AIPLA - MANAGING & LICENSING IP ASSETS 2004

1. AIPLA - MANAGING &LICENSING IP ASSETS 2004 Got Certainty?! Avoiding Ambiguities in DraftingCommon License Provisions William B. Bunker March 12, 2004

2. NUTS AND BOLTS • Beware of “form” paragraphs! • Drafted from a Licensor’s or Licensee’s point of view? • Today, we will primarily focus on Licensor’s point of view • Goal is CERTAINTY – avoid disputes/litigation

3. NUTS AND BOLTS • Most time and attention in negotiation is on the “business deal” – financial aspects • License fees, royalties, minimum payments, equity/stock • Many important clauses, considered mundane or “standard”, are overlooked

4. GRANT CLAUSES • Probably most litigated clause • Probably given the least thought

5. GRANT CLAUSES: Bunker’s Lucky 7 • Exclusive or Nonexclusive? • Royalty Free or Royalty Bearing? • Worldwide or geographically limited? • Unlimited or limited (field of use)? • Sublicense Rights or not? • Using what? • To do what?

6. Bunker’s Lucky 7 • Using what? • “under the Licensed Rights . .” • “under the Licensed Patents . .” • “to use the Licensed Technology . .” • To do what? • “make, have made, use and sell Licensed Products” • “make (but not have made), sell, import, export”

7. GRANT CLAUSES: ONE EXAMPLE Subject to the terms and conditions of this Agreement, Licensor grants and Licensee hereby accepts a non-transferable, royalty-bearing, worldwide exclusive license under the Licensed Rights, to develop, manufacture, have manufactured, use, market and sell Licensed Products.

8. GRANT SUB-CLAUSES • If sublicense rights are granted, expressly state limitations • Don’t forget royalty sharing of sublicense revenue (different % rate) • Reservation of rights by licensor • Specific and general reservation

9. GRANT SUB-CLAUSES: ONE EXAMPLE Licensee shall have no right to sublicense, subcontract, transfer or otherwise convey all or any part of the rights hereby licensed to it without the prior written consent of Licensor. Subject, however, to Licensor’s prior written consent, Licensee may grant sublicenses under the Licensed Rights, to develop, manufacture, have manufactured, use, market and sell Licensed Products, . . .

10. GRANT SUB-CLAUSES: ONE EXAMPLE provided that any such sublicenses shall provide for payment of royalties to Licensor pursuant to the provisions of Article IV of this Agreement. No sublicense shall contain the right to grant further sublicenses. Any such sublicense shall expressly include the provisions of Section 2.4, Article III, Article V, Article IX, Article X and Sections 11.9, 13.11, 13.13, and 3.14 for the benefit of Licensor.

11. GRANT SUB-CLAUSES:Reservation of Rights LICENSEE shall not have the right to sublicense any of the rights or obligations provided LICENSEE by the terms of this Agreement. LICENSOR shall retain any rights under the Licensed Rights and/or the Licensed Products except as expressly granted herein to LICENSEE.

12. DEFINITIONS • Most problematic definitions • “Licensed Rights” • Patents • Technology, know how, trade secrets • “Licensed Products” • Covered by a Claim? • Whether or not covered by a Claim?

13. DEFINITIONS: ONE EXAMPLE “Licensed Technology” shall mean all confidential or proprietary information, trade secrets and know-how relating to the Inventions, Improvements, and Research. “Licensed Rights” shall mean the combination of Licensed Patents and Licensed Technology, or either of them, or any portion or portions thereof.

14. DEFINITIONS: ANOTHER EXAMPLE “Licensed Product(s)” shall mean any product, device, process, method, apparatus kit or component part, or any part thereof, or any subject matter, where manufacture, use, or sale: (a) Is covered in whole or in part by any Claim of one or more of the Licensed Patents; or (b) Incorporates, embodies or uses in whole or in part any of the Licensed Technology.

15. DEFINITIONS: ANOTHER EXAMPLE “Licensed Products” shall mean compact, self-storable inflation repair kits sold solely for the motorized offroad vehicle market, including, but not limited to, those products which are (i) covered by any pending or issued claim of the Licensed Patents; (ii) manufactured in accordance with the Licensed Information; or (iii) promoted or marketed under any of the Licensed Rights.

16. Reports, Books, Records • Reports: be specific; itemize • Books and Records • How long must they be kept? • Who can inspect? • How often? • Audit: royalties underpaid by a % of what?

17. AUDIT CLAUSE: ONE EXAMPLE Licensee shall permit the inspection of such records, files and books of account by an independent certified public accountant chosen by Licensor and reasonably acceptable to Licensee during regular business hours upon five (5) business days’ written notice to Licensee, to the extent necessary to verify compliance with this Agreement.

18. AUDIT CLAUSE: ONE EXAMPLE Such inspection shall not be made more than four times each calendar year. All costs of such inspection and copying shall be paid by Licensor, provided that if any such inspection shall reveal that an error has been made in the amount equal to 3% or more of such royalty payments, such costs shall be borne by Licensee.

19. EXIT STRATEGY • Licensor – usually minimum performance/milestones • Licensee – usually term of the agreement • Who has the leverage?

20. MILESTONES:ONE EXAMPLE Licensor shall be entitled to terminate this Agreement in accordance with Article XI below if Licensee shall fail to adhere to any of the following milestones (the “Milestones”): (i) To obtain equity financing in the minimum amount of $4,000,000 within 12 months of the execution of this Agreement; (ii) To commence to implement the Clinical Test Program set forth in Table 4 of the Business Plan (the “Clinical Test Program”) within one (1) month of the execution of this Agreement; or (iii) To market Licensed Products relating to any or all Inventions listed in Exhibit “C” within _____ years following the date of this Agreement.

21. ENFORCEMENT • Patent litigation is expensive • Who has the right/obligation to enforce licensed patents? • Share expense? • Share recovery? • Settlement issues?

22. ENFORCEMENT: SOME EXAMPLES Upon written notice to Licensor, Licensee shall have the primary right to bring any legal action with respect to such apparent infringement at its own expense and for its own benefit. In the event that consideration other than money is received by Licensee for this alleged infringement, Licensee shall compensate Licensor for royalties for both the past and future making, selling, or using the allegedly infringing product by the alleged infringer. In such event, Licensor agrees to cooperate with Licensee and to join in such action as a party

23. ENFORCEMENT: SOME EXAMPLES plaintiff if requested to do so by Licensee and to give Licensee all needed information, assistance and authority to file and prosecute such suit; provided that Licensee shall reimburse Licensor for all verified out-of-pocket expenses incurred by it in providing such assistance, including attorney’s fees, expenses and expert witness fees incurred by Licensor. To ensure that no rights of Licensor are compromised in any such action, Licensee shall not settle any such claim without Licensor’s prior written consent, which consent shall not be unreasonably withheld.

24. ENFORCEMENT: SOME EXAMPLES Licensee and Licensor acknowledge and agree that it is in their mutual interest to prevent the infringement of the Licensor Patents, but that their interests may vary depending upon the sector in which the alleged infringer is operating. Thus, both Licensee and Licensor agree to promptly give written notice to the other of any apparent infringement discovered by it with respect to the Licensed Technology. Such notice shall set forth the facts of the infringement in reasonable detail and may include the discovering party’s recommendation for a preferred course of

25. ENFORCEMENT: SOME EXAMPLES action with regard to the infringement. Licensee and Licensor will each give due consideration to the recommended course of action; provided, however, if the infringer is operating within the Sector, Licensee shall have the primary right, but not the obligation, to bring any legal action with respect to such infringement at its own expense and for its own benefit. In such event, Licensor shall be named as a party in such legal action and agrees to cooperate with Licensee as requested and to give information, assistance and authority to file and prosecute such legal action. All expenses incurred by Licensor in

26. ENFORCEMENT: SOME EXAMPLES such action, including without limitation reasonable attorneys fees for independent counsel retained by Licensor, shall be reimbursed by Licensee. Licensee shall exercise its discretion in the prosecution and defense of such action; provided, however, to ensure that Licensor’s Rights are not compromised, Licensee agrees to prosecute, defend and/or settle such action with due regard thereto and further agrees to notify and consult with Licensor in the resolution of such action, provided, however, any final decision as to the resolution of such action shall be in Licensee’s sole

27. ENFORCEMENT: SOME EXAMPLES discretion. In the event that Licensee decides not to bring legal action against an apparent infringer in the Sector or if the infringer is operating outside the Sector, Licensor shall have the primary right, but not the obligation, to bring legal action with respect to such apparent infringement at its own expense and for its own benefit. Licensee agrees to cooperate and assist in such action as set forth above with respect to Licensor.

28. Who am I marrying? • Licensing is like a marriage • How well will it work? • No spouse swapping! • Nonassignability clauses • Nontransferability clauses • Avoid standard boilerplate

29. NONTRANSFERABILITY: ONE EXAMPLE LICENSEE shall not grant, assign, sublicense or otherwise convey or transfer any rights inuring to LICENSEE or any obligation or duties owed by LICENSEE to LICENSOR under this Agreement, without the prior written consent of LICENSOR and any attempted transfer or assignment shall be null and void; provided further, however, that LICENSEE shall not, without such prior written consent, assign, transfer, or otherwise dispose of, whether voluntary or involuntarily, by operation of law or otherwise, this Agreement or any rights or obligations

30. NONTRANSFERABILITY: ONE EXAMPLE hereunder to any affiliate, entity or to the purchaser or successor of all or substantially all of the assets of LICENSEE’S business as it relates to this Agreement, nor shall LICENSEE enter into any corporate reorganization, investment, acquisition, merger or consolidation which results in a change of corporate control of LICENSEE without obtaining such prior written consent. LICENSOR, however, may assign or transfer any and/or all of its rights or obligations under this Agreement without prior notice to, or approval of, LICENSEE.

31. What if the marriage doesn’t work? • Resolving disputes • Audience survey: of those who have been through an arbitration proceeding, do you favor including arbitration clauses? • If so, why? • If not, why?

32. DISPUTE RESOLUTION • Consider mandating mediation – multiple sessions • Choose the right mediator! • Then, as a last resort, litigation, but with an attorneys fees clause • If you use arbitration, insert your own rules to supplement AAA, or whatever

33. AVOID LIKE THE SARS • Rights of first refusal/negotiation • Most favored nation clauses • Noncompete provisions • No cross hiring provisions

34. BOILERPLATE • Every agreement should have a complete set of standard provisions • Like the “constitution” of agreements • Bunker’s one time offer to exchange sets!

35. CONCLUSIONS • Give careful attention to the “little” clauses!

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