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TECHNOLOGY LICENSING TODAY(Highlights of Technology Licensing Course)

Karl F. JordaDavid Rines Professor of Intellectual Property Law & Industrial Innovation

Director, Kenneth J. Germeshausen Center for the Law of Innovation & Entrepreneurship

Franklin Pierce Law CenterTwo White Street, Concord, NH 03301 USA

SeminarLicensing Executives Society

Manila, PhilippinesNovember 24-25, 2005

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INTRODUCTION

• Live in “Golden Age” for IPRs• Patent filings and issuances are skyrocketing• Talk of patent “revolution,” “explosion,” “frenzy”

• “Anything under the sun that is made by man” is patentable• Courts, Congress, Justice Department — pro IPRs• Corporations built on patented technologies• Motto: Innovate or perish

• Value of IPRs for securing exclusivity — simply invaluable• Royalties for licensing IPRs in 2002: $150 billion• Over $1 billion for some companies• Universities jumped on bandwagon

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THE AMERICAN PATENT SYSTEM

• The Constitution gives Congress the power to promote the progress of the useful arts by securing for inventors the exclusive right to their discoveries for limited times. (U.S. Const. art. I, § 8, cl. 8.)

• “The issue of patents for new discoveries has given a spring to invention beyond my conception.” (Thomas Jefferson)

• “The patent system added the fuel of interest to the fire of genius.” (Abraham Lincoln)

• “The advancement of the arts, from year to year, taxes our credulity and seems to presage the arrival of that period when human improvement must end.” (Henry L. Ellsworth, Commissioner, Patent Office Annual Report for 1843)

• “A country without a patent office and good patent laws is just like a crab that can’t travel any way but sideways or backways.” (Mark Twain)

• “The American patent system has promoted countless applications of the arts and sciences to the needs and well-being of our people.” (Franklin D. Roosevelt)

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PATENT SYSTEM INCENTIVES

1) To invent2) To disclose inventions3) To “invent around” prior inventions — improvements4) To invest in innovation —

a) the most important incentive of all (CAFC Judge Giles Rich)b) ratio of requisite investment in the 3 phases of innovation from lab to market, i.e. research, development and commercialization is 1:100:1000. (This supports the thesis of investment incentive.)

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TENETS AND TRUISMS on Intellectual Property Rights and Technology Transfer

• Technology transfers, licensing and investments are ever so much easier to carry out and accomplish via patents and other IPRs as vehicles or bases.

• Importation of technology leads not only to export of products but also to export of adapted, improved technology (reverse technology transfer).

• The days when technology transferors took advantage of transferees (in developing countries) are gone, the realization having taken hold that the only viable license is one that results from a win/win approach and passes the fairness test.

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REASONS FOR LICENSING

1) Unblock interlocking IPR’s

2) Settle IP litigation, interference

3) Grow and diversify the business

4) Deal with outside idea submission

5) Convert dormant IP portfolios into profits

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HOW TO FACE THIRD-PARTY PATENTS

Starting point and first step in managing downside risk: company policy is not to infringe valid patents of others

1. Determine scope — if outside, no problem

Caveat: positive doctrine of equivalents(Even if inside there may be no problem by dint of negative doctrine of equivalents)

2. Determine validity — invalid patent cannot be infringed

3. Work around it, design around it, invent around it

4. Wait till expiration, if not too far off

5. Take a license or buy patent or whole businessN.B. Different kinds of patents have different scope of protection• Paper patent• Commercially-used-patent• Basic or pioneer patent

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KINDS OF LICENSES

I. Patent LicenseTrademark LicenseKnow-How License Trade Secret License Copyright LicenseSoftware License Hybrid License Franchise

II. Exclusive LicenseNon-Exclusive LicenseSole (semi-exclusive co-exclusive) License

III. Royalty-bearing License Royalty-free License

IV. U.S. (domestic) License(Specific country) LicenseWorld-wide License

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KINDS OF LICENSES (cont.)

V. SublicenseCross-LicensePackage LicenseLabel LicenseShrinkwrap LicenseGrantback LicenseGrant-forward License

VI. Implied LicenseCompulsory License

VII. ShoprightOption AgreementSecrecy AgreementConsultation AgreementsTechnical Assistance AgreementInvention AgreementEmployment AgreementReleases, Waivers

VIII. Assignments

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DEVELOPMENTS &TRENDS IN LICENSING/TECHNOLOGY TRANSFER

• Companies that didn’t used to license at all, now do it (CIBA-GEIGY, DuPont, IBM, Westinghouse)

• Royalties are going through the roof• Option Agreements are on the increase• Other quid pro quos are preferred, e.g. cross licenses, products• Dormant IP portfolios are licensed for profit• Hybrid Patent or Trademark /Trade Secret Licenses and Franchises• Other arrangements have been developed, e.g. joint venturing, corporate

partnering, co-marketing, co-promotion, strategic alliances, consortium licensing (Sematech)

• No anti-trust enforcementNine no-nos are historyPositive anti-trust through legislation

• Above all — win/win philosophy, attitude more prevalent

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INNOVATION: A THREE-STEP PROCESS

• one day an American firm announces a breakthrough invention;

• next day the Russians claim they made the same discovery twenty years ago; and

• on the third day the Japanese start exporting the new product.

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KINDS OF PATENTS

I. Utility PatentsDesign PatentsPlant Patents

II. Mechanical PatentsChemical PatentsElectrical patentsBiotech PatentsSoftware PatentsBusiness Method Patents

III. Product PatentsComposition PatentsUse PatentsProcess Patents

IV. Pioneer PatentsBasic PatentsDominant PatentsImprovement PatentsPaper PatentsPicture PatentsSelection PatentsPoor Man’s PatentsSubmarine Patents

V. Petty Patents (Utility Models)Patents of ImportationPatents of Confirmation

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LICENSING OF PATENT APPLICATIONS1) Truism: a pending application confers no right of exclusion — only issued patent

do.

2) So how can one license an application that at law grants no right to exclude? If one can’t license and exact royalties after patent term — why before?

3) Very commonly done — grammatical, substantive error?

4) If error — business community lives with it very well.

5) License is merely a withholding of a right to exclude others. License is not grant of anything.

6) What’s rationale, rationalization, justification?

a) § 261 makes patent personal property, so application in and of itself is species of property. Thus right to license application is inherent in lawful right to assign application. Strained!

Better:

b) Purported license = license of trade secret or

c) Purported license = license of patent when issues or

d) Both

7) “Licensing of patent applications is a hybrid animal which requires special treatment to avoid (potential problems.” (David Hill)

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IMPLIED LICENSE

1. Shopright — employer-employee relationship

2. Via acquiescence of patent owner — sits on his/her rights — laches

3. Business relationship — close cooperation on innovative project

See Wang v. Mitsubishi, CAFC, 1997

4. Licensor-Licensee Relationship — under unlicensed but indispensable patent — e.g. dominant patent issued later to licensor or earlier-issued dominant patent acquired by licensor

5. Seller-Buyer relationship under combination or method patent of seller who sells a component or article for use in the patented combo or method

See Jacobson v. Cox, Dist. Ct., Arizona

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COMPULSORY LICENSES

In Foreign CountriesCompulsory License provisions

universalParis Convention — Art. 5GATT TRIPS — Art. 31 (very

restrictive)For non-workingFor dependent patentRarely used

In United StatesGeneral Rule: No duty to use or license patented

invention (§ 271(d)(4)Compulsory license notion = anathema in U.S.However,

Forcing patentee to license = compulsory licenseDenying patentee injunctive relief = tantamount to

compulsory licenseExamples:

Infringement by GovernmentInfringement by TVAInfringement via assistance under International

Development ActCompulsory license provisions in— Atomic Energy ActAir Pollution Control ActPlant Variety Protection ActBayh-Dole Act (march-in rights)As relief in Antitrust casesInjunction denied — Public Health & Safety, Unusual

hardship on infringer without benefit to patentee

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TYPES OF LICENSE TRANSACTIONS

• Assignment

– outright sale, transfer of title

• Exclusive license

– permission to one party only (licensee)

• Sole (semi-exclusive co-exclusive)

– permission to one other party (licensor and licensee)

• Non-exclusive

– permission to one or more parties (licensor and any number of licensees)

• Covenant not to sue

– nonassertion agreement

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NON-EXCLUSIVE LICENSES

• No statutory basis

• Immunity from suit — covenant not to sue

– I.e. merely waiver of right to sue for conduct which would constitute infringement and would be actionable, absent license

• No affirmative rights go with it

– e.g. re enforcement of licensed patent

• No freedom from competition

– if there is infringement, it is no legal injury

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SPECTRUM OF LICENSING

1) Option

2) Option/License

3) Covenant not to sue

Non-assertion agreement

4) License — Non-exclusive

Immunity from suit

5) License — Sole, Semi-exclusive, Co-exclusive

6) License — Exclusive

7) Assignment

8) Acquisition

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OPERATIVE LANGUAGE

A. AssignmentA sells, conveys, transfers and assigns to Ball its right, title and interestin and to certain Patent Rights.

B. License1) A grants to B2) a (non) exclusive license under certain Patent Rights3) to make, have made, use, offer to sell, sell or import Licensed Products (or to practice Licensed Methods)4) throughout the U.S.5) for the duration of the Agreement.

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THE ALL-IMPORTANT GRANT CLAUSE

The most important clause in a license agreement.

A typical basic grant clause might have the following fiveelements:

1) A grants (or agrees to grant or grants and agrees to grant)2) a (non) exclusive (or sole) license under certain IP Rights3) to make, have made, use, offer to sell, sell or import Licensed Products

(or to practice Licensed Methods)4) throughout the territory5) for the duration of the Agreement.

Do not use such modifiers as “indivisible,” “irrevocable,” “non-transferable” and “perpetual.”

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EXCLUSIVE LICENSE OR ASSIGNMENT?

Not uncommonly, what is perceived by the businessman as an “exclusive license,” is best negotiated into the form of a patent assignment perhaps with rights to reversions of title if royalties are not paid — this because the exclusive license differs from assignments only in areas (like who sues infringers and has authority to compromise in settlement) which may be better borne by the party actively in the business than by the passive transferor of the technology.

Tom Arnold, “Basic Considerations in Licensing”, p.128

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PROTECTION OF (EXCLUSIVE) LICENSOR

1. Lumpsum payment — paid up license

2. Minimum royalties

3. Termination power — outright

• if a desired total not reached

• if annual minimums not maintained

4. Conversion to non-exclusive license

5. “Best efforts” clause

• dubious language

• variously interpreted

very strictly or leniently

• better: reasonable diligence consistent with interests of business

• best: objective, quantitative criteria of performance

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BETTER ALTERNATIVES FOR THE COMMON “BEST EFFORTS” CLAUSE

A “best efforts” clause to the effect that ABC “shall exercise its best efforts to exploit theLicensed Products” is dubious language.

Better: “reasonable diligence consistent with the interests of the business”

Best:

1. Best Efforts shall mean those efforts which a reasonably prudent person knowledgeable of such matters would consider desirable, necessary or commercially reasonable to further the intentions of the Parties hereunder”

2. Objective, quantitative criteria of performance

3. Conversion from exclusive to non-exclusive status

4. Termination power if specific levels of performance or annual minimums are not maintained

5. Lumpsum up-front payment

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BEST EFFORTS OBLIGATION

Licensee shall exercise its best efforts to produce, sell and

offer for sale Licensed Machines. “Best efforts” shall mean

those efforts which are commercially reasonable to further the

intentions of the Parties with respect to quality as well as

quantity of the Licensed Machines produced. Production of

250 Licensed Machines per half year after March 1, 2001 of a

quality that conforms with established industry standards, will

satisfy Licensee’s best efforts obligation hereunder.

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WAYS TO PROTECT LICENSEES FROM THIRD-PARTY DOMINANT PATENT RISKS

1) Hold-harmless clause with licensor

— getting licensee another license

— providing a non-infringing alternative or

— defending an infringement suit (but not open-endedly)

2) Cost-sharing arrangement

— if royalties have to be paid to third party

— if infringement suit has to be defended

3) Renegotiation of royalty provision

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A TROUBLE-FREE MFL CLAUSE

A very important clause in non-exclusive licenses.

Advisable

1. to stay away from vague phrases (such as, “other terms and conditions,”

2. to include escape clauses or exceptions, e.g. settlements,

3. to give licensee the right to terminate and negotiate the license, if a subsequent licensee has been overly favored.

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PATLEX LICENSE

ARTICLE XII – MOST FAVORED LICENSEE

If subsequent to the effective Date of this Agreement another manufacturer of

lasers, laser systems, or Low or High Power Laser Tubes similarly situated to

LICENSEE is granted a license by PATLEX which provides to said another

manufacturer a combined royalty rate and royalty base materially more

favorable to said another manufacturer with respect to any of the Licensed

Patents than that provided herein to LICENSEE for lasers, laser systems and

Low or High Power Laser Tubes sold or leased in the United States, then

LICENSEE may, at its option, adopt the subsequent license in its entirety,

mutatis mutandis, as of the effective date of such subsequent license.

PATLEX shall notify LICENSEE of any such subsequent license and provide

LICENSEE an opportunity to exercise the option provided herein.

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ADDITIONAL CLAUSES NEEDING CLOSE ATTENTION

Definitions — the second-most critical clause in licenses

Confidentiality — crucial where trade secrets are involved

Improvements — “grant-back” by licensee to licensor or “grant forward” by licensor to licensee where they continue their R&D, a narrow, precise definition, tied to the scope of the patent claims, in non-exclusive form

Sublicensing rights — especially important in exclusive licenses for practical and legal reasons

Termination — this third most important clause is a multipronged concept, each prong needs to be defined separately, a license never terminates over night, different rights and obligations of the parties continue

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ROYALTIESRoyalty-free

Royalty-bearingLump sum — single or installments

Running royaltiesFixedSliding Increasing DecreasingMaximum (Cap) Paid-up licenseMinimum

Combinations of both

Most common combination1) Initial lump sum (10%)2) Running royalty (on net sales)3) Minimum yearly royalty

- - - - --Total royalty income depends on

Royalty baseRoyalty rateDuration of agreement

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ROYALTIESNon-exclusive Licenses

“Industry Standards”“Folklore — Suspect as Royalty-rate Guide”

Chemicals 1-5%Electronics 1-5%Computers 3-5%

Consumer Products 2%Pharmaceuticals 4-15%

For exclusive licenses20-50% premium

Up to 300% premium in pharma field

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ROYALTIESMOST IMPORTANT FACTORS

a) the state of development of the subject technology (embryonic and untested v. tested and commercial),

b) the strength of the IP rights (solid v. weak, ease to design around vel non), and

c) the degree of exclusivity (exclusive v. non-exclusive)

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d) the amount of, and value added by, trade secrets

“Trade secrets are a component of almost every technology license...(and) can increase the value of a license up to 3 to 10 times the value of the deal if no trade secrets are involved.” (Melvin Jager).

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ROYALTY-FREE LICENSES

There is significant royalty-free licensing.

Makes eminent business sense.

There is indeed great virtue in royalty-free licensing in terms of good will and good relationships,

bringing about increased sales of goods and supplies and hence larger market share.

Examples.

At one point in my career at CIBA-GEIGY Corp. (now Novartis), I prepared over 20 royalty-free

non-exclusive licenses to carpet manufacturers under patents I had obtained in the U.S. and

Canada on an important improvement in tufting carpets. CIBA-GEIGY was not in the business of

manufacturing and selling carpets but dyestuffs. CIBA-GEIGY had no intention to practice this

tufting method itself. Licensing was the best alternative. Rather than doing it for royalties, we

did it for free with the expectation that this would induce grateful carpet manufacturers to buy

more dyestuffs from CIBA-GEIGY. Carpet manufacturers were pleased to be licensed for free to

practice an important new technique for tufting carpets.

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ROYALTY-FREE LICENSES (2)

A more recent example is the royalty-free licensing by Iridian

Technologies of iris-scan patents. Iridian owns a broad patent and

another two dozen patents on iris-recognition software, which is able to

accurately identify people at airport security or automated teller

machines. They licensed these patents also on a royalty-free basis after

deciding that the “upside of software sales was greater than the downside

of collecting royalties.” They won contracts with Schiphol Airport and the

UAE government and expected other big government contracts. Iridian

will “end up getting a lot of business” per US Today of August 15, 2005.

This case also shows that giving away valuable patent rights for free can

be a savvy business move.

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ROYALTY-FREE LICENSES (3)

In the field of licensing law and practice there are other instances of, oroccasions for, granting free licenses.

• Interference settlement agreements.

• Grant-back provisions in license agreements often are royalty-free.

• Releases of patent rights to employees, where a corporation or university has no interest in the employee’s invention.

• Hybrid patent/trade secret licenses with royalty based on the trade secrets.

• Corporations owning patents that would be infringed by university research grant the university a royalty-free license.

• In standard setting situations, assurances by patentees to license on royalty-free terms.

The conclusion is inescapable that royalty-free licensing of valuable IP rights inpreference to royalty-bearing licenses, is conducive to creating good will andestablishing or cementing good relationships, with attendant increases inmarket share.

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DUE DILIGENCE

An investigation undertaken in the course of an IP transaction.

The purpose of a due diligence investigation is to provide the dataneeded to analyze and assess the business and legal risks associatedwith the IP rights that are the subject of the transactions.

Due diligence procedures may include, among other things:

1) identification of all IPRs involved in the transaction,2) verification of ownership and inventorship of the IPRs,3) determination of the enforceability or strength of the IP assets,4) review and verification of all documentation associated with the IPRs,

including registrations, licenses, security liens, file wrappers, and claims of infringement; and

5) interviews of those persons with knowledge of the subject IPRs.

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NEGOTIATION TACTICS

Prepare thoroughly• do research on other side• develop strategy• prepare draft agreement or outline

Choose third or fourth choice candidate for first roundForm a teamStage a dress rehearsalGo in with win/win approach — not “wimpy/wimpy”Assure comfort and convenienceTake good notesTake up less controversial issues firstTake up money matters at end

• agreement clauses have economic weightUse silence in negotiationsVolunteer to draft agreement

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NEGOTIATION OF LICENSING AGREEMENTSA. Object —

1. Good deal for both sides: win-winB. Necessary pre-negotiation homework— the more the better

70% of negotiation is preparation1. Licensor’s information

a) about companyb) product or process descriptionc) proprietary positiond) sales history of producte) materials, components and equipment requiredf) cost datag) licenses already grantedh) other

2. Licensee’s informationa) place in market 1. names and volume of competitorsb) financial positionc) physical plant 1. availability of space and capital for expansiond) ownership 1. other affiliations 2. other licensese) estimated costs for new license programf) estimated future marketg) annual sales volume for past few years for other products, related and non-related

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NEGOTIATION OF LICENSING AGREEMENTS (continued)

C. Pre-negotiation internal discussions.1. Selecting the team2. Who does what3. Practice negotiation – dress rehearsal

a) helps your people feel comfortableb) try to determine and understand other needsc) may discover your, or other’s, weak points

D. The negotiation1. With as high a level as possible2. With knowledgeable people on both sides.3. Convince other party of reasonableness of your position4. Listen to, and analyze, other party’s position5. Know what is important and what is not — what you can give and what you cannot6. Be creative and flexible7. Say enough, but not too much8. Caucus as often as necessary

a) some emphasize items agreed uponb) some emphasize items not agreed uponc) a above is better

9. At end of session, state current status and what is next10. Volunteer to prepare first draft

Homer O. Blair

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INESCAPABLE UNCERTAINTY PRINCIPLE IN CONTRACT

DRAFTING1. Semantic Dilemma

— undefined terms — terms incapable of definition — few terms universally understood to have a single meaning

e.g. “public domain”, “line of business”if try to define, often substitute another uncertaintystiff definitions important

2. Human FrailtyImperfection of human intelligence and attentiveness, press of business — can be mitigatedCan lead to three defectsa.) ambiguity

— two possible meanings — — different from vagueness (imprecise boundaries)

e.g. “residence,” “period from June 15 to” can be eliminated — of different words — additional words

b.) excessive vagueness — e.g. “indivisible”c.) unclear modifier — most common, most dangeroussee p.46 of Brunsvold

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ADMINISTRATION OF LICENSING PROGRAM POST-SIGNING ISSUES

Distribution of license agreement — “working copies”Cooperation with Accounting re royalty set upContinuing contacts with and monitoring, notifications of other party re

– Quality control (in trademark licenses)– Royalty audits– Information exchange and technical assistance– Grantback and grant forwards– MFL clauses– Sublicenses– Patent activities– Patent markings– Bankruptcies — M& A’s– Renegotiation, revision– Termination — Multipronged– Breach of contract– `Other follow-through

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BASIC CONSIDERATIONS

• Some threshold considerations, principles and rules to keep in mind for drafting technology license agreements.

• The only viable license agreement is one that results from a win/win approach and passes the “fairness test.” A win/lose license agreement has no future. It is by far better to “open a relationship” rather than “close a deal,” when concluding a technology license. Even a 500-page agreement may not cover all possible contingencies.

• Technology license agreements covering intellectual property rights (IPRs), and more particularly patents and trade secrets, are unlike other general contracts. The laws relating to IPRs have special characteristics and peculiarities, which leads to many misconceptions.

• In technology licensing the “merchandise” involved in the transaction are IPRs and hence it is imperative that one understands the nature of the “merchandise.” The IPRs, serving as the basis of the transaction, determine much of the substance of the license agreement.

• In drafting technology licenses, the grant clause is the most important one and hence requires special attention. It is formulaic and has five crucial elements. The definitions and termination clauses are the second and third most important clauses, respectively.

• The payment clause is the very last one to be negotiated and finalized, because most other operative clauses have economic weight and affect the size of the ultimate consideration.

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BASIC CONSIDERATIONS (2)

• In royalty-rate setting, so-called industry standards are suspect as royalty-rate guides; instead such factors as the stage of development of the subject technology, the strength of the IPRs and the degree of exclusivity as well as many others among Tom Arnold’s “100 Factors Involved in Pricing the Technology License” are determinative.

• In drafting technology licenses and other IPR licenses, the trend is away from archaic formalistic legalese and the preferred format or sequence of clauses is as follows: preamble, background, definitions, grant of rights, royalties, payment of royalties, license restrictions, confidentiality, enforcement/defense, future IP, duty to use, term and termination, other miscellaneous provisions.

• Most technology licenses are hybrid agreements, covering both patents and trade secrets, because without collateral know-how patented technology often cannot be practiced. But because of the different characteristics of patents and trade secrets, especially as regards duration, there has to be a differentiation in the treatment of patents and trade secrets. Royalties have to be allocated separately to each, depending on their proportional value in the technology package and there has to be a corresponding reduction of the royalty rate if the patent expires, is declared invalid or the application does not issue, inasmuch as it is per se patent misuse to continue to exact royalty payments once patent rights cease or don’t materialize (Brulotte v. Thys, Supreme Court, 1964).

• Anent the question of what role lawyers should play in licensing negotiations, many business and licensing executives believe it is better to limit the lawyer’s role to cleaning up the contract language once the business terms have been settled.

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LICENSING CASE HISTORYCLOCK CALCULATOR PATENT

Four-Step Project

1. Exhaustive infringement search and study2. Exhaustive validity search and study3. Design of comprehensive Licensing Strategy

a) Patent ownership transferred to new subsidiary b) Narrow royalty base c) Low royalty rate d) Offer of paid-up licenses e) Agreements prepared for both paid-up and running royalty licenses

4. Implementation

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LICENSING CASE HISTORYGOULD LASTER PATENTS

CAST OF CHARACTERS

1) Gordon GouldSole inventor as Columbia graduate student — Owns 20% of patent rights and has a 20% share of the royalties.

2) Richard I. SamuelPartner of Lerner, David, Samuel, et al — prosecuted Gould applications — became President and CEO of PATLEX which had acquired 80% ownership in Gould patent rights from REFAC, a New York City licensing outfit, initially retained by Gould/Lerner, David, Samuel, et al to exploit Gould patent rights. (REFAC receives 16% and PATLEX, 64% of royalty income.)

3) Herbert Dwight, Jr.Entrepreneur and founder of Spectraphysics and its CEO till retirement in 1988.

4) Frank BormanFormer Astronaut and Chairman of Eastern Airlines, became Board Chairman of PATLEX in 1988.

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LICENSING CASE HISTORYGOULD LASER PATENTS

THE PRINCIPAL PATENTS1.) USP 4,053,845

Optically Pumped Laser AmplifiersFiled 4/6/59 — issued 10/11/77 — expires 10/11/94

2.) USP 4,161,436Method of Energizing a MaterialFiled 4/6/59 — issued 7/17/79 — expires 7/17/96

3.) USP 4,704,583Gas Discharge Light AmplifierFiled 4/6/59 — issued 11/3/87 — expires 11/3/2004

4.) USP 4,746,201Brewster Angle Window Laser DeviceFiled 4/6/59 — issued 5/24/88 — expires 5/24/2005(Canada — 907,110 — ‘89)

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LICENSING CASE HISTORYGOULD LASER PATENTS

PATENT PROCUREMENT & LITIGATION

Difficult Prosecution

Multi-party Interferences

Three Re-examinations

Appeals from PTO to District Court and Federal Circuit

Infringement LitigationControl Laser FLQuantronix CAGeneral Photomics CA

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LICENSING CASE HISTORYGOULD LASER PATENTS

STANDARD PATLEX LICENSE

1. User License

Grant:

Non-exclusive worldwide license under USP 4,161,436 on “Method onEnergizing and Material” — immunity under all Gould patents.

Royalty:

1) 3% of purchase price of all lasers — for past infringement — within 60 days of effective date.

2) 1% of purchase price on first, second and third anniversary of effective date.

3) 6% of purchase price for future purchases unless purchased from licensed source.

4) 8% for lasers which licensee hides.

5) In case of acquisitions of companies over $20M, royalties as per 1) — 4) within 60 days of acquisition.

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LICENSING CASE HISTORYGOULD LASER PATENTS

STANDARD PATLEX LICENSE

2 Manufacturer License

Grant: non-exclusive worldwide license under all Gould patents.

Royalty:

For Past Infringement:1) 5% of net selling price upon signing under USP 4,053,845.2) 13% under USP 4,161,436.3) 5% under Can. Pat. 907,110..4) 6% under USP 3,562,662, 3,576,500 and 3,586,998.

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LICENSING CASE HISTORYGOULD LASER PATENTS

STANDARD PATLEX LICENSE

As Future Royalties:1) 5% under USP 4,053,845

(Optically Pumped Lasers)2) 2% under USP 4,704,583

(Gas Discharge Laser) or3-1/2% or 5% depending on occurrence of certain conditions.

3.) 3-1/2% under Application No. 869,831(Brewster’s Nagle Window)

4) 3% under USP 4,161,436(User patent)

5) 5% under Can. patent 907,1006) 6% under USP 3,576,500

(Copper Vapor Laser)7) O% under any other Gould patent.

For multiple patents — highest rate.Other terms:

Complicated provisions with respect to the above patents as to royalty base.No royalty on governmental sales.Licensee’s customers won’t be sued.

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LICENSING CASE HISTORYGOULD LASER PATENTS

KEY PROVISIONS — CRUX OF THE AGREEMENTS

Step-up royalty

from 2% to 5% in 2 steps

Triggers:

1) when one competitor licensed or sued up to 3-1/2%

2) when both competitors licensed or sued up to 5%

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LICENSING CASE HISTORYGOULD LASER PATENTS

PATLEX/COHERENT LICENSE

USA SalesSales Range Royalty Rate

$ O — $12.5 million 5.0% $12.5 million and above 4.0%

Foreign Sales

Sales Range Royalty Rate $ O — $7.5 million 2.0% $7.5 million and above 1.6%

As long as Spectraphysics is neither licensed nor sued, royalty is only 3% of U.S. net sales and 1.2% of foreign net sales.

Annual cap of $125K under Use Patent License.

Contains MFL Clause.

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LICENSING CASE HISTORYGOULD LASER PATENTS

VOLUME BREAKPOINTS OR DESCENDING ROYALTY SCALE

USA SalesSales Range Royalty Rate

$ 0-$15 million 5.0%$15-$20 million 3.0%$20-$25 million 1.0%$25 million and above 0.5%

Foreign SalesSales Range Royalty Rate$ 0-$ 5 million 2.0%$ 5-$10 million 1.0%$10-$15 million 0.5%$15 million and above 0.25%

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LICENSING CASE HISTORYGOULD LASER PATENTS

This case history clearly illustrates the dynamic interplay of step-up

royalty/MFL clauses and a descending royalty scheme, with the

former inducing the smaller players to sign up when the bigger

competitors – here Coherent and Spectra-Physics – are holdouts

and thus have an additional competitive edge by not paying any

royalties. And the descending royalty schedules entice the

holdouts to take out licenses, inasmuch as their total royalty

exposure is significantly reduced, e.g. down to about 1.7% in the

case of Spectra-Physics.

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INTELLECTUAL PROPERTY & IP RIGHTS

IP IPR

Invention Patent

Know-how Trade Secret

Brand name Trademark

Work of Authorship Copyright

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INTELLECTUAL PROPERTY (IP)&

INTELLECTUAL PROPERTY RIGHT (IPR)

IP IPR

Invention Patent, Trade Secret

Know-how, Invention Trade Secret

Brand name Trademark

Work of Authorship Copyright

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Trade Secrets

TechnicalInformation

BusinessInformation

Readily Ascertainable

Personal Skill Generally Known

Patents

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Trade Secrets

Readily Ascertainable

Personal Skill Generally Known

Patentable Subject Matter

Technical Information

Business Information

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HISTORY OF TRADE SECRETS

• "Trade Secret law is the oldest form of intellectual property protection, " according to Perritt. (Cave people?!)

• Back in Roman times, the law afforded relief against a person who induced another’s employee (slave) to divulge secrets relating to the master’s commercial affairs.

• Trade secrecy was practiced extensively in the European guilds in the Middle Ages and beyond.

• Modern law evolved in England in early 19th century — in response to the growing accumulation of technology and know-how and the increased mobility of employees.

• Recognized in U.S. by middle of 19th century, Peabody v. Norfolk (1868) held that a secret manufacturing process is property, protectable against misappropriation; secrecy obligation for an employee outlasts term of employment; a trade secret can be disclosed confidentially to others who need to practice it and a recipient can be enjoined from using a misappropriated trade secret.

• By the end of the 19th century the principal features of contemporary law were well established.

• 1939 the Restatement of Torts attempted to “codify” it.

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DEFINITION OF “TRADE SECRET”

1. A trade secret may consist of any formula, pattern, device or compilation of information which is used in one’s business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it. It may be a formula for a chemical compound, a process of manufacturing, treating or preserving materials, a pattern for a machine or other device, or a list of customers. (Restatement of Torts, § 757 comment b (1939))

2. A trade secret is any information, including a formula, pattern, compilation, device, method, technique, or process, that:(i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and(ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.(Unif. Trade Secrets Act § l(4), 14 U.L.A. 372 (1985 & Supp. 1989)

3. A trade secret is any information that can be used in the operation of a business or other enterprise and that is sufficiently valuable and secret to afford an actual or potential economic advantage over others.(Restatement (Third) of Unfair Competition, § 39 (1995))

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TRADE SECRETS

The Restatement of Torts adopted and the courts relied on the following criteria for determining whether a trade secret exists:

(1) the extent to which the information is known outside of the business;

(2) the extent to which it is known by employees and others involved in the business;

(3) the extent of measures taken to guard the secrecy of the information;

(4) the value of the information to the business and to competitors;

(5) the amount of effort or money expended in developing the information;

(6) the ease or difficulty with which the information could be properly acquired or duplicated by others.

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TRADE SECRET

ECONOMIC ESPIONAGE ACT (EEA) DEFINITION

The term “trade secret” means all forms and types of financial, business,scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, memorialized physically, electronically, graphically, photographically, or in writing if —

(A) the owner thereof has taken reasonable measures to keep such information secret; and

(B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, the public.

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TRIPS DEFINITION

Natural and legal persons shall have the possibility of preventing information lawfully within their control from being disclosed to, acquired by, or used by others without their consent in a manner contrary to honest commercial practices so long as such information:

(a) Is secret in the sense that it is not, as a body or in the precise configuration and assembly of its components, generally known among or readily accessible to persons within the circles that normally deal with the kinds of information in question;

(b) Has commercial value because it is secret; and

(c) Has been subject to reasonable steps under the circumstances, but the person lawfully in control of the information, to keep it secret.

(TRIPS Agreement, Part II, Sect. 7: Protection of Undisclosed Information, Art. 39, Par. 2, 1994)

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DEFINITION OF KNOW-HOW

Know-how. The knowledge and skill required to do something correctly. (Dictionary Definition)

Know-how. Information that enables one to accomplish a particular task or to operate a particular device or process. (McCarthy’s Desk Encyclopedia of Intellectual Property, Second Edition, p.236)

Know-how is knowledge and experience of a technical, commercial, administrative, financial or other nature, which is practically applicable in the operation of an enterprise or the practice of a profession. (AIPPI Resolution – Mexico Congress – 1973)

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CHARACTERISTICS OF TRADE SECRETS

• No registration requirement.

• No subject matter or term limitation.

• No tangibility requirement.

• No strict novelty requirement.

• Subject matter must not be generally known or available.

• But secrecy is the most important criterion — a sine qua non. There are no exceptions.

• Affirmative measures must be taken to safeguard a trade secret.

• Sufficient economic value or competitive advantage is also a requisite.

• Proper criterion is not “actual use” but “of value to company”, i.e. negative results can also give a competitive advantage.

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SAFEGUARDING TRADE SECRETS

1. Memorialize the trade secret policy in writing

2. Inform employees of trade secrets

3. Have employees sign Employment Agreements with confidentiality obligations

4. Conduct exit interviews

5. Restrict access to trade secrets (on need-to-know basis)

6. Lock gates and cabinets

7. Label trade secret documents

8. Restrict public accessibility

9. Screen speeches and publications

10. Use contracts in dealing with third parties

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MISAPPROPRIATION OF TRADE SECRETS

1. Acquisition by improper means

2. Acquisition by accident or mistake

3. Use of or disclosure of a trade secret

a) Acquired improperly

b) In violation of a duty to maintain confidentiality

“Improper means” includes “theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means.”

“Proper means” which do not support a claim for misappropriation, include independent discovery, reverse engineering, or discovery from observing what has been allowed to enter the public domain.

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TRADE SECRETSTrue or False?

1. Patents and trade secrets are at best only alternative forms for protection of innovation.

2. Trade secrets at best are but supplements to patents.

3. Patents and trade secrets are mutually exclusive and one or the other has to be chosen for protection to the exclusion of the other.

4. Because the patent system requires enabling and best mode disclosures, patents necessarily disclose and hence preempt all the trade secrets that are useful in the practice of the patented invention.

5. Because patents require disclosure of the invention as a quid pro quo for exclusivity, it is reprehensible to rely on trade secrets.

6. The patent specification, which discloses the best mode and otherwise is enabling, as is required, is sufficient to practice the invention or to be licensed.

7. Trade secrets are merely a matter of "contract rights created in trade secret agreements" as per abstract of our "U.S. Patent & Trade Secret Law" course; that is, no contract rights, no trade secrets. Hence, trade secrets are not property per se like patent and copyrights.

8. The fact that the trade secret to be utilized must be disclosed to others under secrecy obligation set forth in a non-disclosure, confidentiality, secrecy or pre-negotiation agreement, makes trade secret protection merely a matter of contract law.

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TRADE SECRETSTrue or False?

9. Know-how, trade secrets and confidential, proprietary or "undisclosed" information are synonymous terms and can be used interchangeably.

10. There are great differences between patent and trade secrets in terms of duration, scope of protection, kind of protection, degree of exclusivity, and costs.

11. A patentable invention must be patented for protection, while only unpatentable know-how can be protected via trade secrets.

12. A trade secret by definition is "concealed" and "suppressed" under § 102(g), so that a patentee has superior rights, even if he made the invention later in time.

13. "Under current U.S. law the inventor who chooses trade secret protection, accepts the risk that another inventor will seek and obtain patent protection, thereby excluding the original inventor from using his own creation." (Pooley, MIP, Oct. '99, p.68)

14. Trade secrets don't need protection because they are secrets. (So why this course? What's there to talk about?)

15. "Trade Secrets are the cesspool of the patent system." (Professor Kayton)

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ROLE AND VALUE OF TRADE SECRETS INIP MANAGEMENT STRATEGIES

OverviewIntroduction

I. Integration of IPRs

II. Importance of Trade Secrets

III. The Patent/Trade Secret Interface

IV. The Patent/Trade Secret Complementariness

V. The Best Mode Requirement

VI. Exemplary Trade Secret Cases

VII. Conclusion

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I. Introduction

• In our knowledge-based high-tech era it is important to exploit the overlap between IP categories for dual or multiple protection.

• This is true especially between patents and trade secrets.

• Patents and trade secrets are not incompatible but dovetail: the latter can protect volumes of collateral know-how.

• This results in synergistic integration and secures invulnerable exclusivity.

• Most technology licenses are hybrid licenses covering patents and trade secrets.

• Licenses under patents without access to collateral know-how are insufficient for commercial use of patented technology.

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II. Integration Strategy for IPRs

From former fragmentation by specialties, IPRs are now a “seamless web,” due to progress in technology and commerce, per Professor Jay Dratler.

Professor Dratler was the first one to “tie all the fields of IP together.” “Integrative treatment.” (Intellectual Property Law: Commercial, Creative, and Industrial – 1991)

In 1997 the authors of “Intellectual Property in the New Technological Age” (Professors Merges, Merrell, Lemly & Jorde) also• avoid the fragmented coverage• approach IP as a unified whole; and• concentrate on the interaction between different types of IPRs.

Thus we now have a unified theory in the IP world, a single field of law with subsets and significant overlap between IP fields. Several IPRs are available for the same IP or different aspects of the same IP for dual or multiple protection. Not taking advantage of the overlap misses opportunities or, worse, amounts to malpractice.

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II. Integration Strategy for IPRs (continued)

Especially for high-tech products, trademarks and copyright protection may supplement patents, trade secrets and mask works for the product’s technological content.

One IPR category is center of gravity and more important.

Other IPR categories are then supplementary but very valuable to

• cover additional subject matter

• strengthen exclusivity

• invoke additional remedies

• standup if primary IPR becomes invalid

and thus provide synergy and optimize legal protection.

Multiple forms of protection are especially important in the fields of biotechnology and computer.

The most important strategy is exploiting the overlap between patents and trade secrets.

Illustrative examples are:

• GE’s industrial diamond process technology

• Wyeth’s Premarin process

• Pizza Hut decision

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Multiple Protection in Biotech

Protection for a diagnostic kit involvingmonoclonal antibodies:

• Product patent on the test kit• Process patent on the preparation of the antibodies• Trade secrecy for production know-how• Copyright for test kit’s instructions• trademark

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Multiple Protection for Computers

A data processing system can involve:

• patented hardware and software

• patented computer architecture on circuit designs

• patented business methods

• trade secret production processes

• copyrighted microcode

• copyrighted operating system

• copyrighted instruction manual

• semiconductor chips protected as mask works

• consoles or keyboards protected by design patents

• or as trade dress under trademark principles

• trademark registration

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IP Integration Concepts

EXPLOIT THE OVERLAP

DEVELOP A FALL BACK POSITION

CREATE A WEB OF RIGHTS

BUILD AN IP ESTATE

BUILD A WALL

BUILD A RINGFENCE (India)

OVERPROTECT

LAY A MINEFIELD

for

SYNERGISTIC EFFECT

via

DUAL OR MULTIPLE PROTECTION

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III. The Importance of Trade Secrets

Trade secrets are the “crown jewels” of corporations — not the “cesspool of the patent system.”

Mark Halligan: “Trade secrets are the IP of the new millennium and can no longer be treated as a stepchild.”

James Pooley: “Forget patents, trademarks and copyrights…trade secrets could be your company’s most important and valuable assets.”

Trade secret misappropriation cost Walt Disney $240 million and Cargill $300 million.

88% of responses in an IPO Survey indicate trade secrets to be the really important intellectual assets because patents have limits: patentability requirements, publication, invent-around feasibility.

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III. The Importance of Trade Secrets (con’t)

Trade secret protection operates without delay and undue cost against the world — unlike patents which are territorial and so expensive to obtain and maintain that only very selective foreign filing is done.

Patents are tips of icebergs in an ocean of trade secrets

• Trade secrets cover over 90% of new technology

• Over 80% of technology licenses cover trade secrets or are hybrid licenses

Trade Secrets are the “workhorse of tech transfer.” (Bob Sherwood).

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IV. Patent/Trade Secret Interface

As a practical matter, licenses under patents without access to associated, collateral know-how are often not enough, because patents rarely disclose the ultimate scaled-up commercial embodiments of products and processes.

“In many cases, particularly in chemical technology, the know-how is the most important part of a technology transfer agreement.” (Homer Blair).

“It is common practice in industry to seek and obtain patents on that part of a technology that is amenable to patent protection, while maintaining related technological data and other information in confidence. Some regard a patent as little more than an advertisement for the sale of accompanying know-how.” (Peter Rosenberg).

In technology licensing “(r)elated patent rights generally are mentioned late in the discussion and are perceived to have ‘insignificant’ value relative to the know-how.” (Michael Ward, Honeywell VP Licensing).

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IV. Patent/Trade Secret Interface (continued)

“Trade secrets are a component of almost every technology license…(and) can increase the value of a license up to 3 to 10 times the value of the deal if no trade secrets are involved.” (Melvin Jager).

“One potential shortcoming of focusing on patents as a measure of innovation, besides the fact that it ignores the other types of intellectual property, is that patents are often valueless absent the ‘know-how’ that translates protected intellectual property into viable products.” (Gavin Clarkson, Harvard).

“A company with one or more patents for its technology will usually have substantial valuable technical and business information related to, but outside the direct coverage or disclosure obligations of, its patents. The company can maintain vigorous efforts in both areas of legal protection. (Jerry Cohen, Perkins, Smith & Cohen).

“It is frequently stated that know-how is the most valuable element of technology transfer. This is consistent with the writer’s own experience.” (Robert Goldscheider).

Failed Brazilian tactic — translate foreign patents

CIBA-GEIGY examples: Eastman Kodak & DuPont licenses.

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V. Patent/Trade Secret Complementariness

• Supreme Court (Kewanee Oil, 1974): perfectly viable alternatives.

• Not mutually exclusive but mutually reinforcing — dovetail, in harmony

• “Coexistence is well-established.” (Don Chisum).

• Inextricably intertwined: Most R&D data and collateral know-how cannot and need not be included in patent applications — grist for trade secrets.

• Trade secrets precede, accompany and follow patents.

• Tom Arnold: it’s “flat wrong” to assume that “because the patent law requires a best mode requirement, patents necessarily disclose or preempt all the trade secrets that are useful in the practice of the invention.”

13

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V. Patent/Trade Secret Complementariness (continued)

1. In the critical R&D state and before any patents issue, trade secret law “dovetails” with patent law.

2. Assuming that a development has been enabled and the best mode described, all collateral know-how not disclosed, whether or not inventive, can be retained as a trade secret.

3. All R&D data, including data pertaining to better modes, developed after filing, again whether or not inventive, can also be protected as trade secrets.

4. With respect to technologically complex developments consisting of many patentable inventions and volumes of associated know-how, complementary patenting and secreting is tantamount to having the best of both worlds

The question is not whether to patent or to padlock but rather what to patent and

what to keep a trade secret.

Best policy and strategy is to patent as well as to padlock.

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VI. The Best Mode Requirement

The “best mode” requirement applies • only to the knowledge of the inventor, • only at the time of filing and • only to the claimed invention

Hence best mode requirement is no impediment, because —

1. Patent applications are filed early in the R&D stage to get the earliest possible filing or priority date.

2. The specification normally describes in but a few pages only rudimentary lab experiments or prototypes.

3. The best mode for commercial manufacture and use remains to be developed later.

4. Patent claims tend to be narrow for distance from the prior art.

5. As shown by case law, manufacturing process details are, even if available, not a part of the statutorily-required best mode disclosure of a patent.

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VII. Exemplary Trade Secret Cases

1. GE’s exclusive industrial diamond process technology

• Holds patents (some expired) and trade secrets

• Refused to grant licenses

• Fast-track GE scientists stole trade secrets for Far Eastern interests for million dollar payments

• In the end got caught, tried, jailed

2. Wyeth’s exclusive Premarin manufacturing process

• Has market exclusivity since 1942

• Patents expired decades ago

• Closely guards its trade secrets

• Natural Biologies stole these trade secrets

• Wyeth sued, got sweeping injunction

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VII. Exemplary Trade Secret Cases (con’t)

3. Pizza Hut case

• Pizza Hut supplier, C&F Packing, invented and patented a manufacturing process for pizza sausage toppings and kept improvements secret

• Pizza Hut misappropriated trade secrets and got sued

• Court decision:

1. patents are invalid on on-sale bar grounds (on Summary Judgment)

2. trade secrets are enforceable and Pizza Hut had to pay $10.9 million (after trial)

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HYBRID LICENSES

Patents and trade secrets (and other IPRs)

Very prevalent — >80%

Problematic — different duration, etc.

Brulotte v. Thys Co. (Supreme court, 1964):collection of royalties after patent expiration — per se patent misuse or antitrustviolation

Solutions:• Separate agreements — ideally• Lumpsum payments• Differentiation between patents and trade secrets• Allocation of royalties to each• Reduction of royalty rate if patents

• terminate • declared invalid• if applications not issued

• Reduction of royalty-payment period (e.g. 10 years)• Grant of royalty-free license to patents• Grant of trade secret license — no patent license

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TRADEMARKS

Trademarks identify productsService marks identify servicesTrade names identify businesses

N.B. Trade names may also be used in a trademark sense, e.g.IBM is used:

• as company name• to identify computer products• to identify computer leasing services

N.B. A trade name used as a trademark is a housemark, an umbrella mark.

Trade Dress — The totality of elements in which a product or service ispackaged or presented and which combine to create the whole visual image —overall appearance.

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TRADEMARK FUNCTIONS

1. Identification – to identify one seller’s goods and distinguish them from goods sold by others.

2. Source – to signify that all goods bearing the trademark come from, or are controlled by, a single, albeit anonymous, source.

3. Quality – to indicate that all goods bearing the trademark are of an equal level of quality, whether that level is high, low, or a particular quality desired by customers, such as a reasonably priced, no-frills motel chain.

4. Advertising – to advertise, promote, and generally assist in selling the goods.

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TRADEMARKS

• Generic marks – marks that denote the product itself, rather than the source of the mark. They are never entitled to trademark protection, as they are incapable of becoming trademarks.

• Descriptive marks – marks that describe a significantly characteristic of the article. They normally convey an immediate idea of the ingredients, qualities, or characteristic of the goods. They are only entitled to trademark protection if a secondary meaning is show. (Ten K, One-a-Day

• Suggestive marks – marks that require the imagination, thought and perception of a consumer in order to determine the nature of the goods. In this category, a mark is considered as inherently distinctive and worthy of protection immediately. (Coppertone, Playboy)

• Fanciful marks – marks that sue a familiar word in an unfamiliar way. (Apple computer, Camel cigarettes)

• Arbitrary marks – marks which are invented solely for its use as a trademark. (Exxon, Xerox)

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MULTIPLE TRADEMARK PROTECTION

1. Common Law Rights in area where used.

2. State Registration

3. Federal RegistrationAdvantages:

a) Nationwide constructive noticeb) Incontestability, strengthc) Customs seizured) Procedural advantages, presumptions

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TRADE DRESS (“GET-UP”)

1. Totality of elements in which a product or service is packaged or presented and which combine to create the whole visual image – overall appearance.

• Type of trademark or identifying symbol of origin• Includes size, shape, configuration, color, graphics, etc.• Trademark principles govern – Landham Act §43 — • (Not State Law)

2. Conditionsa) Inherently distinctive or secondary meaningb) Non-functional

• No utility patent• No ads promoting utilitarian advantages• No alternative designs performing utilitarian task• Result of simple, inexpensive manufacturing method

3. Examples• Shape and appearance of a product• Shape and appearance of a container• Cover of a book or magazine• Layout and appearance of a place of business• Décor of restaurant (Taco Cabana)• Layout of golf course.

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GEOGRAPHIC DENOMINATION

1. Appellation of OriginRefers to botha) a product’s geographic origin andb) its distinctive product characteristics, caused by particular geographic conditions or methods of productione.g. Champagne sparkling win

Burgundy wineRochefort cheese

2. Indication of SourceRefers solely to the geographic origin of production, e.g. Paris perfume

3. Trademarks or Service marks containing a geographic term

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OPERATIVE LANGUAGEPATENTS

A. AssignmentA sells, conveys, transfers and assigns to B all its right, title and interest in and to certain Patent Rights.

B. License

1) A grants to B

2) a (non) exclusive license under certain Patent Rights

3) to make, have made, use, offer to sell, sell or import Licensed Products (or to practice Licensed Methods)

4) throughout the U.S.

5) for the duration of the Agreement

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OPERATIVE LANGUAGETRADEMARKS

A. AssignmentA sells, conveys, transfers and assigns to Ball its right, title and interest

in and to certain Trademarks together with the good will of the business symbolized by said Trademarks and the registrations thereof.

B. License1) A grants to B2) a non-exclusive license 3) to use certain Trademarks in connection with the Agreement Products4) in the Territory5) for the duration of the Agreement.

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TRADEMARK LICENSING

Special Considerations

Not property as such

(No licensing at all before Lanham Act)

No naked licensing or transfer

No sublicensing

Quality control = sine qua non

Differences in royalty-setting

Licensee estoppel OK

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FRANCHISING

Franchising is big business.

Franchised businesses account for:— one trillion in annual sales— 30% of Gross National product— 50% of all retail sales— 10 million people employed— 600,000 franchised locations— one out of every 12 businesses

Very popular and versatile form of— marketing and— expanding businesses

nationally and internationally

Truly win/win business arrangement

But legally it is a minefield

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FRANCHISING

Business Advantages

Franchisor’s Benefits

(a) The franchisor can engage in rapid system expansion and market penetration without the expenditure of any capital whatsoever, but instead with an infusion of capital.

(b) The franchisor acquires the aggressive self-motivation of franchisees, whose ownership fervor is generally far greater than that of employee managers.

(c) The franchisor can rely on “local entrepreneurs” that can decipher local requirements because of their direct customer contact and garner goodwill engendered in that contact.

(d) The franchisor can obtain revenue from a variety of sources: a substantial fee for the sale of the franchise, a royalty for the use of the mark and the business system, savings due to reduction of large inventories and profits due to economies of scale in the production, storage, and handling of products.

(e) The franchisor has the ability to motivate and control huge numbers of indirect employees, avoids a certain amount of risk inherent in most businesses, receives the benefit of the constant accretion to the value of its trademark or service mark.

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FRANCHISING

Business Advantages

Franchisee’s Benefits

(a) The franchisee is given access to a proven product or service that has been advertised and is known to customers.

(b) The franchisee benefits by the guidance provided by the franchisor in the form of business standards and from a standardized management system and methods of internal control.

(c) The franchisee is assisted in capital matters like site selection, design and engineering of the facility, layout, choice and sources for equipment, furnishings, supplies and even general contractor services.

98

FRANCHISING

Types and Definitions

General Definitions

A form of distribution systems, a method of marketing, under which thefranchisor grants — in return for a fee — a franchisee the right to market and distribute certain goods and/or services in accordance with specified standards, in an agreed-upon relationship.

A trademark license is usually the core of a franchise relationship. The license to use the trademark is the vehicle for the franchisee to becomepart of the business system with uniform format and quality standards.

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FRANCHISING

Types of Franchises

(1) A distribution franchise — one in which the primary purpose is for the franchisee to serve as an outlet for products manufactured by or for the franchisor. Examples are franchised sales outlets for bicycles, automobiles, and gasoline.

(2) A manufacturing franchise — one in which the franchisor permits franchisees to make and sell products using either raw materials and/or specifications supplied by the franchisor. Examples are mattress and bedding manufacturing and the local bottling and canning of soft drinks

(3) A “business format” — one in which the franchisor is primarily licensing a business format or system, rather than selling goods identified with the franchisor. In this type of franchise, the franchisee is primarily paying for the use of a franchisor’s well-known and advertised mark together with training, operating specifications, and business know-how supplied by the franchisor.

(4) An affiliation franchise — one in which the franchisor recruits into its system as franchisees persons who are already established in the particular line of business. Each of the businesses is required to adopt and use the franchisor’s mark, but they may be permitted to continue using their own marks a secondary marks. These businesses rarely use the same overall presentation or identity format except for the mark itself. Examples are insurance, financial, and real estate brokerage services.

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FRANCHISING

Legal Definition

1. Federal Trade Commission (FTC) Rule

The FTC Rule is applicable to all relationships which meet the statutory definition of a franchise, whether or not the parties intend to create a franchise and use the term “franchise” to characterize the relationship.

(1) The franchisee sells goods or services associated with the franchisor’s trademark or service mark. This element is satisfied if the franchisee has the right to sell or distribute goods associated with the franchisor’s trademark, with or without a formal licensing agreement.

(2) The franchisor has the power to exert significant control over, or promises significant assistance with, the franchised business via:

(a) offering formal sales, repair or business training programs,(b) establishing accounting systems,(c) furnishing management, marketing or personnel advice,(d) selecting site locations, or(e) furnishing a detailed operating manual.

Test: Whether the licensee has become dependent upon the licensor’s control or assistance. Trademark quality control not relevant.

3) The franchisee is required to pay the franchisor over $500 during the first six months of the agreement.

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FRANCHISING

Legal Definition 2. State Definitions

A franchise relationship is one in which:

the franchisor provides goods or services for

the franchisee to sell,

the franchisee operates under the franchisor’s trademark or othercommercial symbol, and the franchisee pays some sort of fee.

Some states vary, New York does not require use of a franchisor’s trademark, if the franchisee pays the franchisor a fee and submits to the franchisor’s requirements in marketing and operations.

Many states include “business opportunities” and “business investments,” even though they are not called “franchises.”

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FRANCHISING

Exceptions & Exemptions

(a) “Fractional franchises — where a business that has been in existence for more than two years and the parties anticipate that the new franchise relationship will not increase sales by more than 20% of the dollar.

(b) Oral agreements — where there is no writing evidencing any material terms of the relationship.

(c) Single trademark licenses — where a trademark licensor offers only one trademark license.

(d) Experienced franchise relationships —large and experienced franchisors, sophisticated franchisees.

(e) Categories of industries — certain industries or categories of business arrangements because of public policy considerations, or because these industries are already regulated by other legislation, e.g. motor vehicle dealers, bank credit plans, sellers of farm machinery, and marketers of petroleum products.

(f) Size and net worth —business arrangements initiated by franchisors whose net worth exceeds a specific amount, or who have specified years of experience administering franchise systems of a specified size.

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FRANCHISING

Franchise System Structure

A prospective franchisee has little choice but to put his entire faith and confidence in the franchisor. From sources of supply to advertising, to orders, payments, credits, discounts, the franchisee must look to the franchisor for total guidance in every material aspect of the franchise relationship.

As franchising is a creature of contract, the entire structure of a franchise system will be contained in a franchise agreement, which set forth in detail the rights, duties, obligations and activities which each party pledges to undertake and perform. The basic franchise is the unit franchise relationship, — only one — franchise outlet, at a specified location and within a designated territory.

The beginning point of the franchise relationship is the duration of the franchise relationship. If the term is too short, it will attract few buyers. Franchisees are purchasing a business opportunity where time is needed to develop name recognition, to maximize goodwill and to recoup their investment. If the term of the franchise is too long, the franchisor may be stuck with a less than desirable franchisee, who is unwilling or unable to operate the franchise successfully.

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FRANCHISING

Franchise System Structure

Another key feature of the franchise structure is the grant of territorial rights, an “exclusive territory”. Selection of the franchise location and the construction of the franchise unit are also important. Franchisor approval of any franchisee-selected site should always be provided for. Further, any relocation rights should be addressed as well.

Two types of franchise relationships are the unit franchises and area franchises. In unit franchises a franchisee is granted the right to develop and operate one outlet at a specific location or with a defined territory.

Area franchises: multiple outlet franchises —may include subfranchisors and master franchisors. A franchisee can develop and operate two or more outlets within a defined territory.

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FRANCHISING

Disclosure and Registration Requirements

A. The FTC Rule imposes six different requirements in connection with the “advertising, offering, licensing, contracting, sale or other promotion” of a franchise.”

1.Basic Disclosures — Franchisors must give potential inventors a basic disclosure document at the earlier of the first face-to-face meeting or ten business days before any money is paid or an agreement is signed in connection with the investment.

2.Advertised Claims — Only advertisements that include an earnings claim are affected. Such ads must disclose the number and percentage of existing franchisees who have achieved the claimed results, along with cautionary language

3.Earnings Claims — If franchisors make earnings claims, they must have a reasonable basis, and prescribed substantiating disclosures must be given to potential investors in writing.

4.Franchise Agreements — Franchisors must give investors a copy of their standard-form franchise and related agreements at the same time as the basic disclosures, and final copies intended to be executed at least five business days before signing.

5.Refunds — Franchisors must make refunds of deposits and initial payments to potential investors, subject to any conditions on refundability stated in the disclosure statement.

6.Contradictory Claims — No written or oral claims may contradict information provided in a required disclosure.

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FRANCHISING

Penalties

• Failure to comply with any of the six requirements is a violation of the FTC rule and can result in civil penalties of up to $10,000 per violation.

• Also rescission, reformation, payment of refunds or damages, or combinations of these remedies, and cease-and-desist orders.

• There is no private right of action for violations of the FTC Rule.

• Remedies under state law: a private right of action for rescission, damages, costs and attorneys’ fees, and sometimes multiple or punitive damages.

• Willful violations of state laws may also result in criminal penalties, including fines and imprisonment.

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FRANCHISING

Horror Stories

• An IP agreement, especially a trademark license, and even a technology license or a distributorship agreement, may inadvertently or accidentally create a franchise and fail to comply with the federal and state franchise laws and regulations.

• This is a serious pitfall or trap for the unwary.

• A party to a licensing or distribution agreement may be a franchisor and not know it and find itself facing dire consequences.

• Coverage under franchise laws cannot be avoided simply by describing a relationship as a “license” or by some other name, or by drafting contracts that do not literally reflect the characteristics of a franchise.

• Examples: Kis Corp., Aristacar, Cooper Distribution, “All Snack,” etc.

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International Considerations in Licensing a) Importance of Licensing

The growth in importance of international licensing to the US economy is unmistakable. Between 1950 and 1980, US companies signed approximately 32,000 licensing agreements. In the 1990s, licensing grew at an unprecedented pace with the advent of technological developments in computer technology, biotechnology and pharmaceuticals.

The incentives to licensing are obvious: companies from less developed countries want to duplicate their more developed counterparts’ successes and are eager to offer lower cost production alternatives and companies in more developed countries seek new ides and new markets in which to exploit their existing intellectual property assets.

The rules governing the transfer of technology have been evolving for decades and will continue changing as the importance of licensing increases. The governments of many countries recognize the growth of international licensing and have worked to lower the barriers and ease the systematic impediments of importing and exporting technology.

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b) Cultural and Legal Differences

• Variances in legal systems and cultures still can make international licensing difficult at best and a potential trap for the unwary.

• All of the issues surrounding domestic licensing remain but the international license brings complexities of dealing in more than one legal system, international law, governmental regulation, and different business and cultural practices.

• Moreover, hidden differences, special issues and unique syndromes abound in the agreement negotiation and drafting stages

• Two general categories of differences:– Culture and language– Different legal systems

• Cultural differences in particular are the greatest stumbling blocks, especially I the negotiation phase.

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II. Cultural Differences

a) Hidden Differences/Unique Syndromes

Three uniquely Japanese syndromes:

• Black Ships SyndromeThe expression “Black ships have arrived again” recalls Commodore Perry’s black ship in Tokyo harbor in 1854 and indicates exertion of pressure from the outside, e.g.• IBM’s move to Tokyo in 1984• PIPA delegation in Tokyo in 1984: “Gray Ships”Best to use low-key approach

• Totem Pole SyndromeVestiges of caste system - authority and title are greatly valuedGovernment officials, e.g., MITI officials and JPO examiners higherthan lawyers and IP practitionersThe latter can’t be aggressiveMust help them help you

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a) Hidden Differences/Unique Syndromes (cont’d)

• Black Hole Syndrome

• Tadao Umesao: In terms of communications Japan is like a Black Hole: It receives but does not emit signals. Getting information has a positive social value while giving it is considered harmful.

• Reluctance to “open the kimono”

• Resistance to auditing provisions

• Avoidance of definite commitments even in negotiations

• Ties in with “Silence is gold, eloquence is silver”

• Don’t “feel any need to reveal what (they) know.

• Are “glad to sit and listen.”

• With patience they “usually learn what (they) want to know.”

(See my article on “Patent Solicitation and Licensing in Japan”)

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b) Negotiations

• Preliminary negotiations are more important in the Far East than in the US.

• Americans have a direct let’s get-down-to-business negotiation style.

• In many other countries, establishing a social relationship comes first.

• A personal relationship (“Guan Xi”) of mutual trust and respect.

• Parties need to be able to have “heart-to-heart” (indirect) communications.

• Americans can conduct business with people they don’t know or can’t stand —“it’s just business.” Elsewhere, if they don’t know or like you, they won’t do business with you.

• Culture clashes can derail overseas deals — and quickly.

• E.g. US Chief IP Counsel leaves Tokyo in a huff at the end of a week of negotiations because “nothing had happened.” In fact, he also told me he had insisted they “had to do it his way.”

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b) Negotiations (cont’d)

Other true (apocryphal?) stories:

• American negotiation team getting frustrated after ten days of “dilly-dallying” by Japanese and leave at point when Japanese were ready to wrap up deal

• Another American negotiation team getting impatient already on first day (Monday) because of delegation small talk — delegation head pounds table and protests: “Let’s get down to business. We have a plane to catch on Friday.” (Time is money.)

• Three tractor salesmen go to Japan to sell tractors.

Make a great presentation with pricing. No reaction from Japanese.

Americans get nervous and lower price. Still no reaction from the Japanese.

Americans again lower price way beyond plan.

• Silence of Japanese due to need to think about it and build consensus.

• Patience is key — even in excruciating periods of silence.

• Americans: Japanese approach to business negotiations wastes time

to business deals.

• Japanese complain about the dry American Attitude to business deals

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b) Negotiations (cont’d)

• The extended preliminary socialization of about a week or more should actually be welcome to American negotiators — it can also help in understanding the mindset of potential licensing partner.

• In this connection, it is helpful to bone up not only on the legal system of the foreign country but also its geography and history and its economic and political system, thereby showing a genuine interest and understanding.

• Also be aware of differences between monochronic (time schedules are important) and polychronic cultures (human relationships are important).

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c) Drafting

• Many foreign parties consider a written agreement as a mere memorial of the true agreement, i.e. the oral understanding.

• Hence, the preference for a general and short and even vague text, e.g. “heads of agreement.” Statement of principles.

• Plus a clause providing that the parties will handle any issues that may arise in a fair and reasonable manner. The agreement then amounts to an “agreement to agree.”

• Long and legalistic agreements and specific provisions re e.g. breaches raise suspicions of lack of trust.

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c) Drafting (cont’d)

• Because of the need of brevity, the focus should be on the most important clauses, i.e.:

–grant clause

–definitions clause

–termination clause

–royalties

• Sometimes Japanese may agree to a detailed written contract because of the need to file agreements with foreigners with JPO and/or FTC and also because of the American parol evidence rule. Great reluctance to do so.

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c) Drafting (cont’d)

• Example of a clause that the parties will deal with issues that may arise in a fair and reasonable manner.

• Article 00

The parties shall discuss and decide in good faith the detailed matters necessary to perform this Agreement or the matters not provided in this Agreement.

If a significant change in the business circumstances arises, the parties shall negotiate to change the terms and conditions of this Agreement to conform to such a change and the benefit of the parties.

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c) Drafting (cont’d)

Comparative view of the meaning of contracts:

Signing a contract is “closing a deal” Signing a contract is “opening a relationship

“A deal is a deal” The deal is a work in progress

“If you don’t have it in writing, you don’t have it” “It does not matter what you have on paper”

Sanctity of contract Essence of the deal is the relationship, subject to reasonable changes over time

An executed contract is a definitive set of rights The “deal” being negotiated is not theand obligations strictly binding the two sides contract but the relationship between the

parties

Preference for very detailed contracts to cover Preference for statement of generalAny and all contingencies principles (“Heads of Agreement”)

To solve problems, parties look to their written To solve problems, parties look to theirContract relationship

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d) Different Language

• Often need to use another language.

• Then agreement in both languages, with one being the official language.

• Preferably that of the country where any dispute is likely to be handled.

• Parties also can agree that both versions are formally executed and official. Avoidance of certified translations.

• Simple and straightforward language. Clear definitions of terms having different interpretations.

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III Differences in Legal Systemsa) Comparison of Legal Traditions

United States Japan

Pluralistic society Homogeneous society

Political, religious, and social thought influenced by 18 th Century England and France

Political, religious, and social thought influenced by ancient China and Korea

Common law heritage (England) Civil law heritage (Germany, France)

Adversarial legal system Inquisitorial legal system

Federal republic (federal and state governments have separate court systems and their own substantive law)

Unitary state (jurisdiction and choice of law issues are non-existent

Principle of stare decisis (judicial precedent) important in the application of legal principles

Judicial precedent relatively unimportant (law is based upon civil process and regulations)

Civil justice system most important dispute resolution process (litigious nature of society)

Little reference to the civil justice system to resolve disputes (reliance upon informal compromise or conciliation procedures)

Jury system No jury system

Elaborate mechanisms for discovery Limited discovery

Punitive damages No punitive recovery

Role of law critical in effective resolution of disputes; power to shape society through judicial decisions, legislation, regulation; important participant in business counseling and negotiation

Lawyer viewed as an unnecessary evil: essentially barristers; little involvement in business counseling or commercial negotiation; business executives conversant with commercial law

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b) The Role of Lawyers in Japanese & US Societies

• Great differences in the role lawyers play in Japanese and US societies.

• Important with respect to the role an American lawyer should play in Japan no matter what his/her mission is in Japan.

• US society is organized around its legal system which plays a central role. Law and politics are all important here.

• In the Japanese society law plays only a peripheral role. In fact Japan can function without law. Japanese society has been homogeneous for ages. With deep-seated traditions. Tribal forces have prevailed over social forces of industrialization and modernization.

• US society is heterogeneous with a short history and significant immigration throughout its history. No cultural traditions — law and order is the glue that holds the society together.

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b) The Role of Lawyers in Japanese & US Societies (cont’d)

• What governs social relations in Japan is “giri” — natural standards of propriate conduct and “ninjo” — correct feeling while acting in correct way. Thus, Japanese act in accord with “giri” with appropriate “ninjo” and that’s what being Japanese is all about.

• Japanese society is trusting, harmonious; we are suspicious, litigious.

• Resort to law in Japan presupposes a total breakdown in social harmony and is virtually the equivalent of violence. Litigation is always a disgrace.

• Thus, it’s logical that the Japanese don’t like lawyers. Lawyers have an image problem in Japan, to say the least. They are a sign of trouble and low on the totem pole.

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b) The Role of Lawyers in Japanese & US Societies (cont’d)

• Lawyers must keep a low profile, as low as possible and preferably stay out of sight. (Incidentally, this is also true in certain European countries, especially in Switzerland.)

• This is the reverse of their conduct in the US where they have to be forceful, even aggressive and confrontational.

• There is no horse-trading in Japan. American style hard bargaining produces suspicion and paranoia.

• US lawyers didn’t even get visas from Japan until about the mid-eighties if their reason for traveling to Japan was to depose Japanese nationals or go into law practice.

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c) Differences in IP SystemA. Patent Systems

Focus on inventor Focus on invention

Focus on inventors’ rights Focus on public rights

First to invent First to file

No exclusions Many exclusions

Inequitable conduct None

Best mode requirement None

Grace periods Absolute novelty

Bogus prior art None

No prior user rights Prior user rights

Reexamination Opposition

No compulsory licensing Compulsory licensing

Secret pendency Publication after 18 months

Continuations (-in-part) None

Many differences in enforcement and litigation

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c) Differences in IP System (cont’d)

B. Trademark SystemsEmphasis on use Emphasis on registrationNo “famous marks” Famous marks(Dilution)

C. Copyright SystemsEmphasis on work Emphasis on authorWeak moral rights Strong moral rights

D. Other DifferencesMultiple protection Single protectionNo utility models Utility models

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d) Patent Systems: Divergence

United States Japan

Objective: Objective:

Exclusive rights to inventors Utilization by Industry

Offensive purpose Defensive purpose

Inventor applicant Company applicant

High filing costs Low filing costs

First-to-invent system First-to-file system

1-year grace period Absolute novelty

Jumbo cases Many small applications

Shortest possible examination Deferred examination

Broad claim scope Narrow claim scope

No separate examination fees High examination fees

No compulsory licensing Compulsory licensing

No prior-user rights Prior-user rights

Maintenance not expensive Very high maintenance

Easy, broad discovery — jury trials Difficult to enforce

Preliminary injunctions — high awards — treble damages

Marginal remedies

Doctrine of equivalence Literal narrow claims intrepretation

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e) Additional Considerations

• Format and terms of an international license may track a corresponding US license in many respects.

• But competition laws, customs laws, employment law, tax laws loom larger in international licenses.

• And special considerations and issues in foreign countries may come into play, such as governmental approvals, registration or recordation, applicable language, choice of applicable law, export regulations, arbitration, tax allocation and currency, etc.

• Conversely, certain provisions the licensors routinely include in domestic license may not be enforceable abroad, as for example:

– non-competition covenants

– territorial restrictions, etc.

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f) Competition (Antitrust) Laws

Well developed antitrust now exist abroad.

Their applicability needs to be considered as well as US antitrust laws if an international agreement would affect US commerce.

Two general regimes have existed:

a) “Ten commandments” approachLists of white, gray, black license restrictionsPrior approval requisite, unless “block exemptions” applyChina, European Union, Japan, Latin countries, South Africa

b) “Rule of Reason” approach No submission for approval Scrutiny or attack later, if (likely) adverse effect on competitionAustralia, Germany, UK, US

Due to frequent revisions and complexities consultation with local counsel is essential.

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IV. Conclusion

In licensing in Japan as well as in China and Korea and other foreign

countries, your objective should not be to drive a hard bargain and write

tighter legalistic agreements, but rather to establish better personal and

business relationships.

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REACH OF U.S. ANTITRUST LAW

“The Tokyo Disconnection”

1. Japanese fax paper manufacturers meeting in Japan in 1990 agreed to fix prices.

2. Manufacturers sold paper to Japanese trading houses for specific U.S. customers on the condition that they charge set prices.

3. Paper makers monitored the trading houses to ensure that fixed prices were charged.

4. The Justice Department asked the Japanese government in 1994 to help get price-fixing evidence in Japan.

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REACH OF U.S. ANTITRUST LAW (continued)

“The Tokyo Disconnection” (continued)

5. The Japanese Prosecutor’s Office raided the Tokyo headquarters of two Japanese companies, seized documents for the Justice Department and later questioned company representatives in front of Justice officials.

6. From 1994 through 1996, the U.S. government obtained indictments and guilty pleas from Japanese companies on criminal price-fixing charges under the Sherman Act.

7. The 1st U.S. Circuit Court of Appeals held in March 1997 that the Sherman Act can be used against foreign companies and citizens for conduct that occurred outside the United States.

8. The Sherman Act had gone abroad.

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Thank you!

Karl F. Jorda

David Rines Professor of IP Law and Industrial

Innovation Director, Kenneth J. Germeshausen

Center for the Law of Innovation and

Entrepreneurship

Franklin Pierce Law, Concord, NH, USA