider SIPL = into the chart. Hypothesis on the speed of market pen- SIPB and find: etration over time (i.e. the rate of success) can be fur- MLF=100 (MP -MP )/SIP ther implemented. B L B As a matter of fact, if MP ≥ MP , then MLF=0 Step 4: Licensing deal options L B Therefore, SIPL should be adjusted according to Once the analysis is finalized, the licensing options MLF and MP , such as: can be prepared. L SIP =(SIP LF + MP )/MP As previously mentioned, the relationship between L B L B Where LF is the licensing fee per product. IP asset valuation and business profitability is far from obvious. The analysis described above both at Once this computation is finalized, a decision tree the “micro” level (i.e. the product definition and cost can be drafted, Figure 3: structure) and at the “macro” level (i.e. the market In the case where similar profitability cannot be opportunity over competition), helps finding out the achieved, several options can be taken: key drivers for product profitability within a specific • Alter the profitability to a lower level business environment/market. • Adjust the sell-in price to accommodate a similar Basically, two different, non-exclusive approaches profitability. Depending on the technology rating ma- can be taken to value the licensed technology and the trix, the market may stand a premium price to reflect related IP assets: (1) a metered price, i.e. a running technology uniqueness and higher performance • Adjust the marketing options, for Figure 3: Decision Tree example starting with a limited launch or restricting the commercialization through selective brands only At least same profitability as In any of these options, the VEA may benchmark be conducted again in order to com- pute a suitable licensing fee. In the case where at least a similar profitability is obtained, the licensing fee can Yes No be structured as running royalties on net sales or lump sums or both. Alternative- ly, when applicable, the corresponding IP Running Lump Adjust market- Adjust sell-in Alter assets may also be purchased. royalties sum fees ing options price profitability The most common approach that is used in the cosmetic sector remains the

December 2016 272 Licensing In Cosmetics

lump sum structure. Indeed, the high product turn-over sion across the world, providing a suitable approach is associated to the multi-featured and evolving nature of taken. Indeed, IP protection and valuation of environ- the products make the lump sum approach the most mental technologies require a specific knowledge and suitable one for cosmetics. strategy. Know-how valuation (of a green production Perspectives process for example) and profit sharing with communities will be crucial to conduct a successful licensing As the cosmetic field is quickly evolving, new chal- policy in the sustainable development field. lenges related to open innovation appear, hence mod- In Conclusion ifying the licensing practices in the field. One of the most striking examples is the emergence of the digital The fundamentals of licensing in cosmetics are connected systems. The licensing managers in the cos- based on the multi-features aspects of the cosmetic metic field need to learn about the approaches taken product, as well as the fast-moving nature of the cosmetic market. Conducting a stepwise Value Extrac- in the Information Technology (IT) sector. They must tion Analysis of the technology to be licensed will explore new ways of rating and extracting value from allow one to precisely define the features covered the connected technologies. Furthermore, they may by the technology within the cosmetic product and face tough challenges regarding new IP-related issues, to establish its relative value within a specific mar- such as data property, multiple IP assets in the cloud or ket and business environment. Sharing all or part of artificial intelligence-related IP. the VEA between the licensee and the licensor may Another exciting, yet challenging area is the licens- help achieve a balanced and successful licensing deal. ing in the sustainable development sector. Although However, emerging trends such as the digital prod- this area has been explored for several years,2 its emer- uct transformation or the green technology dissemi- gence in the cosmetic field is rather new and the re- nation will require adapting the licensing models to cent initiatives to limit global warming have increased these new challenges. ■ the need to push forward the technology transfer of Available at Social Science Research Network (SSRN): green technologies. Licensing can foster their diffu- https://ssrn.com/abstract=2857181

2. For a more comprehensive review on licensing and sustainable development, please see Sustainable Development: A “Win-Win” for Licensing and for the Environment by William O. Hennessey, Franklin Pierce Law Center, 1996.

273 les Nouvelles Technology Transfer In UAE

Opportunities And Challenges For Expanding Technology Transfer In United Arab Emirates (UAE) By Ahmed Alosi, Ph.D., John Fraser and Michael J. Martin

Abstract company management personnel; pre-incubator and in- he UAE is a relatively young country (established cubator space; technology transfer support; patient risk in 1971) with enormous per capita wealth and capital, usually angel and a strategic goal as expressed in their 2021 vi- venture funding; start-up T and SME business support ■ Dr. Ahmed Alosi, sion: “To translate from an economy based on fossil fuel to a Knowledge-Based Economy.” Universities can services and facilities; and Training and Development assist in strengthening the Innovation Infrastructure in a tax and incentive system Center, Ministry of Health the UAE by participating in Technology Transfer; i.e., supportive of knowledge- and Prevention, partnering with the private sector to create and grow based economic development. Communications Research Expert, technology-based economic business opportunities, as Sharjah, United Arab part of a Knowledge-Based Economy. and support between and among these elements are Emirates (UAE) The Federal Ministry of Higher Education and Sci- strong for the ideal Innova- entific Research (The Ministry) commissioned a study E-mail: Ahmed.Alosi@ tion Infrastructure. The moh.gov.ae of the capacity and interest in the UAE universities to UAE appears to have some generate inventions with commercial potential and of these components; but, ■ John Fraser, the interest in improving Tech Transfer Support in the they all are at the inception UAE. This study was undertaken with an analysis of where it is critical that the Burnside Development, the published information on UAE research funding government (Federal and President, and the existing IP management offices; and a survey Emirate) take the lead as Bethesda, MD, USA of selected faculty with a general e-mail questionnaire other governments have. and subsequent personal interviews. E-mail: jfraser@ It is essential, even in re- burnsidedev.com The results of the interviews and the analysis of source rich environments, published information was a recommendation to have to develop Innovation In- ■ the Ministry provide Tech Transfer Support, with the Michael J. Martin, frastructures to support Tech Transfer Associates Inc. mission to “support an Innovation Infrastructure that and facilitate the efforts will help transform the UAE into a Knowledge-Based of university technology President, Economy.” This Technology Transfer Support would transfer offices; and to Blacksburg VA USA provide: access to advice, financial support, education nurture and collaborate E-mail: miketechtransfer@ on the technology transfer process and all of the related with the start-up compa- comcast.net activities to support university based technology transfer nies being spun out of activities. The Success of the Study recommendations universities. It is especially will be measured by the enhanced reputation of the UAE important to focus on culture change within the institu- as a Knowledge based Economy; increased engagement tion itself to encourage entrepreneurial activities and of universities in the UAE economy; and impact on the to examine practices and policies which might actually economy. inhibit or discourage entrepreneurship. A key compo- I. Background/Introduction nent of success is rewarding, incentivizing and celebrat- Innovation Infrastructure ing entrepreneurship and risk taking in the economic An Innovation Infrastructure includes people, orga- development arena. nizations and resources available to assist and support The Process of “Technology Transfer” in the creation, growth and sustainability of new com- Technology transfer, as it is more effectively practiced, panies, plus entrepreneurial mindsets, attitudes, and is a process based more on business development than cultures. The elements for success include productive technology implementation. Successful new products university research with the potential to generate com- or businesses must start with a viable product in a pro- mercially viable inventions; a commitment by the profes- tected market niche that has endured multiple stages sors and the universities to provide intellectual property of market analysis, pre-market testing, and the identi- protection for the results of this research; a source of fication of customers willing to pay for the product or “gap” funding—from research to market place; start-up service more than once.

December 2016 274 Technology Transfer In UAE

Each participant in the Innovation Infrastructure with identified and ‘ready to buy’ markets. This gap has has their own definition of success for the function of been called the “Valley of Death.” Technology Transfer. The definition of success for the: University Innovation Infrastructure in the UAE • University/Research Administration: Enhance the Support for Start-ups and SMEs in the UAE local and global reputation of the institution by contrib- The UAE is home to more than 500 training programs uting directly to the local, state, and national economy. for entrepreneurship and leadership skills. There are • Faculty: Show a return, both in recognition by their nearly 100 government grants and incentive programs, peers and financially, on their personal investment in more than 100,000 Small, Medium Enterprises (SMEs) their research by translation into products and/or start- and total commitment to making SMEs the core of the up businesses. nation’s success.2 Government efforts to foster the • Government: Create new economic resources (jobs, Knowledge Based Economy in UAE are exemplified by companies, products, and investment) by transfer of The Abu Dhabi and Dubai Emirates. They have estab- inventions from public funded innovation sources to lished government programs to increase technology private developers. based Start-ups, assistance to SMEs, and Inventions • Businesses: Increase their financial return to inves- from Universities. tors by accessing new technology to meet short and long The Government of Dubai has launched Dubai SME term market needs. in 2002 as a division of the Department of Economic Technology Transfer can serve as a bridging function Development (DED), which supports the development between these differing goals and measurements of of entrepreneurship. SMEs represent 95 percent of all success. In addition, it can manage the expectations of firms registered in Dubai, 42 percent of the labor force the amount of time is required before there is a positive and 40 percent of the emirate’s GDP. impact on the economy. University, national laboratories Takamul is a strategic initiative by the Abu Dhabi and foundation research dollars are generally committed Technology Development Committee supporting inno- for discovery research. Industry prefers to acquire ‘off vation and the development within the UAE. Takamul’s the shelf’ technology and do not invest dollars in tech- mission is to help Emirati individuals, universities and nologies untested at a commercial scale. They tend to be enterprises in Abu Dhabi and the wider UAE, to protect satisfied with what they have been previously using and and commercialize their innovative ideas. See more at: are extremely concerned about cost. This creates a gap http://takamul.gov.ae/home#sthash.81TMWZWG.dpuf. in translating discovery (basic) research into products Takamul has been providing technology transfer services

Figure 1. Funding Resources For The “Valley Of Death” Gap1

•SBIR •Corporate Funding •Venture Capital •Angel Investors •Bootstrapping

The Valley Availability of Capital Availability of Death

Basic Development & Commercial Research Scale-up Operation

1. Source: Richard Palmer, National Institute of Standards and Technology. 2. http://www.smebeyondborders.com/agenda/

275 les Nouvelles Technology Transfer In UAE to multiple universities, each with their own culture, of published papers from the UAE universities. The for 4 years successfully. Their services have been de- number of research papers in peer reviewed journals scribed by University Inventors as working “beautifully” have grown from 474 in 20005 to 4,221 in 2013.6 and “very well.” They said that Takamul offers a list of That number increases significantly to 7,340 when you services and they can choose what they need at no cost include: conferences, books, book chapters, creative to their university. Takamul also does not require any works, patents, and exhibitions. return on the grants or services provided. In the report “Innovation Capabilities of Nations: The Takamul program was recently awarded as “Best Five Key Performance Indicators,” according to the lat- National IP and Licensing Policy 2013” by the Licens- est Global Competitiveness Report, the UAE is ranked ing Executives Society International in Geneva. It has 15th internationally in terms of the availability of sci- expanded its support activities within the entire UAE, entists and engineers. The authors of the report also making it a national innovation program. observe an increase in the number of programs, funds During 2011-13 the Takamul program has provided and awards geared towards scientific and technologi- legal and financial support to 66 UAE inventions with a cal activities. They provide the following examples of further 40 in the pipeline entering 2014. They assisted research and innovation awards that include the Young in the formation of a new advanced materials company Emirati Innovators Prize, the Patent Filing Award, the in Abu Dhabi. University-Industry Research Collaboration and the Zayed Future Energy Prize, a U.S. $4M prize—the Research Capacity in the UAE world’s largest award for innovation in the development Research expenditures are the foundation stone of of sustainable energy solutions.7 It was estimated that the Innovation Infrastructure process. Nothing in a the Research Budget at United Arab Emirates National Knowledge Based Economy starts without invention. Research Foundation (NRF) is 5 million AED, which It has been the experience of many countries that for appeared to be down from the original budget in 2008. every 2 million dollars in research expenditures there The Program Objectives of the NRF program as reported is an expectation of one invention disclosure. on its web site are: It is difficult to estimate University R&D Expenditures • Facilitate the participation of scientists and scholars in the UAE. UAE Universities estimated that 80-90 from UAE in the expansion of frontiers of knowledge percent of R&D funding came from internal annual and in the most sophisticated problem solving. operating budgets or is coupled with pay structure of • Build and enlarge a solid core of knowledgeable, the faculty, which is 50 percent for teaching and 50 capable, and well-trained researchers in UAE. percent for research. All universities apparently award internal research grants on a competitive basis, some • Support activities that focus on developing and en- for multiple year with multiple disciplines focused on hancing research talent in UAE so that the nation strategic technology sectors. The most recent research retains the finest researchers that are working in or expenditures estimate for UAE is 0.5 percent of Gross are attracted to it. Domestic Product as found in the World Development • Enable the UAE academic institutions to recruit and Indicators: Science and Technology report. The U.S. retain top researchers and, through them, the most National Science Foundation Estimated the R&D expen- talented students. ditures in the UAE as $1 billion in 2002. (see Table 1). • Develop interdisciplinary links among researchers to All of the universities contacted stated that their catalyze team research for solving difficult scientific, research expenditures have increased over the past industrial, economic, and societal challenges. 5 years. In some universities, the amount of internal • Promote UAE’s participation in the international funding has doubled, and some have said that their research community. university have quadrupled their support of research. Another bit of evidence that university research funding has increased in the UAE is the growth of the number 3. http://wdi.worldbank.org/table/5.13 4. http://www.nsf.gov/statistics/seind14/index.cfm/chapter-4/ Table 1. UAE Estimated R&D Expenditures c4h.htm#s2 5. Thomson ISI (Intellectual Property & Science Business of R&D expeditures R&D estimated Thomson Reuters) provided by Dr. Randy Wynne, Professor as % of $US billion Virginia Tech. GDP 2005-143 20024 6. UAE Higher Education Fact Book, 2013/2014, 90. United Arab 0.49% $1 billion 7. Innovation Capabilities of Nations: Five Key Performance In- Emirates dicators, An Analysis of Select GFCC Countries, 24.

December 2016 276 Technology Transfer In UAE

Estimate of Current Intellectual Property Inventory Figure 2. Patent Applications in UAE9 The UAE has made the protection of intellectual property a Patent Applications priority. In 2011, the UAE established an independent office for Resident Non-Resident Abroad intellectual property rights (IPR) 250 at the Ministry of Economy and appointed an assistant undersec- retary position for IPR for the first 200 time.8 The current UAE university and research center intellectual 150 property inventory is difficult to

estimate. The World Intellectual 100 Property Office reports that Patent Corporation Treaty (PCT) applications from the UAE have increased 50 from 17 in 2004 to 61 in 2013 as shown in Figure 2. 0

Takamul lists 33 technologies 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 and will be adding approximately Source: WIPO statistics database; last updated 03/2014 60 more, mostly from Universi- ties. Masdar Institute of Science and Technology has obtained three patents with an was an e-mail survey to measure general interest and additional 39 patent applications pending and over 70 expectations. There were 29 respondents. The next invention disclosures. A representative of Khalifa Uni- instrument was administered during personal phone or versity stated that they are receiving about one disclo- Skype interviews of faculty and research administrators sure every two weeks. Presently, they have four issued which were conducted during the period November patents. They file on most disclosures using Takamul 1, to December 22, 2014. There were 23 personal patent funding support. Since 2010, UAE University interviews. These interviews covered 9 different (UAEU) has more than 55 inventions disclosures. UAEU universities, the Abu Dhabi Technology Development has obtained about 20 patents granted under its name. Council, advisor to the Prime Minister’s Office, and Of the 25 universities that are listed as offering the UAE Genetic Diseases Association. graduate degrees and joint research centers that have Survey Results inventions listed with Takamul only five have Intellectual All of the published information indicates that the Property Policies that could be accessed over the web, UAE Innovation Infrastructure is in the embryonic phase and only four have TTO offices. of its development. II. Methodology, Survey Results and Gap •Universities that are involved in research are increas- Analysis ing their funding and peer reviewed publications Methodology are on the increase on the tech transfer operations. This study was undertaken with an analysis of the •Abu Dhabi and Dubai have established assistance for published information on UAE research funding and University inventors, start-ups and SMEs. the existing IP management offices; and a survey of •Those Universities that have Tech Transfer Offices selected faculty with a general e-mail questionnaire and IP policies are growing their disclosures, pat- and subsequent personal interviews. The two different ents, licenses and start-ups. survey instruments were used to measure the interest, The purpose of the e-mail survey was to measure the potential and expectations of the UAE research com- expectations of UAE faculty and research administrators munity about invention disclosures, the technology concerning the role of Technology Transfer in the Uni- transfer process, and any potential NRF Tech Transfer versity and the support that should be provided by the Support. NRF selected over 40 faculty and research NRF. Most of the respondents to the e-mail survey were administrators to be surveyed. The first instrument in favor of the NRF providing a number of services to the University inventors, with the average rating of 3.5–3.9, 8. http://www.state.gov/e/eb/rls/othr/ics/2014/227300.htm where 1 is strongly disagree, three is neither disagree or 9. http://ipstats.wipo.int/ipstatv2/searchForm agree and five is strongly agree. The one function that

277 les Nouvelles Technology Transfer In UAE only received 44.8 percent support (agree or strongly were concerned about the “sustainability” of university agree) was: NRF should represent the interests of the research since it is dependent on an annual budget from inventor when negotiating licenses. A majority of the the Emirate. The concern was not only about the contin- respondents (55.1 percent) agree or strongly agree that ued commitment to research because the budgets are the NRF should provide Tech Transfer Support. The four annual and there is a need for multi-year large centers. functions of a proposed technology transfer services that However, UAEU, which has doubled its research budget over 65 percent of the interviewees rated as agree or over the past five years, do provide the opportunity for strongly support were: competitive grants for three years for multi-discipline • Education in intellectual property issues for research centers. They now have six such centers. A number of contracts and commercialization of inventions. (66.6 the interviewees made the observation that NRF needs percent agree or strongly agree); to return to its original mission—provide sustainable • Assist the university TTO to represent the interests (more than one year) federal source of basic and applied of the inventor when negotiating licenses (69.0 research funds, possibly for large multi-discipline, multi- percent agree or strongly agree); institutional centers not just individual grants. Some were concerned that: • Encourage the formation of inventor start-up businesses (65.1 percent agree or strongly agree); and, • NRF Tech Transfer support services would be a distraction from funding research; and, • Assist the university TTO in the formation of inventor start-up businesses (72.4 percent agree or • It would compete and not partner with Takamul. strongly agree). The interviewees proposed that NRF technology Most of the interviewees felt that the organization of transfer support existing TTOs and partner with Taka- any Tech Transfer Office is for public benefit and to serve mul. In addition, they suggested that NRF support the society. Overall, they rated their university’s Intellectual proposal being headed by Khalifa University to bring Property Policy, if they had one, as acceptable with suf- the Association of University Technology Managers Asia ficient flexibility to accomplish the university objectives. conference to Abu Dhabi. All of the respondents believe that the university should Interactive Workshops where held in Abu Dhabi actively seek to commercialize the results of its research and Al Ain for research administrators and technology work. A number of the faculty and directors of research transfer directors. The attendees started with the role thought this could be improved. They believed that the of research in the Innovation Infrastructure, since it is university could improve providing advice and educa- the beginning of the Tech Transfer process, but also dis- tion on intellectual property issues. They do encourage cussed the operation of the technology transfer process the submission of disclosures but, again, it could be in the UAE. Their recommendations were: increase the improved. Those universities with TTOs do involve the awareness by the public of university Research and how inventor during their evaluation of the disclosure, and it can impact the Economy; and sustainable (certainty/ they are made to feel that they are part of a “Team.” multi-year) government research funds. The attendees Communication about the status of disclosures is im- at the workshops also wanted to see more awareness proving. All of the interviewees thought that presently of the how university research works by all of the stake- universities could improve their marketing of inventions. holders in the Academic research process. This lack of understanding has led to delays in conducting research. There is some interest in becoming personally in- The workshop participants recognized the lack of patient volved in a start-up based on an appropriate technology capital (three to ten year time horizon for a return), for a start-up company, and that the university encour- high risk (no product, nor sales in evidence) capital to ages and supports the formation of Faculty start-up com- finance product development and new start-ups based panies. If there is a TTO, they consider the IP office to be on university research. It was suggested that there could “entrepreneurial” in its approach to commercialization. be support provided by NRF to create a grant program They believe that the TTO office should receive fund- similar to the United States National Science Foundation ing to enhance its resources and improve the service it (USNSF) Partnerships for Innovation (PFI) program to provides to faculty. Most respondents do see the genera- the Canadian IP Mobilization program and to the more tion of sponsored research funding as an objective of the recent USNSF and United States National Institutes of TTO program if the TTO office is created from Federal Health iCorp Commercialization Programs. funds or funds coming from Ministers. A majority of the III. Gap Analysis of Technology Transfer in UAE respondents thought it would be best for any TTO to be A number of governments have attempted to establish located in the university and funded by the university. an “Innovation Infrastructure” addressing the “Triple A number of interviewees were concerned that the Helix” of government, industry, and academia. Most NRF has moved away from funding larger efforts to of the global experience with Federal Tech Transfer funding mostly mobility grants. Most of the interviewees Supports is negative to neutral in their effect on in-

December 2016 278 Technology Transfer In UAE

creasing inventions disclosure and commercialization. for the joining of the Innovation Resource (University Most success for these Federal Tech Transfer Supports Inventions) with patient risk capital and entrepreneurial comes from enabling Technology Transfer on individual business management eager to take risk on new prod- campuses, which are close to the inventor, by provid- ucts or start-up businesses. The source of innovation, ing support, which ranges from competitive grants to the university research budget, is increasing in the UAE. direct assistance. The goals of these national efforts Most of the research faculty and administration reported appears to be: increasing the disclosures of inventions; that they need additional education on Intellectual Prop- providing evaluations of disclosures as to patentability erty commercialization to help change the culture from and commercialization potential; marketing inventions; a traditional university dissemination model of publish to assistance in negotiations for licenses; and assistance one that encourages disclosure for legal protection, then in the post-license entrepreneurial activities. Some lo- publish. A NRF Tech Transfer Support would provide cal governments and universities have added funding that resource to all universities in all of the Emirates. for prototype development, incubators, and sources of In addition, those universities without TTOs and some patient, early stage investment capital (pre-seed and with an office felt that they needed some additional seed Venture Capital Funds). The UAE universities are assistance to review their IP policies and to provide still relatively new to establishing both a culture of traditional technology transfer services to their faculty: basic research and to transforming the results of the encourage disclosures, evaluate them for patentability commercially relevant research results into products or and commercial potential, marketing of IP, negotiat- start-ups. Based on the surveys and literature review, ing licenses, and managing the post license activities. it appears that there are missing components to the These universities could use a Federal resource rather Innovation Infrastructure: than rely on a service from the Abu Dhabi Technology • Sustainable basic and applied research funding with Development Council. All of these services should be industry partners. offered in the spirit of partnership with the focus on • Support services for all UAE research universities making the partners successful. to commercialize their research results. IV. Recommendations based on Gap Analysis • Sustainable Research Funding. Even though the The results of the interviews and the analysis of faculty and research administration believe they published information is a recommendation to have are an important part of the 2021 Vision, they also the National Research Foundation (NRF) provide Tech believe that they have not been adequately funded, Transfer Support, with the mission to “support an In- especially from the Federal Government. novation Infrastructure that will transform the UAE • Establish Tech Transfer Offices. Even though there into a Knowledge Based Economy.” The Vision of the are four university based offices and some discuss- proposed UAE NRF Tech Transfer Support is to “sup- ing establishing more, there is a growing concern port the creation of an internationally competitive about the source of funding for these offices, given innovation system in the United Arab Emirates the number of pressures on the University operat- by enabling the partnerships required for an In- ing budget. novation Infrastructure and the translation of • Future potential for Technology Transfer. Even commercially viable research results into products though there is a growing number of disclosures, or businesses.” UAE NRF Tech Transfer Support has patents, licenses, and start-ups, there is a concern a goal that the businesses and investors of the world that this developing effort will not reach critical and the UAE to come to the UAE universities and the mass without Federal Funding and Advocacy for: NRF Tech Transfer Support for opportunities to sponsor market relevant research; discover research results – Education of Faculty and Students about the that could grow into new businesses or markets; and, opportunities for Entrepreneurship. be in awe of the ease of establishing partnerships to – Addressing the concerns from non-Emirate translate research results into business opportunities. faculty about starting businesses. This will be a support effort, focused on making its – Increasing access for patient risk capital for partners successful. the early stages of product commercialization. This Technology Transfer Support would provide: – More match making opportunities for entre- services, grants and policy advocacy: preneurial faculty to meet serial entrepreneurs • Services, which include: Providing access to ad- and sources of funding for industry relevant vice, support, education and all of the necessary research. forms through the web and consultants to enable The experience of the authors is that the UAE Innova- university invention process; Enablement of busi- tion Infrastructure lacks a central coordinating facility ness start-ups based on university inventions;

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Publication of the Innovation Infrastructure in the and entrepreneurship. Projects are supported UAE. The NRF Tech Transfer Support should be a to demonstrate proof-of-concept, prototype, or readily available resource for University technology scale-up while engaging faculty and students transfer expertise and to University technology in entrepreneurial/innovative thinking. The transfer experience. Nearly all interviewed faculty Canadian IP Mobilization program offers com- expressed concern about their lack of knowledge petitive financing of opportunities to connect and understanding of the intellectual property new knowledge to societal benefit through process. Consequently, the NRF Tech Transfer Sup- translational research efforts and/or partner- port will be a readily available resource for advice ships that encourage, enhance and accelerate and support. The NRF Tech Transfer Support staff innovation and entrepreneurship. Projects are should be able to: financially supported to hire and pay the full – Provide examples of University IP policy if the salary and fringe benefits for technology transfer university needs a policy or review current con- officers in the campus based TTO’s; training tracted research projects to ensure applicability grants for TTO staff; grants to demonstrate of IP clauses appropriate for that university. proof-of-concept, prototype, or modest scale – The NRF Tech Transfer Support should main- scale-up while engaging faculty and students in tain a website which should provide pertinent entrepreneurial/innovative thinking. Similar to information on all intellectual property matters, these programs, the NRF Tech Transfer Support provide answers to frequently asked questions, would offer grants which would NOT have a and provide access to IP policy, disclosure forms, cost match component. evaluation forms, license and research agree- – Increase support for Small and Medium ments which can be downloaded. Enterprise (SME) /University Partnerships. – Education. There should be an ongoing educa- A NRF Tech Transfer Support grant program tional program on intellectual property issues. similar to the NSF Small Business Innovation Periodic workshops and newsletters were Research / Small Business Technology Transfer strongly supported. There should be an orienta- (SBIR/STTR) would provide funds for product tion program for new faculty. development at small businesses and startups, • Grants, which include: Matching grants to industry in cooperation with universities. This program in Free Trade Zones to fund research at UAE uni- supports science and engineering technol- versities; Grants to existing TTOs to expand their ogy with high technical risk and potential for services to leverage Takamul funding; Grants to significant commercial or societal impact. The small businesses to support the commercialization grants are done in phases: Phase 1, a short of a university invention. proof-of-concept / feasibility grant ($150–225k) can potentially be followed by Phase 2, a lon- – Increase University/Industry Partnerships. ger development grant ($750k–$1.5million). The National Science Foundation in the United Grantees prove technical feasibility in Phase I States and the Bill and Melinda Gates Founda- tion provides grants for major inter-institutional and apply for Phase II funding to focus on scale research centers focused on strategically and development. This method of financing important technology, and require an IP com- lowers technical risk, making the enterprise mercialization plan. Funds are provided to the more attractive to future investors and partners/ academic based center and require corporate or customers. In the U.S., over $500k in supple- other government funding. Matching grants to mental funding is also available for awards. For companies, regardless of size, targeting those both the SBIR and STTR program, the applicant companies in the free trade zones to incentivize is a small company. In the case of the STTR the their support of research in UAE universities bulk of the activity is subcontracted to a faculty should also be considered member to be performed on campus. For the – Increase Technology Transfer Capacity. SBIR, the bulk if the work will occur in the Create a grant program similar to the US NSF company or contracted to third parties other Partnerships for Innovation (PFI) program and than the university partner. Canadian IP Mobilization program. The PFI • Policy Advocacy at the Federal level, which offers opportunities to connect new knowl- includes: Increased funding for on campus Intel- edge to societal benefit through translational lectual Property/TTO infrastructure; Creating research efforts and/or partnerships that en- accreditation requirements which include specific courage, enhance and accelerate innovation Technology Transfer goals. Establishing long term,

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sustainable research funding; Establish Technology in the UAE by partnering with the private sector to Parks near Universities as Free Zones so that non- create and grow technology-based economic business Emirati can own the majority of a business started opportunities, as part of a Knowledge-Based Economy. with Faculty Technology; Establish Entrepreneurial These activities can range from company sponsored Sabbaticals so that Faculty can take a leave to start collaborative research in areas of mutual interest, and grow their businesses; Establishing new sources to commercializing academic inventions (technology of public/private venture capital partnerships. transfer). Many UAE universities have organized Of- Success of the NRF Tech Transfer Support will be fices to administer collaborative research, but only a measured by: five have Technology Transfer Offices (TTOs). The Plan • The number of partnerships that result in increased is to grow this technology transfer activity in the UAE commercializable invention disclosures, the num- and further enhance the impact of universities on the ber of potential licensing inquiries, and the interest UAE Economy. in and the consequent investment in university Return on Investment for the NRF affiliated start-up companies. Tech Transfer Support • The enhanced reputation of the UAE as a Knowl- Return on Investment for the NRF Tech Transfer edge-Based Economy; increased engagement of Support will be measured by such Key Performance universities in the UAE economy; and, finally, a Indicators as qualitative and quantitative success of lasting impact on the economy. its partners: the number of universities that request UAE has a significant opportunity to leap forward to services, the number of faculty that are encouraged to the 2021 Vision by increasing support for University disclose commercializable and patentable inventions; Technology Transfer which will increase the number the number of start-ups that initiate discussions; and of UAE university inventions, enhance intellectual the number of visits from global companies looking for property commercialization capacity at UAE universi- research and new product development partnerships ties, and increase university/industry partnerships to and ultimately the measureable impact of such activities commercialize those inventions. The Strategic Vision on the UAE economy. Success of the NRF Tech Transfer outlines the role that universities can play in contrib- Support will be measured by the enhanced reputation uting to the growing diversity of the UAE Economy. of the UAE as a Knowledge-Based Economy; increased Universities can contribute highly qualified manpower engagement of universities in the UAE economy; and, with formal experience in entrepreneurial skills as part finally, a lasting impact on the economy. ■ of both formal and informal education. In addition, uni- Available at Social Science Research Network (SSRN): versities can strengthen the Innovation Infrastructure https://ssrn.com/abstract=2855249

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Allocating Risks And Rewards In Collaborative Agreements Using The Financial Structure By Matthew W. Sagal and Gene Slowinski

Introduction the biotech into toothpaste. Using these definitions, pen Innovation (“OI”) is a well-accepted the toothpaste manufacturer is the “market-facing methodology that allows two or more firms partner” and the biotech firm is the “technology to combine technical and other resources to ■ O source.” Matthew W. Sagal, achieve their marketplace objectives. The OI rela- Alliance Management tionship is called an “alliance.” The firms are often These two definitions referred to as “partners,” although use of that term are somewhat over-sim- Group, Inc., does not imply a partnership in a legal sense. plified. Usually the tech- Senior Partner, The purpose of this paper is to provide background nology in the developed Marblehead, MA, USA in the principles of risk allocation, as guidance to those product comes from both E-mail: mwsagal@ who must plan and negotiate these complex relation- parties. Not only do both comcast.net ships. As we will show, alliances carry risks beyond bring pre-existing tech- those found in in-house programs. In our experience, a nology, but both may con- ■ Gene Slowinski, tribute to new intellectual major portion of the energy devoted to alliance negoti- Rutgers University, ations is developing a mutually acceptable allocation of property created during those risks. Reaching a satisfactory solution is essential work under the alliance. In Director, Strategic to completing any alliance negotiation. However, we spite of this over-simplifi- Alliance Research will not discuss specific solutions to allocation prob- cation, the definitions are Newark, NJ, USA useful in understanding lems. Solutions are situation dependent. Over many E-mail: gene@ years of planning and negotiating alliance terms, we risks and their allocation. strategicalliance.com have developed many solutions to risk allocation issues We will use the word starting with the principles in this paper. Those solu- “product” to describe the tions would fill a good-sized volume, and we can’t ad- output of a joint development program. The principles dress them here. Rather, planners and negotiators can also apply when the partners combine resources to de- use the principles discussed here as a starting point in velop a new service. developing solutions as they plan and negotiate specif- Rewards and Risks Seen by Alliance Partners ic alliances. and Risk Allocation Fundamentals This paper begins with a summary of the risks in- A new product development program intended for herent in an alliance. In order to keep this paper to a marketplace rewards, carried out entirely in-house, in- manageable length, we have limited our discussion of volves well understood risks. Some of the rewards and risk allocation to the financial structure. Other aspects risks in an OI alliance are the same as in an in-house of the alliance agreement such as intellectual proper- development, but there are other rewards and risks ty provisions also involve risk allocation; and must be unique to a relationship between two independent en- considered as the alliance is planned and negotiated. tities. In this section, we will discuss the rewards and To help clarify the principles, we will use two terms risks most commonly encountered in an OI alliance. to distinguish between the partners in an OI technolo- This sets the stage for the following sections, which gy-based alliance: will address the ways that both parties agree to allocate those risks through provisions in the OI agreement. The “market-facing partner” is the entity selling a product or service based on the work of the alliance Let us first look at risks and rewards from the per- into the next step of the relevant value-added chain. spective of the market-facing partner. This is the firm The “technology source” is the entity whose existing that will bring the newly developed product to the technology will be incorporated into one or more of next step in the value added chain. the market-facing partner’s products under the alli- This firm typically sees potential for two rewards ance work program. As an example, consider an alli- from an OI alliance: ance between a large manufacturer of toothpaste and 1. Revenue and profit growth beyond that expected a smaller biotech that carry out a joint development with its present product portfolio or its straight- program to incorporate the proprietary ingredient of forward extensions; and

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2. A persistent commercial advantage over compet- aggressively try to invent around patent claims or itors who will have no or limited access to the independently develop trade secrets, after com- intellectual property of the technology source. petitors become aware of the source’s technology What Risks Does the Market-Facing after the market-facing partner’s successful intro- Partner Face? duction of new products. • The cooperative R&D program aimed at combining • In some industries, regulatory or other legal bar- the resources of both parties to create a new prod- riers may emerge to delay or otherwise constrain uct can fail, for technical shortfalls or failing to the plans of the market-facing partner. meet financial targets during development. While What Rewards Does the Technology this risk is present regardless of the maturity of Source Anticipate? the new technology at the start of the OI alliance, The technology source expects to monetize the the risk is greater for early stage technology. In ad- results of its creative work through the marketplace dition, joint development requires the dedicated success of the market-facing partner. The source has application of R&D resources by both parties. The selected that partner because of the assets brought technology source may not adequately carry out by the partner; development resources, manufac- its development responsibilities. Especially if the turing capability, channels, brands, and the financial source is a small firm, its key technology capability resources to support development and commercial- may be limited to a handful of people; who may be ization. Monetization will be achieved through an spread thin across several projects or may become agreed combination of the cash flows to be discussed unavailable because of resignation or illness. in the next section. • A successfully launched product may encounter Separately from the monetization of rewards, the disappointing customer acceptance. Revenues technology source often expects the market-facing may be slower to grow or plateau at a lower level partner to reimburse the source for its costs incurred than anticipated. during joint development. This recognizes the com- • A superior alternate technology may emerge mon situation where the financial resources of the from a third party technology source. In entering market-facing partner are greater than that of the tech- into the OI alliance, the market-facing partner se- nology source. lected the technology source as its partner after Another reward is the technology source’s use of deciding that source can bring the best available intellectual property developed during the alliance for technology. Subsequently the technology land- products outside the business interests of the mar- scape may change, and superior competing tech- ket-facing partner. nologies may emerge from one or more third par- What Risks Does the Technology ties. A competitor of the market-facing partner Source Perceive? may establish an alliance with such a third party to develop and market a better product, leaving Several risks are similar to risks seen by the mar- the market-facing partner with products based on ket-facing partner. The R&D program may fail, or the the second-best technology. new product may be disappointing in the marketplace. • The technology of the source may not prove to Just as the market-facing partner risks that the tech- be adequately robust to achieve the market-facing nology source will not perform R&D tasks as expected, the market-facing partner may not perform as expect- partner’s competitive strategy. In this context, we ed in R&D or in commercialization. This can happen use the word “robust” to qualitatively character- for several reasons. The technology source may have ize the extent to which competitors of the mar- overestimated the R&D and commercialization abilities ket-facing partner will, or will not, have access to of the market-facing partner. In a distinctly different the source’s technology. A technology protected scenario, the market-facing partner may deliberately by valid, enforceable, and long-lived patent claims decide to move slowly or not at all in its development is robust, as is a technology characterized by or marketing obligations; because of a shift in market- non-patent proprietary technical information (i.e. place priorities or concern over competition with ex- trade secrets) that requires lengthy, difficult, and isting offerings (“cannibalization”). In some cases, the high-risk independent development by a competi- market-facing partner may favor the development of an tor. While a competent market-facing partner will alternative in-house technology. Where the market-fac- assess “robustness” prior to selecting the tech- ing partner has some level of exclusivity, this behav- nology source and negotiating alliance terms, this ior isolates the source’s technology from the market- assessment is difficult and imprecise. This risk is place. We refer to this situation as “parking,” as the exacerbated by the potential for competitors to market-facing partner “parks” the source’s technology

283 les Nouvelles Collaborative Agreements off the marketplace “highway.” While there may be le- operative R&D, manufacturing, and marketing across gal remedies available to the technology source, these multiple product lines. People on both sides have their remedies are difficult and uncertain of success. own ideas about what is fair, and there is a natural bias The technology source also risks the emergence of to more highly value the assets brought by one’s own better technology from a third party. But this risk has firm. When coupled with the complexity of financial an especially damaging implication for the technology structures and the stakes involved, the human aspects source. The market-facing partner may have entered can make the negotiations contentious even when the the market and established a favorable market position parties agree on the overall value of combining re- with initial products or services based on the technolo- sources toward a common objective. gy of the source. Upon emergence of a better technol- The share of the financial rewards allocated to each ogy from a third party, the market-facing partner may party is always based on a balance of past and future switch to the newly emergent technology and aban- values brought by the parties, as agreed in the alliance don its license to the source’s technology; depriving negotiation. The negotiation addresses two questions: the technology source of some or all of its anticipated 1. What past values does each party bring to the OI financial rewards. alliance before cooperative work starts? Examples Finally, the technology source incurs an opportunity include existing intellectual property, technical cost in selecting the market-facing partner. That cost skills, brands, channels to market, and manufac- may result from foregoing opportunities to forming turing capability. alliances with other market-facing firms, if the select- 2. What will each contribute to the cooperative effort, ed market-facing partner has some level of exclusivi- such as newly developed intellectual property, capi- ty. Another cost is the delay if the alliance with the tal investment, and marketplace development? market-facing partner proves unsuccessful. Even if the technology source has the intellectual property rights Methods of moving from these broad principles to required to begin again with another market-facing a mutually acceptable balance of values and to agree- partner; time will have passed, the marketplace has ment on cash flow metrics are beyond the scope of this evolved, and opportunities may have been foreclosed. paper. Here we will focus on the structure of those cash flows and how the structure allocates rewards The risks for both parties inherent in an OI alliance and risks. By “structure,” we refer to the conditions, may be allocated through appropriate provisions in the timing, and sizes of the cash flows during the lifetime financial structure, intellectual property provisions, of the OI alliance. and termination provisions. Risk can never be eliminated for either party. Rather, risk allocation provisions The best way to describe how risks and rewards are mitigate the damage to both by sharing those risks. As allocated through the financial model is to give exam- we will see, risk allocation provisions have important ples of the extreme ends of a continuum. At one end, nuances. A provision to reduce a party’s risk in case all the risk is allocated to the market-facing partner. At of certain marketplace events may increase that par- the other end, all the risk is allocated to the technolo- ty’s risk in other marketplace events. Finally, parties gy source. We will then describe the “middle road op- must accept that a risk that seems to be eliminated by tions” firms can use to more appropriately share risks a strongly worded provision in the agreement may still and rewards. exist in the real world; where litigation is expensive Let’s start with an example that allocates all the and uncertain. risk to the market-facing partner. In this case, a mar- One of the most challenging aspects of creating an ket-facing partner might agree to provide a single pay- OI alliance is to settle on a financial structure that re- ment to the technology source at the start of the alli- flects the values brought by both and that the parties ance. That payment represents the entire NPV share will accept as fair. In the OI context, “accept as fair” the source should earn during the lifetime of the al- is not simply an idealistic objective. Since the parties liance. In return, the market-facing partner receives must work together to create added value in the mar- a license to both pre-existing intellectual property of ketplace, a financial structure that is viewed as unbal- the technology source; prospective new intellectual anced by one side or the other will lead to inter-party property developed by the technology source dur- dissension and alliance failure. For OI success, there ing the alliance lifetime and all of the sources other is no such thing as “putting one over on the partner.” contributions during alliance implementation. In this The negotiated financial structure allocates the pro- case, the technology source is paid in full for its share spective rewards between the parties. Financial struc- of the alliance rewards. All the risk is placed on the tures may range from a straightforward royalty stream market-facing partner’s shoulders. Payments made for in-licensing technology to a complex system of very early in the development process are referred to cost and revenue sharing in an alliance involving co- as “front-end loaded.”

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Let’s look at the opposite end of the spectrum (all the A single fully paid license payment at a specified risk is placed on the technology source’s shoulders). In point in the alliance time line is an example. this case, the market-facing partner makes payments 4. Upfront and progress payments and their relative to the technology source at a fixed percentage royalty, size to royalty payments during commercialization based on sales by the market-facing partner using the reflect agreement on risk allocation. technology source’s intellectual property. The technol- These payments shift part of the risk of development ogy source will work with the market-facing partner to conduct all the development needed to bring the prod- failure from the technology source to the market-facing uct to market. If the product does not sell or is never partner. If the new product never reaches the market, commercialized, the technology source gets nothing. the technology source has benefited from these pay- Payments delayed too late in the development process ments while the market-facing partner never achieves are referred to as “back-end loaded.” marketplace rewards. We have already pointed out a benefit to the technology source through the discipline These simple examples anchor the extremes of a risk that these payments impose on the market-facing part- continuum. However, more complex structures allow ner. In the negotiation, the market-facing partner often the partners to allocate risk in more equitable ways. tries to minimize these payments and delay them until Common Types of Cash Flows and Risk late in the development process when the risk of de- Allocation Effects velopment failure is lower. We will consider the types of cash flows that the par- There is another important aspect of upfront and ties may include in a financial structure, since the selec- progress payments. Where the parties agree that cash tion of cash flow types and their levels and timing has a flows to the technology source should come through major impact on risk allocation. In a given OI alliance, some combination of upfront and progress payments the partners will agree upon a subset of these flows. and royalties, the negotiation dynamics normally lead Flows from the market-facing partner to the tech- to lower royalty rates as the upfront and progress nology source: payments are increased. This results in the technol- Expense Reimbursement ogy source losing some of its potential rewards if the The market-facing partner may reimburse the tech- financial success of the new product exceeds agreed nology source for R&D and other expenses incurred projections. This principle becomes clear if we consid- during the course of cooperative work. This often oc- er the limiting case of a single upfront payment from curs when the technology source has limited cash and the market-facing partner for a perpetual license to the does not wish to use those limited financial resources technology source’s intellectual property. The size of for alliance work. that payment is negotiated based on an agreed projec- Upfront and Progress Payments tion of likely revenues, and in this case the technology source agrees to forego royalties on sales. With greater The market-facing partner may make upfront and marketplace success than projected, the foregone roy- progress payments to the technology source. “Up- alties would have been more rewarding to the technol- front” refers to a payment made upon the effective ogy source than the upfront payment actually made. date of the alliance agreement. “Progress” refers to The same principle applies with a more common mix payments made at specific times or events during the alliance term. For clarity, we will use the term “proof upfront and progress payments and royalties. As the gress” to refer to payments made prior to the start of upfront and progress payments increase, the return new product sales by the market-facing partner. These from royalties diminishes. We refer to this effect as the payments are made for one or more of four reasons. “upside risk” incurred by the technology source when demanding upfront or progress payments. 1. Like upfront payments, early progress payments provide near term cash to the technology source. The risks to the market-facing partner are opposite to the risks to the technology source. By paying up- 2. They provide some assurance to the technology front and progress payments to the technology source, source that the market-facing partner will be dil- the market-facing partner is accepting “downside risk” igent in carrying out its alliance responsibilities. if the new products never reach the marketplace or As one of our client executives remarked, there are financially less successful than projected. But if the is nothing like the requirement to write a peri- product revenues exceed expectations, by paying low- odic check to focus top management’s attention er royalties the market-facing partner will get a larger on the alliance. share of the financial benefits than the parties had -as 3. Upfront and progress payments may provide, in sumed when negotiating the agreement. whole or in part, compensation from the mar- Royalties on Sales ket-facing partner to the technology source for use of the technology source’s intellectual property. The market-facing partner may pay royalties to the

285 les Nouvelles Collaborative Agreements technology source, based on sales by the market-fac- ket-facing partner if revenues dip from a higher level. ing partner of products or services using the technol- The consequences of missing minimum payments ogy source’s intellectual property. These may have impact on risk and are important. As an example, as- minimum annual requirements and maximum total sume that the market-facing partner has an exclusive payments (“caps”). Royalties are normally paid based right to use the technology source’s intellectual prop- on the use of valid patent claims of the technology erty within a defined scope, subject to payment of source. Where the parties agree that the technology minimum royalties. Usually the market-facing partner source provides values beyond that captured in valid wants the impact of missing minimums to be loss of patent claims, royalties may also include a component exclusivity, allowing the market-facing partner to retain tied to these non-patent values. These values may in- non-exclusive rights and continue its marketplace pres- clude non-patent proprietary technical information of ence. This lowers the risk to the market-facing partner, the technology source (“know-how”) or technical assis- who has devoted resources to development and to in- tance by staff of the technology source. The term dur- troduce the product into the marketplace. But contin- ing which such payments must be made can be either uing non-exclusive rights for the initial market-facing more or less than the term in which royalties based partner creates a risk for the technology source. If the on patents must be paid. From a risk allocation per- technology source attempts to find a new market-fac- spective, such payments behave like royalties based on ing partner, the non-exclusive rights of the initial mar- patent claims. Note: non-patent related payments may ket-facing partner encumber the source’s intellectual use a term other than “royalties” to conform to legal property. The technology source may find that the requirements. Please consult IP counsel on this matter. value of its intellectual property has been significantly Minimum Royalties diminished as seen by potential new partners. There- fore the technology source usually wants an option to The technology source often expects the market-fac- terminate all rights of the initial market-facing partner ing partner to pay minimum royalties on a periodic ba- in the event of a minimum royalty shortfall. That op- sis, usually annually. Minimums are intended to protect tion puts the technology source in control in the event the technology source from revenue shortfalls by the of a minimum royalty shortfall. Depending on the sit- market-facing partner after product launch. Shortfalls uation, the technology source could choose to allow may result from one or more problems. Some are con- the initial partner to continue to market the product; trollable by the market-facing partner, such as apply- or not. Because of its importance, this matter is often ing inadequate resources to marketing or sales. Some highly contentious during negotiations. are uncontrollable, such as introduction of competing products by others. By incorporating a minimum royal- As a separate matter, the technology source may ty requirement, the alliance agreement shifts some of expect the market-facing partner to achieve minimum the risk of revenue failure or delay onto the market-fac- revenues as well as paying minimum royalties. At first glance, these two requirements may seem to be equiv- ing partner. alent. But they are different. When this requirement Minimum royalties allow the market-facing partner is part of the agreement, the minimum revenue re- to avoid the consequences of revenue shortfall by pay- quirement is greater than the revenue associated to ing the minimum royalty even if the royalty calculated the minimum royalty. based on revenues is less than the minimum. For ex- What is the purpose of a minimum revenue re- ample, the market-facing partner might conclude that quirement, especially if minimum royalties are al- the revenue shortfall problem is likely to be remedied ready included? The reason is that the technology in a subsequent period. In that case, paying the mini- source may expect better than “minimum royalty” mum might be preferable to incurring the consequenc- performance from the market-facing partner, over es of missing the payment. the long run. Therefore we occasionally find min- Because of the options available to the parties con- imum revenue requirements associated with the nected with minimum royalties (For the market-facing terms for renewal of limited term exclusive licens- partner: Pay or not? For the technology source: Invoke es from the technology source to the market-facing the consequences of a missed payment?), the conditions partner. Since a grant of an exclusive license has associated with minimum royalties are important. For an opportunity cost to the technology source, that example, at what point after initial product launch do party wants to be able to periodically re-visit its minimums begin to apply? That affects the risk alloca- choice of market-facing partner; when the limited tion for an unexpected delay in launch or slower than term license is up for renewal. This requirement is expected revenue growth. Are actual royalties paid in often found when the source provides a right to use excess of minimums in a given period credited against a trademark on the product, either alone or in com- minimums due in a later period? That helps the mar- bination with the market-facing partner’s trademark.

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Volume Independent Payments After “Getting Started Payments” Product Launch A “getting started” payment may be made by the The market-facing partner may make volume-inde- market-facing partner if that partner decides to use an pendent payments to the technology source in parallel alternative technology in the contemplated products, with royalties, after sales of new products or services after starting to work with the technology source. A begin. These are conceptually similar to pre-launch market-facing partner often insists on the right to use progress payments, except they are paid after initial alternative technology even after selection of the tech- product launch. While progress payments reduce de- nology source and the start of the alliance, based on velopment failure risk for the technology source, vol- the argument that marketplace success requires the ume independent payments reduce the risk of revenue use of the “best” technology. This expectation creates shortfalls. They differ from minimum royalties in that several risks for the technology source. The technology they add to the technology source’s income stream source incurs an opportunity cost in working with the from royalties. Like progress payments, volume inde- market-facing partner, and usually relies on anticipated pendent payments tend to reduce royalty rates negoti- royalties or other payments during commercialization ated between the parties compared to the absence of to offset those opportunity costs. If commercialization volume independent payments. The upside/downside payments are truncated before or after launch because risk allocation effect is similar. of a decision by the market-facing partner to use an al- Termination Payments ternate technology from a different technology source, The market-facing partner may agree to make a ter- the technology source is left stranded. Another risk is mination payment if the market-facing partner decides leakage of the original technology source’s intellectual to stop work on the products or services contemplated property from the market-facing partner to the new in the alliance. That might apply during development technology source. While the alliance agreement will (before the first product is launched), after the launch have protections against that, in practice the intellec- of the first product, or in both situations. Such a pay- tual property risk is real and violations may be hard and ment reflects the opportunity cost incurred by the expensive to prove. technology source because of the alliance. The level of In this situation, the technology source argues that termination payments are strongly influenced by the the market-facing partner would not have been able exclusivity level enjoyed by the market-facing partner. to begin in the relevant market (or establish a market- To the extent that the market-facing partner is only one place advantage) except for the intellectual property of many licensees, the risk of termination by any one contributed by the technology source. The technolo- market-facing partner is lower, and large termination gy source demands a payment from the market-facing payments are not justifiable. The level of payments partner if that partner abandons the initial source in is strongly influenced by intellectual property rights favor of a “better” technology. The intent is to shift granted to the technology source upon termination. In some of the risk of loss of commercialization rewards a subsequent article, we will address risks associated from the technology source to the market-facing part- with intellectual property rights upon termination. ner. Can the technology source extract such a commit- In the negotiation, termination payments are usually ment from the market-facing partner, and will its size considered as a separate matter from the allocation of be some reasonable fraction of the technology source’s rewards between the parties. Such payments do not potential loss of commercialization rewards? Like all involve the “upside/downside” risks involved in other other negotiations of risk allocation matters, that de- payment types discussed above. Here, the financial risk pends on circumstances including the relative strength appears to be borne by the market-facing partner, since of the parties. it involves a payment to the technology source that is Payments for Goods not connected to other flows. But in fact, termination The market-facing partner may pay for goods sup- by the market-facing partner inevitably has a financial plied by the technology source. An example would downside to the technology source. Even with a highly be a specialized, proprietary ingredient intended for favorable intellectual property provision upon termi- incorporation into a product of the market-facing part- nation, the technology source incurs a delay in getting ner. Unlike reimbursement for R&D and other costs its intellectual property incorporated into marketable incurred by the technology source, these payments for products. While the alliance has been underway, the goods include a margin over costs. These payments are marketplace may have changed, with competing prod- included in the negotiation of the share of the finan- ucts introduced by others. This opportunity cost to the cial rewards received by the technology source. The technology source may be only partially offset by a ter- margin enjoyed by the technology source is added to mination payment. the upfront and progress payments and the royalties

287 les Nouvelles Collaborative Agreements paid by the market-facing partner to calculate the re- times this matter is handled through a reduction in wards for the technology source. To the extent that the royalty rates paid to the technology source, in anticipa- technology source’s business strategy includes being a tion of the technology source’s “outside scope” use of manufacturer as well as a source of novel technology, intellectual property. the rewards from supply can be an important part of Flows From Either Party to a Third Party the overall reward structure expected by the technolo- Third party vendors usually provide goods and ser- gy source. Since the margin from sales of goods is tied vices to further the objectives of the alliance. OI alli- to commercialization success, this cash flow resembles ance operations incur a variety of administrative ex- royalties in the reward structure. penses, including patent application and maintenance Negotiation of payments for goods becomes more fees, regulatory fees, and audit costs. The parties must complicated when the market-facing partner expects agree on the party will incur these costs and bear the the right to use alternate sources during commer- associated risks. Such payments are included in the cialization, to offset the risks of relying solely on the analysis of all alliance costs and influence inter-party technology source. To the extent that the market-fac- cash flows. ing partner actually develops and uses alternate sourc- Third parties may control intellectual property re- es, two distinct risks are incurred by the technology quired to implement the new products developed un- source. First, the technology source is deprived of der the alliance. When royalties to third parties must some of its financial rewards anticipated from its sales be paid, in addition to royalties paid to the technology to the market-facing partner. Secondly, the technology source, this situation is called “royalty stacking.” The source’s intellectual property may be misused by the fundamental issue is how the risk of royalty stacking alternate source, even if the alliance agreement speci- will be allocated between the parties. The market-fac- fies that such intellectual property may be used by the ing partner will expect the technology source to ac- alternate source only to supply the market-facing part- cept some of the risk through a reduction in royalties ner. Solutions may involve such provisions as minimum paid to the technology source. The problem to be ne- fractions to be supplied by the technology source and gotiated is how much of the risk each shall bear. volume levels that must be met before the alternate source right applies. Summary Flows From the Technology Source to the In conclusion, firms select the type and timing of Market-Facing Partner the cash flows above to allocate risks and rewards in the alliance. There is no “one-best-way” to use these While less common, cash can flow from the tech- techniques. Rather, they select the techniques and nology source to the market-facing partner. The most negotiate the agreement to allocate risks and rewards common situation is one in which the technology acceptable to both partners. source agrees to pay royalties to the market-facing partner, usually for use of alliance intellectual property in Acknowledgments commercial activities of the technology source outside The authors would like to thank Rutgers Universi- the scope of the alliance. “Scope” is defined through ty and the Department of Commerce EDA University parameters such as product and customer types or Center Program for their support of this work. ■ market regions. Typically, the scope coincides with the Available at Social Science Research Network (SSRN): business interests of the market-facing partner. Some- https://ssrn.com/abstract=2855290

December 2016 288 Bankruptcy-Related IP Valuations

Bankruptcy-Related IP Valuations: Consider The Use Of Market Approach By Robert F. Reilly

Introduction First, this discussion summarizes the various types of icensing executives and other intellectual prop- debtor company IP that analysts may be asked to value erty (IP) professionals (for purposes of this dis- within a commercial bankruptcy context. Second, this Lcussion, called “analysts”) are sometimes asked discussion summarizes the generally accepted IP valu- to provide IP valuation and related analyses within the ation approaches and methods. Finally, this discussion context of a commercial bankruptcy or other type of describes and illustrates a common market approach commercial litigation. Within the commercial bankrupt- valuation method for analyzing debtor company IP. Li- cy environment, the analyst could serve as a transaction censing executive analysts (and debtors, creditors, legal adviser, a consulting expert, or a testifying expert on counsel, and other parties to the commercial bankruptcy behalf of one (or more) of the parties to the proceeding. proceeding) should consider the application of market This discussion focuses on a commercial bankrupt- approach methods in the debtor company IP valuation. cy proceeding in the United States, prosecuted un- IP Types der the provisions of the U.S. Bankruptcy Code (“the According to Section 101(35A) of the Bankruptcy Bankruptcy Code”). The bankruptcy-related statutes in Code, the term “intellectual property” is defined as most developed countries can be different from each “(A) trade secret; (B) invention, process, design, or other. For example, the Bankruptcy and Insolvency Act plant protected under title 35; (C) patent application; in Canada provides different treatment of bankruptcy, (D) plant variety; (E) work of authorship protected un- receivership, insolvency, and reorganization compared der title 17; or (F) mask work protected under chapter to its neighboring U.S. Bankruptcy Code. And, in the 9 of title 17; to the extent protected by applicable non- U.S. there is more specific statutory authority, admin- bankruptcy law.” istrative rules, and judicial precedent consideration of Outside of the bankruptcy context, trademarks and the impact of IP in bankruptcy matters—compared to trade names are also considered to be common IP other corresponding national laws. Accordingly, ana- types. However, trademarks are not mentioned as part lysts should seek advice from local counsel with regard of the Bankruptcy Code definition of IP. Both within to the application of each nation’s bankruptcy laws. the commercial bankruptcy context and otherwise, Within the commercial bankruptcy context, analysts these IP types are considered to be a specific subset of may be asked to value the debtor company IP for many the general category of commercial intangible assets. reasons. These reasons could include the analyst’s assessment of the debtor company solvency or insolven- For valuation purposes, the patent category of IP is cy, a secured creditor’s collateral and protection (if IP often expanded to include patent applications, the pro- is the security interest), the fairness of a Bankruptcy prietary technology and product or process designs en- Code Section 363 proposed IP asset sale or license compassed by the patent, and the engineering drawings, transaction, the debtor’s Section 365(n) rejection of schematics and diagrams, and other technical documen- its current outbound IP licenses (and the implications tation that relate to the patent or patent application. of that rejection on the current IP licensees), the rais- The copyrights category of IP is often expanded to ing of debtor-in-possession (DIP) financing (with the include both registered and unregistered copyrights debtor IP serving as the creditor’s security interest), on publications, manuscripts, white papers, musical and the reasonableness of the IP royalty and operation- compositions, plays, manuals, films, computer source al income to the reorganized debtor company in a pro- code, blueprints, technical drawings, and other forms posed reorganization plan, among other reasons. of documentation. In the commercial bankruptcy (or other commer- And, the trade secrets category of IP is often expand- cial litigation) scenarios, many analysts immediately ed to include any information or procedures that (1) think of applying income approach or cost approach the owner/operator keeps secret and (2) provides some intangible asset valuation methods to value the debt- economic benefit to the owner/operator. Trade secret or company IP. However, if sufficient market-derived IP may include computer software source code, em- pricing data are available, market approach intangible ployee manuals and procedures, computer system user asset valuation methods can also be used to provide manuals and procedures, station or employee operating guidance with regard to the debtor company IP value. manuals and procedures, chemical formula, food and

289 les Nouvelles Bankruptcy-Related IP Valuations beverage recipes, product designs, engineering draw- sor to an independent licensee for a license fee that is ings and technical documentation, plant or process expressed as a percentage of the licensee’s revenue. schematics, financial statements, employee files and In the CUT valuation method, the analyst search- records, customer files and records, vendor files and es for arm’s-length sales of IP between independent records, and contracts and agreements. parties. In other words, the analyst is looking for IP Valuation Approaches and Methods the arm’s-length sale of a fee simple interest in the All of the generally accepted intangible asset valua- comparable IP from an independent seller to an inde- tion approaches are often applicable to the valuation, pendent buyer. In particular, the analyst is looking for fair royalty rate, or other analysis of the debtor compa- CUT sales data that can ny IP. The following table lists the generally accepted be expressed as a multi- intangible asset cost approach, market approach, and ple of the number of IP ■ Robert F. Reilly, income approach valuation methods that are typically units sold or as a multiple Willamette Management applicable to the analysis of debtor company IP: (or ratio) of the IP owner/ Associates, operator’s revenue or in- 1. Cost approach methods: reproduction cost new Managing Director, come. Such pricing met- less depreciation method, replacement cost new rics could include dollars Chicago, IL, USA less depreciation method, and trended historical per number of patents in E-mail: [email protected] cost less depreciation method an IP portfolio, dollars for 2. Market approach methods: relief from royalty line of computer software method, comparable uncontrolled transactions source code, or dollars per number of engineering method, and comparable profit margin method drawings or blueprints transferred. 3. Income approach methods: differential income Table 1 presents some of the automated data sources (with/without) method, incremental income that analysts commonly refer to in the search for guide- method, profit split method (or residual profit split line IP sale or license transactions. These automated method), and residual (excess) income method databases provide complete copies of the IP sale or Market approach IP valuation methods are particu- license documents. The analyst reviews these poten- larly applicable when there are a sufficient quantity tial CUT transactions and selects the most comparable of transactional data related to either comparable transactions to provide pricing guidance related to the (almost identical to the subject) IP or guideline (sim- debtor company IP. These databases are searchable by ilar from an investment risk and expected return type of IP, by owner/operator SIC code, by transaction perspective to the subject) IP. These IP transactions date time period, by country of transaction partici- may relate to either sale or license transactions. For valuation purposes, such arm’s-length, third-party transactions involving IP are typically called compara- Table 1. Common On-Line Databases ble uncontrolled transaction (CUT) sales or licenses. For IP Sale Or License Transaction Data The analyst attempts to extract market-derived valuation pricing metrics (e.g., sale pricing multiples, RoyaltySource license royalty rates, or income capitalization rates) www.royaltysource.com—This AUS Consultants database provides IP license royalty rates and IP sale from these CUT data in order to apply to the cor- data. Source documents are available for download. responding metrics of the debtor company financial fundamentals. The result of applying the market-de- RoyaltyStat, LLC rived pricing multiples or royalty rates and capitaliza- www.royaltystat.com—RoyaltyStat is a subscription rates to the debtor company fundamentals is the tion-based database of IP license royalty rates, IP market approach indication of the subject IP value. license agreements, and IP sale data compiled from Securities and Exchange Commission documents. In the relief from royalty (RFR) valuation method, the analyst searches for arm’s-length licenses of IP Royalty Connection that may provide pricing guidance with regard to the www.royaltyconnection.com—Royalty Connection™ subject IP. Typically, the analyst is looking for a mar- provides online access to license royalty rate and other license information related to all types of tech- ket-derived royalty rate that is expressed as a percent- nology, patents, trade secrets, and know-how IP. age (or multiple) of a common financial metric. The most common IP royalty rate metric that analysts look ktMINE for is a royalty rate expressed as a percent of the licen- www.bvmarketdata.com—ktMINE is an interactive see’s revenue. In other words, the analyst looks for database that provides direct access to IP license arm’s-length license agreements where the use of the royalty rates, IP license agreements, and IP sale agreements. Source documents may be printed. comparable IP is licensed from an independent licen-

December 2016 290 Bankruptcy-Related IP Valuations

pants, and by other search criteria. These on-line data analyst selects 2 percent of revenue as the appropri- sources typically obtain their source documents from ate market-derived IP license royalty rate. SEC-registered company (sale or license transaction Let’s assume that the DIP Company management participants) public filings. provided the analyst with a five-year revenue pro- In the comparable profit margin (CPM) valuation jection for the debtor company. Working with DIP method, the analyst searches for publicly traded com- Company management, the analyst selected (1) a panies that are sufficiently comparable to the subject 12 percent present value discount rate (based on debtor company—except that the subject debtor com- the debtor’s weighted average cost of capital), (2) pany owns and operates the unique IP and the select- a 15-year trademark total RUL, and (3) a 0 percent ed public companies own and operate a generic (or expected long-term growth rate beyond the discrete no) IP. This CPM method is based on the premise that projection period. the subject IP provides a profit margin advantage for The analyst’s market approach RFR method IP valua- the subject debtor company compared to the selected tion analysis is summarized in Exhibit 1. guideline companies. This profit margin advantage is typically measured Based on this simplified illustrative fact set, the an- at the earnings before interest and taxes (EBIT) profit alyst concluded that the fair market value of the hy- margin level. For example, let’s assume that the sub- pothetical DIP Company trademarks and trade names ject IP owner/operator earns a 20 percent EBIT mar- security interest is $590 million as of January 1, 2016. gin and that the median EBIT margin of the selected Summary guideline companies is a 15 percent EBIT margin. Ac- Within a commercial bankruptcy matter, licensing cording to the CPM method, the IP owner/operator’s executive analysts may be called on to value a debtor 5 percent profit margin advantage could be assigned as company IP for a variety of reasons. This discussion a reasonable royalty rate for the subject IP. summarized the generally accepted IP valuation ap- That royalty rate (based on the incremental profit proaches and methods. This discussion focused on a margin) is multiplied by the debtor company’s revenue bankruptcy matter presented in the United States un- to estimate a royalty income stream. The present val- der the U.S. Bankruptcy Code. Analysts who perform ue of the royalty income stream over the IP remaining forensic valuations of debtor company IP should seek useful life (RUL) is the CPM method value indication advice from legal counsel with regard to the applica- for the debtor company IP. tion of local statutory authority, administrative rules, Market Approach IP Valuation Illustrative and judicial precedent. Example Analysts (and other parties to the commercial bank- For purposes of this example, let’s assume that DIP ruptcy) often initially think of applying income ap- Company is seeking to raise debtor in possession (DIP) proach or market approach valuation methods to value financing. Let’s assume that all of the debtor compa- the debtor company IP. However, if there are sufficient ny’s current tangible assets are already pledged as a market-derived sale or license transactional data avail- secured financing collateral. The potential lender will able, the market approach can also provide meaningful accept the debtor company trademarks and trade pricing guidance with regard to the debtor company IP. names as collateral (i.e., a security interest) for the DIP This discussion summarized the generally accepted financing. However, before extending the DIP financ- market approach IP valuation methods. And, this dis- ing, the lender requires an independent valuation of cussion provided a simplified illustration of one com- the subject trademarks and trade names. mon market approach IP valuation method (i.e., the An analyst is retained to perform the IP collater- RFR method). Analysts and other parties to the com- al value valuation as of (let’s say) January 1, 2016. mercial bankruptcy should consider the application of Based on the quantity and quality of available market approach valuation methods in the bankruptcy transactional data, the analyst selects the market (or other litigation-related) IP analysts. ■ approach and the RFR valuation method. After ana- Available at Social Science Research Network (SSRN): lyzing several guideline IP license agreements, the https://ssrn.com/abstract=2855295

291 les Nouvelles Bankruptcy-Related IP Valuations

Exhibit 1. DIP Company Trademarks And Trade Names Fair Market Value Valuation Market Approach—Relief From Royalty Method As Of January 1, 2016 Projected Calendar Years

Discrete Projection Period Trademark Income: 2016 2017 2018 2019 2020 $000 $000 $000 $000 $000

Management-Provided Revenue Projection [a] 8,634,139 8,358,945 8,042,393 7,720,369 7,377,326 Arm’s-Length Trademark License Royalty Rate [b] 2% 2% 2% 2% 2% Projected Pretax Trademark License Income 172,683 167,179 160,848 154,407 147,547 Less: Projected Income Tax Rate [c] 37% 37% 37% 37% 37% Projected After-Tax Trademark License Income 108,790 105,323 101,334 97,277 92,954 Discounting Periods [d] 1 2 3 4 5 Present Value Factor @ 12% [e] .8929 .7972 .7118 .6355 .5674 Present Value of Trademark License Income 97,138 83,964 72,130 61,820 52,742 Sum of Present Value of Trademark License Income 397,018

Terminal Period Trademark Income: Fiscal 2021 Normalized Trademark Income [f] $92,954 Direct Capitalization Multiple [g] 5.6502 Terminal Value of Trademark License Income 525,209 Present Value Factor @ 12% .5674 Present Value of Terminal Period Trademark Income $298,003

Trademark Value Summary: Present Value of Discrete Period Trademark Income $287,794 Present Value of Terminal Period Trademark Income 298,003 Fair Market Value of the DIP Company Trademarks $590,000 (rounded)

Footnotes [a] Revenue projection provided by DIP Company management, consistent with the company’s plan of reorganization. [b] Based on the analyst’s selection and review of arm’s-length guideline IP license agreements. [c] Based on the DIP Company expected income tax rate. [d] Assumes year-end discounting for simplification purposes only. [e] Based on the DIP Company 12 percent weighted average cost of capital. [f] Based on the 2020 projected after-tax trademark income and a 0 percent expected long-term growth rate. [g] Based on a present value of an annuity factor for a 12 percent discount rate and a 10-year expected RUL (after the 5-year discrete projection period).

December 2016 292 The Scoop From Europe

Patent Royalties And Competition Law: The Genentech Judgment Of The Court Of Justice Of The European Union By Patricia Cappuyns and Jozefien Vanherpe

n 7 July 2016, the Court of Justice of the Euro- threat of fines and administrative sanctions. Whether pean Union (“CJEU”), the highest court in Eu- or not a license falls within the scope of this prohibi- Orope, held that a requirement to pay royalties tion is therefore of paramount importance. for the licensed use of a patented technology for the The Facts of the Dispute Between Genentech entire duration of the license is not contrary to com- and the Sanofi-Aventis Group petition rules in the event of the revocation or non-in- The German company Behringwerke AG, now part fringement of the patent at issue (Case C-567/14, 1 of the Sanofi-Aventis pharmaceuticals group, was the Genentech v. Hoechst and Sanofi-Aventis). This rul- owner of a European Patent, granted in 1992, as well ing shifts the balance back in favour of the licensors, as two U.S. Patents, issued in 1998 and 2001, in re- while recent case law as well as the Commission had lation to the use of a human cytomegalovirus enhanc- emphasised that licensees must always remain free to er (the “HCMV enhancer”). Behringwerke granted a challenge licensed IP rights. But what is the point of worldwide non-exclusive license to this technology successfully challenging the licensed IP right if the roy- to Genentech. Genentech subsequently used the vi- alties simply keep running? rus enhancer to facilitate the transcription of a DNA Background sequence for the production of a biological medicinal Article 101, paragraph 1 of the Treaty on the Func- product, marketed by Genentech in the EU as well as tioning of the European Union (“TFEU”) prohibits all the U.S. agreements and other arrangements between under- In the license agreement, Genentech undertook to takings that have as their goal and/or effect to appreci- not only pay a one-off fee and a fixed annual research ably restrict or distort competition within the EU inter- fee, but also a running royalty of 0.5 % on the net sales nal market. Transactions involving intellectual property of so-called “finished products.” rights, such as licensing agreements, may fall within On January 12, 1999, Behringwerke’s European Pat- the purview of this Article. Paragraph 3 of the same ent was revoked. Article contains an exception to the aforementioned prohibition if the licensing agreement/arrangement at Genentech duly paid the one-off fee and the fixed an- issue is proportionate and in fact has procompetitive nual research fee mentioned above but, in light of the effects (as set forth in the Technology Transfer Block revocation of the patent, refused to pay the running Exemption Regulation).2 royalty to Hoechst, Behringwerke’s successor company. In the context of licensing agreements, the prohibi- In 2008, the licensor enquired about the finished tion set forth in article 101 TFEU entails several risks, products Genentech had marketed without payment of such as the unenforceability of the license agreement, the running royalty. Following this enquiry, Genentech the possibility of having to pay private damages and the terminated the agreement unilaterally. The licensor then filed arbitration proceedings against Genentech. In the course of these proceedings, Genentech argued 1. CJEU, Judgment of 7 July 2016 in Case C-567/15 be- that it was not required to pay the running royalty, tween Genentech Inc. and Hoechst GmbH and Sanofi-Aventis since, according to the terms of the license agree- Deutschland GmbH, available at http://curia.europa.eu/ ment, the payment of that royalty was based on the juris/document/document.jsf;jsessionid=9ea7d2dc30d52c4760 supposition (i) that the HCMV enhancer was present 97d444421cb146ccb3dbd686b7.e34KaxiLc3qMb40Rch0SaxyK in the finished product at issue and (ii) that the man- ax50?text=&docid=181463&pageIndex=0&doclang=EN&mo ufacture or use of that enhancer had, in the absence de=lst&dir=&occ=first&part=1&cid=1150545. of that agreement, breached the rights attached to 2. Communication from the Commission—Guidelines on the the licensed patents. In the end, the arbitrator denied application of Article 101 of the Treaty on the Functioning of Genentech’s claim for reimbursement of the up-front the European Union to technology transfer agreements, OJ C 89, 28.3.2014, p. 3-50, http://eur-lex.europa.eu/legal-content/ and annual fees and forced Genentech to pay the run- EN/TXT/PDF/?uri=CELEX:52014XC0328(01)&from=EN. ning royalty. In this regard, the arbitrator reasoned that

293 les Nouvelles The Scoop From Europe

Genentech had agreed to pay the licensors in consider- tung judgment a fortiori, ruling that if an obligation to ation for the certainty of averting patent litigation and pay royalties may be compatible with 101 TFEU after that Genentech had subsequently received the benefit the expiry of a patent (Ottung), the same applies be- of this certainty. fore the expiry of the rights at issue. The CJEU con- In the context of proceedings for annulment of the cluded that the obligation to pay royalties for technol- arbitral award, brought by Genentech, the Paris Court ogies that are not or no longer covered by a patent of Appeal referred a number of questions to the CJEU is not incompatible with article 101 TFEU, provided regarding the compatibility of the agreement with com- that the licensee is free to terminate the contract with petition law. More specifically, insofar as the license reasonable notice. agreement required the licensee to pay royalties which The reasoning of the CJEU is based on the idea did not serve any purpose in view of the revocation ■ Patricia Cappuyns, of the European Patent and Genentech’s non-infringe- that the royalty payment ment arguments, the licensee was confronted with a is the price to be paid Founding Partner, competitive disadvantage (estimated at 169 million for the right to exploit CAPE IP Law, EUR by Genentech). This motivated the court to call the licensed technology Belgium, Brussels into question the agreement’s compatibility with the commercially, with the E-mail: patricia.cappuyns@ abovementioned Article 101 TFEU. guarantee that the licen- cape-iplaw.com A Question of Admissibility sor will not enforce its industrial property rights Before delving into the substantive issues tackled ■ Jozefien Vanherpe, against the licensee. This by the CJEU in the Genentech decision, it should be was also the position of CAPE IP Law, noted that a considerable part of this judgment was Advocate General Wa- Associate, devoted to a purely procedural element, namely the thelet, set forth in his Belgium, Brussels question of admissibility of the questions referred by Opinion dated 17 March the Paris Court of Appeal. Indeed, both the licensors E-mail: jozefien.vanherpe@ 2016: unlike other com- and the French Government argued against admissibil- cape-iplaw.com panies who had not con- ity, claiming inter alia that the arbitration clause agreed cluded any license agree- upon by the parties excluded the intervention of the ment, Genentech had CJEU in the present case. Indeed, under French rules actually benefited from this ‘temporary truce’ for the of procedure, an international arbitral award may only duration of the license agreement. Therefore, the be reviewed in case of flagrant infringement of inter- payments due by Genentech under the agreement national public policy. However, the CJEU dismissed could not be reimbursed. their objections and declared the questions admissible. The CJEU Judgment of 7 July 2016 As long as the license agreement at issue is still in force and may be terminated freely by the licensee, the According to the CJEU, who largely agreed with royalty payment is due and the agreement is accept- Advocate General Wathelet’s Opinion in this case, able under article 101 TFEU. In this case, Genentech the type of license agreements at issue are not nec- had been free to terminate the license agreement at essarily problematic in view of EU competition law. any time, with a notice period of two months. Further- In reaching this decision, the CJEU referred to the Ot- more, the agreement contained no supplementary ob- 3 tung judgment (Case C-320/87). In this judgment, the ligations4 nor any restriction on Genentech’s freedom CJEU decided that an obligation to pay royalties after to act after its termination, to the extent that Genen- the expiry of the period of validity of a licensed patent tech could challenge the validity of the U.S. patents could be compatible with 101 TFEU, provided that the at issue—an opportunity which it seized, however un- licensee is at liberty to terminate the agreement by giv- successfully. In view of this, the CJEU concluded that ing reasonable notice. The CJEU considered that such there had been no restriction of competition. an obligation could reflect a commercial assessment of A final interesting remark in this regard was made the value attributed to the possibilities of exploitation by Advocate General Wathelet: he considered that the granted by the license agreement and that it was not question here was not whether Genentech was com- per se anticompetitive. mercially disadvantaged by the arbitrator’s interpre- In the Genentech decision, the CJEU applied the Ot- 4. Which was the case in CJEU, Judgment of 25 February 3. CJEU, Judgment of 12 May 1989 in Case 320/87 between 1986 in Case C-193/83 between Windsurfing International Inc. Kai Ottung and (1) Klee & Weibach A/S and (2) Thomas Schmidt and the Commission of the European Communities, available A/S, available at http://curia.europa.eu/juris/showPdf.jsf?text=& at http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CEL docid=95732&doclang=EN. EX:61983CJ0193&from=FR.

December 2016 294 The Scoop From Europe

tation of the license agreement or whether, with the license agreement if he is to continue commercialising benefit of hindsight, it would not have entered into a standard-compliant product. In that case, obtaining such an agreement. The Advocate General went on to a finding of invalidity or non-infringement is the licen- observe that the aim of Article 101 TFEU is not to see’s only option to discontinue the royalty payments. regulate commercial relations between undertakings This aspect of dominance under Article 102 TFEU, so in a general way; its prohibition should only apply to crucial in the standardisation context, is absent in the anticompetitive agreements or arrangements. Genentech case, which was decided under Article 101 Compatibility with the Huawei/ZTE Judgment TFEU. This explains the apparent discrepancy between One might wonder whether this new ruling from the the two judgments. CJEU is compatible with the Court’s previous holdings Conclusion in the Huawei/ZTE judgment of 16 July 2015 (Case The one clear take-away from the Genentech judg- C-170/13).5 For details about this judgment, readers ment is that the parties should expressly set out the are invited to refer back to the “Scoop from Europe” consequences of a possible revocation (or finding of column in the les Nouvelles edition of July 2015.6 In non-infringement) of the licensed patent(s) in the orig- the Huawei/ZTE judgment, the Court emphasised that inal license agreement. The licensor may shift the risk (potential) licensees of standards-essential patents of invalidation onto the licensee by requiring an up- should always have the option to challenge the validity front lump sum royalty. Conversely, the licensee may and infringement of the patents they are licensing in. insist that running royalties will end in the event of What good does this option do the licensee if—under revocation or a finding of non-infringement, especially the recent Genentech judgment—he may be required if the license covers only a single patent. The negoti- to keep paying royalties in the event of revocation or ation position of the parties on this point will heavily non-infringement of the patent anyway? depend on the perceived strength of the patent(s) and In fact, the two judgments are not as incompatible as the licensee’s need for the license. In any event, the a first reading would suggest. In the Genentech judg- parties should bear in mind that an obligation on the ment, the Court stressed that the obligation to con- licensee to give a very long notice period to terminate tinue paying royalties complies with competition law the license, or any other onerous post-revocation obli- only if the licensee is at liberty to terminate the agree- gations on the licensee, are possible red flags under EU ment by giving reasonable notice. This liberty general- competition law. ■ ly does not exist for a truly standards-essential patent, Available at Social Science Research Network (SSRN): where the licensee has no choice but to continue the https://ssrn.com/abstract=2865736

5. CJEU, Judgment of 16 July 2015 in Case C 170/13 between Huawei Technologies Co. Ltd and ZTE Corp., ZTE Deutschland GmbH, available at http://curia.europa.eu/juris/document/document.jsf?text=&docid=165911&pageIndex=0&doclang=EN& mode=lst&dir=&occ=first&part=1&cid=941884. 6. Available through log-in at https://www.lesi.org/ Login?ReturnURL=%2fles-nouvelles%2fles-nouvelles-archives.

295 les Nouvelles Recent U.S. Decisions

Recent U.S. Court Decisions And Developments Affecting Licensing By John Paul and D. Brian Kacedon*

Odyssey Wireless v. Apple, Samsung, The court applied the Motorola, & LG contract interpretation law ■ John C. Paul, Inventor’s Employment Agreement Did Not Affect of Virginia according to Finnegan, Henderson, Farabow, His Freedom to Assign and Assert Patents Broadly a choice-of-law provision Garrett & Dunner, LLP, Related to his Employment in the employment agree- Attorney, ment, observing that basic Patent infringement defendants attempted to dismiss Washington, D.C., USA rules of contract interpre- a lawsuit on the basis that the inventor’s employment E-mail: [email protected] tation apply in Virginia, so agreement obligated him to assign his rights to inventions a contract should be con- ■ D. Brian Kacedon, to his employer and that the employer had title to the strued based on its plain Finnegan, Henderson, Farabow, patents, rather than the plaintiff to whom the inventor meaning and “extrinsic Garrett & Dunner, LLP, assigned his rights. evidence” may be relied on Partner, The defendants urged the court to interpret the employ- to resolve any ambiguities Washington, D.C., USA ment agreement as broadly covering inventions related to in the contract language. E-mail: brian.kacedon@ wireless communications technology. But the court found finnegan.com that the parties intended the agreement to cover only Applying Federal Circuit patents on the inventor’s work that related to particular precedent, the court found business activities of his employer, and not patents on the the “hereby grants” language of the agreement automati- inventor’s unrelated independent work, which had been cally assigned all rights to MSV in future inventions by Dr. assigned to the plaintiff. Karabinis covered under the agreement without the need Background for any additional act of assignment. The court then considered the language of the agree- Odyssey Wireless sued Apple, Samsung, Motorola, & LG ment defining the scope of invention rights covered by for infringement of patents related to wireless telecommunications technology that Odyssey acquired by assignment the agreement as those “which refer to or result from my from the inventor, Dr. Peter Karabinis. work for MSV during my employment by MSV and which relate to MSV’s current, anticipated, or prospective busi- The defendants tried to dismiss the litigation, claiming ness activities.” The court found that the terms, “work that Odyssey Wireless had no title to the patents and for MSV” and “MSV’s current, anticipated, or prospective therefore no standing to sue because an employment agree- business activities” were not expressly defined and could ment between Dr. Karabinis and Mobile Satellite Ventures be understood in multiple ways. Thus, the district court (“MSV”) resulted in a prior assignment of the patent rights considered the terms to be ambiguous and resorted to to his employer MSV, leaving him with no rights to assign extrinsic evidence to determine their intended meaning. to Odyssey. The relevant portion of Dr. Karabinis’s employment contract with MSV provided: The defendants argued that the patents fall within the Step 1: I [,Peter Karabinis,] agree that MSV shall own, broad scope of MSV’s business activities because they and I hereby grant to MSV, all right, title and interest in generally relate to wireless communication systems and and to all proprietary rights, including but not limited methods. Odyssey Wireless, on the other hand, argued to copyrights, patents, trademarks, and trade secrets, that MSV’s business activities during Dr. Karabinis’s em- in all work product, developments, inventions, or other ployment related specifically to repurposing and adapting materials produced by me (“Works”) which refer to or satellite communication frequencies for use in terrestrial result from my work for MSV during my employment cellular communications. This differed from the subject by MSV and which relate to MSV’s current, anticipated, matter of the patents, which related to using new and or prospective business activities . . . . different waveforms. The Odyssey Wireless Decision The court sided with Odyssey Wireless, relying in large The court’s decision in Odyssey Wireless turned on part on the conduct of the parties to the MSV employ- whether the sole inventor of the patent-in-suit had title ment agreement. In particular, the court was persuaded to the patents when he assigned them to Odyssey Wire- by extrinsic evidence showing that MSV and Dr. Karabinis less’s predecessor, or whether they had been automati- did not intend for his separate work for his business to fall cally assigned under his employment agreement to his under the employment agreement. In support, the court employer, MSV. cited evidence that 1) Dr. Karabinis took the job at MSV on

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the condition that he be allowed to work on ideas unrelated or sell another product using the patented design. to his work at MSV when he was not at work; 2) MSV After the parties terminated the promotional agreement, knew Dr. Karabinis filed patent applications using his own the defendant began manufacturing and selling a compet- company, EICES; 3) MSV and Dr. Karabinis knowingly used ing product. The patent owner filed suit for patent infringe- the same patent prosecution counsel who billed for work ment, trade-dress infringement, and unfair competition. for MSV and EICES separately; 4) In 2007, MSV discussed The defendant filed a motion to dismiss or to enforce the with Dr. Karabinis a potential license to the invention that arbitration clause of the promotional agreement because is the parent of all the patents-in-suit; and 5) MSV never it required the parties to arbitrate any dispute “arising un- suggested that it had any rights to the inventions at issue der” it. In doing so, the defendant argued that the factual while Dr. Karabinis worked there. Based on these facts, allegations in the patent owner’s complaint related to the the Court concluded that both parties were aware that Dr. promotional agreement. Karbinis was pursuing patents on inventions apart from his The Roof N Box, Inc. Decision work at MSV and that both parties considered him to be the owner of such subject matter. Accordingly, the Court The court denied defendant’s motion to dismiss or to en- ruled that Odyssey Wireless had title to the patents and force the arbitration clause of the promotional agreement, had standing to sue the defendants for patent infringement. noting that the arbitration clause did not cover claims which arose from conduct occurring after the agreement Strategy and Conclusion ended. Further, even if the arbitration clause survived the This decision shows that past employment or assign- agreement’s termination, the claims were unrelated to the ment agreements of inventors can threaten an apparent promotional agreement. title-holder’s standing to bring suit on a patent and result The court found the arbitration clause did not cover in disputes on ownership and standing to sue. The likeli- the claims in part because the parties had terminated the hood of such disputes may be diminished by identifying promotional agreement before the dispute arose. Under agreement terms that are undefined or can be understood Supreme Court precedent, all parties are released from in different ways and expressly defining them or reciting their respective contractual obligations once a contact the details of what is covered and not covered. expires. A court will compel arbitration under an expired Further Information contract only if the dispute arises under the contract. A The Odyssey Wireless opinion can be found here. post-expiration dispute arises under a contract only where http://tinyurl.com/h8alj88 (1) the dispute arises from facts occurring before expiration, (2) an action taken after expiration infringes on a right vesting during the life of the contract, or (3) a contractual Evans & Roof n Box, Inc. v. Building Mtls. Corp. right is interpreted to survive the contract’s expiration Agreement to Arbitrate Does Not Cover Infringe- under normal principles of contract interpretation. ment Occurring After the Agreement is Terminated According to the court, the arbitration clause failed to Under Supreme Court precedent, parties to a contract cover the plaintiffs’ claims because (1) the dispute arose are released from their contractual obligations when a from defendant’s alleged unauthorized copying and selling contract expires. But a court will compel arbitration under of the patented design after the parties terminated the an expired contract if a dispute falls within the scope of agreement, (2) the plaintiffs’ right to protect their design the arbitration clause of that contract. vested under patent law long before the agreement, and In Evans & Roof n Box, Inc. v. Building Mtls. Corp. (3) nothing in the agreement indicated that the arbitration of America, the district court found an arbitration clause clause was meant to survive the agreement’s expiration. in the parties’ expired contract did not cover the patent The court also found that even if the arbitration clause owner’s claims because the conduct giving rise to the claim survived after the parties terminated the agreement, the of infringement—unauthorized copying and selling of the plaintiffs’ claims for patent infringement, trade-dress in- patented design—occurred after the contract between fringement and unfair competition fell outside the scope the parties expired. The court also held that even if the of the arbitration clause. The factual allegation underlying arbitration clause survived termination of the contract, the plaintiffs’ claim was that defendant manufactured and dispute did not fall within the scope of the clause because sold the model without authorization. The agreement the patent owner did not rely on the contract to establish established how the model would be supplied and paid the infringement claim. for but did not address the unauthorized use of the model Background years after the agreement was terminated. Consequently, The patent owner developed and patented a three- the court found, the promotional agreement between the dimensional roofing model used during sales presentations parties did not constitute any part of plaintiffs’ claims to homeowners and agreed to sell the model to defendant against defendant. at discounted prices. The agreement gave the defendant Strategy and Conclusion the right to promote the model to their contractors, but it This case demonstrates the difficulty of compelling did not give defendant the right to manufacture, develop, arbitration to adjudicate conduct occurring after an agree-

297 les Nouvelles Recent U.S. Decisions ment expires if the agreement does not indicate that the because both licenses were for unlimited use and the arbitration clause survives the agreement’s expiration. Cathay license cost less. Further Information The court also concluded that the only way to give ef- The Roof N Box, Inc. opinion can be found here. fect to the most-favored licensee clause was to apply the new terms from the Cathay license retroactively and have http://tinyurl.com/godgsec DataTreasury refund JP Morgan the amount that its payment exceeded the payment terms in the later license to JP Morgan Chase Bank, N.A. v. Cathay. The court reasoned that in retroactively replacing DataTreasury Corp. the terms of the JP Morgan license with the more favorable “Most-Favored” Licensee Clause Entitles Paid-Up terms of the Cathay license, it must also apply the Cathay license terms requiring an additional license payment of Licensee to Refund of $69M Amount Exceeding up to $250,000 for each after-acquired entity. Because Lump-Sum Payment of Subsequent Licensee JP Morgan had acquired three entities after 2005, the Licensees who sign up early may try to ensure that later district court found that JP Morgan owed an additional licensees do not get a better deal by including “most- $750,000 license, for a total of $1 million. The district favored licensee,” provisions in their license agreements. court therefore entered a final judgment in favor of JP However, at a later time, the parties may disagree as to Morgan in the amount of $69 million—the $70 million JP how those clauses are interpreted and applied. Morgan paid under its original license less the $1 million In JP Morgan Chase Bank, N.A. v. DataTreasury Corp., total it owed under the retroactively applied terms of the JP Morgan sued DataTreasury for breaching the most- Cathay License. favored licensee clause in their lump-sum license agree- The JP Morgan Decision ment relating to patented check processing technology, On appeal by DataTreasury, the Fifth Circuit first found claiming that DataTreasury later granted a similar license that DataTreasury had waived any arguments as to the to another entity for a lesser lump-sum amount. In a case district court’s conclusion that DataTreasury breached of first impression, the United States Court of Appeals the JP Morgan License and therefore considered only the for the Fifth Circuit found that JP Morgan was entitled to amount of damages. retroactively apply the more favorable terms of the lesser lump-sum license agreement and receive a refund for the DataTreasury argued that the most-favored licensee difference between the two lump-sum license agreements. clause could not be applied retroactively to obtain a refund of amounts previously paid. Instead, DataTreasury argued Background that the most-favored licensee clause could only apply pro- DataTreasury Corporation sued JP Morgan Chase Bank, spectively from the date the new terms were recognized. N.A. for willful infringement of patents relating to elec- Under DataTreasury’s theory, JP Morgan could escape tronic check-processing systems. only from payments it owed under its license at the time In 2005, they settled the case, and JP Morgan received a the Cathay agreement was executed and the most-favored license in exchange for a lump-sum payment of $70 million, licensee clause of JP Morgan’s license was affected. In JP paid in installments of $30 million in 2005, $5.5 million Morgan’s case, that amount would be zero because JP each year from 2006 to 2011, and $7 million in 2012. Morgan had paid all installments due on its license before The JP Morgan license included a “most-favored licensee” the Cathay License was executed. clause, requiring DataTreasury to notify JP Morgan of any The court first distinguished between the different types subsequent licenses and entitling JP Morgan to the benefit of royalties available under a license, explaining that a of any more favorable terms of those licenses. licensee can pay a “running royalty,” which includes a rate In 2012, after JP Morgan made the last payment on the that typically requires a payment based on the number of JP Morgan license, DataTreasury separately entered into products sold, or a lump-sum amount for unlimited use, another license agreement with Cathay General Bancorp in- the type of royalty JP Morgan paid DataTreasury. The court volving the same patents but with different lump-sum price acknowledged that a licensee cannot obtain a refund of terms. The lump-sum price was $250,000 for Cathay’s sole amounts paid under a previously applicable running royalty use plus $250,000 for each entity Cathay later acquired. by invoking a most-favored licensee clause. But the court No such provision regarding later-acquired entities existed found the scenario involving a paid-up lump-sum license in the JP Morgan license. and a later, more favorable paid-up lump-sum license to JP Morgan sued DataTreasury in Texas for breaching the be a matter of first impression. most-favored licensee clause in the JP Morgan license, In noting that the JP Morgan and Cathay licenses were claiming that DataTreasury had failed to notify JP Morgan of identical in most respects—both were paid-up lump-sum the Cathay License, and that payment terms of the Cathay licenses granting unlimited use of the patented technol- license were more favorable than the JP Morgan license. ogy—the court found that the only material differences in In an issue of first impression, the district court agreed payment terms were that the JP Morgan License cost $70 that the most-favored licensee clause gave JP Morgan the million, while the Cathay License cost only $250,000 plus right to the more favorable terms of the Cathay license $250,000 for each entity it later acquired. It was immaterial

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that the JP Morgan License called for payment in install- Further Information ments, while the Cathay License was a single payment. The JP Morgan opinion can be found here. The court explained that DataTreasury’s theory would http://tinyurl.com/hsj53g3 render the most-favored licensee clause effectively meaningless in situations involving two paid-up lump-sum licenses that differ only in the total license cost, because The Medicines Co. v. Hospira, Inc. once the first licensee had fully paid its license fee, it could A Prior Agreement To Outsource Manufacturing receive no practical benefit from invoking the most-favored Does Not Invalidate a Patent licensee clause. This would mean JP Morgan would not be A patent is invalid if a product embodying the claimed entitled to any refund because it had already paid the final invention was “on sale” more than one year before the installment on its license agreement before DataTreasury filing of an application for the patent. In The Medicines executed the Cathay license—a result causing a most- Co. v. Hospira, Inc., an en banc Federal Circuit held that favored licensee clause to “mean virtually nothing.” entering into a contract with a manufacturer to make The court concluded that such “an unreasonable result” a patented product does not constitute an invalidating violated Texas law for contract interpretation and that po- commercial sale. tential problems can be avoided by reasonable restrictions Background on the most-favored licensee clause, such as limiting the effective time period of a licensee to exercise their right The Medicines Company (“MedCo”) holds two patents that cover an anticoagulant drug, bivalirudin, which MedCo under the clause. sells under the trade name Angiomax. These patents were A dissenting opinion concluded that JP Morgan should filed in July of 2008. Thus, any commercial sale of bivaliru- not be entitled to recoup sums paid before DataTreasury din prior to July of 2007 would render the patents invalid. granted the lower-priced license to Cathay because the MedCo does not have its own manufacturing facilities language of the most-favored licensee clause was prospec- so in late 2006, MedCo contracted with Ben Venue to tive and that the parties would not have agreed to language manufacture Angiomax according to the patented formula. reaching the result JP Morgan sought. The dissent noted By the end of 2006, Ben Venue manufactured three batches that DataTreasury’s prospective-only theory would not of Angiomax, valued at over $20 million. The contract render the most-favored licensee clause meaningless be- between MedCo and Ben Venue stated that “the solution cause it would still give JP Morgan the ability to skip future will be filled for commercial use” and that the manufac- payments if DataTreasury entered into a more favorable tured product would be placed on hold until testing was license before JP Morgan finished paying. completed. The invoices for each batch that Ben Venue The dissent also questioned how JP Morgan could be manufactured stated that it would be “released to MedCo placed at a competitive disadvantage in view of the finite for commercial and clinical packaging.” lifespan of patents—JP Morgan enjoyed the right to prac- MedCo placed the products into quarantine pending tice the two licensed patents until their respective expira- FDA approval. MedCo signed a distribution agreement tion dates in 2016 and 2017, for seven years more than making ICS the exclusive authorized distributor of An- Cathay. This was an interpretation the majority opinion giomax in the United States and made the quarantined rejected, because it found no support for this position in Angiomax available for sale in August 2007. the plain language of the most-favored licensee clause or Before MedCo’s patents expired, Hospira filed applica- in the nature of JP Morgan’s payment obligation. tions with the FDA to request approval to sell a generic Accordingly, the Fifth Circuit affirmed the district court’s form of the drug. MedCo sued Hospira, alleging that Ho- conclusion that the most-favored licensee clause in the JP spira’s FDA applications to manufacture and sell bivalirudin Morgan license required the court to apply the price terms infringed its patents for manufacturing the drug. During of the Cathay license retroactively and granted JP Morgan litigation, Hospira alleged that the patents were invalid a refund for the difference in payments under the two because MedCo sold products manufactured according to agreements in the amount of $69 million. the process claimed in the asserted patents when it paid Strategy and Conclusion BenVenue to manufacture Angiomax in 2006, and that This case illustrates how a most-favored licensee clause MedCo offered to sell manufactured Angiomax to ICS for in a paid-up lump-sum license agreement can be applied distribution in 2007. not only to royalties paid after a subsequent license is Under the Supreme Court’s decision in Pfaff v. Wells, a granted to another licensee on more favorable terms, but patent is invalid under the “on-sale bar” rule if a product also retroactively to royalties paid before the subsequent embodying the claimed invention is both ready for patent- license is granted. This could result in a refund of the ing, and commercially offered for sale more than one year difference in payments by the most favored licensee and before the date of the patent application. Although finding the subsequent licensee even though the payments by the that the claimed was invention ready for patenting more most favored licensee were fully completed before the than a year before the application date, the district court subsequent license agreement arose. found that the invention was not commercially offered for

299 les Nouvelles Recent U.S. Decisions sale prior to the priority date of the patent applications. did not market or release its invention to any purchasers by Specifically, the district court found that the transaction contracting with Ben Venue. The court therefore vacated between MedCo and Ben Venue was a sale for contract the panel opinion and remanded to the panel for further manufacturing services, and that title to the Angiomax proceedings. always resided with MedCo. The court also found that Strategy and Conclusion because the batches manufactured by Ben Venue were for This case illustrates how patent holders can structure “validation purposes,” they were not made for commercial transactions with suppliers before commercially mar- profit, as required by the “on-sale bar,” but for experimental keting goods and services to avoid potentially negative purposes. The district court also held that MedCo’s agree- consequences later on. For example, patent owners ment with ICS wasn’t an invalidating sale, but rather, the outsourcing manufacturing services should retain title to agreement was merely an agreement for ICS to be the sole products embodying the patented invention and maintain U.S. distributor of Angiomax—“a contract to enter into a confidentiality over contracted services. contract.” Hospira appealed. On appeal, Hospira criticized the district court’s conclu- Further information sion that the batches of Angiomax were for experimental The MedCo opinion can be found here. purposes, noting that MedCo had not claimed that the http://tinyurl.com/hrn6h5s Angiomax manufactured by Ben Venue was for experimental use, and that, although title to the manufactured drugs Dr. Kamdem-Ouaffo v. PepsiCo, Inc. never transferred between MedCo and Ben Venue, MedCo was able to stockpile its product for future sale, thereby Alleged Omitted Inventor With No Patent Owner- enjoying a commercial benefit from the transaction, thus ship Fails to Adequately Allege Reputational Harm triggering the “on-sale bar” rule. to Sue for Inventorship Correction The En Banc Decision The Patent Act provides a cause of action to sue for the An en banc Federal Circuit held that for the “on-sale rule” correction of inventorship on a patent in federal district to apply, a product must be the subject of a commercial sale courts. As with all types of suits, Constitutional require- or offer for sale, and that a commercial sale is one that in ments of standing require that a party bringing suit dem- which title passes from the seller to the buyer for a price, onstrate a sufficient connection to the harm sought to be evidencing relinquishment of interest and control over the redressed. When an individual sued PepsiCo, claiming he product. The court found that in this case, no such invali- should have been listed as an inventor on a patent, the dating commercial sale occurred. The court emphasized Federal Circuit found he had no standing to sue for cor- that it must focus on activities that constituted sales and rection of inventorship on a patent where he had assigned offers for sale “in the commercial community.” The court away any ownership interest and merely alleged that he found that the transactions between MedCo, Ben Venue, “sustains and/or might sustain” reputational injury as a and ICS in 2006 and 2007 did not constitute commercial result of the alleged omission. sales of the patented Angiomax product. Background The court first clarified that the sale of manufacturing Dr. Kamdem-Ouaffo worked as a food scientist under services by a contract manufacturer to create embodiments a contract at a PepsiCo, Inc. research and development of a patented product for the inventor did not constitute facility starting in July 2008. He signed an agreement as- a “commercial sale” of the invention. Ben Venue merely signing all of his patent rights arising from his work under sold contract manufacturing services to MedCo—not the the contract to PepsiCo. When his contract with PepsiCo patented invention. MedCo paid Ben Venue only about expired in September 2009, it was not renewed. Following 1 percent of the ultimate market value of the product the expiration of his contract, Dr. Kamdem-Ouaffo sent a that Ben Venue manufactured, and Ben Venue invoiced letter to PepsiCo claiming “authorship” on “any current the sale as manufacturing services. or future work resulting in . . . flavor encapsulates or . . . The court further explained that the sale was only of Ben aroma delivery systems.” PepsiCo subsequently filed five Venue’s manufacturing services since title to the manu- patent applications on which Dr. Kamdem-Ouaffo claims he factured pharmaceuticals remained with MedCo. Because was erroneously omitted as a named inventor. One of the Ben Venue lacked title, it was not free to use or sell the applications became a patent for “Releasable Entrapment claimed products or to deliver the patented products to of Aroma Using Polymeric Matrix.” anyone other than MedCo. Dr. Kamdem-Ouaffo sued PepsiCo for a number of claims The court also explained that “stockpiling” was not im- including correction of inventorship of the patent applica- proper commercialization that would invalidate the patent. tions under 35 U.S.C. § 116 and correction of inventorship Commercial benefit, even to both parties in a transaction, of the patent under 35 U.S.C. § 256. Dr. Kamdem-Ouaffo is not enough to invalidate a patent under the “on-sale bar” also alleged that the agreement he signed, assigning all of rule. Rather, the product “on sale” must be “commercially his patent rights to PepsiCo, is unenforceable, invalid, or marketed,” and did not include preparation for potential or voidable. The district court dismissed all of Dr. Kamdem- eventual marketing The court therefore found that MedCo Ouaffo’s claims and he appealed.

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The Federal Circuit’s Decision Within a few days of purchasing several patents for $2 The Federal Circuit found it was appropriate for the million, the patent owner in High Point SARL v. Sprint district court to dismiss Dr. Kamdem-Ouaffo’s claims that Nextel Corp. began sending demand letters to potential his assignment to PepsiCo was unenforceable because infringers and filed a patent infringement suit within the there was insufficient support for Dr. Kamdem-Ouaffo’s year. The U.S. Court of Appeals for the Federal Circuit allegations of lack of mutual assent, failure to disclose affirmed the district court’s determination that the prior material facts, and ambiguity. owner of the patents, by working with the defendants for years through unlicensed activity, led the defendants into Having established that Dr. Kamdem-Ouaffo assigned his inferring that the patents would not be asserted against patent rights to PepsiCo, the Federal Circuit considered them. Based on this conduct, the Court held that the new whether Dr. Kamdem-Ouaffo had standing to assert his patent owner was equitably estopped from asserting the claims for correction of inventorship even though he had patents. no ownership interest in the applications or the patent. As to the four pending applications, the Federal Circuit Background affirmed the district court’s determination that there is In the early 1990s, AT&T’s Bell Labs (“AT&T”) developed no private right of action to challenge inventorship on a patents relating to standards for CDMA communications pending patent application. 35 U.S.C. § 116 only allows networks around the world. AT&T spun off and assigned an applicant to correct named inventorship during the the patents to Lucent Technologies (“Lucent”), and Lucent pendency of prosecution of the patent. Once a patent spun off and assigned the patents to Avaya, Inc. (“Avaya”). issues, however, 35 U.S.C. § 256 provides a private right Around 1995, Sprint Nextel Corp. (“Sprint”) decided to of action to correct inventorship on the issued patent. build a nationwide CDMA network. To do so, Sprint con- The Federal Circuit did note that Dr. Kamdem-Ouaffo’s tracted with Nortel, Motorola, and other vendors to supply lack of ownership in the issued patent did not necessarily equipment for the network. In 1996 and 1997, Sprint deprive him of standing to pursue correction of inventor- executed supply agreements with Nortel and Motorola, ship under § 256 if he suffered “concrete and particular- respectively, for equipment for the CDMA infrastructure. ized reputational injury” tied to economic consequences, In 1996 and 1999, AT&T (and later Lucent) also agreed such as loss of employment prospects.” However, Dr. to supply Sprint with equipment. The supply agreements Kamdem-Ouaffo’s bare assertion that he “sustains and/ with AT&T and Lucent included limited licenses for several or might sustain damages in terms of the loss of the patents, including the patents that High Point ultimately ownership, inventorship, recognition, and the honor for purchased from Avaya. Later, Sprint signed a Memorandum his” patent rights was not sufficient to provide him with of Understanding with Lucent to develop multi-vendor standing to sue as such assertion was merely “conjectural interoperability within Sprint’s CDMA network. That or hypothetical” rather than concrete and particularized. same year, Lucent entered a similar licensing arrangement Accordingly, the Federal Circuit held that Dr. Kamdem- with Nortel, which was later cross-licensed to Sprint. Ouaffo did not adequately allege facts demonstrating actual Avaya did not discuss licensing the patents after Lucent harm to his reputation by virtue of economic damage from assigned them. not being listed as an inventor on the patent and lacked Initially, the zones in Sprint’s network were covered by standing to sue for correction of inventorship claims. a patent license, either by the license in the Lucent-Sprint Strategy and Conclusion supply agreement, or by a cross-license that originated from Naming the correct inventors is important under United an agreement with Lucent and Nortel (which applied to States patent law and may impact a patent’s validity. Er- Sprint’s use of Nortel equipment). But as the network grew, rors in naming inventors may be corrected so long as the Sprint began to purchase and use unlicensed equipment. error was not made with deceptive intent while typically In March 2008, Avaya sold the CDMA patents to High such corrections are made by the patent owner, even Point. Within three days of acquiring the CDMA patents, inventors no longer having an ownership interest in the High Point began sending demand letters asserting infringe- patent may be able to sue for correction by showing actual ment, including to Sprint and its affiliates. High Point filed harm to reputation and an economic impact such as loss a patent infringement suit against Sprint for violating its of employment. licensing agreements and infringing its CDMA patents. Further information A Kansas district court entered summary judgment in The PepsiCo opinion is available here. favor of Sprint, finding that Sprint suffered economic and evidentiary prejudice because Lucent and Avaya remained http://tinyurl.com/jeuhabm silent as to any patent rights while Sprint actively tried to establish its CDMA network through the sale, purchase, High Point SARL v. Sprint Nextel Corp. and licensing of network equipment. High Point appealed. Purchaser of Patents Barred from Asserting Patents The High Point Decision Against Practicing Entity Led to Believe it Would Sprint and the other defendants argued that High Point’s Not Be Sued by Prior Owner predecessors, including AT&T, Lucent, and Avaya, commu-

301 les Nouvelles Recent U.S. Decisions nicated through their actions and silence that Sprint would practicing entities are affected by such relationships and not be disturbed in establishing a CDMA network with course of conduct between the prior owners and those equipment from multiple vendors. They also argued that entities against which the patents may be asserted. High Point’s predecessors could have sued much earlier, but Further Information chose not to. Instead of suing, High Point’s predecessors The High Point opinion can be found here. expressly agreed to help Sprint integrate the equipment from other vendors. The defendants argued they relied http://tinyurl.com/zwur457 on the conduct of High Point’s predecessors in investing in interoperable CDMA infrastructure and foregoing the Halo Electronics, Inc. v. Pulse pursuit of non-infringing alternatives, and would now be Electronics, Inc. prejudiced economically if High Point was permitted to continue with the suit. Enhanced Damages and Willful Infringement Depend on What the Infringer Knew at Time of High Point argued that preventing it from asserting the Infringement CDMA patents because the previous patent owners failed to do so for several years is an extraordinary remedy that In Halo Electronics, Inc. v. Pulse Electronics, Inc., the should not apply without a statement of intent not to do so Supreme Court rejected the “Seagate” test for enhanc- given the complexity of the business transactions involved ing patenting infringement damages as unduly rigid. On and the sophistication of the parties. High Point also ar- remand from the Supreme Court, the Federal Circuit gued that under the various licensing agreements, it was vacated the district court’s finding of no willful infringe- prevented from asserting infringement until more recently. ment made under the Seagate framework and directed the district court to reconsider whether enhanced damages The Federal Circuit held that the district court ruled were appropriate under the circumstances. The Federal appropriately to preclude High Point from prosecuting its Circuit directed the district court to focus on whether the lawsuit against the defendants. The court first outlined the patent infringer intentionally or knowingly infringed the three elements required to establish whether High Point’s patent considering what the infringer knew or had reason lawsuit should be barred by equitable estoppel: (1) the to know at the time of infringement. patentee, through misleading conduct (or silence), leads the alleged infringer to reasonably infer that the patentee Background does not intend to enforce its patent against the alleged In 2007, Halo Electronics, Inc. (“Halo”) sued Pulse infringer; (2) the alleged infringer relies on that conduct; Electronics, Inc. (“Pulse”) in federal district court for and (3) the alleged infringer will be materially prejudiced patent infringement of three patents directed to surface if the patentee is allowed to proceed with its claim. mount electronic packages containing transformers for The Federal Circuit concluded that the misleading con- mounting on a printed circuit board. Pulse allegedly knew duct of High Point’s predecessors caused Sprint to reason- of Halo’s patents as early as 1998. In 2002, Halo offered ably infer that they would not assert the CDMA patents Pulse licenses to its patents, but did not accuse Pulse of while Sprint purchased unlicensed equipment to build its infringement. Upon receiving the license offer from Halo, network. The court noted that the conduct of High Point’s a Pulse engineer reviewed the Halo patents and concluded predecessors included both silence and active conduct. that they were invalid in view of Pulse products. Pulse did The court noted that High Point’s predecessors repeatedly not seek the advice of counsel on the validity of the patents did nothing to assert their patent rights when the patent and continued to sell its products. licenses were not in effect. The court also dismissed High Following a trial on Halo’s claims of infringement, a jury Point’s argument that bad faith must be present to estab- found that Pulse infringed Halo’s patents and that it was lish intent, particularly in view of the active participation highly probable that Pulse’s infringement was willful. On a of High Point’s predecessors in building Sprint’s CDMA post-trial motion for enhanced damages, the district court network. The Federal Circuit also agreed with the district applied the Seagate test for willfulness and concluded court’s determination that the defendants detrimentally that the objective prong of the two-part test was not met relied on the conduct of High Point’s predecessors and that because Pulse reasonably relied on its internal review the defendants were prejudiced by the delay. and determination that the patents were obvious in light Accordingly, the Federal Circuit affirmed the district of prior Pulse products. The district court determined court’s ruling. that this obviousness defense was not baseless and thus concluded that Pulse’s infringement was not willful based Strategy and Conclusion on the threshold, objective prong of Seagate. On appeal, This case illustrates how the relationships and course the Federal Circuit affirmed the judgment of no willful of conduct between prior owners of patents and practic- infringement. On appeal from the Federal Circuit, the ing entities can affect the ability of a subsequent owner Supreme Court rejected the rigid, two-part Seagate test to assert the patents against those practicing entities, and for enhanced patent infringement damages, vacated the how it can be difficult for purchasers of patents to know Federal Circuit’s affirmance of no willful infringement, and and evaluate how their rights to assert the patents against remanded to the Federal Circuit.

December 2016 302 Recent U.S. Decisions

The Federal Circuit’s Halo Decision als to be used as a basis to calculate reasonable royalty On remand, the Federal Circuit considered the impact damages when the expert reasonably explained and sup- of the Supreme Court’s Halo opinion on the district ported the methodology and calculations by comparing court’s finding of no willful infringement. In particular, the technological and commercial circumstances at the the Federal Circuit discussed the rejection of Seagate’s time of licensing proposals to those at the time of the requirement of “a finding of objective recklessness in ev- hypothetical negotiations. ery case before district courts may award enhanced damages.” According to the Supreme Court, this requirement Background excluded a finding of willful infringement against “many When expert opinion testimony is provided in patent of the most culpable offenders, such as the ‘wanton and infringement cases to determine a reasonable royalty malicious pirate’ who intentionally infringes another’s in damages calculations, the experts and their opinions patent—with no doubts about its validity or any notion must meet admissibility standards based on qualifications, of a defense—for no purpose other than to steal the methodological reliability, and pertinence. patentee’s business.” Rather, “the subjective willfulness In determining whether an expert’s methodology is of the patent infringer, intentional or knowing, may war- reliable, courts consider (1) whether the evidence has rant the award of enhanced damages.” been or can be tested, (2) whether the evidence has been In view of the Supreme Court’s Halo opinion, the Federal subjected to peer review, (3) whether a potential rate of Circuit vacated the district court’s determination of no error is known, and (4) whether the evidence is generally willful infringement, which was based on the objective accepted in the scientific community. prong of Seagate—that is, the determination that Pulse’s The Arctic Cat Inc. Decision obviousness defense was not objectively baseless. The Federal Circuit remanded for the district court to exer- In the damages phase of a patent infringement case in cise its discretion in determining whether enhancement Florida, Arctic Cat asked the court to exclude the testimony of damages is warranted. The Federal Circuit specifically of Bombardier Recreational Products’ (BRP’s) damages directed the district court to consider the jury’s finding of expert on reasonable royalty damages, arguing it was subjective willfulness and what Pulse knew or had reason impermissible for the expert to use a non-specific “black to know at the time of the infringement of Halo’s patents, box” approach, and it was impermissible for the expert to citing the Supreme Court’s guidance that “culpability is use licensing proposals as an indicator of value. generally measured against the knowledge of the actor at Specifically, Arctic Cat contended that BRP’s expert did the time of the challenged conduct.” This direction to the not consider the differences in the technological and com- district court was given in view of Halo’s argument that mercial circumstances between the time that Arctic Cat Pulse’s invalidity defense was developed after the lawsuit made its licensing proposals to BRP and the time of the was filed and that Pulse did not actually rely on any invalid- hypothetical negotiation, and that the report on the range ity defense when selling the accused products. of possible royalty rate values provided by BRP’s expert Strategy and Conclusion did not include any information about the methodology or calculations for arriving at those possible royalty rates. The rejection of Seagate’s objective recklessness require- BRP countered and argued that its expert’s opinion was ment has likely removed a common obstacle to proving based on a reliable methodology, was thoroughly reasoned, willful infringement. As demonstrated in Halo, avoiding and used systematic calculations to arrive at its range of liability for willful infringement may require more than reasonable royalty rate values. simply showing, post-hoc, the existence of a substantial question about whether the patent was valid or infringed. The court agreed with BRP and found its expert report Instead, more focus will likely be put on what the infringer provided detailed calculations and in fact outlined and knew or had reason to know at the time of infringement, explained each step in the methodology BRP’s expert used including the infringer’s knowledge of any defenses at the for calculating the royalty damage range. In particular, the time of infringement. court noted that BRP’s expert established the lower value of the royalty damage range based on systematic mathematical Further Information calculations fully explained in his opinion. The Federal Circuit Halo opinion can be found here. Similarly, BRP’s expert report showed that his use of http://tinyurl.com/jyufjw7 Arctic Cat’s licensing proposals to establish the upper value of his royalty damage range was justified. Specifically, the Arctic Cat Inc. v. Bombardier Recreational expert explained that the technological and commercial Products, Inc. circumstances at the time of Arctic Cat’s licensing proposals to BRP in 2000 were comparable to those at the time Licensing Proposals May Be Used as a Basis to of the hypothetical negotiations in 2004. Accordingly, the Determine Reasonable Royalty Damages court held it was acceptable for BRP’s expert to use Arctic In Arctic Cat Inc. v. Bombardier Recreational Products, Cat’s licensing proposals to BRP to establish the top of his Inc., a district court in Florida permitted licensing propos- royalty range.

303 les Nouvelles Recent U.S. Decisions

Strategy and Conclusion began, the expert factored in the likelihood of liability for This case illustrates how licensing proposals may be used the defendant at that time. Specifically, he opined that in determining reasonable royalty damages and may be if “Settlement Value=Likelihood of Liability*Expected admitted by the court to be used as evidence of reasonable Damages,” then “Expected Damages = Settlement Value/ royalty damages if the report clearly and reasonably explains Likelihood of Liability.” and supports the expert’s methodology and calculations. The plaintiff’s expert applied a 40 percent likelihood of Further Information liability based on a study of success rates of patent suits in the District of Delaware. Based in part on his reliance on The Arctic Cat Inc. decision can be found here. the 40 percent estimate, Defendant moved to exclude the http://tinyurl.com/zadoky5 entirety of the plaintiff’s expert’s opinions as not reliable and not sufficiently tied to the facts of the case. MAZ Encryption Technologies LLC v. The MAZ Encryption Decision Blackberry Corp. The court rejected the expert’s reasonable royalty Expert Opinion on Reasonable Royalty Based on opinions for failing to consider facts relating to the merits Prior Settlement Agreement Must Depend on Facts of the plaintiff’s case. In particular, the court faulted the of the Case Rather Than Generic Statistics expert’s reliance on the 40 percent rate of the generic study for failing to consider the nature of the asserted For an expert witnesses’ testimony to be admissible in patent, the accused products, and the litigation strategy Federal district courts, the expert must be qualified, and of the parties. The court compared the expert’s approach his or her opinion must be both reliable and supported by to the “25 percent” rule-of-thumb license rate rejected the facts of the case. In MAZ Encryption Technologies LLC by the Federal Circuit in Uniloc USA, Inc. v. Microsoft v. Blackberry Corp., No. 13-304-LPS, Judge Stark of the Corp. (Fed. Cir. 2011). Quoting the Federal Circuit in United States District Court for the District of Delaware that case, the court criticized Plaintiff’s expert for failing found an expert witness’ opinion on a reasonable royalty to say anything about the particular technology, industry, for patent infringement damages to be inadmissible. The or parties in the case. In light of these failures, the court expert relied on an amount for which the patent owner struck the criticized portion of the expert’s report. But agreed to settle a prior litigation. But in using the amount of that prior settlement to estimate a reasonable royalty though Defendants asked the court to strike the entire rate for the litigation based on a hypothetical negotiation opinion, the court allowed the possibility of an amended taking place before infringement, the expert had based report correcting the analysis, and asked the parties to his estimate of the likelihood of liability for patent in- confer and provide proposals accordingly. fringement only on a general statistic of litigation success Strategy and Conclusion rates by patent owners in the District of Delaware. The This decision illustrates the value in having a proposed district court faulted this approach for failing to consider damages award supported by reliable methodology and the particular facts of the case, such as the nature of the having the entire analysis consider the particular facts of asserted patent, the accused products, and the litigation the case rather than generic statistics. strategy of the parties. Further Information Background The decision can be found here. Plaintiff MAZ Encryption Technologies LLC sued Defen- http://tinyurl.com/hepwo29 dant Blackberry Corporation, alleging infringement of a single patent. Plaintiff offered an expert report estimating its damages in the case under a reasonable royalty theory. Imperium IP Holdings (Cayman), Ltd. v. A reasonable royalty aims to estimate a royalty rate that Samsung Elecs. Co. the parties would have agreed to had they successfully License Defense is Waived Due to Unjustified Delay negotiated an agreement just before infringement began. and Prejudice In forming his opinion, the plaintiff’s expert relied on a In Imperium IP Holdings (Cayman), Ltd. v. Samsung previous license agreement for the infringed patent that Elecs. Co., a Texas court held that Samsung waived its was made in the context of settling a litigation. In the ex- defense that accused products did not infringe the asserted pert’s opinion, the damages amount of this prior settlement patents because they contained licensed third-party com- was lower than a reasonable royalty rate because at the ponents. Samsung did not sufficiently raise the defense time of settlement, issues of validity and infringement are until two months after the deadline for filing dispositive in dispute. In contrast, in the “hypothetical negotiation” motions despite being aware of the license agreement and used in a damages analysis, the parties must assume the patent is valid and infringed. Thus, the patentee occupies its relevance to the asserted claims. a better bargaining position in the latter case. In order to Background translate this rate reached during settlement into a rate the In 2014, Imperium filed a complaint alleging that same parties would have arrived at just before infringement Samsung’s mobile phones, tablets, and digital cameras

December 2016 304 Recent U.S. Decisions

infringed Imperium’s digital photography patents. Sam- Imperium argued that Samsung’s defense based on the sung served mandatory disclosures indicating that the Sony license was barred for lack of diligence in failing accused products contained image sensors provided by to disclose the theory. Imperium pointed out that in its Sony, and responded to interrogatories specifying exactly response to the complaint, Samsung merely provided a which products contained Sony image sensors. Imperium boilerplate license defense, and later responded to inter- produced a 2013 Settlement and License Agreement with rogatories indicating that the accused products may be li- Sony that involved the patents. censed under its membership in a standard setting alliance. On the last day for filing expert reports and dispositive Imperium also argued that it did not rely on Sony’s image motions such as motions for summary judgment, Imperium sensors to establish infringement, and that its infringement filed its technical expert report on patent infringement, theory allowed for the claim elements in question to be which referred to the Sony image sensors included in performed by components other than an image sensor. Samsung’s products. The Imperium Decision Nearly eight weeks later, after the deadline for filing Noting that affirmative defenses must usually be raised in motions had passed, Samsung asked the court for per- a party’s response to the complaint, the court nonetheless mission to file a motion that it was entitled to summary acknowledged that the defense could be asserted if the judgment because the accused products were licensed. patent owner is not prejudiced in its ability to respond to Samsung argued that it should be allowed to file such a the defense prior to trial. But the court found that evidence motion after the deadline because it was not previously of prejudice existed because there was not sufficient time aware that Imperium would rely on the licensed Sony prior to trial for Imperium to respond to the defense, to image sensors to prove infringement until it received take discovery on the issue, to file briefings with the court, Imperium’s expert reports. and to hold a hearing if necessary. The court denied Samsung’s motion, finding that even The court also agreed with Imperium’s arguments that before the deadline on which the expert report was filed, in answering the complaint, Samsung merely provided a Samsung already knew, or should have known, most of the boilerplate general license defense, and did not supple- information it relied on to support its motion for permis- ment its interrogatory responses to identify its defense, sion to file for summary judgment. The court noted that despite having access to the Sony license agreement and half of the accused Samsung products had the licensed becoming aware of the issue. Sony image sensor component; Samsung was aware that The court noted that the parties’ disagreement about the patent claims included “an image sensor coupled to the necessity of an image sensor did not demonstrate that a memory;” Samsung identified accused products that Imperium concealed its reliance on the Sony image sensors. contain, as the only image sensor, a Sony image sensor; Rather, Imperium’s continued insistence that infringement and Samsung had access to the Sony license agreement. could occur without an image sensor justified Imperium’s In conclusion, the court found that even if Imperium “ob- claim charts and expert testimony. scured” the fact that it is relying upon Sony image sensors, Finding that Samsung failed to provide a reasonable ex- Samsung could have been aware of the potential relevance planation not to assert the Sony license until eight weeks of the Sony license regarding almost half of the accused after the deadline for filing dispositive motions and expert products long before Imperium’s expert report was filed, reports, the court determined that Samsung waived its and that the timing of the filing was in the reasonable license defense. control of Samsung. Strategy and Conclusion When Samsung raised the defense again during pre-trial This case demonstrates the value in asserting all avail- conference, the court decided to take up the issue after able and reasonable affirmative defenses at the earliest trial because briefing the issues related to the Sony license opportunity. An unjustified delay in raising a defense may would cause a significant delay to the proceedings. At trial, cause the defense to be waived if the other party is preju- a jury determined that Samsung infringed multiple claims diced by being unable to adequately address and respond of the asserted patents. to the defense. Briefing the issue of the Sony license after trial, Samsung Further Information argued that the asserted claims require an image sensor, The Imperium decision can be found here. and that Imperium concealed its reliance on Sony’s image http://tinyurl.com/zg59mc9 sensors throughout the litigation. In particular, Samsung argued that Imperium cited to generic image sensors in its Available at Social Science Research Network (SSRN): claim charts rather than the specific Sony image sensors, https://ssrn.com/abstract=2865743 and that Imperium’s expert testified in deposition that although an image sensor would likely be present in the accused product, it was not necessary to meet the claim *The authors thank Rob MacKichan and Rob Wells for their limitations at issue. assistance in preparing these articles.

305 les Nouvelles LES International

Officers Delegates President Patricia A. O. Bunye Andean Community Germany Scandinavia President-Elect Peter Hess Enrique Berckholtz Christian W. Appelt Morten Balle Renzo Leonello Scavia Past-President Jim Sobieraj Ingo Bruckner Martin Draebye Gantzhorn Arab Countries Heinz Goddar Kaisa Fahllund Vice-President Omer Hiziroglu Nabil Salame Jochen Schäefer Vice-President Ichiro Nakatomi Singapore Renad Noubani Guido von Scheffer Yu Sarn Chiew ® Vice-President John Paul Argentina Mathias Zintler Sheena Jacob Vice-President Audrey Yap Gustavo Giay Hungary Secretary Fiona Nicolson Fernando Noetinger Michael Lantos South Africa Treasurer Eduardo Souza Australia & New Zealand Katalin Szamosi Johan Du Preez Pieter Venter Legal Counsel Emmanuel Gougé Albert Ferralore India Philip Heuzenroeder Spain & Portugal Russell Levine Santosh Mohanty Jan Tennent Richa Pandey José Miguel Lissén les Nouvelles Editorial Review Board Austria Israel Antonio Tavira Karin Hofmann Tessa Malamud Switzerland Andreas Pföstl Chair: Rodney DeBoos, Melbourne, Australia Liad Whatstein Markus Ineichen Lex van Wijk, Amersfoort, Netherlands Benelux Italy Raymond Reuteler Laura Macdonald Heinz Goddar, Munich, Germany Giovanni Grippiotti Martin Schneider Achim Krebs Mattia Dalla Costa Norm Jacobs, Boca Raton, Florida, U.S.A. Lex van Wijk Turkey Sun R. Kim, Seoul, Korea Mario Traverso Brazil Japan Murat Idal Masato Kobayashi, Tokyo, Japan Cândida Ribeiro Caffé Katsumi Harashima Arda Karaduman Kenneth D. McKay, Toronto, Canada Marcela Trigo Britain & Ireland Yorikatsu Hohokabe USA & Canada Thomas Bereuter, Vienna, Austria Ichiro Nakatomi Simon Chalkley Ned Barlas Frank Tietze, Cambridge, UK Hayley French Makoto Ogino Fernando Noetinger, Buenos Aires, Argentina Junko Sugimura Allen Baum Colin Hunsley Pam Cox Jennifer Pierce Korea Chile Kwang Jun Kim Ted Cross Chris J. Katopis, Executive Administrator Fernando Garcia Darby (YuYeon) Park Pam Demain Larry Plonsker, Editor Gonzalo Sánchez Malaysia Tom Filarski China Pauline Khor Bob Gruetzmacher 10580 Northgreen Dr., Wellington, FL 33449 Yibin Feng Brian Law Yoo Foo Tel: +1-561-432-8814 E-mail: [email protected] Ron Grudziecki Anita Leung Mexico Gary Keller Ningling Wang Carla J. 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Society Officers Subscription for the print publication is available to non- Chapter President Secretary members for US$250/year. Please contact the Editor for Andean Community Renzo SCAVIA Enrique BERCKHOLTZ further details or go to www.lesi.org/les-nouvelles/about- Arab Countries Talal ABU-GHAZALEH Nabil SALAMÉ les-nouvelles/non-member-subscription Argentina Gustavo P. GIAY Ignacio Maria BERETERBIDE The articles published in les Nouvelles reflect the views Australia & New Zealand Philip HUEZENROEDER Jan TENNANT of the authors and not of the Society as an association or Austria Alexander CIZEK Thomas ADOCKER its officers. Material printed in the journal is covered by Benelux Laura MACDONALD Achim KREBS Brazil Cândida Ribeiro CAFFÉ Paula Mena BARRETO copyright. No parts of this publication may be reproduced, Britain & Ireland Colin HUNSLEY Simon CHALKLEY displayed or transmitted in any form, without prior per- Chile Rodrigo PUCHI Hermes TORRES mission from the Editor or Board of LESI. China-Hong Kong Anita LEUNG Rosita LI A peer review and evaluation system is used to maintain China Yong LI Yibin FENG the scholarly nature of the material published in this Chinese Taipei John R. ALISON Horng-Dar LIN journal. All articles submitted for publication are reviewed Czech Republic & Slovakia Vojtěch CHLOUPEK Alena KODRASOVA and evaluated by members of the Editorial Review Board France Luc SAVAGE Anne Charlotte LE BIHAN Germany Ursula KÖNIGER Klaus HAFT (ERB). The ERB members are chosen for their expertise in Hungary Michael LANTOS Katalin DERZSI the fields of licensing and intellectual property. All evalu- India Raj HIRWANI Sunil KRISHNA ations are reviewed in a double-blind fashion to remove Israel Hananel KVATINSKY Dalit SAGIV any bias in the results. The final decision on publication Italy Mattia DALLA COSTA Corrado BORSANO rests with the editor. Japan Junko SUGIMURA Masaki HATANO A guideline for authors can be found on our Web site at Korea Kwang Jun KIM Dookyu KIM Tamara Lee CIAI the following address: www.lesi.org/lesnouvelles/advertise. Malaysia Chiew Lan CHEAH Mexico Jose Luis SOLLEIRO Carlos TRUJILLO asp#submission Philippines Maria Trinidad P. VILLAREAL Reefia MITRA-VENTANILLA Copyright ©2016 Licensing Executives Society International. Poland Jakub MROZOWSKI Monica KACZMARSKA DEADLINES FOR les Nouvelles: Copy for publication Russia Sergey DOROFEEV Velery MEDVEDEV Scandinavia Per ERICSSON Olli PEKONEN in les Nouvelles should be received by the Editor-in-Chief George HWANG as far as possible in advance of the final deadlines, Janu- Singapore Suresh SACHI South Africa Pieter VENTER Darren MARGO ary 1, April 1, July 1 and October 1. Articles for the Spain & Portugal José Miguel LISSÉN white pages are reviewed by the LES Editorial Review Susana Bayon PLAZA Switzerland Raymond REUTELER Stefan KOHLER Board, and they are published as soon as possible after Thailand Wilaiporn CHETANACHAN Panassaporn RATANANON acceptance. All materials are to be submitted electroni- Turkey Samir DELIOMANLI Evren BUKULMEZ cally in either MS Word or Text Only format. USA & Canada Brian O’SHAUGHNESSY Arthur ROSE December 2016 LES International

LESI Management Committees Licensing And Intellectual Chairs & Co-Chairs Property Organizations Meetings Audit Ted Cross Awards Peter Chrocziel For more information on LESI Meetings, go to www.lesi.org Ron Grudziecki Communications Hecter Chagoya 2016 April 23-25 Michael Lechter October 12-13 LESI 2017 Annual Meeting Education Janet Pioli LES Pan-European Novotel Paris Centre Conference 2016 Eiffel Tower Martin Schneider Hilton London Paris, France Endowment Art Rose Kensington Hotel External Relations Tilman Muller-Stoy London, England May 9-12 LES Asia Pacific Conference Investment Pat O’Reilley October 23–26 Melbourne Cricket Ground IP Maintenance Giovanni Grippiotti LES (USA & Canada) Melbourne, Australia Legal Emmanuel Gouge 2016 Annual Meeting Russell Levine Vancouver, Canada May 9-11 Junichi Yamazaki LES 2017 Spring Meeting November 4 Willard Hotel Long-Range Planning Thomas Adocker LES Pan-European Washington, DC Meetings Sergey Dorofeev YMC Event Hayley French Madrid, Spain October 22–25 Membership Felix Grether LES (USA & Canada) 2017 2017 Annual Meeting Nominations Jim Sobieraj February 2-3 Chicago, Illinois U.S.A. Publications Sun Kim LES Thailand LESI Industry, Professional & Annual Meeting 2018

Chatrium Hotel LESI 2018 Annual Meeting Regional Committees Riverside Bangkok San Diego, California U.S.A. Bangkok, Thailand Industry Chemicals (CEEM) Rashid Kahn October 14-17 February 3-5 LES (USA & Canada) Consumer Products To be confirmed LESI 2017 Winter 2018 Annual Meeting High Tech Keith Lutsch Planning Meeting Boston, Massachusetts U.S.A. Christopher Shaowei Bangkok, Thailand IUGT Karin Hofmann February 27-28 Life Sciences Gary Keller The 2017 IP100 Executive Forum Professional Arizona Biltmore, Copyright Licensing Abraham Alegria Phoenix, AZ Ken McKay Dispute Resolution Junichi Yamazaki Pauline Khor International Past-Presidents Patent & Tech Licensing Patrick Terroir KJ Kim 1974 J. Gay 1988 D. Ryan 2002 T. Sueur Trademarks, Designs 1975 M. Finnegan 1989 K. Payne 2003 M. Jager and Merchandizing Johan Du Preez 1976 B. Hedberg 1990 J. Portier 2004 J. Gulliksson Stefan Völker 1977 M. Okano 1991 F. Noetinger 2005 W. Manfroy Valuation To be confirmed 2006 P. Chrocziel 1978 D. Smith 1992 A. Mifune Regional 1979 J. Gaudin 1993 L. Evans 2007 R. Grudziecki 2008 C. Fukuda Americas To be confirmed 1980 J. Stonier 1994 O. Axster 2009 A. Liberman Africa and Middle East Mohammed Al-Ansari 1981 S. Heijn 1995 N. Jacobs 2010 P. O’Reilley Kevin Dam 1982 W. Poms 1996 J. Brown 2011 A. Lewis Asia-Pacific Yu Sarn Chiew 1983 H. Hodding 1997 S. Layton Jr. 2012 J. Malackowski Ningling Wang 1984 F. Pombo 1998 R. DeBoos 2013 K. Nachtrab European Bruno Vandermeulen 1985 M. Ariga 1999 P. Mandros 2014 Y. Chua Emmanuel Gouge 1986 L. Mackey 2000 H. Goddar 2015 A. Michel 1987 P. Hug 2001 E. Shalloway 2016 J. Sobieraj Ad Hoc Committees Global Technology Impact Forum Mark Wilson Young Members Congress Sherry Rollo les Nouvelles LES International

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The 7th LES Asia Pacific Conference is to be hosted by LESANZ in 2017. Delegates are invited to attend the conference in Melbourne, 9-12 May at the Melbourne Cricket Ground (MCG), in the main sporting precinct of the CBD. Translating the opportunities that arise from the need to ensure the wellbeing of the world’s growing population (9 billion people by 2050), including meeting the challenges of keeping them healthy and active, will be the focus of this licensing and technology transfer event. This conference offers delegates an excellent forum to source opportunities from across the Asia-Pacif- ic region. This region is the growth engine of the world economy. The Licensing for Wellbeing, Health, Nutrition & Sport theme focusses on key areas of interest for an ageing population with increasing disposable income. The last few years have seen an increased emphasis on innovation across the region, which has manifested with new approaches to healthcare, a focus on nutrition in addition to food security, and an amplified interest in sport and recreation. Delegates will be hosted at two major Australian sporting icons: • MCG, the home of Cricket and Australian Rules Football • Rod Laver Arena, the venue of the Australian Tennis Open • Our sports themed dinner will also include a Champions Tour of Rod Laver Arena Optional extras include: • Licensing half day workshops • A millinery workshop—create your own fashions on the field hat or fascinator, to wear throughout the social events We’ll take care of your health and wellbeing on a journey through one of Victoria’s renowned food & wine regions, the Yarra Valley, where you will be able to sample the exceptional fresh and locally grown produce the region has to offer! LESANZ invites you to grab your active wear, jump on a flight and join us in Melbourne next year!

http://www.lesanz.org.au #LESAP2017

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DIAMS iQ ANNE LAYNE-FARRAR — Page 234 Filings PCT - Nationalizations To What Extent Are University IP Policies Legally Binding? Part 2: Students PHILIP MENDES — Page 239 Application of Enterprise Risk Management (ERM) Principles To Patent Freedom To Operate (FTO) Analysis: A Novel “IP-RM” System GILLIAN M. FENTON — Page 246 NSFW: Naked Licensing And Uncontrolled Trademark Use LUKE S. CURRAN — Page 256 Licensing In Cosmetics: A Practical Approach JEAN-YVES LEGENDRE — Page 259 Opportunities And Challenges For Expanding Technology Transfer In United Arab Emeriates (UAE) AHMED ALOSI, PH.D., JOHN FRASER AND MICHAEL J. MARTIN — Page 264 Allocating Risks And Rewards In Collaborative Agreements Using The Financial Structure MATTHEW W. SAGAL AND GENE SLOWINSKI — Page 272 Bankruptcy-Related IP Valuations:Consider The Use Of Market Approach ROBERT F. REILLY — Page 279 Patent Royalties And Competition Law: The Genentech Judgment Of The Court Of Justice Of The European Union PATRICIA CAPPUYNS AND JOZEFIEN VANHERPE — Page 283 Recent U.S. Court Decisions And Developments Affecting Licensing JOHN PAUL AND D. BRIAN KACEDON — Page 286 $62.50/Issue