Considerations in Drafting Settlement and License Agreements—Part I By Paul Morico Previously published in the February issue of Intellectual Property and Technology Journal As any intellectual property (IP) attorney who has practiced for a number of years knows, drafting settlement and license agreements takes some skill. Most outside counsel do not have a lot of experience drafting such agreements, and even many in-house counsels only draft such agreements periodically. For those who have drafted more than a few such agreements, you know that it takes a lot of patience and, most importantly, requires great attention to detail. There are many provisions that need to be covered in these types of agreements, but equally important to making sure that all of the “bases are covered” is making sure that each of the clauses are comprehensive. The reason it is important for such agreements to be so comprehensive is that the goal of both types of agreements is to avoid future litigation. In some sense, pre-litigation license agreements can be thought of as a pre-nuptial agreement. In the case of a settlement agreement, the parties already have been in litigation and the goal is to keep the parties from going back to litigation. Because many IP settlement agreements contain many of the same terms found in a license agreement and because settlement agreements have some unique aspects to them, the first part of this article focuses initially on license agreements. The second part of this article, which will appear in an upcoming issue of the Intellectual Property & Technology Law Journal, will address issues unique to settlement agreements. This article attempts to cover all of the major provisions in such agreements, but also some of the nuances in many of the key provisions. Much as most other aspects of practicing law, a great deal of our knowledge and wisdom is shaped by our experiences and this article naturally is confined to my limited personal experience. The Grant Clause Perhaps the most important provision of any IP license or settlement agreement is the grant clause. This is the clause where the IP rights are transferred from the grantor or licensor to the granteeor licensee.1 These clauses are the ones most often fought over by the parties. The tension that typically exists is that the licensor wants to retain as many of its underlying rights as possible while the licensee wishes to obtain as many of those rights as possible. The main question that needs to be asked by the licensor is whether licensor wishes to retain any of these rights for itself and whether it also wants to retain additional rights to license to other parties. Thus, the threshold question the parties typically face is will the license be exclusive, sole, or non-exclusive? A purely exclusive license grants all rights (except ownership) to the licensee, whereas a sole license allows the licensor to retain rights for itself to practice the invention. A non-exclusive license in contrast permits the licensor to grant rights to other licensees. Even these various ways of dividing up rights, however, can be further parsed. For example, the licensor can grant the licensee an exclusive or sole license in a particular field of use and either no license at all or a non-exclusive license in other fields of Austin Beijing Brussels Dallas Dubai Hong Kong Houston London Moscow New York Palo Alto Riyadh San Francisco Washington bakerbotts.com | Confidential | Copyright© 2016 Baker Botts L.L.P. use. For example, the owner of a patent to a certain Web site tool (assuming such a patent were valid these days under the Supreme Court’s decision in the Alice case) could grant an exclusive license to that tool for use in advertising vehicles only to a particular car company but then carve out other uses of the tool, for example, by other types of retailers. When parsing rights among different fields of use, it is critical to make sure that there is no overlap between such fields of use. That can lead to competing interests in the IP rights being licensed. In order to illustrate other issues to take into account in dealing with grant clauses, let’s look ata sample clause: Licensor hereby grants to Licensee and its Affiliates a perpetual, nonexclusive, royalty bearing (as provided in Article 3 below),non-transferable (except as provided below),irrevocable (such irrevocability subject only to Articles 4 and 5 and paragraph 6.1 below)license under the Licensed Patents to make, have made, use, off er to sell, sell, import and export Products coming within the scope of any claim in any of the Licensed Patents (the Licensed Products) anywhere in the world. As illustrated in this clause above, another term affecting scope in addition to exclusivity or field of use is territory. Will the license be worldwide, limited to the United States, or some other limited territory? One question the licensee should ask itselfis does it really need a worldwide license? It maybe that the licensor only has limited rights outside the United States or the licensee has no aspirations to expand outside a limited territory and thus does not need a license beyond a certain territory. The counter vailing consideration, however, is that often the cost for making the license worldwide is not any more or only nominally more at the time the license is being granted, whereas it may be much more costly at a later date. Transferability is another major term of the grant clause. Does the licensor want the licensee to have the ability to sell or license its rights under the agreement to a third party? This provision can become particularly sensitive when the IP right sat issue are trademarks. The law requires that the trademark holder police the quality of its mark. If the licensor is going to let the licensee grant third parties rights to their mark, the licensor will need to either police that third parties use of the mark directly or put into place certain standards and reporting required of the licensee. This can become quite cumbersome to manage. Transferability is sometimes less of a concern when the IP rights at issue are patents, especially when the licensor is not in the business and merely trying to extract value from its investment in the asset. Because of issues of moral rights and often an author’s desire to control the integrity of his or her work, copyright scan be similar to trademarks when it comes to the licensor’s willingness to allow the licensee to transfer those rights to third parties. Often, it is the licensee who needs to think hard about whether it needs the right to transfer rights to third parties. Frequently the licensee may not have the capacity or capability to manufacture the entirety of a product being licensed and thus may need the assistance of third parties in manufacturing the products at issue. In those scenarios, the licensee will want to insist on the ability to transfer the IP rights to third parties. The licensee will at the very least want to be granted “have made” rights so that it can have third parties manufacture all or part of the products at issue. This is an area in which the licensor may wish to exert some oversight. One consideration concerning transferability that the licensor will need to watch out for is exhaustion. Is the right’s holder getting paid for the IP rights transferred? On the other side of the equation, are the licensee and/or sub-licensee paying twice for the rights transferred? Some thought needs to go into this question. The licensee/sub-licensee should not have to pay twice for the IP rights being granted, yet the licensor should at least get its fair share. This issue was presented in Quanta Computer ,Inc. v. LG Electronics, Inc.2 In that case, the plaintiff, LG Electronics, owned three patents covering computer systems, including components and methods. LG had licensed these three patents to Intel. Under the license, Intel was permitted to manufacture and sell microprocessors and chipsets covered by the LG patents. The license contained a non-transferability clause, however, prohibiting third parties from combining the licensed products with components from another source. BAKER BOTTS Quanta was a computer manufacturer that purchased microprocessors and chipsets from Intel. Quanta combined the Intel products with non-Intel components to make computers that practiced LG’s patents. LG then sued Quanta for patent infringement. The district court denied summary judgment, holding that the patent exhaustion doctrine did not apply to method claims, and therefore ,did not apply to LG’s patents because they contained method claims. The U.S. Court of Appeals for the Federal Circuit affirmed the district court’s decision holding that the patent exhaustion doctrine did not apply to method claims. Quanta then appealed to the U.S. Supreme Court. On appeal, LG argued that the patent exhaustion doctrine should not apply to method claims because method patents are not connected to a product and cannot be exhausted by the sale of a product. Quanta argued that courts previously have applied the doctrine to method claims, and that, if the doctrine is not applied to method claims, patent owners could avoid the doctrine by including method claims in their patents. The Supreme Court sided with Quanta holding that even though methods are not sold in the way that a product is, “methods may be embodied in a product, the sale of which exhausts patent rights.”3 The Supreme Court concluded: The authorized sale of an article that substantially embodies a patent exhausts the patent holder’s rights and prevents the patent holder from invoking patent law control post sale use of the article.