les Nouvelles®

JOURNAL OF THE LICENSING EXECUTIVES SOCIETY

Volume XXXVI No.4 December 2001

Out of the Lab and into the Marketplace: It’s About a Business PlanG. KIP CULLER

Page 125

An Over view of Structured LicensingFRANK W. SUDIA, JD

Page 128

U.S. License Agreements Should be Adapted for Use in CanadaMIRKO BIBEC AND MICHEL GÉNÉREUX

Page 132

Restructuring Technology-rich Companies—Options Available Under U.S. Bankruptcy Law

ZACK CLEMENT, JONATHAN BOLTON AND CARMEN R. EGGLESTONPage 137

Community Court Raises Key Licensing IssuesBRUNO VANDERMEULEN AND VIRGINIE PISSOORT

Pagw 143

Andean OutlookNATALIA TOBÓN

Page 149

EU ReviewALEC BURNSIDE

Page 152

Recent Decisions in the United StatesBRIAN BRUNSVOLD AND JOHN PAUL

Page 157

LES INTERNATIONAL

OfficersPresident Thierry SueurPresident-elect Mel JagerPast President Ed ShallowayVice President Peter ChroczielVice President Masataka HashimotoSecretary Barry QuestTreasurer Willy Manfroy

Committee ChairpersonsAuditor Ron GrudzieckiAutomotive Thomas AhrensAwards Olivier Axster

Larry EvansChemical Industry John Woodley

Abdullah Al-SubyaniCommunications James LeavyConstitution Nigel JonesCopyright Licensing Elisabeth LogeaisDispute Resolution Jonas GullikssonEducation Tom VinjeEndowment Gonzalo de UlloaEnvironmental Chris GoodmanEuropean Arnaud MichelHealthcare Elisabeth Thouret-LemaitreIndustrial Sectors Robert R. GruetzmacherInvestment Alan LewisIP Maintenance Tom SmallIT & E-Commerce Dwight OlsonLegal Clyde WillianLESIAC Ron GrudzieckiLong Range Planning Jim Malackowski

Rodney De BoosMeetings Benny BrowneMembership Adam LibermanNominating Ed ShallowlyPan American Gloria Isla del CampoPan Asian Yoon Bae-KimPatent & Technology Allen Richmond

Licensing Guenter IsenbruckPublications D, Patrick O’Reilley

Renate SiebrasseTrademark Luigi SagliettiUniversity Robert Smailes

les Nouvelles Editorial Review BoardBrian G. Brunsvold, Washington, D.C.Michael Burnside, London, EnglandRodney M. DeBoos, Melbourne, Victoria, AustraliaJinzo Fujino, Tokyo, JapanGloria Isla, Mexico City, MexicoNorman A. Jacobs, Franklin Lakes, New JerseyJohn T. Ramsay, Calgary, Alberta, CanadaC. A. (Clem) Wachinski, Wilmington, DelawareThomas G. Ryder, Editor7384 Penn DriveAllentown, PA 18106 U.S.A.Tel: +1-610-336-9575Fax: +1-610-336-9576E-mail: editor@lesi.org

les NouvellesVolume XXXVI Number 4

(ISSN 0270-174X)The articles published in les Nouvelles reflect the views of theauthors, and not of the society as an association or of its officers.les Nouvelles is published each March, June, September, andDecember by the Licensing Executives Society (U.S.A. andCanada), Inc. for the Licensing Executives SocietyInternational. The Licensing Executives SocietyInternational is a worldwide federation of business-orientedprofessional societies of individuals involved in the transfer oftechnology and industrial or intellectual property rights.

Copyright © 2001 Licensing Executives SocietyInternational.

DEADLINES EOR LES NOUVELLES: Copy for publicationin the blue pages of les Nouvelles should be received by theEditor as far as possible in advance of the final deadlines,February 1, May 1, August 1 and November 1. Articles forthe white pages are reviewed by the LES Editorial ReviewBoard, and they are published as soon as possible afteracceptance. All materials are to be submitted electronicallyin either MS Word or Text Only format.

Arab Countries Abdullah Al-SubyaniNabil Salame

Argentina Fernando NoetingerMiguel O’Farrell

ANZ Alan MoyleBenny BrowneRichard HamerGeoff Levy

Austria Dietmar HofstaetterMeinhard Ciresa

Benelux Nigel WagstaffBruno VandermeulenEmma van Oosterom

Brazil Eduardo AriboniRaul Hey

Britain/Ireland Chris GoodmanFiona NicolsonNigel JonesBarry QuestChristi Mitchell

China Wei ChengShaojie Chi

Colombia/Ecuador/Peru Rodrigo Bermeo

Ernesto CavelierCzech Republic Jana Kuhnlova

Ales VokalekFrance Arnaud Michel

Thierry SueurElisabeth Thouret-

lemaitreGermany Christian Osterrieth

Guenter IsenbruckHelga KutzenbergerDirk Kruger

Hungary S. SzentpeteriAndras Weichinger

Israel Henry EinavRami Bar-Josef

Italy Mario TraversoFurio GhezziRinaldo Plebani

Japan Masataka HashimotoKazunori YamagamiChikao FukudoKenichi Nakano

Korea Yoon-Bae KimYong In Kim

Malaysia Michael ChewJin Wong Nee

Mexico Gloria Isla Del CampoBjorn Vadillo

Philippines Alonzo AnchetaAlex Ferdinand Fider

Russia Natalia KarpovaSergey Dorofeev

Scandinavia Jonas GullikssonArne AlnaesViveca RüterPer Aukner

Singapore Tan Kee-LengGoh Oon Tong

South Africa Johan de PreezAndré Van Der Merwe

Spain/Portugal Thebar MirandaFernando PomboGonzalo de Ulloa

Switzerland Felix GretherPhilipp DreierRalph Schlosser

USA/Canada Wes AnsonWalt BraticDavid BraunsteinDexter BrooksCathryn CampbellIndranil ChowduryE.B. (Ted) CrossHenry FradkinRobert GoldscheiderAlan GordonRonald GrudzieckiRobert GruetzmacherMichael LechterKeith LutschJames MalackowskiJim MorshArlene MorrisEmmett MurthaArt NutterDwight OlsonDennis P. O’ReilleyErnest PosnerArt RoseThomas SmallJames SobierajClyde WillianJohn Woodley

Delegates

1974 J. Gay1975 M. Flnnegan1976 B. Hedberg1977 M. Okano1978 D. Smith1979 J. Gaudin1980 J Stonier

1981 S. Heijn1982 W. Poms1983 H. Hodding1984 F. Pombo1985 M Ariga1986 L. Mackey1987 P. Hug

1988 D. Ryan1989 K. Payne1990 J. Portier1991 F. Noetinger1992 A. Mifune1993 L. Evans1994 O. Axster

1995 N. Jacobs1996 J. Brown1997 S. Layton Jr.1998 R. De boos1999 P. Mandros2000 H. Goddar2001 E. Shalloway

International Past-Presidents

Society OfficersCountry President Secretary

Arab CountriesArgentinaAustralia/New ZealandAustriaBeneluxBrazilBritain/IrelandChinaColombia/Ecuador/PeruCzech RepublicFranceGermanyHungaryIsraelItalyJapanKoreaMalaysiaMexicoPhilippinesRussiaScandinaviaSingaporeSouth AfricaSpain/PortugalSwitzerlandUSA/Canada

Talal ABU-GHAZALEHFernando NOETINGERBenny BROWNEGunter KAHLERNigel WAGSTAFFGabriel LEONARDOSChris GOODMANYue MAErnesto CAVELIERVladimira HUSAKOVAElisabeth THOURET-LEMAITRERolf EINSELEMihaly LANTOSShlomo COHENLuigi SAGLIETTIMasataka HASHIMOTOYoon-Bae KIMJin Wong NEEOscar BECERRILAntonio VELICARIANatalia KARPOVAJonas GULLIKSSONTan KEE-LENGJohan DU PREEZMaria Dolores CONDEPhilipp DREIERJohn WOODLEY

Khaled ABU OSBEHMiguel O’FARRELLGeoff LEVYHarald POLAKGreg VOOSRaul HEYJohn ROEShaojie CHIGabriel IBARRAJan HAKHenri COLLETTEBernhard GEISSLERKatalin DERZSIHenry EINAVRoberto PRATOTatsuya AMEMIYADuk BAEKKen ST JAMESPatricia BECERRILPatricia BUNYESerge DOROFEEVGoran BERGQVISTSuresh SACHIZelda SNYMANIsabel GOMEZ-ACEBODieter RIGGENBACHJames SOBIERAJ

les Nouvelles 125December 2001

Entrepreneurial researchers arediscovering that now may bethe time to bring their new

technologies to market. Now thatInternet euphoria has worn off,many investors are seeking newtechnology alternatives and someresearchers are capitalizing onopportunities to start new venturesthrough their discoveries. A start-up venture can lead to far betterreturn on research in the form ofsignificant stock positions plusconsulting fees instead of technol-ogy licensing fees that may notcompare. Attracting investors andpartners who can help bring a newbusiness or technology to liferequires first and foremost a sharpbusiness plan. Guidelines for creat-ing a compelling business plan fora research-based venture, includ-ing what components it shouldcontain, are provided here.

R&D

Once a new technology is readyfor market applications, the prioremphasis on research shifts tobringing the new technology tomarket. This invariably requiresfunding, and a few things oninvestors’ demand lists are: a qual-ified management team; a sensiblebusiness model—the capability forrevenues and profitability; largeand growing markets; competitiveadvantages such as patented prod-ucts; and financials that demon-strate a return to them. Forinstance, a start-up with apatented, breakthrough heart sur-gery device and experienced man-agement is likely to get takenseriously since it appeals to largemarkets, is difficult to encroachupon due to its patents, and is led

by managers with proven trackrecords.

A business plan can help youraise capital, attract management,pursue alliances or even licensetechnology by demonstrating howa business can be built around it.When it comes to raising capital fora new venture, all investors are notalike, and the pathway to topinvestors and partners begins witha compelling business plan.

Since research and developmentskills are different from entrepre-neurial business skills, researchersare seeking specialized tools andprofessionals to create their busi-ness plans.

BUSINESS PLAN

A key factor that differentiatestop entrepreneurs—who are oftenalso investors—is an understand-ing of how to “sell the story” of anew concept in a business plan.These plans “speak the venture lan-

guage” and convincingly demon-strate why a start-up or new con-cept should be funded. This differsfrom a hard to follow technologydissertation or a boilerplate docu-ment.

More specifically, following aretypical sections in a business plan,with common mistakes that shouldbe avoided when crafting convinc-ing research-based business plans:

Executive Summary. This sectionshould both summarize the busi-ness plan and capture investorinterest enough so that the investorreads the entire plan. Make it clearwhat the business is about andmost importantly translate technol-ogy into clear terms. If potentialinvestors can’t understand it or ittakes inordinate time to decipher

Out of the Lab and into theMarketplace: It’s About a Business Plan BY G. KIP CULLER*

* G. Kip Culler is president of Atlanta-based US Business Plan, Inc., a com-pany that prepares in-depth businessplans for promising technology start-ups and other technology-related ven-tures.

R&DReadiness• New technology ready or nearly ready for new product applications

BusinessPlanContents• Executive Summary• Company• Products and Services• Market Analysis• Marketing and Sales• Operations• Management• Finance• Presentation

Start-upVentureSuccess Factors

• Management Team• Product(s)• Marketing and Sales• Operations• Financial Management• Timing

Return onResearch

“ ”

126 les NouvellesDecember 2001

jargon, they won’t invest in it. Infact, clarity is important through-out the entire business plan. A com-mon mistake is to spend a minimalamount of time on the executivesummary, however, this sectionshould be refined for as long as ittakes, because many investors willnot read further if the summarydoes not capture their interest. It iscritical to perfect the executivesummary, and it should be nolonger than two to three pages.

Company Background. This areashould include the organization’sexisting or planned legal structuresuch as a partnership or C-corpora-tion; a very brief synopsis of prod-ucts or services; and the company’smission, business strategy, loca-tions and other company-relatedinformation. Also include any con-tracts or alliances the company hasor expects to have. If there arealready customers, these should bebriefly profiled. A brief mention ofthe key individuals involvedshould be included; however,resumes, CVs, and other detailsshould be excluded here and sum-marized instead in theManagement section of the plan.

Products and Services. For prod-ucts that involve complex technolo-gies, even technology-savvyinvestors will appreciate beginningwith a short overview in layman’sterms that provides a basis tounderstand the technology and itsmarket potential. Then describeeach product and/or the applica-tions in which the new technologywill be used; unique advantages;and most importantly, what thebenefits are to whom. Discuss vari-ous product lines, what servicesand support will be offered, ongo-ing research and development, andfuture plans. All of these elementswill invariably change; however,the business plan serves as a tem-plate for your start-up or market-bound research and developmentwork and can be revised as circum-stances change. The most common

mistake is to dedicate most ornearly all pages in the businessplan to this section and use highlytechnical terms to describe technol-ogy and products in detail. Whileresearch and technology—and thejargon associated with it—is oftenthe area of most comfort andknowledge, the ability to under-stand its context in a new ventureand equally articulate the manyelements required to create a viablebusiness around it is what sepa-rates a compelling business planfor a new venture from a disserta-tion on technology.

Market Analysis. This criticalanalysis demonstrates how wellthe research entrepreneur knowshis or her target market and poten-tial customers. State why marketswill buy the technology and/or itsapplications and how value will becreated, sustained and grown—backed up with facts and figures.Although market research can besparse for cutting-edge technolo-gies, there are almost always uni-verses of potential customers thatcan be quantified to some degree.This section should also include adiscussion of competitors or poten-tial competitors and how the newventure’s offerings will be differentand/or have competitive advan-tages. A common mistake that issure to raise a red flag for investorsis to state “we have no competi-tion.” If the technology and busi-ness are worthwhile, you will soonhave competitors, so acknowledgeeven potential sources of competi-tion that could provide technologyor products to fulfill or even par-tially fulfill the same customerneeds. To further strengthen this,include barriers to entry that favorthe company versus competitors,such as patents that will make itdifficult for competitors to matchthe company’s new products andcompete.

Marketing and Sales. Even forbreakthrough products with imme-diate market demand, marketing

and sales are keys to success. Thissection is an “outward-looking”view of how the company interactswith customers and how its prod-ucts reach them, whether cus-tomers are other businesses such asmanufacturers and distributors, orend consumers. For instance, prod-ucts may be sold directly to manu-facturers, sold to wholesalers orretailers, sold directly to consumersor sold in countless other ways.Your plan may be to reach them byusing in-house sales professionals,outside manufacturers’ representa-tives, telemarketing, direct mail orother methods. Marketing plansmay also include advertising, pro-motions, sponsorships or commis-sion programs. Also includeestimated pricing and how theproduct or technology will be posi-tioned. For instance, a new clearplastic could be positioned as amore durable and lower cost alter-native to glass for commercialoffice windows. A higher-pricedenzyme may be positioned as thekey ingredient for a stand-alone,quick-acting, universal stainremover that is more useful andconvenient than everyday con-sumer detergents. Don’t assumethat your product is so advancedthat a marketing and sales plan isnot needed. Investors weigh mar-keting and sales heavily, sometimesmore than the product or serviceitself. A light treatment is likely toraise doubts about management.

Operations. A rule of thumb onwhat goes into this section is toview it as an “inward-looking”snapshot of how the business oper-ates day-to-day. This shouldinclude a high-level discussion ofhow products will be manufac-tured or to whom manufacturingwill be outsourced. Also includefactors such as how products willbe packaged and inventoried andthe logistics for delivery of prod-ucts and services to customers,whether businesses or consumers.It’s likely that there are industry

127les Nouvelles December 2001

norms that apply. For instance, thepackaging of software can be out-sourced to third parties, and distri-bution can be outsourced as well.In these cases, the plan shoulddescribe this along with the costsinvolved and contractual arrange-ments required such as depositsand minimum orders to engage thethird party. Other elements toinclude in this section are systemsthat are needed, whether informa-tion technology systems or simpleworkflow processes.

Management. Investors placeextremely high weighting on man-agerial leadership, especially fornew ventures. A “been there, donethat” team is preferred. Illustratethe breadth and depth of the man-agement team, include summarybiographies, and state the responsi-bilities each team member has orwill assume. This section can alsoinclude advisors—business, techni-cal and professional advisors suchas attorneys, accountants and man-agement consultants. Even for anearly-stage venture, a team oranticipated team should be pro-filed in the business plan. Do notinclude only technologists and/oraltogether leave out critical posi-tions such as marketing becausethere is no one yet identified to filla given role. Instead, the plan willbe considerably stronger byacknowledging the unfilled posi-tions and associated skills, and pre-senting how these gaps will befilled. In fact, the business plan canbe used early on as a recruiting toolfor the needed additional manage-ment and advisors.

Finance. This section shouldinclude capital required, and sum-mary financial statements that fol-low standard income statementand balance sheet formats. Thiscontrasts sharply with providing asalary, expense and equipmentbudget. Unlike grant reviewers,investors aren’t interested in open-ended funding of research. Moreimportantly, the statements should

bear out the business’s growth andeventual profitability. For start-upbusiness plans, financial state-ments are often prepared across 3-5years, with monthly detail in thefirst year, quarterly in the second,and yearly thereafter. A commonmistake is to project initial sales asflat—or zero—followed by anexponential increase in revenue—a“hockey stick” projection. Thiscasts question on the reasonable-ness of the statements even if itmay be possible. If the company isalready operating, financial sum-maries of past years should beincluded. This section should alsodescribe a realistic “exit strategy,”which may also be mentioned inthe Company section and/orExecutive Summary. The point ofthe exit strategy is to showinvestors how they will get theirinvestment back, plus a return forthe involvement and risk taken.While the most publicly familiarexit strategy may be an initial pub-lic offering, or IPO, at which timethe company raises capital and itsshares begin trading on a publicstock market such as Nasdaq, amore likely exit for many start-upsis an acquisition by a larger com-pany at which time some combina-tion of cash or the new corporation’spublicly traded stock is typicallyoffered for the existing owners’shares of stock in the start-up.

Presentation. A subtle butimportant factor is the ability tocreate enthusiasm in the businessplan, which depends on both thecontent and presentation—includ-ing appropriate graphics if neces-sary to clarify complex conceptsand technologies. If you use tech-niques that make a strong businesscase and create buzz at the sametime, there is a much better chanceof receiving a more enthusiasticresponse. Once the right technol-ogy and a compelling businessplan are in place, it’s then a matterof placing it in the right hands—those who would see value in your

proposition and who can providethe right resources to you.

START-UP

Potentially the biggest mistake inpreparing a start-up business planis to approach it as a sole academicexercise to create a technical, legalor boilerplate document. The valueis in the planning itself, not thedocument per se, and for aresearch-based venture, develop-ing a successful plan requires con-siderable thought and oftenmultiple disciplines.

This overview is not meant to beall inclusive of what a start-upstrategy should be or what shouldbe profiled in a business plan, butrather a guide for a plan to movetechnology out of the lab and intothe marketplace via a start-up, andat the same time help R&D profes-sionals command due return fortheir work. There is often a canyonin between, and this approach canbring down barriers in reachinginvestors, bridge the canyon anddeliver significant value to allinvolved. When stakes are high,entrepreneurial researchers needthe best tools available to attractinvestors and partners. And nowmay be the best time to launch.

les NouvellesDecember 2001128

ABSTRACT

This paper outlines a “structuredlicensing” model to facilitate nego-tiation of multi-party patent agree-ments. Principles of legalengineering developed on WallStreet over the past severaldecades, in fields such as assetsecuritization, derivatives andstructured finance, are applied toaggregate and to commercializesplit IP positions, using specialpurpose legal entities (SPEs) cre-ated to carry out a single transac-tion. The role of an independentdirector serving as a neutral deci-sion maker is also discussed.

THE SPLIT-POSITION PROBLEM

Problems of this type take manyforms. The following is not highlyfact-specific, and you could beplaying any of the roles.

One of your scientists creates atechnology innovation that couldhave a dramatic market impact.However, it’s an improvement thatreads on a more generic methodinvented and patented elsewhere.And both inventions are merelycore concepts that will require con-siderable additional effort andmoney to commercialize.

It doesn’t matter whether youhold the generic patent or theimprovement, because both youand the other IP holder are blockedfrom practicing the “good” embod-iment that end customers willreally want to buy. (This problemcan also arise out of the failure of aprior development effort, after

which the core and improvementpositions were separated.)

To get an attractive return for thisIP, a commercialization licenseemust be found that will commitresources to create the optimallymarketable product and make it astandard. An exclusive agreementwould best enable the licensee toreap a solid return on its invest-ment, with milestones imposed sothat if they do not commercialize ina reasonable time period the IPholders can find another licenseeand restart the effort.

AGGREGATION ISSUES

Your first problem is to get theother IP holder to talk with you atall. Most IP deals fail. Why shouldyour potential collaborator incurmanagement time and expense tonegotiate, since you cannot ensureyour deal will not fail down-stream? Perhaps your licensee willpatent all over (and around) theirIP position, impairing its value,and then not bring the technologyto market successfully, yielding aless-than-zero return.

Projects can fail for any reason orno reason. A corporate licenseemay change its strategy, key per-sonnel may depart or a startup canrun out of money. The most prom-ising deals may even have anabove-average failure rate, as par-ties may become “jazzed” abouttheir compensation opportunity,leading to poor performance.

Worse yet, the other IP holder,allegedly seeking to mitigate theserisks, may demand an active role in

your out-license negotiations, seek-ing to know and to control everydetail of the transaction beforecommitting to it. Then, as youwork to assemble a deal, their shareof the economic pie goes up and upand they demand unreasonablerisk allocations that scare off poten-tial licensees.

How can you get them to acceptyour leadership, while providingsolid assurance they will be pro-tected from poor performancedownstream?

ENRICHMENT ISSUES

To ensure freedom to operate,you would like to generate a “cov-ering position” of improvementpatents as soon as possible. Thesecould include further embodi-ments, related processes, applica-tions, test methods, controlsystems, user interfaces, packagingand so on. Few firms would under-take such a task knowing of thesenior patents—except competi-tors, who might file patents overyour IP to prevent you from intro-ducing it, or to force you to sell outto them, etc.

Can you initiate an enrichmentprocess before finalizing the out-license? This can broaden yourfield of licensees to include thosewith weak engineering ability andreduce the improvements likely tobe made by the out-licensee.

An Overview ofStructured Licensing

BY FRANK W. SUDIA, JD *

* Frank W. Sudia, JD is CEO of SanFrancisco-based IP Asset Services, Inc.

129les Nouvelles December 2001

THE RESTART PROBLEM

No matter how carefully youselect your out-licensee and negoti-ate their license, there’s a realchance the product will not beintroduced, often without regard tothe merits of your technology.Similarly, parent corporations mayforget that spinouts are just out-licensees and neglect to imposecommercialization requirements onthem, losing valuable technologiesif a spinout performs poorly.

One way to mitigate potentialdamage to the IP position is torequire a grant back of licenseeimprovements, coupled with ter-mination for default on the mile-stones. However, there is room forunfairness by the licensors, whomay impose arbitrary terminationprovisions, allowing them to “har-vest” the licensee’s technologywithout compensation, chilling itsincentive to pursue further innova-tion in the field.

If the out-license fails, the licen-sors want to find a new licenseeand restart the project quickly,without litigation. Yet from a pro-competition standpoint it would bepreferable to compensate thelicensee for improvements filed bythe failed project, treating it like ade facto (albeit, inefficient) enrich-ment project. Even if your grantback is non-exclusive, theirimprovements will be of little valueafter your senior license termi-nates. To restart more rapidly, youmay also wish to acquire othermaterials from the defaultinglicensee, such as design docu-ments, prototypes, software copy-rights or work in process.

How can you speedily acquireand fairly compensate thelicensee’s improvements from afailed commercialization attempt?

FINANCIAL SPONSORS ISSUES

While IP contributors may seekto shift risks to others by demand-ing uncompensated grant backs,financiers often seek to shift risksby demanding a liquidation prefer-ence. If accompanied by a right toveto terms for additional financingor other necessary actions, this canalso confer an effective right to“harvest” a company’s technologyand IP rights. Yet there is little justi-fication for giving IP to venturecapitalists, as their track record ofrealizing value for IP assets is min-imal.

Without impairing their preroga-tive to shut down the project, couldyou offer them something withmore practical value than residualIP rights?

ONGOING CONTRACT MANAGEMENT

During its long lifetime, a com-mercialization agreement mayexperience major changes in itsunderlying facts and assumptions.Supplier and customer markets canchange, competing technologiesmay arise, commercialization mayhit unforeseen snags and any partycan invent something unantici-pated.

Language can be drafted toaddress problematic areas such asaccess to background technology,adjustment of milestones, grantbacks and sublicensing, but inter-preting these provisions in light ofchanging circumstances may posedifficulties that could lead to litiga-tion.

It is important to prevent suchissues from causing a failure,because it upsets the terms underwhich the parties agreed to con-tribute their IP, incurring risks andforegoing other options. If oneparty can exploit changed circum-stances to demand a renegotiation

in their favor, then you have bro-ken your commitment to protectthe other parties.

Can you provide a fast, effectivedispute resolution method to keepthe project on track?

SPEs AND STRUCTUREDFINANCE

When every patent holder andfinancial sponsor can veto orpotentially terminate the project, itfeels like a classic “Mexican stand-off.” Everyone in the room has agun, pointed at everyone else, andno one can move. Put another way,the parties have many rights andpowers, but in their raw form theseare useless for getting the job done.

In large financial deals, it is com-mon to transfer all property rightsto a special purpose entity, typi-cally a limited liability company(LLC) or business trust (originallyknown as a “Massachusetts Trust”)formed to carry out the transaction.The terms of the equity interestscan then be drafted to create anydesired set of economic and gover-nance rights. The parties’ rawrights are “rolled-up” into thestructure in return for new andmore useful synthetic rights.

Special purpose entities (SPEs)are commonplace in the securitiza-tion of mortgages, credit cardreceivables and auto loans; inderivatives and credit risk manage-ment; and in non-recourse “projectfinance” when, for example, youare building a power plant and it isnot meaningful for the creditors torepossess it. They are even used tosecuritize copyright or patent roy-alties.

In a typical securitization,income-yielding assets are trans-ferred to an SPE, which issuesbonds backed by anticipated rev-enues and uses the bond sale pro-ceeds to purchase the assets fromthe transferor. The SPE has its own

130 les NouvellesDecember 2001

credit rating and is insulated fromthe bankruptcy of any party. Muchcan be learned from prior uses ofSPEs, but they must be redesignedto meet our unique property man-agement requirements.

SPE Deal MechanicsFor the deal manager (DM) an

SPE can provide many benefits. Ifyou wish to protect the down-stream parties from the upstreamparties and vice-versa, it is criticalto achieve a two-stage close, asillustrated in Figure 1. The follow-ing assumes that technical, marketand valuation issues are ade-quately understood.

The general process flow is as fol-lows:

1. The DM identifies the scope(technical and market) of the pro-posed pool, the desired IP and con-tributors, a basic commercializationplan, a proposed economic alloca-tion among contributors and condi-tions precedent (minimum IPrequired) for the first close.

2. To provide continuity andassistance in managing the deal onbehalf of all parties, a corporatetrustee and servicing agent may beretained.

3. Armed with the above, theDM approaches the IP holders,promising them minimum termsand stable deal management. The

allocation and commercializationplans may be adjusted as needed tosecure their consents.

4. Once enough IP holders con-sent to one version of the terms (tofulfill the conditions precedent) afirst close occurs. The operatingagreement of an LLC or businesstrust can be a single document. IPrights are transferred to the SPEand the contributors become equityholders. If a contributor cannotaccept equity (or prefers not to)they can receive deferred incomeplus certain decision approvalrights.

5. Appointments of officers tomanage the SPE are ratified. The

DM will typically be appointedchief executive. The bank trustee,servicing agent and law firms willbe retained. An independent direc-tor (such as a seasoned patent liti-gator) may be appointed to providebinding resolution of disputesunder the agreement.

6. An enrichment contractor canbe hired to perform engineeringservices, to generate a more com-plete “product package” of IPrights and, if desired, can begranted an equity interest in thepool as partial compensation for itscontributions.

7. Armed with aggregated andenriched IP rights, the DM has afree hand to identify and to negoti-

ate with potential out-licensees,without interference from the IPholders, provided that the resultingout-license meets the requirementsagreed among the contributors.

8. The out-license must be rati-fied by the beneficiaries, who mayobject if they feel it does not meetthe requirements. All beneficiaryobjections are reviewed by theindependent director. As his or herfirst act, the independent directorwill review and approve the pro-posed license, thus setting the proj-ect on its way.

9. Payments from the licenseeare passed back through to the IPcontributors, net of administrativeexpenses. The out-licensee may feelmore comfortable assigning newpatent applications to the SPE,because it is truly separate andindependent from the contributors.

Failure and RestartIf the project is successful, all IP

rights can be conveyed to thelicensee and the SPE dissolved. If itfails and must be restarted, theterms and allocations between theoriginal parties need not be renego-tiated, because only the seconddeal is failing, not the first one. TheSPE operating agreement will pro-vide that the DM may or must findanother licensee and continue. Theoverall process is illustrated inFigure 2.

In lieu of a liquidation prefer-ence, the financiers of the failedproject can be offered (a) a firstright to present a new commercial-ization plan that meets the originalrequirements and (b) an arbitratedpercentage of the pool based on theincremental value of IP rightsgranted back by the venture,although such rights should notdilute the original contributorsprior to the project’s failing.

If the parties and the independ-ent director concur that exclusivecommercialization has becomeunlikely due to market or technol-ogy changes, the pool can be down-

IP ContributorA

IP ContributorB

Governance

Tech Pool X, LLCCommercialization Plan

Allocation Plan

Out-Licensee

The "Structure"

First Close Second Close

FIG. 1, EXAMPLE OF “2-STAGE CLOSE” TRANSACTION

131les Nouvelles December 2001

CONCLUSION

We have provided an overviewof a “structured license” for tech-nology transfer based on legalengineering principles. Similarlegal structures may be useful inother situations where shared own-ership of IP rights with independ-ent governance are desirable, suchas spinouts, joint-ventures, settle-ments and competitor cross-licens-ing, and financing of patentapplications.

appear to pose insurmountableproblems.

Pooling to clear blocking posi-tions is a permissible businessobjective. Bringing new products tomarket promotes competition withexisting ones, benefiting con-sumers.

New technologies rarely havemarket power, and normally arestruggling to obtain financing.

Joint price-setting violations areavoided by centralizing negotiat-ing power in the SPE, and the DM,an objective of many poolingarrangements.

Regulators prefer non-exclusivelicenses, both in and out, but thereis little chance that many productswill be commercialized unless thelicensee can protect its investment.In many cases only certain patentsneed be exclusive, and other rightscan be non-exclusive.

Other red flags, such as exclusivecross-licensing, can be avoided bydiligence to steer clear of them. Theservicing agent can help the partiesspot and avoid such issues. Thepresence of responsible disinter-ested third parties with duties topromote antitrust compliance mayalso provide comfort to regulators.

graded to general non-exclusivelicensing, or it can be dissolved withthe IP being returned to contributors.

Replacement of ManagersThe DM is a manager of the entity,

and if a specified percentage of theIP contributors have lost confidence,perhaps because the first out-licensefailed, he or she can be removed anda new DM can qualify and be rati-fied by a vote of the contributor ben-eficiaries.

The bank trustee, servicing agent,independent director and any lawfirms are service providers, and theycan be replaced by qualified substi-tutes. If the independent directorresigns or is disqualified, his or herreplacement must also be free ofconflicts of interest.

When constructing an SPE theseand many other contingencies mustbe addressed.

ANTITRUST ISSUES

Patent pools are routinelyreviewed by various governmentalagencies (in the United States bythe US Department of Justiceand/or the Federal TradeCommission) for potential anti-competitive effects. Patent antitrustissues must be handled with care,but our arrangements do not

FIG. 2, AGGREGATION, ENRICHMENT, COMMERCIALIZATION, RESTART DEAL FLOW

SPEFormed Aggression

IP Contributors

Enrichment

Out-Licensee #1

Commercial-ization, #1

Commercial-ization, #2

EngineeringServices Out-Licensee #2

Bi = Beneficial Interest EQ = Equity GB = Grant Back

OtherParties:

IP, $ BI's $ IP $, EQ IP GB $, EQ IP GB BI

les NouvellesDecember 2001132

In the new economy, the numberof commercial agreementsinvolving U.S.–Canada cross-border use or exploitation oftechnology or intellectual prop-erty has greatly increased.Similarly, the sale of licensedmerchandise, such as apparel,toys, computer games and knap-sacks, depicting such things asprofessional sports franchiselogos and cartoon characters,has become more prevalent andalmost commonplace. As a con-sequence, the negotiation oflicense agreements whereby therightsholder to the underlyingintellectual property licensessome of its rights to technologyintegrators or users, or to man-ufacturers and/or distributors oflicensed merchandise, has alsobecome more prevalent in boththe commercial and legal envi-ronments.

In many cases, large licensors areU.S.-based. These U.S.-based licen-sors, as a matter of policy, prefer touse standard form license agree-ments that they ask each licensee toexecute without any, or very few,modifications being made. Usually,these standard form license agree-ments are used with U.S.-basedlicensees. They therefore mostlyaddress U.S.-specific commercialand legal issues. From a practicalpoint of view, this allows licensorswith extensive licensing programsto maintain certain standards

“across the board,” which is morecost-efficient in terms of managingthe licensing program. However,where such standard form licenseagreements are used withCanadian-based co-contractingparties without any modificationsor adaptations, dangers arise thatcould affect both parties to thelicense. These dangers could, forexample, affect the enforceability ofthe agreement, the commercialrelationship between licensor andlicensee and, perhaps most impor-tant, the financial bottom line of therelationship.

In other cases, a large U.S.-basedlicensee may, for example, enterinto a license agreement pertainingto the use in the U.S. of technologydeveloped by a small or mid-sizedCanadian technology company.Here again, ignoring certain peculi-arities of Canadian law might jeop-ardize the profitability orenforceability of the agreement inthe long run or upon the occur-rence of certain events.

The following is a list of the “Top10” tips or considerations thatshould be kept in mind when draft-ing license agreements that involvea Canadian-based party:

THE TOP 10

1. Withholding Taxes

Licensees typically pay royaltiesto licensors for the right to use thelicensor’s intellectual property. Inmany cases, the royalties payableare based on “net sales,” as definedin the agreement. It is not uncom-mon to find that license agreements

forbid the licensee to deduct anyform of taxes in the computation of“net sales,” and hence royaltiespayable.

In certain cases under Canadianlaw, licensees are required to with-hold from royalties payable to aforeign licensor, taxes otherwiseowing by the licensor to theCanadian government on accountof royalties (i.e., income) earned inCanada. At present, under theCanada–United States Income TaxConvention, the applicable tax rateis 10 percent (10%). By prohibitingthe licensee from withholding taxesfrom the royalties payable to thelicensor, the licensor is in effectrequiring the licensee to “gross up”the royalties payable by theamount of the withholding tax,hence the common use of the term“gross up clause.”

Although a gross up clausemight sound like a good idea fromthe licensor’s standpoint, in reality,it could render the license unprof-itable to the licensee and in the longrun, also be detrimental to thelicensor and the business relation-ship generally. One way aroundthis problem is to draft the licenseagreement so that it fits one of afew exceptions to the applicabilityof this withholding obligation. Forexample, both the Canada–UnitedStates Income Tax Convention andCanada’s Income Tax Act exemptfrom the obligation to withhold

U.S. License AgreementsShould be Adapted for Usein Canada BY MIRKO BIBIC AND

MICHEL GÉNÉREUX*

* Mirko Bibic is a partner in theIntellectual Property Group of theOttawa office of Stikeman Elliott.Michel Généreux is an associate in theTechnology Group of the Montrealoffice of Stikeman Elliott.

133les Nouvelles December 2001

taxes, royalties or similar paymentsfor the use of a copyright in respectof the production or reproductionof any literary (e.g. software), dra-matic, musical or artistic work.Similarly, the Canada–UnitedStates Income Tax Conventionexempts from the withholding obli-gation, payments for the use or theright to use computer software orpatents. Each particular businessagreement should therefore becrafted or reviewed in light ofthese—and other—potentiallyapplicable exemptions to tax with-holding obligations underCanadian law so that, where possi-ble, it can be made profitable toboth parties.

2. Bankruptcy and the Sale of theUnderlying Technology by aCanadian Licensor

Contrary to U.S. law, Canada’sBankruptcy and Insolvency Actdoes not include a provision simi-lar to subsection (n) of § 365 of theUnited States Bankruptcy Code,which affords some protection tomost licensees of intellectual prop-erty upon the rejection or assump-tion and assignment of the licenseby a trustee in bankruptcy.Furthermore, there is a fair amountof uncertainty in Canadian law asto whether or not a license for useof technology can be enforcedagainst a third party acquirer forvalue—whether in a bankruptcycontext or otherwise—of theunderlying technology or intellec-tual property. Although, in reality,the sale of such technology or intel-lectual property by a licensor isusually accompanied by an effortto assign all related licenses, therisk that a particular license mightnot, for any given reason, beassigned to and assumed by suchacquirer—and thus that thelicensee might then only have adamage claim for breach of thelicense, however so important,against its licensor as opposed toan enforceable license—remains

real and important. Legislation—as has been enacted

in the United States through §365(n) of the U.S. BankruptcyCode—would obviously also bedesirable in Canada. In the mean-time, however, various mecha-nisms are at the disposal oflicensees dealing with Canadianlicensors to protect their rights.

For example, a company wantingto obtain rights to a key technologyshould consider obtaining anassignment of the rights it mightoriginally have considered licens-ing from the owner of such tech-nology. This approach has beenincreasingly used in Canada in therecent past with respect to soft-ware—primarily through the use ofSection 13(4) of the Copyright Actof Canada, which expressly allowsthe partial assignment of a copy-right, for example by limiting suchassignment with respect to specifictypes of use, duration, territory andso forth. A company desiring toacquire rights with respect to theuse of software that it criticallyneeds as part of its business shouldtherefore consider the possibility ofobtaining an assignment of thoserights, as opposed to automaticallyadopting the “licensing route.”

Regardless of whether use of akey technology is obtained througha license agreement or an assign-ment, however, it is desirable toregister the rights that are obtainedwith the Canadian IntellectualProperty Office (CIPO). Section 51of the Patent Act of Canada states,in essence, that unregistered“assignments” are void againstsubsequent registered assignmentsof the patent. Section 57 of theCopyright Act of Canada furtherstates that an assignment of copy-right, or a license granting an inter-est in copyright, is void against anysubsequent assignee or licensee forvaluable consideration withoutactual notice, unless the priorassignment or license is registered.There is considerable debate in

Canada as to whether (or which)license agreements or securityagreements constitute “assign-ments” under these statutes—andtherefore as to which of these canor should be registered. Mostagree, however, that a subsequentbut registered “assignment” of apatent or copyright will prevailover a prior but unregistered“assignment.” In fact, in its recentdecision of Les Poinçons deWaterloo Inc. v. 3288731 CanadaInc. (February 26, 2001), Montreal500-09-006534-986 (C.A.), the courtof Appeal of Quebec reminded allof the drastic impact that section 51of the Patent Act can have on acompany’s business, when it con-firmed a Superior court’s decisionthat an unregistered exclusivepatent license was void against asubsequent but registered assign-ment of the patent, even though theassignee had actual notice of thelicense prior to obtaining theassignment of the patent. Goodpractices therefore dictate that anattempt to register with CIPO bemade for any license agreement,security interest or other similarinstrument pertaining to an impor-tant patent or copyright—not tomention that all assignmentsshould be registered as a matter ofcourse. Obviously, the cost of regis-tering rights with CIPO might beprohibitive in the long run for cor-porations with large licensing pro-grams (i.e., there is a fee for eachregistration), but the necessity oropportunity of registering theserights should nevertheless be con-sidered and then determined caseby case on an ongoing basis.

Many contractual techniques ormechanisms can also be used cre-atively in Canadian license agree-ments to reduce the risk exposureof licensees. One approach is toinclude a provision in the licenseagreement whereby the license willbe converted upon the occurrenceof certain events that could typi-cally jeopardize a licensee’s right to

134 les NouvellesDecember 2001

use the technology or intellectualproperty. For example, a fixed-termsoftware license featuring yearlyroyalty payments could be madeconvertible into a perpetual andfully paid-up license upon thelicensor making an assignment inbankruptcy. Similarly, such licenseagreement could be made convert-ible into a straight assignment ofthe technology to the licensee uponthat same event occurring. In orderto minimize the risk that such con-tract provisions be held unenforce-able or void under Canada’sBankruptcy and Insolvency Act asfraudulent preferences, theyshould provide for an amount cor-responding roughly to the fair mar-ket value of the rights sotransferred to be paid by thelicensee to the licensor/trusteeupon receiving these rights (Seesidebar, this page).

Another approach commonlyused with respect to softwarelicenses is to require the licensor toplace the source code and allrelated documentation in escrowwith an escrow agent so that it beavailable to the licensee upon theoccurrence of certain events. Thiswill be especially relevant in caseswhere a licensee is dependent onits licensor for ongoing services, or

support or maintenance of the soft-ware—or example, in the case ofsophisticated enterprise software.Of course, a source code escrowagreement would not grant thelicensee ownership rights in thetechnology itself—like an assign-ment would—but at least it wouldgive a licensee the tools necessaryto operate its business, while deal-ing with a trustee or the new ownerof the technology concerning therights to its use.

One could also include in thelicense agreement a provision thatprohibits the licensor from sellingthe technology and intellectualproperty that is being licensedwithout first obtaining the consentof the licensee or without ensuringthat the acquirer assume all of thelicensor’s obligations under thelicense.

The actual usefulness or efficacyof these various contractual tech-niques and mechanisms usuallydepends on whether or not thelicensor has already granted a secu-rity interest covering the technol-ogy or intellectual property tocreditors at the time it enters intoan arrangement with a licensee.Hence it is key when negotiating alicense agreement or an assignmentwith a Canadian-based party, to

conduct the appropriate level ofdue diligence so as to determine ifany third parties have rights in orsecurity interests covering the rele-vant technology or intellectualproperty.

Conversely, and in order toincrease the ultimate efficacy of thecontractual techniques and mecha-nisms outlined above, a licenseeunder a Canadian license shoulditself consider, where appropriate,obtaining a security interest on thetechnology and intellectual prop-erty it intends to license. This canguarantee the performance by thelicensor of some or all of its obliga-tions under the license agree-ment—for example, a licensor’sobligation not to sell the technol-ogy or intellectual property that isbeing licensed without first requir-ing the third party acquirer toassume all of the licensor’s obliga-tions under the license. At least, thelicensee’s security interest shouldgive the licensee some comfortwith respect to the licensor’s subse-quent dealings with the technologyand intellectual property. Ofcourse, any security interestobtained by a licensee should beregistered, not only with the rele-vant provincial security registry,but also with CIPO. This will helpavoid the risk that the licensee’ssecurity interest be later defeatedby a subsequent registered assign-ment of the intellectual propertygranted by the licensor—on thegrounds that such security interestwas in fact an “assignment” thatshould have been registered withCIPO in the first place.

3. Transaction Value of Goods Sold forExport to Canada

Large U.S.-based licensors typi-cally wish to maintain a significantamount of control over the design,development, manufacture andsale of licensed merchandise. Thisranges from requiring a licensee toobtain pre-production approval forlicensed merchandise to requiring

The decision of the Supreme Court of Canada in Les Coopérants,Life Insurance Society v. Dubois, [1996] 1 S.C.R. 900, supports thisview. In Les Coopérants, the Supreme Court upheld the validity ofa co-sale agreement that had been challenged by a liquidatorappointed under Canada’s Winding-up Act. The co-sale agreementallowed each of two co-owners of an immovable property to forcethe other one to sell its interest in the property in certain circum-stances, including where a liquidator had been appointed withrespect to the assets of the other. The price for the transfer under theco-sale agreement was 75 percent of the fair market value of the co-owner’s interest in the property, established on the basis of the valueof the property as a whole, without regard to the fact that the prop-erty was held in co-ownership. The Supreme Court held that therehad been no evidence adduced to suggest that an appraisal at 75percent based on the above guidelines was prejudicial to the othercreditors’ interests in a liquidation context and upheld the provisionas being valid.

135les Nouvelles December 2001

the licensee to manufacturelicensed merchandise in accor-dance with design specificationsestablished by the licensor. In somecases, licensees with no manufac-turing facilities of their own may berequired to use a manufacturerappointed or chosen by the licen-sor.

In Canada, it is not uncommonfor Canadian licensees to arrangefor licensed merchandise to bemanufactured overseas, and thenshipped to the licensee. In certaincontractual situations, Canadiantax authorities may require thelicensee, for customs purposes, toinclude the value of the royaltiespayable to the licensor to the trans-action value of the licensed mer-chandise shipped to Canada.Specifically, the Supreme Court ofCanada has held that royaltiesshould be included in the transac-tion value of the licensed merchan-dise exported to Canada onlywhere the contract of sale betweenthe vendor of the goods (i.e. ,theoverseas manufacturer) and theimporter (i.e., the licensee) pro-vides that the payment of royalties(to the licensor) is a condition ofsale of the goods.

The above is important to con-sider when negotiating a licenseagreement. If the agreement is notdrafted carefully, the licensee maybe required to pay duties on thevalue of royalties otherwisepayable to the licensor, which maynot be intended by the parties.Given the size of the Canadianmarket, the payment of such dutiescould render an agreement unprof-itable to the licensee, a situationthat, in the long run, would bedetrimental to both licensor andlicensee.

4. Resale Price MaintenanceSome standard form (U.S.-based)

license agreements also providethat the licensee shall not be enti-tled to sell the licensed merchan-dise or consumer software package

to retailers at a price lower than acertain percentage (e.g., 120%) ofthe manufacturing cost of thelicensed merchandise. Ostensibly,the rationale behind the provisionis to set a pre-defined wholesaleprice for the licensed merchandise,in an effort to maintain royaltiespayable to the licensor at a suitablelevel. License agreements mayeven provide that the licensed mer-chandise cannot be used as “pre-mium sales.”

In Canada, a licensor insisting onsuch a provision could be guilty ofa criminal offence under Canada’sCompetition Act. In particular, sec-tion 61 of Canada’s CompetitionAct prohibits, inter alia, any personwho has the exclusive rights andprivileges conferred by a trade-mark or copyright from trying, byagreement, threat, promise or anylike means, to influence upward ordiscourage the reduction of theprice at which any person (e.g., alicensee) supplies a product (e.g.,licensed merchandise or consumersoftware package) in Canada.

Given the potential serious con-sequences associated with criminaloffences (which could include theimposition of fines and/or incar-ceration), licensors should bemindful of the provisions of section61 of the Competition Act.

5. Exclusive Jurisdiction of U.S.Courts

Standard license agreementsdrafted by U.S. licensors typicallyprovide that U.S. courts shall haveexclusive jurisdiction over any dis-putes arising under the agreement.Although U.S. licensors undoubt-edly insist on these provisions dueto their familiarity and comfortwith the laws and court system intheir domestic jurisdiction, aninsistence on granting to U.S.courts the exclusive jurisdictionover all disputes may make it moredifficult to enforce the licenseagreement in Canada.

For example, an injunction

issued by a U.S. court enjoining alicensee from breaching the agree-ment would have no effect on aCanadian licensee operating onlyin Canada. The licensor would thenbe required to apply to a Canadiancourt of competent jurisdiction tohave the U.S. injunction recog-nized. This is an additional, time-consuming and costly step and onethat is not always effective. TheU.S. judgment could be impeachedor not recognized in Canada onseveral grounds, including that theenforcement of the U.S. judgmentwould be contrary to Canadianpublic policy or that the procedureby which the judgment wasobtained was contrary to Canada’sbasic requirements of justice.Another issue would be whetherthe Canadian court would havejurisdiction, under the agreement,to enforce the U.S. injunction, giventhe specific provision in the agree-ment that U.S. courts have exclu-sive jurisdiction over any dispute.

6. “Works-Made-for-Hire”In an effort to protect the licen-

sor’s intellectual property rights,the license agreement will typicallyrequire the licensee to assign to thelicensor the copyright to any workcreated by the licensee in thedesign and development of anylicensed products, or associatedartwork, hangtags, etc. In thisregard, standard form licenseagreements often require thelicensee to acknowledge that suchcopyright works are “works-made-for-hire” under the U.S. CopyrightAct.

However, if the licensee isCanadian, the licensed merchan-dise is to be distributed and soldonly in Canada, and the copy-righted works are created inCanada, then Canadian copyrightlaw, not U.S. copyright law, wouldapply. Under Canadian copyrightlaw, there is no “work-made-for-hire” doctrine. In Canada, theapplicable principle is that a copy-

136 les NouvellesDecember 2001

right work made by an employeein the course of his or her employ-ment is owned by the employer.

7. Attacking the Validity of theUnderlying Intellectual Property

It is our understanding that it is abreach of U.S. law to require alicensee to covenant not to challengeor attack, directly or indirectly, thevalidity of the intellectual property ithas licensed, or the ownership ofsame by the licensor. In Canada,however, such a covenant is permis-sible. As such, U.S. licensors seekingenhanced protection for their intel-lectual property, at least in Canada,may wish to require their Canadianlicensees to undertake not to chal-lenge the validity or ownership oftheir intellectual property rights.

8. Expiry of Intellectual PropertyProtection

Similarly, it is our understandingthat it is not permissible in the U.S.to require a licensee to continue topay royalties after, for example, apatent has expired or a trade markhas been expunged or is otherwiseremoved from the Trade MarksRegister. In Canada, however, pro-vided that the licensor is not abus-ing a dominant position orotherwise engaging in conductcontrary to Canada’s CompetitionAct, it is permissible for a licensorto require a licensee to continue topay royalties, if the licensee main-tains its use of the patent or trademark rights in question. Again,these are clauses that the licensormay wish to consider with respectto license agreements to be enteredinto with Canadian licensees.

9. Language LawsIn an effort to protect their intel-

lectual property rights (especiallytrademark and copyright rights),licensors will usually requirelicensees to include certain noticeprovisions with the licensed prod-ucts, associated artwork and/orhangtags (e.g., that the licensed

merchandise is being sold underlicense from the licensor). In thisregard, license agreements alsotypically provide that any suchnotices must be in the English lan-guage, and in the licensor’s stan-dard form or such other form as ispre-approved by the licensor. Thelicensor’s standard form will rarelyinclude a French-language version.

Where the parties intend thelicensed products to be sold in theProvince of Quebec, the majority ofwhose population is French-speak-ing, all “labels” must be in bothFrench and English. As such,license agreements should give thelicensee sufficient flexibility toinclude French-language labelingon hangtags, artwork, etc. At thevery least, the agreement shouldcontain a procedure for French-lan-guage labeling to be pre-approvedby the licensor.

10. Registered User LawsStandard form agreements that

include a license to use trade-mark(s) will often require thelicensee to register itself as a regis-tered user of the licensed trade-mark(s). Since Canada no longerhas a registered user system, aninsistence on maintaining this pro-vision in a license agreement that isapplicable only to Canada couldlead to unnecessary negotiationbetween a licensor and licensee.

CONCLUSION

The foregoing list is meant onlyto illustrate the issues, problemsand dangers that arise when stan-dard form U.S.-based license agree-ments are used and adopted inCanada without modification.Licensors and licensees wouldtherefore be well-served in obtain-ing Canadian legal advice so thatthese issues, problems and dan-gers, among others, are addressedproperly. Both parties could thenhave more comfort in the fact that

their respective rights and obliga-tions under the license agreementshould be enforceable and that noCanadian laws have been or will bebreached.

les Nouvelles 137December 2001

There are many technology-richcompanies that are facing uncer-tain financial futures. Theequity markets that previouslyhelped fuel the growth of tech-nology companies have dried up.This article explores financingalternatives for these companies,including some of the optionsavailable under the U.S.Bankruptcy Code. Many trou-bled companies need to raisecash and restructure their debtobligations so that their pro-jected cash flows are sufficient topay their debt as it becomes due.Indeed, a common method ofrestructuring is to raise cash,use it to pay off some old debt,and restructure the remainingdebt to pay it off over a longerperiod of time.

It is important to develop astrategic plan of reorganizationeither to pay down or to restructureexisting debt. If one is fortunate,such a plan can be implementedthrough consensual negotiationswith creditors. However, it may benecessary to implement a reorgani-zation plan in a bankruptcy pro-ceeding, where a Bankruptcy Courthas the power to force implementa-tion of certain provisions of theplan. Fortunately, there is not asmuch stigma attached to filing forbankruptcy as there once was. Thisis especially true if the case is pre-

planned and completed in 60 to 90days.

There are essentially three meth-ods of raising cash for such a strate-gic reorganization plan: (1)borrowing money and taking onmore debt; (2) selling assets or (3)selling stock in the company. TheU.S. Bankruptcy Code actuallyfacilitates each of these, but partic-ular issues arise if intellectual prop-erty is an important asset of thetroubled company.

BORROWING MONEY

One of the first areas a troubledcompany should review is whatrestructuring options may existwith respect to the company’s debt.Many companies that pledge col-lateral to secure their financing arerequired to pledge their intangibleassets, even though the value ofthose assets is not considered indetermining the loan amount.Therefore, the value of the assetssecuring the current indebtednessexceeds the amount of the debt. Ifthe existing lender is not willing tolend on this additional value andwill not consent to junior liensbeing placed on the assets, then theU.S. Bankruptcy Code offers thecompany some alternatives.Additionally, some lenders aremore willing to lend to a companyin bankruptcy because of the pro-tections afforded a debtor-in-pos-session lender.

Section 364 of the BankruptcyCode permits a debtor to borrow

money and to grant a lien on itsassets to secure such a loan. Thesedebtor-in-possession loans may besecured by junior liens1, by equalliens2 or by senior liens3. If the courtfinds that a lender is acting in goodfaith, then any appeals from anorder granting such liens are mootunless the objector obtains a staypending such an appeal.

These rules give a debtor achance to obtain new loans if it canprove that the value of its collateralis significant enough to provideadequate protection to pre-existinglenders. This very substantialpower comes into play with intel-lectual property, which companiesgenerally can pledge in considera-tion for new financing.

Generally, trade secrets, patentsand patent application are treatedas “general intangibles” underArticle 9 of the UniformCommercial Code.4 Rights in atrademark are also considered to be“general intangibles” under Article9. However, the borrower mustspecifically grant the secured party

Restructuring Technology-richCompanies — Options AvailableUnder U.S. Bankruptcy Law

BY ZACK CLEMENT,JOHNATHAN BOLTON ANDCARMEN R. EGGLESTON *

*Zack Clement and Jonathon Boltonare both with the law firm of Fulbright& Jaworski in Houston, Texas; andCarmen R. Eggleston is with Intecap,Inc., in Houston, Texas.

1 Even if pre-petition lending agreementsprohibit them.

2 Even if pre-petition liens prohibit them, aslong as adequate protection is provided to thepre-existing lenders.

3 Even if pre-petition liens prohibit them, aslong as adequate protection is provided to thepre-existing lenders.

4 See United States v. Antenna Sys., Inc., 251F. Supp. 1013 (D. N.H. 1966).

138 les NouvellesDecember 2001

a security interest in the “goodwill”of the company and any assets thatembody that “goodwill” for such alien to be valid. Therefore, a lendermay take a security interest in thesetypes of collateral to secure itsdebtor-in-possession financing.

In addition, a secured lender maytake a security interest in thedebtor’s copyrights, including theright to rental or license income.5

Taking a security interest in adebtor’s right to payment is a com-mon commercial practice and canbe used in the bankruptcy contextto give a potential lender sufficientcollateral protection to make adebtor-in-possession loan. Finally,a lender may also seek a securityinterest in the right to sue andrecover for past infringement of apatent or a copyright.

Alternatively, there are restruc-turing options available withrespect to a company’s existingdebt, particularly its non-secureddebt. When a company is emergingfrom bankruptcy, cash is not theonly currency that can be used topay the company’s existing unse-cured indebtedness. As discussedin more detail later, by filing forbankruptcy a company can use itsstock to pay down debt, alter theterms of unsecured loans or payout general trade creditors or cer-tain taxing authorities over time.The flexibility provided by non-cash or longer-term paymentoptions can free up funds for thecompany’s critical needs.

SALE OF ASSETS

Another restructuring alternativeavailable to a company is a sale ofall or a portion of its assets. Manytechnology-rich companies holdintellectual property assets that arenot currently utilized in the com-pany’s core business. Therefore, thecompany should critically review

its intellectual property to deter-mine if there are sale or licensingopportunities. If the potential saleof these assets or a debt restructur-ing will not raise sufficient cash tosolve the company’s cash flowproblems, then a sale of the entirecompany may be necessary. If thecompany can not agree to a consen-sual sale with the lenders holdingliens on its assets, then the U.S.Bankruptcy Code offers someadvantages for structuring the sale.

Paragraph Section 363 of theBankruptcy Code generally per-mits a debtor to sell assets free andclear of liens, with the liensstripped from the assets to thenattach to the proceeds of such asale. This provision of the Codeencourages buyers to purchase adebtor’s property, because goodfaith purchasers of the debtor’sassets receive clean title to theproperty. Additionally, a good faithpurchaser is protected from chal-lengers to the sale since anyappeals from a bankruptcy courtorder approving the sale are mootunless a stay is obtained stoppingthe consummation of the sale. Suchstays are difficult to obtain.

Many purchasers prefer the pro-tections they receive in sales fromthe Bankruptcy Court. However,purchasers who negotiate the saleterms prior to the company filingfor bankruptcy run the risk thattheir bid will be trumped byanother buyer offering a higherprice than the one they agreed towith the company. This is becausean agreement to sell the company’sassets must be approved by theBankruptcy Court. As a part of thisapproval process, the terms of thedeal will be made public and therewill be time for another bidder tosubmit an offer. Moreover, theBankruptcy Court will usuallyapprove the highest offer.

Generally, sales during a bank-ruptcy are conducted through anauction, with the bankruptcy courtessentially acting as auctioneer. Often

in these types of proceedings, a bidprocedures order is entered by theCourt, which sets forth the rules forthe auction and procedures for bid-ding, and grants the initial bidder abreak-up fee for its trouble in negoti-ating the initial sale agreement withthe debtor. Often, the other bidderstake advantage of this work and sim-ply copy the contract. The break-upfee is payable to the initial bidder ifthe initial bidder loses at the auction.These auction sales tend to generatevery good prices for assets.

Particular issues are presentedwhen a debtor proposes to sell intel-lectual property. Often that intellec-tual property is in the form of alicense agreement, and the debtormay be the licensor in some cases andthe licensee in others. Courts havegenerally considered nonexclusivepatent and copyright licenses, alongwith trademark licensing agreementsto be executory contracts, the treat-ment of which is discussed below.

The leading definition of what con-stitutes an executory contract is the“Countryman definition,” whichdefines an executory contact as “acontract under which the obligationof both the bankrupt and the otherparty to the contract are so far unper-formed that the failure of either tocomplete performance would consti-tute a material breach excusing theperformance of the other.”6

Most nonexclusive patent licenseshave been held to be executory con-tracts under this definition.7 This isbecause “a licensor’s obligation toforebear from suing the licensee . . .

5 See In re AEG Acquisition Corp., 127 B.R. 34(Bankr. C.D. Cal. 1991).

6 Vernon Countryman, Executory Contractsin Bankruptcy: Part I, 57 Minn. L. Rev. 439, 460(1973); see also Sharon Steel Corp. v. Nat’l FuelGas Dist. Corp., 872 F.2d 36, 39 (3d Cir. 1989); Inre Access Beyond Tech. Inc., 237 B.R. 32, 43(Bankr. D. Del. 1999).

7 See, e.g., In re CFLC, Inc., 89 F.3d 673, 677(9th Cir. 1996); Summit Inv. & Dev. Corp. v.Leroux (In re Leroux), 69 F.3d 608, 610 n.3 (1stCir. 1995); Lubrizol Ent., Inc. v. RichmondMetal Finishers, Inc. (In re Richmond MetalFinishers, Inc.), 756 F.2d 1043, 1046 (4th Cir.1985), cert denied, 475 U.S. 1057 (1986); BiosafeInt’l, Inc. v. Controlled Shredders, Inc.(In reSzombathy ), 1996 WL 417121 (Bankr. N.D. Ill.1996), rev’d in part, 1997 WL 189314 (N.D. Ill1997).

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[is] both a significant and continuingperformance obligation that [makes]the contract executory as to the licen-sor.”8,9 Nonexclusive copyrightlicenses have also been held to consti-tute “executory contracts.”10 Add-itionally, a few courts have held thattrademark licensing agreements are“executory” in nature.11

The debtor has until confirmationof its plan to decide whether toassume or reject these executory con-tracts and its unexpired leases, exceptthat leases of non-residential realproperty must generally be assumedor rejected in 60 days. The decision ofwhether to assume or reject is gener-ally left to the debtor’s business judg-ment, but must be approved by theBankruptcy Court.12

If a debtor assumes an executorycontract, it must cure all past-duedefaults. Once assumed, the contractbecomes an administrative liability,breaches of which are paid as anadministrative claim, essentially at100 percent on the dollar. If the con-tract is rejected, never having beenassumed, then damages are pre-peti-tion unsecured claims that are oftenpaid at cents on the dollar13.

Therefore, in most cases, the non-debtor party to the contract wants itscontract to be assumed.

If the debtor chooses to assume anexecutory contract, generally thedebtor may then assign that contractto the highest bidder to generate addi-tional assets to pay other creditors.14

This is true even if the contract inquestion contains a provision that pro-hibits such assignment.15 To accom-plish this, a debtor must cure all pastdue defaults under the contract orprovide adequate assurances that itwill promptly cure, and provide ade-quate assurances of the assignee’sability to perform in the future.16

However, there is a notable excep-tion to a debtor’s ability to assumeand assign executory contracts.Section 365(c)(1) of the BankruptcyCode prohibits a debtor’s assump-

tion and assignment of such a con-tract if “applicable law excuses aparty, other than the debtor, to suchcontract or lease from accepting per-formance from or rendering perform-ance to an entity other than thedebtor or the debtor in possession . . .and (B) such party does not consentto such assumption or assignment.”17

This so-called “personal services”exception to the general rule of theassignability of executory contractshas been held to apply to licenses ofcertain types of intellectual property,where federal or state law prohibitsassignment. For example, somebankruptcy courts have held thatboth the federal patent and copyrightlaws are “applicable law” prohibit-ing such assignment under 11U.S.C. § 365(c).18 Bankruptcy courts

8 Everex Sys., Inc. v. Cadtrak Corp. (In reCFLC, Inc.), 89 F.3d 673 (9th Cir. 1996); see alsoDe Forest Radio Tel. & Tel. Co. v. U.S., 273 U.S.236 (1927).

9Additionally, most patent licenses includevarious ongoing obligations on the part of thelicensor; including: (1) the duty to maintain thepatent; (2) the duty to give notice of and defendfrom infringement suits; (3) the duty to indem-nify; (4) the duty to forebear from grantinglicenses to others; (5) most favored licenseeprovisions; (6) the duty to not unreasonablywithhold sublicense permission; and on thepart of the licensee, including: (a) the duty topay royalties to the licensor; (2) the duty toaccount for sales and provide written reports tothe licensor; and (3) the duty to allow audits.

10 See, e.g., In re Patient Educ. Media, Inc.,210 B.R. 237, 240 (Bankr. S.D.N.Y. 1997); see alsoHarris v. Emus Records Corp., 734 F.2d 1329,1333-34 (9th Cir. 1984); Ilyin v. Avon Publ’ns,Inc., 144 F. Supp. 368, 372 (S.D.N.Y. 1956).

11 See, e.g., Richard Royce Collection, Ltd. v.New York City Shoes, Inc. (In re New York CityShoes, Inc.), 84 B.R. 947, 960 (Bankr. E.D. Pa.1988)(noting that trademark licensing agree-ment was executory contract in that contractwas not terminated pre-petition, was not fullyperformed by both sides, and gave debtor rightto assume or reject).

12 See In re Lubrizol Ent., Inc., 756 F.2d 1043(4th Cir. 1985).

13 If a debtor chooses to reject a license of intel-lectual property under which it is the licensor,Section 365(n) of the Bankruptcy Code providescertain protections to the non-debtor party tosuch license. Section 365(n) states:

(1) If the trustee rejects an executory contractunder which the debtor is a licensor of a right tointellectual property, the licensee under suchcontract may elect

(A) to treat such contract as terminated by suchrejection if such rejection by the trustee amountsto such a breach as would entitle the licensee totreat such contract as terminated by virtue of itsown terms, applicable nonbankruptcy law, or anagreement made by the licensee with anotherentity; or

(B) to retain its rights (including a right toenforce any exclusivity provision of such con-tract, but excluding any other right under appli-cable nonbankruptcy law to specificperformance of such contract) under such con-tract and under any agreement supplementaryto such contract, to such intellectual property(including any embodiment of such intellectualproperty to the extent protected by applicablenonbankruptcy law), as such rights existedimmediately before the case commenced, for -(i)the duration of such contract; and (ii) any periodfor which such contract may be extended by thelicensee as of right under applicable nonbank-ruptcy law.

(2) If the licensee elects to retain its rights, asdescribed in paragraph (1)(B) of this subsection,under such contract

(A) the trustee shall allow the licensee to exer-cise such rights;

(B) the licensee shall make all royalty pay-ments due under such contract for the durationof such contract and for any period described inparagraph (1)(B) of this subsection for which thelicensee extends such contract; and

(C) the licensee shall be deemed to waive (i)any right of setoff it may have with respect tosuch contract under this title or applicable non-bankruptcy law; and (ii) any claim allowable

under section 503(b) of this title arising from theperformance of such contract.

(3) If the licensee elects to retain its rights, asdescribed in paragraph (1)(B) of this subsection,then on the written request of the licensee thetrustee shall

(A) to the extent provided in such contract, orany agreement supplementary to such contract,provide to the licensee any intellectual property(including such embodiment) held by thetrustee; and

(B) not interfere with the rights of the licenseeas provided in such contract, or any agreementsupplementary to such contract, to such intellec-tual property (including such embodiment)including any right to obtain such intellectualproperty (or such embodiment) from anotherentity.

(4) Unless and until the trustee rejects suchcontract, on the written request of the licenseethe trustee shall

(A) to the extent provided in such contract orany agreement supplementary to such contract(i) perform such contract; or (ii) provide to thelicensee such intellectual property (includingany embodiment of such intellectual property tothe extent protected by applicable nonbank-ruptcy law) held by the trustee; and

(B) not interfere with the rights of the licensee asprovided in such contract, or any agreement sup-plementary to such contract, to such intellectualproperty (including such embodiment), includingany right to obtain such intellectual property (orsuch embodiment) from another entity.

11 U.S.C. § 365 (n).14 See 11 U.S.C. § 365(f)(2).15 See 11 U.S.C. § 365(f)(1).16 See 11 U.S.C. § 365(f)(2).17 11 U.S.C. § 365(c)(1).18 See, e.g., In re Patient Educ. Media, Inc., 210

B.R. 237, 242 (Bankr. S.D.N.Y. 1997)(noting thatunder federal copyright law, nonexclusive licenseis personal to licensee who cannot assign it tothird party without consent of copyright owner);In re CFLC, Inc. 89 F.3d 673, 675 (9th Cir.1996)(holding that patent licenses were nonas-signable under federal common law).

140 les NouvellesDecember 2001

have looked to state law on trade-marks to determine whether“applicable law” bars assignment.19

Section 365(c)(1) has been inter-preted by at least one federal circuitcourt to mean that a debtor maynot even assume its own non-exclusive patent license absent con-sent of the licensor.20 However,another federal circuit court hasallowed a debtor to assume such alicense absent consent of the licen-sor.21 This split of authority in thefederal circuit courts remains unde-cided by the United States SupremeCourt. For a detailed discussion ofthe issues presented by these cases,see Appendix A hereto.

SALE OF STOCK

A company can also look to anew infusion of equity for addi-tional funds. Many times, when thefinancial or cash flow condition ofthe company is tenuous, the newinvestor wants to invest only if thecompany’s debt has been restruc-tured or if their equity stake sub-stantially dilutes or eliminates theoriginal equity holders. The newequity investor essentially makesits equity investment on the effec-tive date of the debtor’s plan ofreorganization, at the same timethe plan restructures or dischargesold debt. Old equity is therebyreduced or eliminated.

As with loans and sales, appealsof plan confirmation orders aremoot unless the objector obtains astay of the consummation of theplan pending an appeal. This per-mits new equity investors to maketheir investment with the assur-

ance that the company’s capitalstructure, as restructured pursuantto the plan, is attractive to theequity investors. The most signifi-cant intellectual property issuehere is whether the debtor com-pany can assume its intellectualproperty licenses. This was done inCambridge Biotechnology.22

There are basic rules governingwhat can be done in a plan or reor-ganization in which new equitymight invest. First, every classmust receive at least as much as itwould receive in liquidation.Second, the plan must be feasible.After that, each class must eithervote to accept the plan or be treatedfairly and equitably. The Codedefines what is fair and equitable.As to secured claims, they mustreceive cash payment with a pres-ent value equal to the securedclaim. As to unsecured claims, thecreditors can be paid in cash, notesor stock, but must receive 100 percent payment before old equity canretain any interest. However, theabsolute priority rule applies,which means that unsecuredclaims must receive 100 percentpayment before old equity canretain any value under the plan.

Assume, for example, that a com-pany has an enterprise value of$100, secured debt of $25, andunsecured debt of $37.5. Thesecured claims will be paid in full,either in cash or under termsagreed to in the Plan ofReorganization. The unsecuredclaims of $37.5 can be paid in fullby giving them 50 percent of thecommon stock of the reorganizedcompany.23 The remaining 50 per-cent stock of the company is avail-able then to be split between theold and new equity. The stake allo-cated to new equity will depend onthe amount of cash invested andthe importance of the cash, espe-

cially if cash is critical to allow thecompany to emerge from bank-ruptcy.

The amount of the reorganizeddebtor’s stock that goes to oldunsecured claims, old equity andthe new investor is much negoti-ated and can be resolved by theCourt. The new investor is the onlyone of these parties who can walkaway from a deal with its money inits pocket if it does not like thestructure imposed by the Court. Onthe other hand, if the new investorlikes the result, it can then invest ina company with a capital structurethat it likes.

APPENDIX A

Split of Authority Concerning theAssumption of IP Licenses inBankruptcy

The Third and Ninth Circuit’sAdoption of the “HypotheticalTest”

Section 365’s prohibition of theassumption of contracts that arenonassignable under non-bank-ruptcy law without consent of thenon-debtor party was firstexplained by the Third Circuit in Inre West Electronics, in the contextof a debtor’s contracts with thegovernment. In West Electronics,the Third Circuit concluded that 11U.S.C. § 365 creates a hypotheticaltest (i.e., Under the applicable law,could the [non-debtor party] refuseperformance from an entity otherthan the debtor or the debtor inpossession?).24 If so, the Court con-cluded, the contract cannot beassumed by the debtor-in-posses-sion absent consent of the non-debtor party.

After West Electronics, theDelaware Bankruptcy Courtapplied the same “hypotheticaltest” to bar a debtor’s assumptionof nonexclusive patent licenses inIn re Access Beyond Technologies,

19 See, e.g., In re Rooster, Inc., 100 B.R. 228,232 (Bankr. E.D. Pa. 1989)(applyingPennsylvania law).

20 See Perlman v. Catapult Entm’t, Inc. (In reCatapult Entm’t, Inc.), 165 F.3d 747 (9th Cir.),cert. dismissed, 528 U.S. 924 (1999); see also Inre Access Beyond Technologies, Inc., 237 B.R.32 (D. Del. 1999).

21 See Institut Pasteur v. Cambridge BiotechCorp., 104 F.3d 489, 495 (1st Cir.), cert. denied,521 U.S. 1120 (1997).

22 See Institut Pasteur, 104 F.3d at 495.23 This value is one half of the enterprise

value remaining after subtracting the secureddebt burden of the reorganized company. 24 See id.

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Inc., 237 B.R. 32 (D. Del. 1999). InAccess Beyond, the DelawareCourt read West Electronicsbroadly and stated, “Although theWest Electronics case dealt with afederal statute, which barredassignment, the Third Circuit [inWest Electronics] held that section365(c)(1) similarly applied in otherinstances.”25

The Bankruptcy Court quotedthe rule of West Electronics, stating,“This provision [of the Code] limit-ing assumption of contracts isapplicable to any contract subjectto a legal prohibition againstassignment.”26 The DelawareCourt concluded that the debtor-in-possession in Access Beyond couldnot assume a non-exclusive patentlicense because under federalpatent law, “the holder of a non-exclusive patent may not assign itslicense unless the right to assign isexpressly provided for in thelicense agreement.”27 Similarly, inIn re CFLC, Inc. 89 F.3d 673, 675(9th Cir. 1996), the Ninth Circuitprevented a debtor’s attempt toassume and assign an intellectualproperty license to a third party inholding that patent licenses werenonassignable under federal com-mon law. In CFLC the NinthCircuit did not, however, addressthe issue of whether the debtoritself could assume such a license ifit did not also seek to assign it to athird party.

Three years later, however, inPerlman v. Catapult Entm’t, Inc. (Inre Catapult Entm’t, Inc.), 165 F.3d747 (9th Cir.), cert. dismissed, 528U.S. 924 (1999), the Ninth Circuitwas presented with that exactissue. Catapult concerned thedebtor’s attempted assumption ofnon-exclusive patent licenses.28 TheNinth Circuit in Catapult joined the

Third and Eleventh Circuits inadopting “hypothetical test,” andstated the rule as follows: “a debtorin possession may not assume anexecutory contract over the non-debtor’s objection if applicable lawwould bar assignment to a hypo-thetical third party, even where thedebtor in possession has no inten-tion of assigning the contract inquestion to any such third party.”29

The Ninth Circuit explained that“the statute [, 11 U.S.C. § 365,] by itsterms bars a debtor in possessionfrom assuming an executory con-tract without the nondebtor’s con-sent where applicable lawprecludes assignment of the con-tract to a third party”30 The Courtexplained that “our precedentsmake it clear that federal patentlaw constitutes “applicable law”within the meaning of § 365(c), andthat nonexclusive patent licensesare “personal and assignable onlywith the consent of the licensor.”31

The Court held that “where appli-cable nonbankruptcy law makes anexecutory contract nonassignablebecause the identity of the non-debtor party is material, a debtor inpossession may not assume thecontract absent consent of the non-debtor party.”32

THE FIRST CIRCUIT’SADOPTION OF THE “ACTUALTEST”

The First Circuit has come to adifferent conclusion on this issuethan the Third and Ninth Circuits.In Institut Pasteur v. CambridgeBiotech Corp., 104 F.3d 489, 495 (1stCir.), cert denied, 521 U.S. 1120(1997), the First Circuit adopted the“actual test” in interpreting Section365 and held that a non-exclusivepatent license may be assumed by adebtor in possession. The debtor’s

plan of reorganization sought toassume both cross-licenses and tosell all of its stock to a subsidiary ofthe non-debtor party’s direct com-petitor.33 The non-debtor partyobjected to the assumption and “defacto assignment.”34 The FirstCircuit found that “the pre-petitionlicensing relationship . . . was nei-ther ‘unique’ nor ‘something in thecategory of a personal services con-tract’.”35

The First Circuit, in CambridgeBiotech, applied the rule of SummitInv. & Dev. Corp. v. Leroux (In reLeroux), and held that “subsections365(c) and (e) contemplate a case-by-case inquiry into whether thenondebtor party actually was being‘forced to accept performanceunder its executory contract fromsomeone other than the debtorparty with whom it originally con-tracted.” The First Circuit, inCambridge Biotech, distinguishedthe Ninth Circuit’s decision in In reCFLC, Inc., 89 F.3d 673 (9th Cir.1996), explaining that, “The plan inCFLC, Inc. unmistakably providedfor an outright assignment of thedebtor’s patent license to anentirely different corporation withwhich the patent holder … hadnever contracted. By contrast, [thedebtor here] all along has con-ducted, and proposes to continue,its . . . enterprise as the same corpo-rate entity which functioned pre-petition.”36

The First Circuit also distin-guished a decision of the TennesseeBankruptcy Court in In re AlltechPlastics, Inc., 1987 WL 123991, *19-*3237, which held that 365(c) pre-cluded an entity, which hadacquired a debtor’s stock in a chap-ter 11 plan, from exercisingdebtor’s patent rights.

The First Circuit, in CambridgeBiotech, explained that “stock salesare not mergers whereby outright25 Id. at 48.

26 Id. at 48-49.27 Id. at 46.28Footnote 3 of the Court’s opinion states

that the court expresses “no opinion regardingthe assignability of exclusive patent licensesunder federal law.” See id. at 750, n. 3.

29 Id. at 750.30 Id.31 Id. 32 Id.

33 See id.34 See id. 35 Id. at 491.36 Id. at 493-94.37 (Bankr. W.D. Tenn. 1987)

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title and ownership of the licensee-corporation’s assets (including itspatent licenses) pass to the acquir-ing corporation. . . [the debtor’s]separate legal identity, and its own-ership of the patent cross-licenses,survive without interruptionnotwithstanding repeated andeven drastic changes in its owner-ship.”38. The First Circuit explainedthat “[the non-debtor party to thelicenses] was free to negotiaterestrictions on [the debtor’s] con-tinuing rights under the cross-licenses based on changes in itsstock ownership or corporate con-trol . . . Nevertheless, these cross-licenses contain no provision eitherlimiting or terminating [thedebtor’s] rights in the event itsstock ownership were to changehands.”39

As stated previously, althoughthe Cambridge Biotech andCatapult cases dealt with the treat-ment of nonexclusive patentlicenses by Section 365, it is likelythat the bankruptcy courts wouldtreat a copyright license in thesame fashion, since bankruptcycourts have traditionally looked tothe patent laws for guidance onwhether copyright licenses are“executory.”40 Additionally, at leasttwo courts have held that licensesto use trademarks are assumableby the debtor.41

38 Cambridge Biotech, 104 F.3d at 494; seealso Seagram Distillers Co. v. AlcoholicBeverages Control Comm’n, 519 N.E.2d 276,281 (Mass. 1988)(holding that corporation’ssale of all its capital stock does not alter itsidentity, nor effect a transfer of the corpora-tion’s executory contracts or licenses)

39 Id. at 494.40 See In re Patient Educ. Media, Inc., 210

B.R. at 240.41 See In re Superior Toy & Mfg. Co., Inc., 78

F.3d 1169, 1176 (7th Cir. 1996) (finding thatexclusive non-transferable license to distributetoys using trademark was assumed); In reRooster, Inc., 100 B.R. 228, 229 (Bankr. E.D.Penn 1989)(concluding that exclusive subli-censing agreement to use trade name andtrademark on debtor’s neckties was not “per-sonal services contract” which could not beassumed or assigned under § 365(c)).

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As Europe prepares for a com-munity patent court, littleattention has been paid to theimplications for patent-relatedcases. This paper examines thepitfalls of an over-specializedpatent litigation system.

INTRODUCTION

The discussions about the reformof the patent litigation system inthe member states of the EuropeanUnion are entering into a decisivephase. Whatever solution will bebrought forward, it is likely thatone or more specialized and cen-tralized courts will be composedand designated to consider claimsrelating to the infringement andvalidity of European patents andcommunity patents. For purposesof this article, such a court will bereferred to as community intellec-tual property court or CIPC.

The issues that divide the partiesduring these discussions are, withfew exceptions, of a political, finan-cial and professional nature. Theparticipants in Europe’s patent liti-gation discussion are diverse innationality, specialization, lan-guage skills and procedural back-ground. Their concerns expressedregarding the future system’s aimto preserve interests relating to thepatent practitioners’ profession, tothe industry or to the politicalpower that the individual memberstates (reflecting also the interestsof their industries) will continue toyield in the appointment of judges,the control over compulsory

licences or anti-competitive behav-ior.

Therefore, it should not be sur-prising that the questions raisedduring the discussions about thefuture of the community patentsystem affect exclusively the func-tioning of the future court(s): Howmany courts shall there be? Whoshall sit on these courts? Should thejudges be specialized in patentmatters or not? Should there be acentralized court on a first instancelevel or only at an appeal level?Who shall have rights of audience?What language(s) shall be spokenbefore these courts?

What is rarely addressed duringthese discussions — because it doesnot reflect nor represent any partic-ular interest described above — ishow the proposed patent litigationsystem will deal with ancillaryissues such as the protection ofknow-how, breaches of contractuallicensing agreements and acts ofunfair competition, many of whichoccur simultaneously with acts of“pure” patent infringement.Whereas a pure patent litigationdeals with disputes between par-ties who have no other commercialdealings with each other, there aremany more disputes where patentrights are only a part of the dispute.Such cases are not clear-cutinfringement/invalidity disputes,and involve other legal issues thatalso need to be addressed by thecourt. How will these be dealt within the future system?

This article will draw attention tothese other disputes, and examinehow these will (or will not) be dealtwith on a community centralizedlevel in the future system, and

what the consequence of that mightbe. We shall start from the findingthat in the national regulations, forreasons of public policy and coher-ence of dispute settlement, legisla-tors have mandated that patentdisputes and disputes relating topatent licences, as well as ancillarydisputes relating to unfair competi-tion and misuse of know-how,should be dealt with simultane-ously before a single court.Assuming that this cannot alwaysbe the case in the future system,this article will examine what theconsequences thereof may be, howto deal with this in future litigation,and how to draft appropriatelicensing agreements in the future.

THE FUTURE SYSTEM

The envisaged powers for theCIPC are defined very narrowlyand in an exhaustive way in thedraft regulation:

Article 30.1. Exclusive jurisdic-tion of the CIPC: The communitypatent may be the subject of inva-lidity or infringement proceedings,of actions for a declaration of non-infringement, of proceedings relat-ing to the use of the patent or to theright based on prior use of thepatent, or of requests for limitation,counterclaims for invalidity orapplications for a declaration oflapse. It may also be the subject of

Community CourtRaises KeyLicensing Issues BY BRUNO VANDERMEULEN

and VIRGINIE PISSOORT *

* The authors are with the law firm ofBird & Bird in Brussels, Belgium. Thisarticle was first published in“Managing Intellectual PropertyReview,” September 2001.

144

proceedings or claims for damages.Article 30.3: The actions and

claims referred to in paragraph 1come under the exclusive jurisdic-tion of the CIPC.

(Proposal for a council regulationon the community patent pre-sented by the Commission on 1August 2000 (COM (2000) 412final), n° 2.4.5).

The purpose of this exclusivejurisdiction is that only a CIPC canguarantee without fail the unity ofthe law and case law.

Centralization guarantees thepatent owner legal certaintyregarding the validity of his patentand the rules on its infringement(proposal for a council regulationon the community patent pre-sented by the Commission onAugust 1, 2000 (COM (2000) 412final), n° 2.4.5). Such centralizationis also mandated for preliminarypatent infringement proceedings.The Commission explicitly ex-pressed its desire that no interfer-ence be made by nationalpreliminary proceedings: “It isappropriate not to endow memberstates’ courts with concurrentpower to order provisional meas-ures in cases where the centralizedcourt would have jurisdiction todecide on the substance of the case.It is important, as far as possible, toprevent any inconsistency arisingbetween the provisional and pro-tective measures ordered bynational courts and by the central-ized court.”

The national courts shall retainjurisdiction over all matters thathave not been explicitly conferredupon the CIPC such as disputesconcerning, for example, the rightto the patent, the transfer of thepatent and contractual licences.

Article 46: Jurisdiction ofnational court : The national courtsof the Member States shall havejurisdiction in actions relating tocommunity patents which do notcome within the exclusive jurisdic-tion of either the Court of Justice

under the Treaty or the CIPCaccording to the provisions ofChapter IV, Section 1.

And in case of parallel proceed-ings, the CIPC should receive pri-ority:

Article 51.3: Obligation of thenational courts: A national courthearing an action or claim relatingto a community patent other thanthe actions referred to in Article 30shall stay the proceedings if it con-siders a decision on an action orapplication referred to in Article 30to be a prior condition for its judg-ment. Proceedings shall be stayedeither by the court of its ownmotion, after hearing the parties,where an action or applicationreferred to in Article 30 has beenbrought before the CIPC, or at therequest of one of the parties, andafter hearing the other parties,where proceedings have not yetbeen brought before the commu-nity court. In the latter case, thenational court shall invite the par-ties to bring such proceedingswithin a period prescribed by it. Ifsuch proceedings are not broughtwithin the prescribed period, theproceedings before the nationalcourt shall continue.

HOW CLAIMS FOR PATENTINFRINGEMENT RELATE TOCLAIMS FOR UNFAIRCOMPETITION

Claims for patent infringementrely upon a breach of a privatemonopoly right, whereas claims forunfair competition rely upon a lackof respect for fair trade practices,requiring a fault or a violation of aspecific legal norm (SylvianeDurrande, « Les rapports entre con-trefaçon et concurrence», 31emecahier, Chronique, XXXI, A.31,Dalloz-Sirey, 1984). Each type ofclaim is based on different lawsand has different purposes. For thepurposes of this article, it isassumed that they relate to and

attack a similar practice as in apatent infringement claim, i.e., thecopy of an allegedly protected (orproprietary) product or process.

In many national laws of mem-ber states, claims that are “basedon” or “related to” patents areassigned to a specialized jurisdic-tion. This is justified by the highdegree of specification of patentmatters. Many national laws alsorequire that claims for patentinfringement that also comprise arelated claim for unfair competi-tion are brought before the samecourt that has jurisdiction to ruleupon the patent claim. This is, forinstance, the case in Belgium (arti-cle 73.1,2° of the Belgian PatentAct), in France (article L615-19 ofthe Code de la PropriétéIntellectuelle) and in the UnitedKingdom (White Book, Vol 2, 1-140-1-142.2D-1 and 2D-2).

This centralist requirement has adouble purpose. In the first place, itis not desirable that two separatecourts rule on the legality of thesame facts, regardless of whetherthey apply patent law or other lawswhen they examine the legality ofthese same facts (in most jurisdic-tions, claims for unfair competitionwill only be allowable in conjunc-tion with claims for patent infringe-ment if both claims relate todifferent, although very intercon-nected, facts). Suppose that a suit isbrought against the commercializa-tion of a product, based on a claimfor patent infringement (attackingthe act of commercializing theproduct) and on a claim for use ofillegally obtained know-how(attacking the misappropriation ofthe know-how). Both claims aim atstopping the commercialization ofthe same product, but are based ondifferent laws. There is a risk thatcontradictory decisions are ren-dered whereby one court wouldauthorize the commercialization ofthe product, while another courtwould issue an injunction for thissame product (for an example of

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this line of argument, see: Lyon, 11March 1971, D., 1972.307, con-firmed by the CommercialChamber of the Supreme Court, 27November 1972, Bull.civ., IV, n°307,p. 286). While both court decisionsare not necessarily incompatiblefrom a legal point of view, an effi-cient administration of justice man-dates that both claims are heardand dealt with simultaneously bythe same court. This is the first andmost obvious reason to favour cen-tralization.

The second reason isrelated to the first one, but moreimportant. For reasons of publicpolicy, considered in many nationaljurisdictions, it is accepted thatwhere a specific law organizes aspecific type of protection andwhen the conditions for this spe-cific type of protection appear notto be fulfilled, one can no longerrely on the general norm to find analternative legal basis against thesame facts. This general principle isknown as “lex specialis derogat lexgeneralis” in Latin and mandatesapplication of a special rule over arule with a broader scope of appli-cation. In intellectual property mat-ters, scholars have identified theeffet reflexe between protection viapatents, copyright, designs or trademarks on one hand and unfaircompetition laws on the other hand(the “effet reflexe theory” has beenexamined by Andrée Puttemans inher doctoral dissertation: “La pro-tection des droits intellectuels parl’action en concurrence déloyale,”Brussels, Bruylant, 2000)

This principle means that onceone of these types of specific pro-tection is applicable, reliance onunfair competition laws isexcluded as an alternative (or as aback-up) for obtaining the sameresult. For instance, when a prod-uct falls outside the scope of apatent, or the protecting patent isdeclared void, its manufacture ordistribution cannot be prohibitedanymore on the basis of unfair

competition laws (for an examplein Belgian case law, seePres.Comm. Bruxelles, 10 June1992, Ann. Prat.Comm., 1992, 423;Pres. Courtrai, 1 April 1999,Ann.Prat.Comm., 1999, 899).Unless, (and here is where thenational systems have variedapproaches to this problem) thereare other facts that accompany themanufacture of the products andthat make these acts unlawful onother grounds than the fact thatthey constitute unauthorizedcopies.

When a single court has beengiven exclusive jurisdiction to ruleupon all the claims related to apatent infringement, there is noneed to define the border linesbetween patent claims and claimsof unfair competition as far as juris-diction is concerned. The court willbe in a much better position to findwhen an act, although not fallingunder a patent claim, may never-theless be enjoined by an actionbased on unfair competition law.

CLAIMS RELATED TO PATENTSUNDER THE FUTURE SYSTEM

If, under the proposed system fora community patent, one or morecentralized courts is given exclu-sive jurisdiction to hear only claimsrelating to infringement or validityof a community patent, the currentrequirement in national laws ofbringing ancillary claims for unfaircompetition before the same court,will no longer be maintained. Thiswill at least be so if the court of firstinstance is also centralized at thecommunity level. In the context ofthe revision of the European PatentConvention, it has been empha-sised that a system with firstinstance national courts wouldoffer the advantage that suchcourts could also decide on casesinvolving further claims — such ascompetition law — not covered bythe patent (first proposal for an

EPLP, paper of the working partyon litigation, p.14, http://www.ige.ch/D/jurinfo/j.12.htm).This would not be possible in caseof centralization. In any event, if itwere allowed on first instancelevel, problems would arise in caseof the appeal of such a decisionbefore a centralized court.

This could have the following,negative consequences:

• Duplication of legal proceed-ings. Separate proceedings canbe brought before, respectively,the CIPC for infringementclaims, and before one (or more)national court(s) for claims basedon unfair competition laws.Although there is a specific pro-vision in the draft regulation thatnational proceedings containingclaims “relating to a communitypatent” must be stayed in favourof the community proceedings(Article 51.3), there is a risk thatsuch provision will not work effi-ciently or that it will be used onlyfor dilatory purposes. Which cri-teria will be used to determinewhether or not a claim “relates”to a community patent? And,when the claims relate to a com-munity patent for which theCIPC has exclusive jurisdiction,how will the national court deter-mine whether the outcome of theproceedings brought before theCIPC is a prior condition for itsjudgement? Suppose that anational court is seized with aclaim that a product (which isalso said to infringe a communitypatent) is made with illegallyacquired know-how. Would thenational court have to stay itsproceedings while the commu-nity patent court is seized withthe claim for patent infringe-ment? The finding of misappro-priation of know-how seems insuch case not a “prior conditionto the patent judgement” and thenational court would be keen notto stay its proceedings. It couldorder the cessation of its manu-facture on totally differentgrounds to the patent law. Butthe CIPC could shortly thereafterfind that the patent is invalid

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because the so-called proprietaryknow-how was not secret andolder than the patent, and has infact invalidated the patent. Bothcourts would take a totally differ-ent position on the same technol-ogy in terms of protectability,and issue decisions that will giverise to conflicts and inconsistentsituations.

• Plaintiffs will try to “shoparound” and first try out thenational court before initiatinglitigation before the CIPC, or viceversa. If a clear distinction ismaintained between the jurisdic-tion of each court, a plaintiffcould speculate on a doublechance to obtain success, and tryout different arguments beforeeach court.

• The predominant role of theunfair trade practice court will beundermined. In certain jurisdic-tions, such as in Belgium, special-ized unfair competitionproceedings exist in the form ofan action en cessation (for detailsover this proceeding, see D.Dessard “L’action en cessation etles droits de propriété intel-lectuelle,” in Les pratiques ducommerce. Autour et alentour,1997, p. 156) , which are dealtwith quickly and which cannotbe stayed in favour of other pro-ceedings, even criminal proceed-ings (Article 106 of the BelgianUnfair Trade Practices Act).Admitting that these nationalproceedings should neverthelessbe stayed in favour of the central-ized patent proceedings wouldrun afoul of the desired efficiencyof the national proceedings.Bearing in mind that unfair com-petition laws aim more at pre-serving the public interest than apatent right, it could be arguedthat national proceedings shouldnever be stayed as soon as theunfair trade practice can be han-dled by the national court inde-

pendently of the issue of validityor infringement of the patent.

• A revival of unfair competitiontheories to combat illegal copy-ing. When the national courtsnarrowly interpret article 51.3 ofthe regulation when applying therule that they should stay theirproceedings if the patent issue is“a prior condition for its judge-ment” there will be an opportu-nity for parallel litigation beforethe national court and the CIPC,a practice which had beenbanned in many national patentsystems. Depending on the effi-ciency of the future CIPC, thiscould be a healthy or a disturbingdevelopment. In any event, itwill cause a revival of unfaircompetition litigation before thenational courts and reinstate apractice that the legislators inmany countries wanted to disap-pear.

• What about the enforcement ofanti-competition rules? The juris-diction of the CIPC does notseem to cover counterclaims foranti-competitive behaviour of thepatentee. It should be noted thatarticle 40 of the draft regulationgives standing to the EuropeanCommission to sue for invalida-tion of community patents and tointervene as a third party in pro-ceedings before the centralizedcourt (Article 40 of the proposedregulation says: “Where neces-sary in the Community’s interest,the commission may bring inva-lidity proceedings against a com-munity patent before the CIPC.The Commission may also,under the condition referred to inparagraph 1, intervene in all pro-ceedings before the CIPC.”). It isnot clear however if this possibil-ity shall be used by theCommission to enforce its com-petition policy, and how theCIPC will deal with competitionrules in an infringement dispute.

Here again, the risk of parallelproceedings is clearly present.

PATENT INFRINGEMENT ANDLICENSING DISPUTES

As stated above, in many dis-putes the existence of a patent isonly part of the litigation. Veryoften the parties to the litigation arebound by licensing agreements. Apatent licence agreement can be asource of disputes which, at leastinitially, have nothing to do withpatent infringement or invalidity.The dispute can concern theamount or the payment of the roy-alties, a breach of a confidentialityundertaking, the term of thelicensee’s right, the assignment ofthe licence, the warranties, the obli-gations at the expiration of thelicence etc. Very often, however, thedispute amounts in a counterclaimwhereby the validity of the patentis challenged and/or the scope ofthe patent must be examined.

The draft regulation states in itsintroduction that “all other dis-putes, which do not fall under theexclusive jurisdiction of the CIPC,will have to be dealt with by thenational courts, i.e., the contractuallicences” (page 15). On the otherhand, Article 19 of the draft, (con-tractual licences) provides: “therights conferred by the communitypatent may be invoked against alicensee who breaches any restric-tion in the licensing contract.“Hence, the CIPC has jurisdictionto take into account and considerthe licence agreement (scope of theagreement, field of use and terri-tory, duration of the licence,improvement clause, etc.) and todetermine whether or not thelicensee infringes the licensedrights.” Similar provisions can befound in national laws (for exam-ple article 45.2 of the Belgian PatentAct). So a licensor does not have to“shop around” and can combine aclaim for patent infringement with

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a claim for violation of the licenceagreement before the communitycourt. This should also be the caseupon or after the termination of thelicence agreement.

Problems may arise howeverwhen a licensor wishes to enforce aparticular clause in his licensingagreement which has no bearingwith the patent. In such a case he isbound to introduce his claim beforea national court or before an arbi-tration panel, if provided for in theagreement. What if during suchproceedings the validity of thepatent is questioned by the defen-dant/licensee? The regulation pro-vides that the national court shouldconsider the patent as valid untilinvalidated by the CIPC (article51.2) Such a defence would thusfail, unless the national court con-siders the validity of the patent a“prior condition for its judgment”(article 51.3).

If the licensor wishes to termi-nate the licensing agreement forbreach of contract on groundswhich have no bearing on thepatent, a dispute arising from thattermination does not fall under theexclusive jurisdiction of the CIPC.Such disputes will have to bebrought before a national court. Butvery often the licence agreementwill contain an obligation for thelicensee to stop practising thepatent. If this obligation is notrespected, to which court shouldthe licensor go? It would appearthat there is no exclusive jurisdic-tion for such a claim with the CIPC,so that the licensor/patent holderhas the choice of bringing such aclaim before the national court orbefore the community court. If hebrings the suit before the nationalcourt (where the termination dis-pute is probably already pending)these proceedings risk howeverbeing suspended if the validity ofthe patent is challenged. In eithercase, a double litigation seemsinevitable.

An action for recovering unpaid

royalties will have to be introducedbefore the national court because itdoes not fall under the exclusivejurisdiction provisions of article 44and the claim is based on a con-tract. However, if royalties areclaimed for surpassing the scope ofthe licence agreement, article 19.2of the draft regulation provides theopportunity (but not the obliga-tion) to sue before the CIPC. Whendamages are claimed, only theCIPC seems to have jurisdiction(article 44). It is clear that many dis-putes will involve a combination ofboth types of claim so that doublelitigation will become, also in suchcases, inevitable.

TIPS FOR THE FUTURE

The risks of duplication of litiga-tion, as discussed above, can bereduced by carefully drafting thelicence agreement. It is also advis-able to amend existing licenceagreements to cope with the futurechanges. These amendmentsshould take account of the follow-ing:

It is desirable to split patentlicence agreements from know-how licence agreements, and avoidcombined technology licensingagreements.

A combined technology licensingagreement can however containseparate dispute resolution mecha-nisms for each type of licensedtechnology. Splitting jurisdictionaccording to the type of litigationand the subject matter involved isnot uncommon in licence agree-ments (Noel Byrne, Licensing tech-nology, drafting and negotiatingagreements, London, AnthonyRowe Ltd, 1994, p. 294).

Although both proposals willinevitably cause a multiplication oflitigation in the event of disputes,they will create greater certainty forthe parties.

Regarding arbitration, one musttake into account that the regula-

tion allows arbitration of disputesinvolving community patents onlyfor infringement, and not for inva-lidity (Article 53 of the draft). InBelgium, an arbitration panel caninvalidate a patent and such invali-dation has effect erga omnes (arti-cle 73 §6, al 2 of the Belgian PatentAct). So an arbitration clause for acommunity patent licensing agree-ment must contain a different dis-pute resolution mechanismdepending on whether the disputeconcerns 1) a claim for patentinfringement, 2) a claim for invalid-ity of the patent, and 3) other con-tractual issues which fall outsidethe scope of article 19 of the regula-tion.

Special provisions must be madefor preliminary relief. The partiescould agree that provisional meas-ures (other than those falling underthe exclusive jurisdiction of theCIPC) can be ordered by a nationalcourt (or arbitration panel) of theirchoice, notwithstanding litigationon the merits.

NEED FOR WIDE POWERS

The proposed regulation on thecommunity patent is ambitious andwill without any doubt improvethe enforcement of patent laws inthe European community. How-ever, the goal of reducing multipleproceedings by setting-up a cen-tralized CIPC may not be achievedif that court has too narrowlydefined functions and jurisdiction.Patent disputes are rarely confinedto issues of infringement and valid-ity, and often involve other legalissues which will not be dealt withby the centralized court. The futuresystem will therefore not “central-ize” patent litigation as much aswas intended. The draft regulationoffers many possibilities for con-ducting parallel proceedings beforethe national courts, creating a gen-uine risk of delays, complicationsand incompatible judgments.

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The best way to overcome thisrisk is to follow the example of thecommunity trademark court sys-tem, whereby national courts act asa specialized community courtwith full jurisdiction over allaspects not specifically regulatedby the community patent regula-tion. Structuring the future CIPCalong these lines, i.e. nationalcourts with an extended jurisdic-tion for community patent dis-putes, is to be preferred to a systemwith exclusive, over-specializedcourts and judges which may haveno feeling for most other disputeswhich concern parties in a patentlitigation.

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les Nouvelles 149December 2001

Andean OutlookA recurring featureby Natalia Tobón of Cavelier Abogados

A review and commentary on recent developments in the law of theAndean Community (Colombia, Venezuela, Ecuador, Perú and Bolivia)that relate to the field of licensing.

COMMERCIAL NAMES IN DECISION 486 OF THE ANDEAN COMMUNITY

Decision 486 of 2000 regulated extensively the topic ofcommercial names, in contrast to Decision 344 of 1993,which only dealt with its general aspects and that hadto be complemented in many aspects by the local law ofeach of the member countries of the Andean Pact and bythe jurisprudence of the Andean Court of Justice.

In fact, Decision 344 established as a general principlethat “the commercial names will be protected in themember countries of the Andean Pact, without the obli-gation of deposit or registration. ”1 This lead to theunderstanding that the protection of this sign had originon its use and not on the registration.

It additionally provided that the registration processof a commercial name would be based on the procedureestablished for the registration of trademarks, accordingto the internal regulations existing in each membercountry.

In Colombia, the legal concept of commercial namecoexisted with the one of the commercial emblem, whilein Ecuador these two concepts were covered by the con-cept of the commercial name. On the other hand, Perúrequested proof of use for the renewal of the registrationof a commercial name.

In virtue of the brief regulations regarding the topic ofthe commercial name, contained in Decision 344, TheCourt of Justice of the Andean Community, based onprejudicial interpretations, complemented the scope ofthis legal concept as follows:

1. The commercial name is the “means by which anindividual or legal entity identifies its business activity,in order to protect it and differentiate it from others ”2

2. Signs that can constitute a commercial name are a

“denomination, an acronym, a combination of numbers,a surname, a name and a surname, a pseudonym, a geo-graphical name, etc.”3

3. The right to the exclusive use of a commercial nameis obtained by use. Therefore, its use is mandatory formaintaining the right. Furthermore, the use is qualified,since it must be a continuous, actual and effective use ofthe commercial activity that the name protects.

Based on the foregoing, “for the existence of use, itwill be necessary that the use of the designation bemade out of the internal scope of the entity or personimplementing the corresponding activity...”4

4. The commercial name is used for protecting busi-ness activities.

5. A commercial name must be distinctive; that is, itcannot “be a commercial or company name, a mark or asign used by another individual or company. It shouldnot be confusingly similar to another or to a markalready used to individualize individuals, legal entitiesor other signs, which could serve as basis for an opposi-tion.”5

6. A commercial name should be lawful and cannot bemade by signs forbidden by the law, nor contrary topublic morals; neither it can be deceitful nor contradictthe principle of veracity, nor to imply risk of association,confusion or dilution with other distinctive signs; nei-ther to attempt to violate the rights of third parties, norto imply unfair or parasitic practices.6

7. A commercial name has personal character and,therefore, it must be used by its legal owner.

1 Artículo 1282 TRIBUNAL DE JUSTICIA DE LA COMUNIDAD ANDINA. Proceso

No. 17-IP-97, 26 de junio de 1998. (COURT OF JUSTICE OF THE ANDEANCOMMUNITY. Process Number 17-IP-97, June 26, 1998)

3 TRIBUNAL DE JUSTICIA DE LA COMUNIDAD ANDINA. ProcesoNo. 27-IP-98, 18 de noviembre de 1998. (COURT OF JUSTICE OF THEANDEAN COMMUNITY. Process No. 27-IP-98, November 18, 1998)

4 Idem5 TRIBUNAL DE JUSTICIA DE LA COMUNIDAD ANDINA. Proceso

No. 27-IP-98, 18 de noviembre de 1998. (COURT OF JUSTICE OF THEANDEAN COMMUNITY. Process No. 27-IP-98, November 18, 1998)

6 Ernesto ARACAMA, Los Retos de la Propiedad Industrial, esquema delNombre Comercial, INDECOPI-OMPI, 1996, pág 205. (The Challenges ofIndustrial Property, commercial name scheme)

150 les NouvellesDecember 2001

8. The registration of a commercial name has declara-tive character, but it does not constitute rights.“Protection arose from the use of the commercial name,and countries can regulate their registration as a formaland declarative matter, however not creating the rightto the exclusive use of the commercial name”7

In virtue of above, no member country of the AndeanPact could demand, in defending the right of the com-mercial name from third parties, that its deposit beapplied and that it obtain “the corresponding certifi-cate, as provided by Article 102 of Decision 344 of theCartagena Agreement, because this article refers to theexclusive use of a mark, which is applicable by refer-ence to the commercial names, in case that the local lawsestablish the possibility of registration for them.”8

9. “The proof of the use of a commercial name corre-sponds to anyone alleging its existence and to anyonefiling an opposition against the mark, or against anothersign because of its previous use, which should be previ-ous to the registration of the contested mark, in applica-tion of the principle “prior tempore, potior iure”9

In contrast with Decision 344, Decision 486 regulatedin a detailed manner the topic of the commercial name,as follows:

1. A commercial name is “any sign identifying an eco-nomic activity, a company or a commercial establish-ment.”10

Regarding this matter, it is important to remark thatthis definition unifies under the concept of commercialname the concepts of commercial name and commercialemblem, which is relevant in our country, since inColombia the law treated them as two different con-cepts.

This way begins a process of unification of the differ-ent criteria established by the local law of each membercountry of the Andean Community regarding the topicof commercial name-emblem-label. Consequently, itwould have been advisable to define the concepts ofeconomic activity, company and commercial establish-ment.

Decision 486 also provides that a company or estab-lishment may have more than one commercial nameand stipulates that a commercial name can be identicalto the corporate name or to any other designationrecorded in a log of individuals or business entities.

2. Article 191 of Decision 486 provides that the right tothe exclusive use of the commercial name is acquired byits first use in commerce and finishes when:

(i) the use of the commercial name ceases (ii) the activities of the company come to an end (iii) the establishment using the commercial name

cease to existThe new decision, as well as Decision 344, also bases

the origin of the commercial name on the use, whichshould be continuous, real and effective

Likewise, it also stipulates that “the legal owner of acommercial name can register or deposit it at the com-petent national office. The registration or deposit willhave declarative character.” This norm clarifies thedeclarative character of the registration of the commer-cial name, a matter that, under Decision 344, was farfrom clear and had to be clarified by the Andean Courtof Justice.

3. Decision 486 set forth the rights of the owner of acommercial name and suggested to read about the topicof marks in the relevant part.11

4. Article 194 stipulated the specific cases in which acommercial name cannot be registered. However, invirtue of the importance of use in the commercial namefor generating rights, it would have been more advis-able to establish the commercial names that cannot beused or registered.

Letter d) of this article provides that a commercialname cannot be registered if there is a previous regis-tration or application for a commercial name. This pro-hibition should have extended to signs in general andnot only to commercial names.

The reason for the foregoing is that an application foror the registration of a mark in class related with thebusiness activities that the commercial name seeks toprotect could be considered a sufficient obstacle to theregistration of the commercial name, especially if theuse of the commercial name is not prior to the registra-tion of the trademark.

5. An innovation of the new decision is the term ofduration of the registration of a commercial name, aswell as the procedure to follow for its renewal. .12

Decision 486 stipulates that the term of duration ofthe registration of a commercial name will be for 10years. Under Decision 344, the registration of the com-mercial name was left to the local laws of each country,which in general did not set any term for that registra-tion.

In our opinion, a mistake was made by stipulating aterm of duration for the registration of commercial

7 TRIBUNAL DE JUSTICIA DE LA COMUNIDAD ANDINA. ProcesoNo. 27-IP-98, 18 de noviembre de 1998.(COURT OF JUSTICE OF THEANDEAN COMMUNITY. Process Number 27-IP-98, November 18, 1998.)

8 Idem9 TRIBUNAL DE JUSTICIA DE LA COMUNIDAD ANDINA. Proceso

No. 27-IP-98, 18 de noviembre de 1998. (COURT OF JUSTICE OF THEANDEAN COMMUNITY. Process Number 27-IP-98, November 18, 1998)

10 Article 19011 Article 192 of Decision 486 of the Andean Community. 12 Articles 196 and 198 of Decision 486 of the Andean Community.

151les Nouvelles December 2001

names in Decision 486, for the following reasons: (i) Registration has a declarative character and does

not generate rights(ii) The use of the commercial name generates rights.

Consequently, it is use that determines the existence of the right.

(iii) One of the causes for losing rights on thecommercial name, is its lack of use

(iv) The right to the exclusive use of a commercial name exists regardless of the obtainment of the registration.

Regarding renewal, we wish to remark the power andautonomy given to each member country for requiringor abstaining from requiring evidence of use in therenewal process of the registration. It seems indeed con-tradictory that if the purpose of Decision 486 was tounify criteria and policies regarding the matter of thecommercial name, power is given to each membercountry for demanding evidence, specially taking intoaccount that registration only has a declarative charac-ter.

6. One of the novelties of Decision 486 of 2000 is con-tained in paragraph 2 of Article 199, by means of whichit is established that “a commercial name may belicensed. When so stipulated by local laws, that licensemay be registered at the competent national office”.

Regarding this provision, we find it relevant to men-tion the following: :

(i) It establishes the legal ground for the registration of licenses of use of commercial names, because in current commercial practice said licenses wereissued without being certain of their validity.

(ii) It is clarified that in the case of a license of use of a commercial name, it should be understood thatsaid use is as if it had been made by the owner ofthe commercial name, since for obtaining rights on the commercial name, besides the use, it is also required that the use be made by the ownerof said name.

(iii) The registration of the license is at the discretion of each member country, so therefore arises the question of whether or not for registering a license it is essential to register the commercial name.

7. Decision 486 of 2000 introduced for the protectionof commercial names and in general for the protectionof trademarks and patents, a specific judicial actioncalled action for infringing industrial property rights. .

8. Finally and even though this is not the topic of thisessay, it is worth mentioning the inclusion of Article 200,which provides for:

“The protection and deposit of labels or emblems will be regulated by the provisions relating to the

commercial name, as per the national laws of each member country.”

This provision will probably create confusion,because if the intention of the Andean lawmakers wasto unify the laws regulating commercial names,emblems and labels under a unique legal form(Commercial Name Art. 190) in all the member coun-tries, then this decision will only generate confusion inregard to this matter.

9. It is then concluded, that now in Colombia the mat-ter of commercial names is regulated by Decision 486and by the Colombian Commercial Code, in all theaspects where the Andean law leaves gaps or expresslyrefers to the local law of each member country.

les NouvellesDecember 2001152

EU Review A recurring featureby Alec Burnside, Linklaters & Alliance, BrusselsA review and commentary on recent decisions relating to licensing in the European Union.

RECENT ANTI-TRUST CASES

European Commission Prohibits Proposed Schneider/Legrand Merger

Following a phase-two investigation, the Commissionhas prohibited the merger of Schneider Electric andLegrand, the two main French manufacturers of electri-cal equipment. The effects of the merger on competitionrelated primarily to low-voltage electrical equipment,i.e. all the systems used for electricity distribution andthe control of electrical circuits in homes, offices or fac-tories. The Commission’s investigation showed thatthere was substantial overlap between the activities ofSchneider and Legrand in the markets for electricalswitchboards, wiring accessories and certain productsfor industrial use or for more specific applications. InFrance, the merger gave rise to particularly seriousproblems over virtually the whole range of productsconcerned and would, in most cases, have resulted inthe strengthening of a dominant position. Schneiderand Legrand are by far the largest players on the Frenchmarket, and the Commission’s investigation demon-strated clearly that there was little prospect of any sig-nificant development in the activity of foreigncompetitors in the short and medium terms.Furthermore, competition problems were also identi-fied in Denmark, Spain, Greece, Italy, Portugal and theUnited Kingdom.

In an attempt to remedy these problems, Schneidersubmitted an initial series of undertakings to theCommission on September 14, 2001, the deadline forpresenting undertakings. However, it became evidentthat these initial undertakings were not enough torestore the conditions of effective competition.

Schneider submitted new undertakings on September24, but they left serious doubts as to the competitivecapacity of the entities to be sold off, notably in regardto access to distribution in France and the economicrisks associated with the actual separation of these enti-ties from the rest of the group to which they belonged.In any event, the uncertainties associated with the fact

that these were last-minute proposals could not becleared up within the deadlines set. Lastly, Schneider’sproposals did not provide any effective solution inregard to a number of geographic markets and/orproduct markets on which competition problems hadbeen identified.

The merger took the form of a public offer on theParis stock exchange and, under the rules of theexchange, it had already been implemented, conditionalbids not being permitted. Therefore Schneider isrequired to divest itself of the 98 percent of Legrand’sshares that it had acquired.

The European Commission Imposes Fine of Nearly Euro 72 Million on DaimlerChrysler

The Commission has imposed a fine of ¤ 71.825 mil-lion on DaimlerChrysler AG, one of the world’s leadingcar manufacturers, for three infringements againstArticle 81 of the EC Treaty. This is the fourthCommission decision imposing a fine against a carmanufacturer that does not respect EC competitionrules.

The Commission identified three types of infringe-ments of the EC competition rules. The first one consistsof measures by DaimlerChrysler that constitute obsta-cles to parallel trade. The undertaking instructed themembers of its German distribution network forMercedes passenger cars, roughly half of which areagents, not to sell cars outside their territory. In addi-tion, DaimlerChrysler instructed its distributors tooblige foreign, but not German, consumers to pay adeposit of 15 percent to DaimlerChrysler when order-ing a car in Germany.

In a second infringement, in Germany and Spain,DaimlerChrysler limited the sales of cars by Mercedesagents or dealers to independent leasing companies aslong as these companies had not yet found customers(“lessees”) for the cars concerned. As a consequence, itrestricted the competition between its own leasing com-panies and independent leasing companies because thelatter could not put cars on stock or benefit from rebates

153les Nouvelles December 2001

that were granted to all fleet owners. Finally, DaimlerChrysler participated in a price fixing

agreement in Belgium with the aim of limiting to 3 per-cent the rebates granted by its subsidiary MercedesBelgium and the other Belgian Mercedes dealers to con-sumers. This amounts to resale price maintenance, apractice for which the Commission had alreadyimposed sanctions in its decision against Volkswagenlast June.

The amount of the fine takes into account the gravityand duration of the infringements. The fine must alsohave a sufficient deterrent effect on DaimlerChryslerand other companies.

Commission Fines Six Companies in SodiumGluconate Cartel

Six international companies, Akzo Nobel NV, ArcherDaniels Midland Company Inc., Avebe BA, FujisawaPharmaceutical Company Ltd., Jungbunzlauer andRoquette Frères SA, have been fined by the EuropeanCommission for their involvement in a price-fixing andmarket-sharing cartel.

The companies, producers of virtually all the world’ssupply of the cleaning agent sodium gluconate, forwhich the EEA market during the lifetime of the cartelwas worth Euro 18 million annually, operated the illegalagreement from 1987 to 1995. They held regular meet-ings in Europe, Japan and North America where theyagreed on individual sales quotas, fixed minimum andtarget prices and even shared out specific customers.The cartel members then monitored each other’s com-pliance with the quotas and if any company had over-sold, it would be penalised by a reduction in its quotafor the next year.

The overall fine in the case was, at Euro 57.53 million,the ninth largest ever imposed — this despite the factthat all of the companies took advantage of theCommission’s leniency program, which allows for fullor partial immunity from fines for companies that co-operate with the Commission in a cartel case. Fujisawa,fined Euro 3.6 million, was given an 80 percent reduc-tion, the highest percentage reduction ever allowed, forproviding decisive evidence of the cartel. It would havebeen eligible for total immunity but for its failure tocome forward before the Commission sent a request forinformation. Archer Daniels Midland, at 10.13 million,and Roquette Frères, at 10.8 million benefited from a 40percent reduction in fines for “adding value” by theircooperation. Akzo Nobel, at Euro 9 million and Avebe at3.6 million, were granted only a 20 percent reduction, asthey provided no new information to the Commission.

Jungbunzlauer, although it was given a 20 percentreduction in its fine for corroborating informationbefore the Statement of Objections was issued, wasregarded as the “driving force” behind the cartel and

the basic fine was therefore increased by 50 percent,bringing it up to Euro 20.4 million.

The investigation into the case was begun in 1997after similar conduct on the part of some of the partiesto the cartel was uncovered in the United States. Thisresulted in the companies pleading guilty and beingfined in the United States and Canada.

Provisional Suspension of Commission Decisionagainst IMS Health

The President of the Court of First Instance hasadopted a provisional suspension order of the decisionof the Commission taken in July of this year in a caseconcerning IMS Health, which has wide implications inthe field of intellectual property rights. At issue is towhat extent the Commission can override copyrightprotections by arguing that, in exceptional circum-stances, the exercise of an exclusive intellectual prop-erty right can constitute abuse of a dominant position.(This argument draws its precedent from the Magillcase of 1995). A further sensitive issue in this case is thatthe Commission decision in question amounts to adirect countermand of an explicit decision of a nationalcourt.

IMS Health Incorporated is a market research com-pany providing a broad range of market research, mar-keting and sales management services to thepharmaceutical sector. It had developed a system inGermany known as the “1860 brick structure,” wherebythe country was broken down into 1,860 geographicalareas, or “bricks,” within which data on prescriptionsgiven and sales at pharmacies could be analysed in ameaningful way. IMS had copyrighted this structure.When two prospective competitors, NDC Health of theUnited States and AzyX of Belgium, tried to use theirown versions of this structure, they were held, by theGerman courts to be in breach of IMS’s copyright.When, subsequently, IMS refused to grant them licencesto use the structure, they complained to the EuropeanCommission.

The Commission’s decision, which has now to someextent been put in doubt, was that IMS, in keeping the1860 brick structure to itself, was abusing a dominantposition and locking competitors out of the market. Itfound that the brick structure had become an “essentialfacility” and without access to it, no competitor couldenter the market — a finding directly contrary to that ofthe German court. The Commission made an interimorder that IMS should issue licences to its competitorson commercial terms, receiving agreed royalties. IMSappealed this decision and made an application forinterim relief. IMS argued that the Commission, in mak-ing an interim order that licences should be granted hadfailed to maintain the status quo pending a substantivedecision in the case.

154 les NouvellesDecember 2001

The President of the CFI has now ordered that it is inthe interest of the proper administration of justice thatthe Commission decision be suspended pending theoutcome of the full hearing on the question of interimrelief. He stated that the suspension was a protectivemeasure that was not such as to cause irreparable harmeither to the Commission’s interests or those of the com-petitors in the market, NDC Health and AzyX.

PATENTS

Judgement Concerning Words with a Customary Meaning

The company Merz & Krell filed an application forregistration of the wordmark “Bravo” in respect to writ-ing implements. That application was refused by theDeutsches Patent und Markenamt on the ground thatthe word “Bravo” is, for the class of persons to whom itis addressed, purely a term of praise and an advertisingslogan devoid of any distinctive character, thus render-ing it ineligible for protection.

Merz & Krell brought an action against that decisionbefore the German patent court. The court pointed outthat the term “Bravo” has the same meaning in manyEuropean languages as a term of praise in the sense of ajob well done. It also observed that that word is in factused in advertising in Germany and various otherEuropean countries as a term of praise in respect of var-ious goods and services. The court found that registra-tion could be refused if the word “Bravo” had becomecustomary in current language or in established practiceof the trade. But, under German patent law, the wordmust have become customary to describe the goods forwhich the patent was sought in order for registration tobe refused.

The German court sought clarification of the meaningof the directive from the European court. The Europeancourt ruled:

Under the Trademark Directive, registration shouldonly be refused if the word for which registration wassought had become customary (i.e., generally used inrespect of the goods in question).

If such usage of the word has become customary, itdoes not matter if it is generally used as an advertisingslogan or an indication of quality.

Registration is not precluded if a word is generallyused as an advertising slogan or an indication of qual-ity. It is for the national court to determine in each casewhether the signs or indications have become custom-ary in the current language or in the bona fide andestablished practices of the trade to designate the goodsor services covered by that mark.

Therefore, the only test, under the directive, iswhether the words for which registration is sought have

entered into general usage to describe the goods or serv-ices in question: if so, registration may be refused.

Case Reference: C-517/99, Merz & Krell GmbH & Co

TRADEMARKS

Community-wide Exhaustion of Trademark Rights

The debate on Community-wide versus internationaltrademark exhaustion was re-opened in October withthe publication of a European Parliamentary Report onthe issue. The question is whether the EU should stickto the current regime of EU-wide exhaustion of trade-mark rights or change to a system of internationalexhaustion of such rights, thus allowing “parallelimports” from third-party countries into the EU oftrademarked products at supposedly much lower pricesthan those paid by EU consumers. Parallel imports area highly controversial issue among MEPs because oftheir far-reaching economic and social consequences.Those who would prefer to keep the current system ofCommunity-wide exhaustion argue that the benefits ofparallel imports to EU consumers would be minimal(estimated 2 percent price falls on average), while theadverse effects for European industry — in particular,employment — would be enormous, as productionunits and hence jobs would be shifted to low-wage,non-EU countries. In addition, piracy would flourish.

Parliament’s compromise called on the Commission: • to produce a detailed study of the implications of a

possible transition to an international exhaustionregime for European manufacturers and consumers aswell as for jobs;

• to produce a report on cases of abuse of trademarkrights notified to the Commission;

• to ascertain the prospects for the conclusion of aninternational agreement on harmonized rules onexhaustion of trademark rights under the WTO orWIPO;

• to submit to Parliament, by December 31, 2002, areport on these points, containing detailed proposals.

The Commission, however, has declined to act on thisrequest. Commissioner Bolkestein has told theEuropean Parliament that the Commission at presentsees no reason to re-examine the issue of exhaustion oftrademark rights. The Commission is in favor of main-taining the present regime of Community-wide exhaus-tion rather than changing to international exhaustion oftrademark rights and is not convinced that a changewould have a significant impact on consumer prices. Itis of the view that the present system strikes a balancebetween the interests of consumers and the legitimateinterests of trademark holders. Commissioner

155les Nouvelles December 2001

Bolkestein acknowledged that there were price differ-ences on certain consumer goods between memberstates but did not agree that this could be attributed tothe trademark regime. He noted that, as far as compar-isons with the United States were possible, the EU mar-ket was the cheaper market. Commissioner Bolkesteinstated that all the aspects had been thoroughly studiedand analysed by the Commission services and no newelements had been put forward that would require fur-ther examination or which would give the Commissionreason to reconsider its decision.

Advocate General’s Opinion Concerning TrademarkedGoods

The Advocate General has given an opinion to theeffect that someone selling goods cannot be stoppedfrom orally referring to trademarked goods to describequalities of the goods being sold. The question posed inthe case was:

Where a person owns a national trademark in theform of a name for goods possessing certain character-istics, does the Trademarks Directive entitle him to pre-vent another person from using that name in the courseof trade in order to indicate characteristics of other sim-ilar goods, which that other person is offering for salebut which are not produced by the trademark propri-etor and the seller makes no claim to that effect andthere can be no confusion as to their origin? AdvocateGeneral Jacobs concluded:

Article 5(1) of the 1988 Trademarks Directive does notentitle a trademark proprietor to prevent third partiesfrom referring orally to his trademark when offeringtheir goods for sale if they make it clear that he did notproduce those goods and if there can be no question ofthe mark being perceived in trade, whether at that stageor subsequently, as indicating the origin of the goodsoffered for sale.

However, even in other circumstances in whichArticle 5(1) does give the trademark proprietor a rightto prevent use, Article 6(1) precludes the exercise of thatright if the use is for the purpose of indicating charac-teristics of the goods in question, unless such use is notin accordance with honest practices in industrial orcommercial matters.

Case Reference: C-2/00, Michael Hölterhoff v UlrichFreiesleben

Community Utility ModelThe Commission has issued a consultative document

to update information previously received from inter-ested parties on the possible impact of a CommunityUtility model. The last consultation took place in July1995 when the majority of replies were opposed to theintroduction of such a model.

Utility models, sometimes called “petty patents,” areregistered rights that confer exclusive protection oninventions but that are granted without examinationand require a lower level of inventiveness than isrequired for patents. Protection can be obtained morequickly and at lower cost than a patent, but with lesslegal certainty. At present, national utility model protec-tion is available to varying degrees in many EU MemberStates but not in the United Kingdom, Sweden or theBenelux countries.

Work on the proposed directive to approximatenational systems of utility model protection was put onhold in March 2000 while priority was given to theCommunity patent. In March this year, the StockholmEuropean Council expressed concern at the lack ofprogress on the community patent and utility modeland the Commission has responded by issuing the con-sultative document.

The consultative document proposes the establish-ment of a Community utility model to complement, butnot replace, national systems. It asks a number of ques-tions concerning the potential impact on research anddevelopment and competition (both within the EU andbetween the EU and the rest of the world); and the effecton legal certainty; and estimates the number of applica-tions likely to be filed in each year.

The Designs DirectiveThe EU Designs Directive (98/71/EC), which had to

be implemented by October 28, 2001, is likely to makedesign registration a more attractive option. In particu-lar, the introduction of a 12-month grace period, duringwhich disclosure will not destroy novelty, is new tomost member states and will allow companies to testthe market or find financial backers for a new productwithout losing priority. Also new to most member statesis the fact that it will not be necessary to limit registra-tions to a specified article or set of articles, protectionwill extend to any product incorporating a registereddesign.

The directive will not lead to complete harmonizationof all aspects of national laws, in particular, with regardto spare parts. The Commission is required to reviewthe consequences of the directive by October 2004 and,by October 2005, to propose any changes needed tocomplete the Internal Market in respect of componentparts of complex products (i.e., spare parts) and anyother changes that it considers necessary in the light ofits consultations with affected parties.

Provisions relating to sanctions, remedies andenforcement are left up to the individual member states.The directive does not attempt to harmonize the con-cepts of “public policy” or “morality,” which may leadto refusal of registration.

Implementation of the Designs Directive will be fol-

156 les NouvellesDecember 2001

lowed by finalization of the Community DesignRegulation, for which an amended proposal was pub-lished in October 2000. It will reflect all the relevant pro-visions on substantive design law featured in thedirective and so will be fully compatible with the direc-tive.

TRIPS AGREEMENT

Judgement of the European Court of Justice

In a case referred by the Netherlands, the court hasruled that Article 50 of the TRIPs Agreement (concern-ing provisional measures for the protection of intellec-tual property rights), although not binding, should berespected as far as possible by national courts.

In particular, the Court ruled: Where TRIPs became applicable in the member state

concerned at a time when the court of first instance hasheard the case but not yet delivered its decision, Article50 is applicable to the extent that the infringement ofintellectual property rights continues beyond the dateon which TRIPs became applicable with regard to theCommunity and the member states.

The procedural requirements of Article 50(6) are notsuch as to create rights upon which individuals mayrely directly before the Community courts and thecourts of the member states. Nevertheless, where thejudicial authorities are called upon to apply nationalrules with a view to ordering provisional measures forthe protection of IP rights falling within a field to whichthe TRIPs Agreement applies and in respect of whichthe Community has already legislated, they arerequired to do so as far as possible in the light of thewording and purpose of Article 50(6).

Article 50(6) is to be interpreted as meaning that arequest by the defendant is necessary for provisionalmeasures ordered by way of interim relief to lapse onthe ground that no substantive action has been broughtwithin the prescribed period.

It is for each member state to determine the limits ofthe powers of the judicial authorities in ordering provi-sional measures.

Case Reference: C-89/99 Shieving-Nijstad vif & ors vGroeneveld

les Nouvelles 157December 2001

PATENT OWNERS’ LETTER, CHARGING ACOMPANY IN ANOTHER STATE WITH WILLFULINFRINGEMENT, IS SIGNIFICANT FACTOR INFINDING PATENTEE MAY BE SUED IN THAT STATE

A court will review many factors to determinewhether a defendant has sufficient contacts with a stateto allow him to be sued in that state. In IanmedCorporation v. Kuzmak No. 00-1292 (Fed. Cir. May 15,2001), the Federal Circuit held that a New Jersey pat-entee who asserted willful infringement in a letter to aCalifornia company, negotiated four license agreementswith that company, and received royalties from sales ofproducts manufactured in California created sufficientcontacts with California to establish personal jurisdic-tion over him in California and allow him to be sued inthat state.

Dr. Kuzmak, a New Jersey resident, had entered intofour license agreements with Inamed Corporationinvolving four patents directed to devices and methodsfor the surgical treatment of obesity. For six yearsKuzmak received more than $1.3 million in royaltiesfrom Inamed for sales of products manufactured inCalifornia. After Inamed terminated the license agree-ments, Kuzmak sent Inamed a letter asserting thatInamed was willfully infringing certain patents. Inamedresponded by filing a declaratory judgment action inCalifornia seeking a declaration of invalidity, unen-forceability and noninfringement, along with a claim ofpatent misuse. The lower court dismissed the action,concluding that it lacked personal jurisdiction overKuzmak because the license agreements had alreadybeen terminated and that Kuzmak conducted all dis-cussions concerning these agreements by way of tele-phone and mail from New Jersey.

On appeal the Federal Circuit reversed, concludingthat Kuzmak had sufficient minimum contacts withCalifornia to support jurisdiction. In support, the courtcited Kuzmak’s letter asserting willful infringement asthe most important contact, since the charge of “willful”infringement indicated Kuzmak’s awareness that hemight be entitled to treble damages and attorneys fees

in a successful infringement action against Inamed. Thecourt noted that Kuzak’s sending of the letter throughhis counsel to Inamed’s attorney in New York is imma-terial because it was considered to be directed atInamed, who was located in California.

Noting that the sending of an infringement letterwithout more is insufficient to establish jurisdictionover an out-of-state patentee, the Federal Circuit alsocited Kuzmak’s negotiation of four license agreementsand the receipt of royalty payments based on sales ofdevices manufactured in California as additional evi-dence that Dr. Kuzmak purposefully directed activitiesat California residents. The Federal Circuit further heldthat Inamed’s claims were at least related to Kuzmak’sactivities in California. Finally, the court held thatKuzmak failed to show that the exercise of jurisdictionwas unreasonable or unfair due to a back injury. Thecourt noted that such injury could form the basis for arequest to change venue or other challenge to theforum.

PATENTEE’S LETTER SUGGESTING THAT ALICENSE MAY BE NEEDED PROVIDES SUFFICIENTNOTICE OF INFRINGEMENT TO CAUSE DAMAGESTO BEGIN ACCRUING

When a patented article has been produced by a pat-entee or its licensee, the amount of damages the pat-entee can recover in an infringement suit is statutorilylimited to those acts of infringement that occurred afterthe patentee gave the alleged infringer “notice ofinfringement.” 35 U.S.C. 287(a). The statute permitseither constructive notice, which is accomplished bymarking the article with the patent number, or actualnotice. For actual notice, leading cases have required anaffirmative communication of a specific charge ofinfringement by a specific accrual product or device.However, the patentee is not required to make anunqualified charge of infringement.

In Gart v. Logitech, Inc., No. 00-1088 (Fed. Cir. June 26,2001), the Federal Circuit held that a letter suggestingthat a license may be needed is sufficient to provide

Recent Decisions in theUnited StatesA recurring featureby Brian Brunsvold and John Paul

158 les NouvellesDecember 2001

actual notice under 35 U.S.C. § 287(a). The court furtherstated that the alleged infringer’s subjective belief ofwhether the letter was a charge of infringement wasirrelevant to whether notice was adequate.

In April 1995, Gart sent Logitech a letter stating thatGart owned the ‘165 patent and that Logitech was sell-ing trackballs under the name TRACKMAN VISTA, andsuggesting that Logitech “determine whether anon-exclusive license is needed under the patent.” InSeptember 1996, Gart sent another letter to Logitechstating that Logitech may find the ‘165 patent “particu-larly interesting” relative to its TRACKMAN VISTA andTRACKMAN MARBLE products. Logitech respondedthat the ‘165 patent does not cover its product. Gart thensent another letter in January 1997, stating that he wasinvestigating “the Logitech Vista and Marble Trackballsinfringement of” the ‘165 patent.

Gart then filed suit alleging that Logitech’s TRACK-MAN products, as well as products sold under thename MOUSEMAN, infringed the ‘165 patent. Onmotion by Logitech to limit damages, the lower courtheld that Gart had not given notice of infringement ofthe TRACKMAN products until the January 1997 letterand had not given notice of infringement of theMOUSEMAN products until Gart filed suit.

On appeal, the Federal Circuit held that Gart’s 1995letter was sufficient to provide notice of infringement ofthe TRACKMAN VISTA products. The court stated theissue of whether the patentee’s communication pro-vides sufficient specificity regarding a charge ofinfringement must focus on the actions of the patenteeand not the subjective belief of the alleged infringer. Thecourt found that the 1995 letter provided a sufficientlyspecific charge of infringement because it referencedclaims of the ‘165 patent and Logitech’s selling of prod-ucts and noted that Logitech may want to determinewhether a license is needed. The court said that the clearobjective inference from this letter is that is that Gartbelieved the TRACKMAN VISTA products infringedthe ‘165 patent. Further, the court held that the 1996 let-ter, considered with the 1995 letter, provided notice thatGart believed that the TRACKMAN MARBLE productsinfringed the ‘165 patent. Finally, the Federal Circuitaffirmed the lower court’s conclusion that Gart did notprovide notice of infringement of the MOUSEMANproducts until it filed suit.

A FRENCH COURT’S DECISION REGARDING THEOWNERSHIP OF A U.S. PATENT IS RECOGNIZEDAND ACCEPTED BY U.S. COURTS UNDER THEDOCTRINE OF COMITY

In International Nutrition Company v. HorphagResearch Ltd., No. 00- 1408 (Fed. Cir. July 16, 2001), the

Federal Circuit held that the district court did not abuseits discretion in recognizing and accepting the decisionof a French court concerning ownership of a U.S. patentrelated to plant extracts.

In this case, Societe Civile D’InvestigationsPharmacologiques D’Aquitane (SCIPA), a French com-pany, entered into a joint development agreement withHorphag Overseas Limited, an English company, thatresulted in U.S. Patent No. 4,698,360 (the ‘360 patent).The agreement was executed in France and specifiedthat litigation regarding interpretation or performanceunder the agreement was under the jurisdiction ofBourdeaux, although it contained no choice of law pro-vision.

The inventor of the ‘360 patent assigned his rights toSCIPA and Horphag. SCIPA assigned its rights in the‘360 patent to International Nutrition Company (INC), aLiechtenstein company, Horphag sued in Bourdeaux tovoid the assignment, asserting that it violated Frenchlaw. In that action, the court voided the assignment forviolating French statutory prohibitions against jointowners unilaterally assigning their ownership stakes inpatents. INC’s subsequent infringement suit in theUnited States district court for the district ofConnecticut against Horphag and others was dismissedbecause the district court, extending recognition or“comity” to the French court, held that INC lackedstanding as it had no ownership interest in the ‘360patent.

On appeal, the Federal Circuit noted that courts willnot extend comity to foreign proceedings when doingso would be contrary to the policies or prejudicial to theinterests of the United States. INC argued that givingcomity would violate U.S. patent law. In this case, how-ever, the Federal Circuit held that the district court didnot abuse its discretion in granting comity to the deci-sions of the French court because that court merelydetermined who owned the ‘360 patent, which is typi-cally not a question arising under United States patentlaws. The court noted that the development contract didnot contain an explicit choice of law clause, but that ithad a forum selection clause requiring actions be triedin Bordeaux, and that the French courts looked to theobjective indicia of the parties about the choice of lawand concluded that French law governed the questionof ownership. As a result, the court held that the districtcourt did not abuse its discretion by extending comityto the decision of the French courts.

les Nouvelles 159December 2001

For additions and revisions, please commu-

nicate with: Thomas G. Ryder editor@lesi.org

For the March 2002 issue, insertions

must be received prior to February 1, 2002.

2002

January 23-26American Intellectual PropertyLaw AssociationMid-Winter MeetingLa Pointe Hilton on South MountainPhoenix, Arizona+1 703-415-0780

February 14-16LES (USA & Canada)Winter MeetingLas Vegas, Nevada+1-703-836-3160www.usa-canada.les.org

April 5-7LESI Delegates and Committees MeetingThe Rhiga Royal HotelOsaka, Japan+81-3-3595-0578

April 7-10LES International Annual ConferenceThe Osaka International Convention CenterOsaka, Japan+81 3-3595-0578

April 11-13LES ANZ Annual ConferenceMelbourne, VIC, Australiawww.lesanz.org.au

April 18-20American Intellectual PropertyLaw AssociationSpring MeetingWaldorf Astoria HotelNew York, New York+1 703-415-0780

April 20-24International Trademark AssociationPennsylvania Convention CenterPhiladelphia, Pennsylvania+1 212-768-9887

May 1-4LES (USA & Canada)Summer MeetingWashington, DC+1 703-836-3106

June 26-30American Bar AssociationIntellectual Property Law Section Summer ConferenceLoews Philadelphia HotelPhiladelphia, Pennsylvania+1 312-988-5639

August 8-14American Bar AssociationAnnual MeetingWashington, DC+1 312-988-5639

September 8-11LES Czech RepublicLES Pan European ConferencePrague Czech Republic

September 29-October 2LES (USA & Canada) Annual MeetingSheraton ChicagoChicago, Illinois+1 703-836-3160www.usa-canada.les.org

October 3-5LES International Delegates & Committees MeetingSheraton ChicagoChicago, Illinois

2003

June 13-15LES InternationalDelegates and Committees

MeetingRadisson SAS Plaza HotelOslo, Norway

June 16-18LES InternationalAnnual Conference 2003Radisson SAS Plaza HotelOslo, Norway

September 21-25LES (USA & Canada) Annual MeetingHyatt Regency San DiegoSan Diego, California+1 703-836-3106www.usa-canada.les.org

2004

May 7-12LES Arab CountriesLESI Delegates and Committees MeetingLESI Annual ConferenceCairo, Egypt

October 17-20LES (USA & Canada) Annual MeetingBoston Copley Place MarriottBoston, Massachusetts+1 703-836-3106www.usa-canada.les.org

2005

LESI ConferenceMunich, Germany

September 25-28LES (USA & Canada) Annual MeetingPhoenix, Arizona+1 703-836-3106www.usa-canada.les.org

Licensing and Intellectual Property Organizations Meetings

USA/Canada — Local ChaptersMeetings are held regularly in many locations. Call the chairperson in your area to attend a local meeting.

Kathleen A. Denis - Regional, VP, USA E.B. (Ted) Cross - Regional, VP, CanadaArthur S. Rose, VP Local Chapters

CANADA Calgary Mark Butler butlerm@macleoddixon.com Edmonton Lorena Forster forsterl@arc.ab.ca

Robert McDonald rmcdonal@millerthomson.ca Montreal Jacques Labreche jacques.labreche@sap.com

Francois Painchaud fpch@robic.com Ottawa Jane Clark clarkj@gowlings.comToronto Diane LaCalamita dlacalamita@dww.com

David Tyrrell davet@vertexips.com Vancouver Jim Hendry Jim.Hendry @famulus.bc.ca CENTRALChicago Jeffrey M. Duncan jduncan@brinkshofer.com

Brian R. Oliver boliver@intecap.comCleveland-Akron Brian K. O’Riordan bkor1@aol.com

David Untener +1-216-631-0041 (h)Dallas/Ft. Worth Steven H. Slater slater@slater-matsil.com

Rodney A. Cooper rcooper@sidley.comHouston Keith Lutsch, Esq lutschk@pdq.net

Gerald E. Lester iplawlic@flash.netIndiana Michael D. Beck mdbeck@bakerd.comMichigan Christopher A. Danowski cdanowsk@ford.com

Richard W. Marczewski richard.w.marczewski@delphiauto.comMinneapolis-St.Paul Gregory C. Swinehart gswinehart@dttus.com

Krista Richardson krrichardson@dttus.comOklahoma Charles T. "Chip" Whittier chip@tedsco.org

Douglas J. Sorocco doug_sorocco@okpatents.comSt. Louis Daniel Davison Ddavison@bentonsedge.comToledo David D. Murray, Esq. dmurray@brinkshofer.com

Robert M. Leonardi robert.leonardi@dana.com EASTERNAtlanta Carol Beckham beckham.carol@bsc.bellsouth.net

Joel Goldman joel.goldman@troutmansanders.com Fairfield-Westchester Counties Wil Jacques wjacques@competitivetech.net

Frederic Zotos zotos@javanet.com Florida Gregory Nelson

John Simmons John.W.Simmons@lmco.com Greater Boston Beth Arnold 617-832-1000

Joseph Cote cote.joe@adlittle.com Greater Washington D.C. John Charles Paul john.paul@finnegan.comMetro New Jersey Ovita Franz ofranz@lucent.com

Linda Webb lindawebb@definedhealth.com New York Mark Stehr mstehr@dttus.com Philadelpha Anthony Cupoli cupoli@attglobal.net

Andrew Ney alney@ratnerprestia.com Research Triangle Park F. Michael Sajovec msajovec@carolinapatents.com WESTERNArizona Michael Lechter mlechter@ssd.com

Thomas Major thomas.major@honeywell.com Denver Edward J. Hendrick, Jr. Edward.J.Hendrick.Jr@saic.com

Dallas R. Martin Dallas.martin@firstdatacorp.comTim Schultz Timothy_schultz@storagetek.com

Idaho-Montana Jeffrey Mobley mobljw@inel.gov Los Angeles Lorraine Morrison lsmorrison@kpmg.com

Thomas Small TMS@SLIPLAW.com New Mexico Mark Allen msallen@sandia.govOrange County Robert Roby rroby@kmob.com

Robert Roby Voet_Martin@Allergan.com Salt Lake City James Jensen jjensen@npsp.com San Diego Norman A. Brown brownn@saic.com

Diane S. Goostree dgoostree@durapharm.comSeattle Cathryn Campbell ccampbell@candf.com

Debra Leith dle@zge.comSilicon Valley Bradford Friedman friedman@cadence.com

Lawrence Udell udellipi@ix.netcom.com

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