Advanced Patent Licensing

1. Advanced Patent Licensing Bill Berner Assistant General Counsel Managing Attorney – IP Nike, Inc.* *The views expressed in this presentation are solely those of the author and do not necessarily reflect the position of NIKE, Inc.

2. Typical Topics to Cover • Parties • Recitals • Definitions • License Grant • Consideration • Representations • Confidentiality • Patent Prosecution and Maintenance • Patent Enforcement • Term and Termination • Arbitration (?) • “Boilerplate”

3. Definitions • “Licensed Patents” • Provide list of Licensed Patents in schedule • Include follow-on patents: “any patents that issue on applications that claim priority from the same application as any listed patent” • Include “Improvements”? • “Licensed Products” or “Licensed Activities” • “Net Sales” • “Royalty-Bearing Products” or “Royalty-Bearing Activities” ?

4. License Grant • Subject Matter – What is being Licensed? • Patents ? • “Know-how” ? • Types of “know-how” • One-time teaching (how to use a patented machine) • Trade secrets

5. License Grant • Benefits of incl. know-how (licensor) • Broadens scope of royalty bearing products • Potentially extends life of royalty stream beyond life of patents • this may be unrealistic depending on pace of innovation in the industry (invention may be obsolete well before the patents expire)

6. License Grant • Benefits (licensor) (continued…) • Much more important where licensing fundamental patents which are nearing the end of their term (technology has taken a long time to mature), and licensor has developed a lot of post-filing expertise

7. License Grant • Benefits (licensee) • Avoids later claims of breach of confidentiality obligations / misappropriation of trade secrets

8. License Grant • Difficulties with know-how licenses • Defining scope of royalty-bearing products • Creating multi-tiered royalty structure • Watch out for best mode issues – don’t create tools for folks challenging the validity of licensed patents

9. Scope of Grant / Limitations • “Exclusive” or “sole” or “non-exclusive” or “covenant not to sue” ? • Generally assumed to be non-exclusive • Grant of an exclusive license generally prohibits licensor from practicing licensed technology. If your client wants to continue to use the technology, specifically reserve the right.

10. Scope of Grant / Limitations • Non-exclusive license vs. covenant not to sue • Debtor in bankruptcy permitted to reject executory contracts • IP licenses are generally considered executory contracts

11. Scope of Grant / Limitations • §365(n) of the bankruptcy code provides an exception to the general rule for licenses of “Intellectual Property” • Patents • Patent applications • Works of authorship • Mask works • Trade secrets • NOT TMs!

12. Scope of Grant / Limitations • Other limitations to scope of grant include: • Fields of use? • Territory • Particular apparatus construction or configuration? • Distribution channels?

13. Scope of Grant / Limitations • Right to sublicense? • depending on field and other restrictions, could licensee sublicense your competitor? • can you legitimately exclude sublicensing to competitors? • Licensor reserves right to reject proposed sublicense?

14. Scope of Grant / Limitations • Right to sublicense? (continued…) • If your (small) client is licensing technology, consider asking for commitment from licensor to honor sublicenses even in the event of licensee default • Very valuable in university licensing / startup, if startup will sublicense to large entity. • Could be automatic obligation, or negotiated with University when structuring the sublicense (gives University comfort with sublicensee)

15. Special Issues for Know-How Licenses • Define with particularity what is being licensed • Avoids disputes in later years over what was shared vs. what was developed independently by licensee (memories fade, relationships deteriorate) • Specify licensee’s obligations to maintain confidentiality of trade secrets • “. . . with the care it uses to protect its own confidential information . . . ?” • Audit rights!

16. Special Issues for Know-How Licenses • Risk! • Any meaningful recourse available for disclosure? • Legal system with jurisdiction • Judgment proof? • Sublicenses? • Reserve approval/veto right?

17. Consideration • One-time fee? • Royalties as percentage of sales? • Fixed royalty per unit sold? • Minimums? • Advances? • Combinations?

18. Paid-up License • Check with accounting department re treatment • can it be expensed into the future or does entire payment hit the books this quarter? • Generally depends on whether business can identify particular products and plans to sell into the future

19. Royalties • Royalty Rate • Typically “X% of Net Sales” or equivalent

20. Royalties • Valuation • ”industry norm” vs. economic negotiation • $ spent to develop the technology is irrelevant to license. Focus instead on value to licensee: • increased sales or revenues? • statement-level product (brand initiative)? • breadth/scope of patent portfolio (US only? Key foreign markets?) • cost to design-around?

21. Royalties • cap? • reduction in rate over time (reflect decreasing value of particular innovation) • increase in rate over time (reflect cost of investment to commercialize invention) • decrease in rate at certain sales or royalty levels?

22. Royalties • “Net Sales” • Be sure to check with client’s accounting department to ensure definition describes information that is captured by existing accounting system and uses terms consistent with business usage • Alternative: $Y per unit sold/manufactured? • avoids disputes over deductions in typical “% of Net Sales” royalties • Allows licensee to benefit from inflation

23. Royalty Base • Definitions: “Licensed Products” vs. “Royalty-Bearing Products” • include products / methods “covered” by pending applications? • Take care to define what happens if technology is small cog in large apparatus – DON’T rely on the language of the patents

24. Royalty Base • Definitions: “Licensed Products” vs. “Royalty-Bearing Products” (continued…) • Ensure definition is objectively auditable – allowed deductions are regularly captured and not subject to “inflation” • Hint: If licensee is publicly traded, tie this to information that the licensee uses to report earnings; licensee will have no incentive to inflate deductible expenses

25. Accrual Again, check with accounting to make sure that client’s systems capture information to allow you to capture accrual information

26. Reporting and Payment • Check with client’s accounting department regarding timing; consider staggering payment other than by Calendar Year or Quarter, and avoid FY end, to spread workload away from busy season. • Remember that different business units even within the same client may collect and report information differently, let alone subsidiaries and licensed distributors.

27. Reporting and Payment • Beware of interplay between royalty accrual and reporting/payment dates. If it typically takes 60 days for accounting to receive financial reports from licensees in the Middle East, or a subsidiary in India, build that into the reporting obligations

28. Audit Rights ? • Necessary for licensor, but very disruptive for licensee. • Consider limiting: • frequency of audit rights • who can participate in audit (licensor personnel or just neutral auditor – particularly important when licensing competitor) • notice requirements • “blackout” periods (end of FY?) • Time during which licensee must keep records.

29. Sublicenses? • Ensure all reporting and payment obligations pass through to sublicensees. • Also specify that licensee is responsible for all obligations of sublicensees

30. Minimum Royalty Obligations • Gives certainty to licensor • Can licensee avoid minimums by terminating contract? • Be very careful to walk this through with business unit whose budget will bear the cost; counsel against enthusiasm and deal creep

31. Minimum Royalty Obligations • Alternatives? • Advances build in licenses “account” and are set off against earned royalties. • gives certainty of income to licensor, easier to swallow for licensor • Loss of exclusivity for failure to hit sales/royalty targets • Allow licensee to “buy” continued exclusivity?

32. Royalties: buyout option? • Acquire Licensed Patents? • Just convert to paid-up irrevocable perpetual license? • Deduct royalties paid to date? • Just earned royalties?

33. “Most Favored Nation” Clause • Very difficult to measure “most favored” where license terms other than royalty obligations vary • can be a roadblock to future licensing opportunities • fails to recognize “first mover” advantage given to first licensee • particularly difficult where later license is result of litigation, or where scope of license grant is different

34. “Best efforts” or “reasonable efforts” obligations • Some courts have implied obligation to use “best efforts” or “reasonable efforts” to commercialize licensed technology where • (a)   exclusive license; • (b)   licensor retains no right to practice technology; • (c)   no negotiated minimum license.

35. “Best efforts” or “reasonable efforts” obligations • Make your intent clear in the document to avoid expensive litigation: • If licensee, specifically reject any such obligation • If licensor, consider building in specific obligations • Regardless of which side you’re on, if you build in “reasonable efforts” clause, take the time to specify those efforts in easily and objectively measurable terms • Litigator’s cash cow!!

36. Representations and Warranties • Typical licensor representations and warranties • ownership of patents • no prior license or conflicting agreements • no liens or pledges or hypothecations (use of patents as security) • If licensor, be careful to disclaim consequential damages – specify licensee’s available remedies in case of breach • When offering reps and warranties, try to specify remedy for breach

37. Confidentiality • Of Agreement? • If licensee, consider securing right to record abstract with PTO to provide notice against future bona fide purchasers • In addition to assignments, U.S. Patent and Trademark Office will record documents relating to ownership, such as licenses and security interests (MPEP §313) •  Of information gained through audits •  Of licensed / transferred “know-how”

38. Term and Termination • Evergreen provisions •  Sell-off rights? • Check with your business unit!!!

39. Patent Maintenance • Who pays? • Common in university licensing for licensee to pay maintenance fees and even reimburse for prosecution costs • Affirmative obligation of Licensor? (Important for exclusive licenses) • Where licensor fails to pay, can licensee step in and acquire the patents?

40. Patent Enforcement • Difficult issue in exclusive licenses • Each party wants control over patents – what positions to take, which infringements to pursue • Revenue sharing? • recall that licensor will have to participate in lawsuit and will be subjected to extensive discovery • fair that licensor should share in proceeds of litigation

41. Patent Enforcement • Licensor failure to enforce against infringers • termination of royalty obligations? • reduction in royalty obligations? • licensee have right to enforce?

42. Arbitration • Forum? • Qualifications of arbitrator(s)? • Nationality? • Selection? • Venue? • Different forums for different disputes?

43. Arbitration • Procedural limitations? • Time? • Discovery? • advance ”Markman” ruling? • Bifurcation? • Reserve right to secure injunction (either through court or through arbitration if relevant forum states will enforce arbitration decision)

44. Arbitration • Decision? • Summary or detailed? • Segregate infringement and validity issues from contractual issues? • Arbitration awards affecting patent must be reported to U.S. Patent and Trademark Office (35 U.S.C. §294) • Be aware of new West / AAA arrangement

45. Arbitration • Sticking the deal: How do you make sure the arbitrator honors parties’ agreement on arbitration terms? • pay incentives? • proceeding not in compliance with requirements automatically void or voidable?

46. Indemnification and Insurance • Product liability claims? • does grant of a license put licensor in stream of commerce so as to be liable in product liability claims? • Is licensee sufficiently substantial to make indemnification meaningful? • If not, require insurance

47. Indemnification and Insurance • Take care in drafting these terms – small changes in language can have meaningful impacts on scope of defense and indemnity obligations

48. Boilerplate • Modify applicable limitations period? • 6 years (limitations period for written contract in Oregon) is a REALLY long time •  Assignment? • Rights are generally not assignable unless expressly made so in the agreement • Beware loss of control from unanticipated assignments

49. Boilerplate • Marking • Be very careful to talk with client before accepting an obligation to mark. Don’t allow your client to walk into a breach. • May want to specify remedy available for breach of a marking obligation

50. Boilerplate • Choice of law • Venue and Jurisdiction • secure consent to jurisdiction of selected forum state • work out service protocol to avoid delays imposed by Hague Convention (or worse, citizens of non-signatory countries)?