Intellectual Property Rights: Advantage Business Introduction to Licensing

1. Intellectual Property Rights: Advantage BusinessIntroduction to Licensing for MarkPatent.org Miku H. Mehta Partner, Sughrue Mion February 13-14, 2010

2. Topics • Introduction • License Structure • International Comparison • Practice Tips • Recent Supreme Court Decisions • Medimmune v. Genentech (use of Declaratory Judgment to challenge licensed patent) • Quanta v. LG (Patent Exhaustion Doctrine) • Questions and Discussion

3. Introduction of Licensing • A patent license exists when a patentee enforces its patent rights by giving another party permission to practice the patent, in exchange for compensation • Patentee still keeps ownership of the patent • Licensing is an alternative to litigation • In some countries other than the United States, a license may be required to enforce patent rights • Why would an Indian company be interested in out-licensing or in-licensing? • Pros and Cons

4. Licensor and Licensee • Licensor (Patent Owner) • Not required to be competitor or manufacturer • A research entity that does not make a product, but sells know-how • A company or person seeking income from their research efforts • Licensee • Needs to practice the patent in order to make, use, sell, import, or export its products and/or services • Licensee may try to avoid patent scope by obtaining a legal opinion of non-infringement or invalidity, or change product design • If the licensee cannot avoid the patent, it may contact the patent owner to start a negotiation of a license, or try to purchase the patent

5. Negotiation • Licensor or licensee may start the negotiation • A licensor may be seeking to protect its market share and prevent its competitors or parties in the supply chain of competitors from practicing the patented technology • A licensee may need to use the patent to sell its key products • The licensee may also have patents that the licensor needs • One party might have more bargaining power than another party • This can influence final license terms

6. Basic License Structure • Licensor obtains right to make, use, sell, offer to sell, import (“practice the patent”) • May be exclusive right (no other licensees) or non-exclusive (other licensees) • Exclusive license gives competitive advantage and enforcement right • Non-exclusive license permits other licenses which may be at other rates and have different terms • May be worldwide or only for certain countries • May include other IP (trade secret) and technical consulting • Licensee obtains payment and right to improvements on licensed patent, and may retain some additional rights • License terms may depend on type of technology, product life, and industry standard • Pharma • Automotive • Electronics • Software

7. License Structure: Grant • Patent owner grants rights to licensee • What type of IP • Patents, trade secrets, etc. • What can be done • Practice the technology for specific products; sub-license, marking, etc. • Duration • How many years? How to renew? • Territory • Worldwide or only for certain countries or regions? • Field of Use • Only for certain products or technologies? Or for any product? • Exclusivity • Can patent be licensed to others? Does licensee have a right to prevent licensing to others?

8. License Structure: Compensation • In exchange for the grant, what does the patentee get? • Money • Fixed fee – not based on amount of sales • Up-front payment for the right to take the license • Periodic payments • End-of-license payment • Variable fee (royalty) – based on amount of sales • May be a flat rate, or may be scaled to encourage commercialization (volume discount) • Maximum/minimum total payment for the entire license • Cross-license from licensee • Right of licensor to use patents owned by licensee • Royalty Factors • definition of the “net sales” and of a “sale” • royalty rate and license period • accounting or tax requirements • advance vs. later payments • possible splitting of sublicensing income • currency of payment (e.g., US dollar vs. JP yen) • interest rate for late payment; penalty for contract violations

9. License Structure: Enforcement • How does the licensor know that the licensee is not under-reporting sales or revenue, or not paying enough? • License should specify reporting requirements • Permit inspection of sales records by independent accountant • Permit such inspection on a regular basis (yearly, quarterly, monthly, etc.) • Licensee must make a detailed report for the licensor

10. License Structure: Non-disclosure • Protect confidential information between the parties • The license itself may be kept secret (only existence of license is announced to public) • This includes all data from the negotiation, as well as reporting requirements due to license enforcement clause • Includes trade secrets and other non-public information • May require non-disclosure agreement or non-compete agreement • Under US law, there is no patent license registration requirement

11. Licensing Structure: Ownership • Under US law, if a patent is jointly owned by company A and company B, then the companies may each separately license the patent, without asking permission of the other party • By agreement, company A and company B may limit the right to enforce. For example, company A promises to not enforce without the permission of company B • License should clarify which patents are jointly owned, and whether there is any restriction on the right of the patentee to enforce the patent

12. Licensing Structure: Improvements • If an improvement is made on a licensed patent, who owns the IP? • Grant back – if licensee develops IP based on the licensed patents, the licensee must grant the IP rights (such as improvement patents) to the licensor (patentee) • Essentially, a license from the licensor back to the licensee • Grant forward- if the licensor makes improvements in the licensed patent that results in additional IP rights, such IP must be granted to the licensee • Essentially, the license would include future patents based on improvements on the original patent by the patentee • No grant – each party keeps the IP from their own improvement • Patentee may require collaboration on joint research

13. Licensing Structure: Transfer of Rights • Can parties assign the rights to other parties? • Usually require permission and notification between licensor and licensee • One or both parties may have the right to refuse to grant the license to a third party • Consider possibility of bankruptcy, merger, acquisition, sale, etc.

14. Licensing Structure: Technology Transfer • Logistical framework for the transfer of information, such as trade secrets or know-how and consulting, between the parties • What information? • When? How does transfer occur? • Technical Consulting by Patent Owner • May be included in license fee, or charged separately • Depends on various factors • Nature of the technology • Resources of licensee to learn and practice technology without assistance of licensor • Cost of learning/testing/implementing technology

15. Licensing Structure: Indemnification • Scenarios • Licensee sued by third party for patent infringement based on technology that is believed to be licensed • Licensor sued by third party for patent infringement based on products made by licensee • Licensor agrees to indemnify (compensate) licensee in such a situation, or vice versa • Both parties may agree to indemnify each another • Limits may be placed on the maximum indemnification amount • Or, parties may purchase “IP insurance” • Example will be discussed later, with regard to Quanta-LG case

16. License Structure: Right to Enforce the Patent • If a third party infringes the licensed patent, who can sue the third party? • Licensor retains the right to enforce • Any joint owner may enforce unless agreed otherwise by contract • Licensee • If non-exclusive, no right to enforce • If exclusive, right to enforce in some situations; may require joining the licensor in the enforcement (litigation)

17. License Structure: Contract Disputes • If a party believes that the license has been breached, then a lawsuit for breach of contract may be brought • In the United States, state contract law governs licenses • Different states may have different rules • Some states may be more or less favorable to out-of-state parties • Parties should have some business relationship to the state law that is chosen as the controlling law • License specifies the forum (e.g., law of State of New York) • License may also specify whether mediation or arbitration is required, and how to challenge result of mediation/arbitration • Right to challenge the patent • File Declaratory Judgment Action in court, or reexamination in USPTO • Can licensor prevent such a challenge by including a no-challenge clause in the license? • License can include penalty for such activity, and very high penalty if challenge is not successful • We will discuss the later in more detail with the Medimmune case

18. License Structure: Expiration • Duration may vary • Nature of the product/technology • Market forces such as changes in the cost of materials, consumer preferences, new competitors in marketplace, or different technologies/standard • If it is extremely difficult to predict the useful life of a patented technology, the parties may set a short initial license period and the patentee may set favorable terms for the renewal of the license • May expire with the expiration of the patent(s) • May be fixed term, and renewable by agreement of the parties • Consider possible early termination situations such as bankruptcy, merger or acquisition, and the like • If the contract must be terminated early, there may be special procedures in the license • What must be done after termination? Return IP, stop practicing patent, stop royalty payment, deplete remaining inventory, etc.

19. International Comparison

20. Discussion • What are the licensing issues facing Indian patentees? • Domestically • Internationally • How about manufacturers who are potential licensors? • What is the incentive to obtain a license, both domestically and internationally?

21. Practical Tips - Licensors • Include a list of the patents/claims covered by the license agreement as well as those excluded by the license agreement, and a list of licensed products • Avoid confusion as to whether an implied license exists • Include enforcement provisions for financial reports, inspection by accountant • Consider whether a higher up-front payment is better than a higher royalty rate • Depends on technology, product life, etc. • Courts may interpret the contract based on whether there was a “meeting of the minds”, so be explicit and maintain the documentation from negotiations, such as meeting summary • Be clear in the license about dispute resolution and termination procedures • Include penalties for breach and if the licensee challenges the patent unsuccessfully • Specify the circumstances for early termination

22. Practical Tips - Licensors • Maintain pending continuation application during the negotiation process • In case of non-infringement/invalidity issues, or defects in issued patent • In case of design around attempt by potential licensee • In case of new products by other companies that fall within scope of specification, but not present in issued patent • Limit field of use, so that patent can be licensed to other companies for other fields of use (e.g., engine licensed for automobile separately from boat, heavy truck, and motorcycle) • Depending on business relationship, decide whether license should be exclusive or non-exclusive (trade-off in terms of royalty rate) • Check litigation record of potential licensee to see if they have breached/challenged the license in the past • Retain the enforcement right • Require the licensee to use “best efforts” to maximize the value of the patent. • try to commercialize the patented technology, including advertisement and marketing efforts, and for product development to meet milestones or deadlines • mark the patent number on the product, undertake quality control efforts so that the reputation of the technology is not damaged, and include any required legal notices or disclaimers.

23. Practical Tips - Licensees • Maximize number of patents and patent claims covered by the license • Minimize reporting requirement burden • Study litigation history of patentee to understand possibility of lawsuit • Study prosecution of patentee for continuations and related applications that could be asserted • Consider your own patent portfolio for possible cross-licensing opportunities

24. Practical Tips - Licensees • If patent is jointly owned, be aware of possible risks, and obtain written guarantees • If the license is exclusive, monitor the products of other competitors • Include the enforcement rights and benefits in the license (who pay for litigation?) • Protect your customers, especially if you are a supplier • Due diligence • Indemnification of purchaser/indemnification by licensor • Do not give up right to challenge the patent • Licensee should also include terms in the license that require the patentee to warranty the patent. • promise that patentee has the legal right to grant the license, the patent is in force and has not been invalidated, and there are no conflicting licenses • require patentee to pay maintenance fees and avoid patent lapse, as well as rights with respect to prosecution of continuations and related applications.

25. Current Topics • Patent Exhaustion Doctrine (Quanta, 2008) • Declaratory Judgment Action to challenge patents under license (Medimmune, 2007)

26. Patent Exhaustion (“First Sale Doctrine”) • Concepts • Only one royalty per product sold under a patent • The first authorized sale of the product exhausts (depletes) patent rights • Designed to prevent patentee from receiving double royalty • Patent Exhaustion is a defense to infringement • To prove patent rights were exhausted, accused infringer must show • Sale of a product was “authorized” by the patentee (such as by license) • Article was “unconditionally” sold, or conditionally sold with satisfied license conditions • Article sold is “under the patent”

27. LGE’s patent portfolio licensed to Intel • USP 4,939,641 • USP 5,379,379 • USP 5,077,733

28. Relationship of Parties

29. Quanta case - facts • LG is the licensor, Intel is the licensee, Quanta is the customer of Intel • License Agreement • No license, waiver or immunity granted to any third party to combine licensed product with parts from other source • Agreement does not limit or alter exhaustion doctrine • Master Agreement - Intel must give notice to customers that: • Intel products are licensed and do not infringe LGE patents • But license does not extend to product made by combining Intel product with non-Intel product • Quanta bought microprocessors/chipsets from Intel • Intel notified Quanta, as required • Quanta combined Intel parts with non-Intel parts

30. Legal Issues • Does patent exhaustion apply to sale of product that performs patented method? • When does patent exhaustion apply to sale of only some components used to make patented product?   • When is patent exhaustion limited by license agreement?  

31. Federal Circuit Holding • Patent Exhaustion does not apply to product sales because sales were unauthorized • Patent Exhaustion does not apply to method claims • Quanta appeals to Supreme Court

32. Supreme Court • Unanimous decision (9-0) in favor of Quanta • Held: patent exhaustion applies in this case • Intel’s sale of microprocessors and chipsets to Quanta was authorized • Article “substantially embodies” patent • This includes exhaustion of method claims • Unconditional authorized sale results in patent exhaustion • Quanta is excused from patent infringement

33. Exhaustion of Method Claim • If method is “substantially embodied” in product, sale of product exhausts patent rights in the method • Patentee cannot avoid exhaustion simply by describing and claiming invention as a method instead of product

34. Exhaustion when only Component is Sold • Intel component embodies “essential features” of LGE patents • 1. Component (not other components) is directed to inventive feature • 2. No other reasonable use for Intel component

35. Patent Exhaustion not limited by License Agreement in this case • License Agreement’s notice provision does not restrict Intel’s right to sell products to purchasers who intend to combine products with non-Intel parts • Thus, sale was “authorized”

36. Summary • First sale of component exhausts both method and product claims when component “substantially embodies” the patent • 1. No reasonable non-infringing use • 2. Component include all “inventive aspects” of patent claims • In this case, notice provision does not prevent exhaustion • Provision does not require licensee to sell to only third parties who are also authorized licensees • However, patent exhaustion does not apply where a conditional license is granted and the conditions are not fulfilled

37. Examples of Conditional Licenses • Field of use license • Restricts license to particular implementation, while reserving other implementations • For example- license for transmission used cars to auto maker, reserve other fields such as heavy truck, boat, motorcycle for other licensees • Single use license • Commonly used for disposable cartridge or camera

38. Medimmune v. Genentech • How can a patent be challenged? • In USPTO by reexamination • In court by Declaratory Judgment Action • Declaratory Judgment (“DJ”) Action • A licensee who has not been sued by the patentee can attack the validity of the patent • However, licensee must have “standing” to sue the patent owner • Licensee’s rights must be affected by patent (“case or controversy”) • A licensee promises to pay a royalty in exchange for patent rights • How can a licensee file DJ Action to challenge a licensed patent without breaking the license?

39. Medimmune Background • Jurisdictional Question – who can file a DJ Action • Article III of U.S. Constitution requires “actual case or controversy” for jurisdiction to file a complaint in US court • Is there a “actual case or controversy” if there is an existing license when the DJ action is filed? • Requirements • Potentially infringing activity • Reasonable apprehension of litigation • Lear v. Adkins (1969) does not grant every licensee the right to challenge patent validity in all circumstances • Gen-Probe v. Vysis (2004) requires licensee to either breach the contract in order to file a DJ Action, or to continue to make payments for a patent believed to be invalid • Patent licensee in good standing • No “reasonable apprehension of suit.” • Therefore, cannot file DJ action

40. Medimmune Facts • 1997: Genentech gives Medimmune a license for “Cabilly I” patent, as well as continuations • Cabilly I patent expired in 2006 • Cabilly II (continuation) issued in 2001, expires in 2018 (pre-GATT filing) • 80% of Medimmune revenue covered by Cabilly II • Medimmune challenges validity of Cabilly II by filing DJ action • District Court denies jurisdiction based on Gen-Probe case law • Federal Circuit affirms because a patent licensee does not have standing while the license is not breached and not terminated – no jurisdiction for Medimmune • Appealed to Supreme Court

41. Medimmune Decision • Supreme Court reversed Federal Circuit. • A licensee is NOT required to terminate or materially breach its license agreement to bring a lawsuit challenging validity or infringement of a licensed patent • A concrete and well-defined dispute existed • Medimmune would be threatened with suit if payments ceased • Jurisdiction would exist if Medimmune stopped royalty payments

42. Medimmune Decision • DJ Jurisdiction • Threat and coerced payment can establish “case or controversy” • Licensee does not need to be exposed to liability before filing DJ action • Supreme Court rejected Genentech arguments: • License is not an implied promise not to sue • Contract law rule that a contracting party cannot challenge a contract while gaining benefit from the contract does not apply because Medimmune is not challenging the contract (license) – only the patent

43. Medimmune Decision • Is “reasonable apprehension of suit” a proper test? • Supreme Court criticized this test • Contradicts other Supreme Court precedent • No longer an absolute requirement for jurisdiction • May not be necessary to challenge license • What should a licensee do before filing a DJ action? • Make payments under protest and allege patent is invalid • Could this act establish DJ jurisdiction for patentee to declare the patent valid?

44. Practical Effects • Existing Licenses • Licensee • Increased freedom to challenge validity • Little to no risk of losing license • Avoid willfulness (3x damages and attorney fees) and possibly injunction • Increased bargaining power to renegotiate • Licensor • Greater risk of litigation • Would royalties be due for the period of litigation if the patentee loses? • Future Licenses/Negotiation • Licensee • “License and sue” strategy? • Licensor • Higher royalties • Higher front end payment • Licensee cannot get a refund for already paid royalties • Can a party contract out of the right to bring a DJ action? • Supreme Court did not answer this question

45. Effect on Warning Letter Practice • What is the “threat” needed in a warning letter for DJ jurisdiction? • Notice of existence of patent • Enough for damages? • Assertion of infringement • Offer to license

46. Practical Tips • Existing Licenses • Review existing licenses to decide whether to challenge: • Large payments remaining • Questionable patents – how weak is the patent? • Other possible patents of licensor to consider? • Possibility of successful renegotiation • Termination clause in license? • Forum clause for validity challenge? • Especially for foreign licensee (home field advantage) • Costs/risks of litigation? • Financial as well as business

47. Practical Tips • Future Licenses • Consider Medimmune in future license terms • Termination clause in the event of any action • Limit to DJ action, or include reexamination? • Supreme Court did not answer whether such a clause would violate Lear • Forum selection clause • Where would an Indian company do the best? • Mediation or arbitration? • Pre-suit notification requirement • Require advance notice (certain number of months) and list of prior art to be used in challenge (may result in successful renegotiation without litigation) • Differing royalty rates • X% royalty if no challenge, 2X% royalty during pendency of challenge, 3X% royalty if licensee loses challenge • Attorney fees and court costs? • 0.5X% royalty if patentee loses challenge (is this legal?) • Licensee cannot recover royalties paid before challenge

48. Thank You • Questions and Discussion • mmehta@sughrue.com