Detailed Contents

Preface ...... v Preface to the First Edition ...... vii Summary Contents ...... ix Contents of Forms ...... xxiii

1 Some Premises and Commentary ...... 1 1.00 Orientation and a Disclaimer of Legal Completeness ...... 1 1.01 License Agreements as a Separate Topic ...... 2 1.02 A Pessimistic Prognosis Concerning Certainty of Draftsmanship ...... 4 A. The Semantic Problem ...... 4 B. Uncertainty Through Human Frailty ...... 6 1. Ambiguity ...... 6 2. Vagueness ...... 8 3. Misplaced Modifier ...... 10 1.03 Contra Preferentum ...... 12 2 Legal Principles ...... 15 2.01 Evaluating the Legal Nature of the Subject Matter ...... 15 A. The Scope of a ...... 16 B. The Scope of Unpatented Technology ...... 17 2.02 The Transfer of Technology and : License and Assignment ...... 20 A. License ...... 20 B. Assignment ...... 21 C. Assignment Formalities ...... 26 D. Assignment of Right to Sue for Infringement ...... 27

xi xii Drafting Patent License Agreements

2.03 Agreements to Assign ...... 28 2.04 The Rights of Joint Owners ...... 32 3 Enforcement of Licensed Patents ...... 37 3.00 Standing to Sue for — Generally ...... 37 3.01 Standing to Sue for Patent Infringement— Exclusive Licensee ...... 39 A. Constitutional Standing for Exclusive Licensees ...... 39 B. Grant of “All Substantial Rights” to Exclusive Licensees ...... 41 C. Joinder of the Patent Owner ...... 44 3.02 Standing to Sue for Patent Infringement— Non-Exclusive Licensee ...... 45 3.03 Contracting for the Right to Sue ...... 46

4 Express Agreements: Nonexclusive Licenses, Nonassertion Agreements, and Exclusive Licenses ..... 51 4.00 Forms and Types of Express Licenses ...... 51 4.01 The Nonexclusive Patent License ...... 53 4.02 The Nonassertion Agreement ...... 54 4.03 The Exclusive License ...... 61 A. Exclusive Licenses: Antitrust Aspects ...... 62 B. Hart-Scott-Rodino Act Filing ...... 63 C. Exclusive Licenses: Sublicensing Rights ...... 64 D. Exclusive Licenses: Reservations ...... 66 E. Exclusive Licenses: Protection of the Licensor ...... 67 1. Termination by the Licensor ...... 67 2. Conversion From an Exclusive to a Nonexclusive License ...... 67 3. “Best Efforts” and Other Commitments by the Licensee ...... 68 F. Exclusive Licenses: Assignment of the Patent ..... 70 5 Specific Types of Licenses ...... 73 5.00 The Field of Use License ...... 73 5.01 The Cross License ...... 75 5.02 The Grantback License ...... 77 5.03 The Sublicense ...... 79 A. “Have Made” Rights ...... 83 5.04 The ...... 84 5.05 The Shop Right ...... 85 5.06 Foundry Agreements ...... 86 Detailed Table of Contents xiii

6 Implied Licenses and Patent Exhaustion ...... 89 6.00 Introduction ...... 89 6.01 Implied Licenses That Arise by Consent of the Patentee ...... 92 6.02 Implied Licenses That Arise From Misleading Conduct by the Patentee ...... 94 6.03 Implied Licenses That Arise From the Express Grant of Limited Specific Rights ...... 95 6.04 Implied License to Additional Patent Rights That Arise From an Existing License Agreement ...... 96 6.05 Implied Licenses That Arise From an Unrestricted Sale of an Unpatented Machine or Component Useful Only in Practice of a Patent ...... 99 6.06 The Doctrine of Exhaustion and Its Effects on Implied License Issues ...... 102 6.07 The Requirement of Not Practicing the Patent ...... 108 6.08 Restrictions Imposed at the Time of Sale ...... 111 6.09 International Exhaustion ...... 115 7 Issues in License Agreement Negotiation ...... 117 7.00 Introduction ...... 117 7.01 Initiation of Negotiations and the Notice Letter ...... 117 7.02 Other Consequences of Negotiation ...... 120 7.03 The Negotiation Agreement ...... 122 8 The Opening Part of the Agreement ...... 125 8.00 Introduction ...... 125 8.01 Date ...... 126 8.02 Description of the Contracting Parties ...... 126 8.03 Recitals ...... 128 8.04 A “Modern” Style of Contract Opening ...... 130 8.05 Formal Structure of the Body of the Agreement ...... 131 9 Definitions ...... 135 9.00 The Location of Definitions ...... 135 9.01 The Several Kinds of Definitions ...... 137 A. The Precising Definition ...... 137 B. The Stipulative Definition ...... 139 9.02 Strategy in the Choice and Design of Definitions ...... 141 9.03 Precising Definitions for Patent Licenses ...... 141 A. Licensed Patent Definition ...... 141 B. Licensed Product Definition ...... 144 C. Definition of the Parties ...... 147 xiv Drafting Patent License Agreements

10 The Granting Clause; Elements of the Grant; Definition of Licensed Subject Matter ...... 149 10.00 The Granting Clause ...... 150 10.01 Notes on Granting Clauses ...... 151 A. “Grants” or “Grants and Agrees to Grant” ...... 151 B. “Subsidiaries, Affiliates, and Controlled Companies” ...... 151 C. “Under the Licensed Patents” ...... 154 D. “And for the Lives of Such Patents” ...... 156 E. Character of License ...... 157 F. Statutory Rights Granted ...... 158 1. “Make, Use, Offer to Sell, Sell, and Import” (Clauses 1, 2, and 3) ...... 158 2. “Make, Have Made, Use, Offer to Sell, Sell, Import, Lease, or Otherwise Dispose of” (Clause 4) ...... 158 3. “Make” (Only), “Use” (Only), “Sell” (Only)—With or Without Limitations (Clauses 5, 6, and 7) ...... 160 G. “Throughout the United States of America, Its Territories and Possessions” ...... 161 10.02 Definition of Licensed Subject Matter ...... 163 11 Reservations and Improvements ...... 167 11.00 Reservations ...... 167 A. Reservation of Rights in the Grantor ...... 168 B. Reservation Made Necessary by the Existence of Prior Licenses ...... 169 C. Reservation in Nonexclusive Grants ...... 170 11.01 Improvements ...... 171 12 Royalties, Reports, and Payments ...... 175 12.00 Determination of Amount of Royalties ...... 176 12.01 Selection and Definition of the Royalty Base ...... 177 A. Selecting the Royalty Base ...... 177 B. Defining the Royalty Base ...... 179 1. Vagueness as to Subject Matter ...... 179 2. Uncertainty Concerning Metes and Bounds ...... 180 3. Reach-Through Royalties ...... 182 4. Uncertainty as to Licensee’s Sales and Distribution System ...... 184 C. Net Selling Price: Deductions and Special Circumstances ...... 185 D. Royalty Stacking Provisions ...... 192 12.02 General Statement of Royalty Obligation ...... 193 12.03 Reporting and Accounting Provisions ...... 195 12.04 Minimum Annual Royalties ...... 198 Detailed Table of Contents xv

12.05 Keeping and Auditing Records of the Licensee ...... 199 12.06 Providing for the Possibility of Inflation or Deflation ...... 202 12.07 Nomenclature Information to Be Furnished ...... 203 13 United States Tax Issues Relating to Transfers of Patents and Know-How ...... 205 13.00 Introduction ...... 206 13.01 The Structure of United States Tax Law Applied to Patent and Know-How Transfers to Determine Eligibility for Capital Gains Treatment ...... 206 13.02 U.S. Tax Treatment of the Proceeds of Transfers of Patent Rights ...... 207 A. Existence of a Capital Asset ...... 207 B. Has There Been a Sale or Exchange (Section 1231) or a Transfer of All Substantial Rights (Section 1235)? ...... 208 C. Has the Intellectual Property Been Held for the Required Period? ...... 209 13.03 U.S. Tax Treatment of the Transferor’s Proceeds Resulting From a Know-How Transfer ...... 209 A. Sale or Exchange of Know-How by a Business Entity ...... 210 B. License of Know-How by a Business Entity ...... 210 13.04 Tax Treatment of Costs of Acquiring Intellectual Property—Deductibility or Amortization ...... 211 A. Cost of Patents Purchased Separately ...... 211 B. Cost of Patent Rights Transferred by License (Not as Part of a Sale of a Trade or Business) ...... 212 C. Cost of Patents Purchased as Part of the Sale of a Business ...... 212 D. Cost of Patent Licenses Acquired as Part of a Trade or Business ...... 213 E. Cost of Patent Licenses Acquired Separately ..... 213 F. Purchase Price for Know-How and Trade Secrets ...... 213 G. Cost of Know-How Licenses ...... 213 13.05 Tax Treatment of Payments Under International Transactions ...... 214 14 Protection for a Nonexclusive Licensee ...... 215 14.00 Protection Against a Subsequent More Favorable License ...... 216 A. The Most Favored Licensee Provision: Drafting Considerations ...... 219 B. The Most Favored Licensee Provision: Sample Provisions ...... 223 xvi Drafting Patent License Agreements

14.01 Protection Against Toleration of Third-Party Infringement ...... 228 15 Transferability of Rights and Obligations of License Agreements ...... 231 15.00 Assignment of License Agreements Generally ...... 232 15.01 Licensor’s Right to Assign the Licensed Patent ...... 236 15.02 Licensor’s Right to Assign the License Agreement ...... 239 15.03 Licensee’s Right to Assign the License Agreement ...... 240 16 Representations and Warranties and Negation of Implications ...... 247 16.00 Warranties ...... 248 A. In Connection With a Simple License Grant ...... 248 B. In Connection With a Grant of Future Rights ...... 249 C. In Connection With the Outright Sale of Patents or of a Business to Which Patent Rights May Be Relevant ...... 251 D. In Connection With an Exclusive License ...... 254 16.01 Negation of Implications by Licensor ...... 255 17 Indemnification and Liability Insurance ...... 257 17.00 Indemnification Provisions Generally ...... 259 A. Who Indemnifies ...... 259 B. Defend and Indemnify ...... 260 C. What Claims and Liabilities Are Subject to Indemnity ...... 262 D. Exceptions to Claims and Liabilities ...... 268 E. Indemnitor Rights to Minimize Liability ...... 269 17.01 Indemnification by the Licensor ...... 269 17.02 Liability of the Licensor, Indemnification by the Licensee ...... 271 17.03 Mutual Indemnification Provision ...... 272 17.04 Liability Insurance Against Third-Party Claims .... 274 18 Licensing of Pending Patent Applications ...... 277 18.00 Provisions for Licensing Patent Applications ...... 278 18.01 Assumption by Licensee of Responsibility for Prosecution of Patent Applications of the Licensor ...... 280 19 Alternative Dispute Resolution ...... 285 19.00 Negotiations ...... 286 19.01 Mediation ...... 287 Detailed Table of Contents xvii

19.02 Arbitration ...... 289 19.03 Staged Proceedings ...... 299 20 Common Provisions of Consequence ...... 303 20.00 Choice of Law and Forum Provisions ...... 304 A. Choice of Law ...... 304 B. Choice of Forum ...... 310 20.01 Notices Under the Agreement ...... 312 20.02 Patent Marking ...... 314 20.03 Force Majeure Provision ...... 317 20.04 Severability Provision ...... 318 20.05 Post-execution Amendment of Agreement ...... 318 20.06 Non-waiver Provision ...... 320 20.07 Integration ...... 321 A. Contract Interpretation ...... 321 B. Use of Integration Provision to Preclude Asserted Prior Understandings ...... 324 20.08 Government Approval Provision ...... 327 21 Term and Termination of the Agreement ...... 329 21.00 The Significance of “Termination” ...... 329 21.01 Formal Treatment of the Termination Problem ...... 330 21.02 Termination for Breach ...... 333 21.03 Termination on Change of Control ...... 335 21.04 Termination Not the Sole Remedy ...... 337 21.05 Some Tax Considerations in Reference to Termination Provisions ...... 337 22 Execution of Agreements: Problems of Authority and Proof ...... 339 22.00 Authority to Contract ...... 340 A. The New Enterprise Situation ...... 340 B. The Problem of Intracorporation Authority ...... 341 C. A Married Individual in a Community Property State ...... 343 22.01 Execution ...... 343 22.02 Authentication ...... 346 A. Execution by an Individual Acting on His or Her Own Behalf ...... 346 B. Execution on Behalf of a Corporation ...... 347 23 Bankruptcy Law Considerations ...... 351 23.01 Asset Disposition ...... 352 23.02 Automatic Stay ...... 353 23.03 Contracts ...... 354 A. Rejection of Executory License Agreements ...... 357 1. Protection for Licensees of Bankrupt Licensors ...... 358 xviii Drafting Patent License Agreements

B. Assumption of Executory License Agreements ...... 362 23.04 Bankruptcy License Drafting Issues ...... 363 A. Protection for the Licensee of a Bankrupt Licensor ...... 363 B. Protection for the Licensor of a Bankrupt Licensee ...... 363 23.05 Security Interests ...... 366 24 Validity and Construction of Patents ...... 369 24.00 Lear and the Doctrine of Licensee Estoppel ...... 369 24.01 Lear and Liability for Royalties ...... 374 25 Settlement of Patent Litigation ...... 377 25.00 Releases ...... 377 25.01 Discontinuance of Suit ...... 383 25.02 Avoidance of Publicity ...... 386 25.03 Avoidance of Relitigation of Validity and Enforceability Issues ...... 389 26 Confidential Disclosure Agreements ...... 391 26.00 Confidential Information ...... 392 26.01 Disclosure of Confidential Information ...... 395 26.02 Confidentiality Obligations ...... 396 26.03 Residual Rights ...... 397 26.04 Term of the Agreement ...... 398 26.05 Option for a License ...... 399 27 Agreements Concerning the Sale or Other Transfer of Unpatented Technological Values ...... 401 27.00 Definitions ...... 402 A. Proprietary Information ...... 402 B. Submitted Ideas ...... 402 C. Trade Secrets and Know-How ...... 403 27.01 Principal Drafting Problems in Contracts for the Transfer of Technological Information ...... 404 27.02 Dealing With Submitted Ideas and Other Technical Proposals of Highly Contingent Value ..... 405 27.03 Definition of the Field of Technical Values to Be Dealt With ...... 406 27.04 Responsibility of the Supplier of Information; Disclaimers and Reservations ...... 417 27.05 Limitations and Restrictions on the Conduct of the Recipient of Transferred Information; Abnegation of Restrictions ...... 419 27.06 Consequences of Early Termination of Know-How Agreement ...... 421 Detailed Table of Contents xix

28 Collaboration Agreements ...... 425 28.00 Introduction ...... 425 28.01 Infringement Liability ...... 427 28.02 Funding, Options to Cease Funding ...... 428 28.03 Allocation of Intellectual Property Ownership and License Rights ...... 433 A. Joint Ownership ...... 436 1. Enforcement of Jointly Owned Patents ...... 437 2. Licensing of Jointly Owned Collaboration Patent Rights ...... 438 3. Obtaining Jointly Owned Collaboration Patent Rights ...... 438 B. Joint Research and Patentability ...... 440 C. Allocation of Ownership of Jointly Developed Inventions ...... 441 D. Licenses for Collaboration Activity ...... 442 28.04 Obtaining and Enforcing Patent Rights ...... 444 28.05 Termination, and Effect on Intellectual Property Rights ...... 446 29 Cross-Border Licensing Issues ...... 449 29.00 Place of Payment; Rate of Exchange; Tax Burdens ...... 450 29.01 Problems of Governmental Approval ...... 453 29.02 Registration, Notification, or Recordation of the Transaction ...... 454 29.03 Termination Because of Change of Status of One Party or Because of Modified Exchange Regulations ...... 455 29.04 Choice of Applicable Law and Jurisdiction ...... 456 29.05 Arbitration ...... 458 29.06 Applicable Language ...... 459 29.07 Definition of Included Patent Rights ...... 460 30 Export Laws and Regulations of the United States ...... 463

31 University and Government Licensing ...... 471 31.00 The Bayh-Dole Act and Regulation of Government-Funded Inventions at Universities ...... 471 31.01 University Patent Policies and Ownership of University Inventions ...... 477 31.02 Inventions Made by Government Employees ...... 478 31.03 Licensing U.S. Government-Owned Inventions ...... 478 31.04 Cooperative Research and Development Agreements (CRADA) ...... 480 xx Drafting Patent License Agreements

32 Selected Competition Law Issues ...... 483 32.00 The U.S. Antitrust Laws ...... 486 A. The Sherman Antitrust Act ...... 486 B. The Clayton Act ...... 487 C. The FTC Act ...... 488 D. Relevant Market ...... 488 E. Rule of Reason ...... 489 F. The Per Se Rule ...... 490 G. The DOJ/FTC Guidelines ...... 492 32.01 Licensing and Antitrust ...... 493 A. Exclusive License ...... 493 B. Cross License and Patent Pools ...... 494 C. Refusal to Deal and Exclusive Dealing ...... 494 D. Improvement Grant Back ...... 495 E. Tying ...... 496 F. Reverse Settlements ...... 498 G. Standards Setting ...... 501 32.02 Patent Misuse and Licensing ...... 508 32.03 Misuse Based on Tying ...... 510 A. Exception to Tying ...... 511 B. Tie-Out ...... 511 C. Package Licensing ...... 512 1. Multi-Patent Licensing: Suggested Treatment ...... 513 2. Pooling Patents for Standards Licensing ...... 518 32.04 The Misuse Problem and Label Licensing ...... 522 A. Label Licensing Staple Articles or Commodities ...... 523 B. Articles and Commodities Not Suitable for Noninfringing Use ...... 526 32.05 Other Patent Misuse Scenarios ...... 527 A. Total Sales Royalties ...... 527 B. Post-Expiration Royalties ...... 528 C. Hybrid Patent–Know-How Licenses ...... 530 D. Double Royalties ...... 531 32.06 Evolution of Misuse ...... 534

Appendices (in text and on CD-ROM) Appendix A Antitrust Guidelines for the Licensing of Intellectual Property ...... 535 Appendix B Assignments ...... 569 Appendix C Simple License Agreement ...... 575 Appendix D Nonexclusive License Agreements ...... 577 Appendix E Defined Field Patent License Agreement ...... 593 Detailed Table of Contents xxi

Appendix F Patent and Technical Information License Agreement ...... 603 Appendix G Confidential Disclosure Agreements ...... 613 Appendix H Forms for Dealing With Outside Submissions ..... 631 Appendix I Employment Agreement ...... 637 Appendix J Simple Collaboration Agreement ...... 643

Table of Cases ...... 653 Index ...... 671 About the Authors ...... 701