Contracting/Licensing Obstacles & Pitfalls: Know Before You Sign

1. Customer Contracting/LicensingObstacles & Pitfalls By: Mark E. StallionContact Info (314.345.6223/Mark.Stallion@HuschBlackwell.com)

2. IntroductionWhat Should I Know • What’s The Nature Of The Deal ? • Who Is Bringing What To The Table ? • Who Is Taking What Risk ? • Who Stands To Profit The Most ? • If No License - What Are The Alternatives ? • What to Watch ? • Grant Clause; Limitations On Use; Term & Termination; Royalties/Fixed Fees; Reporting/Accounting Requirements; Quality Control; Indemnification; Reps & Warranties; Confidentiality; Dispute Resolution

3. Licensing Obstacles • JOINT OWNERSHIP • a. Exploitation Of Patented Technology In U.S. • i. Each joint owner can exploit without permission of others • ii. No duty to share royalties • b. Enforcement In U.S. • i. Usually All joint owners must join suit • ii. Other owners can grant license thereby circumventing suit • b. Possible Solution (1) Contractual Allocation (2) Assignment w/ License Back

4. Licensing Obstacles • Technology (Products; Processes or Know-How) Intermingled w/ Intellectual Property Rights (Legal Rights = Patent, Trademark, etc..) • If “Technology” defined as “Product/Deliverable” + Patents; Then A “Grant To Practice Technology” gives right to practice patents independent of product/deliverable • If Non-Infringement Guarantee given; Then Protects Licensee’s own implementations under patent unrelated to the product/deliverable Possible Solution: Clearly Segregate Definition & Grant Clauses

5. Licensing Pitfalls • Grant Clause Does Not Convey What Was Intended • Assignment – Must be in writing; transfer “entire right, title and interest” • Problems – Limitations On Use; Limitations On Right To Assign or License; etc… • Exclusive License - Must have beneficial ownership of right to prevent others from making/using/selling (exclusivity can be – geographic, field of use, or temporal) • Avoid ambiguity – Exclusive even as to licensor? – Be Explicit • Non - Exclusive License

6. Licensing Pitfalls • Lack Of Planning For Mergers, Acquisitions, Etc... • Make sure ability to transfer is clear and under what conditions • Plan for Potential Bankruptcy • If Licensor does not want to accept performance from another party in the case of licensee bankrupt – Licensor should specify in case of bankruptcy, the license is personal and performance by another is not acceptable.

7. Licensing Pitfalls • Representations, Warranties & Indemnification • Technology Licenses – Performance To Specs (have detailed specifications) • Non-Infringement – Indemnification (be specific and provide specific remedies) • No Encumbrances (licenses, security interests, etc…) • In case of IP rights – will maintain rights

8. Licensing Pitfalls • Patent Exhaustion/First Sale Doctrine • Authorized sale of product made under patent license exhausts the patent rights against downstream users • Applies to both device and method claims • If product made/sold under license to patent A also “substantially embodies” patent B (Same Owner), then B exhausted too Avoiding Exhaustion: License, don’t sell; make and use only – not resell

9. Licensing Pitfalls • Sublicenses • Sublicense should be no broader than Licensee’s rights • Be specific regarding termination of sublicense upon termination of primary license • If sublicensing is allowed – require notification and providing copy of sublicense • Avoid automatic renewal of sublicenses base on automatic renewal of primary license

10. Licensing Pitfalls • Royalty Based Licenses • Provisions for on-site hands on accounting • Specific and Periodic Reporting requirements • Easier to base royalty on selling price rather than calculation based on net profit • If sublicenses are involved – easier to used fixed fee per unit rather than percent royalty • When accounting watch out for (packaged sales; non-sale transfer of goods such as payment in kind deals; using sales price from parent to subsidiary rather than price to user)

11. Licensing Pitfalls • NEGOTIATIONS • Counsel – Get appropriate counsel involved early at the term sheet stage • Term Sheet Stage – Try to resolve most of the major issues at the term sheet stage • Negotiation Stage – Understand the overall nature of the deal and negotiate issues collectively; Have a clear objective; Understand your alternatives going in and be prepared to walk away from a bad deal; Understand the value to you and avoid bidding with no basis • Soft Cease & Desist w/ Offer For License – can give cause for DJ action

12. Licensing Pitfalls • Trademark Licenses – Quality Control • A licensor must exercise quality control, otherwise it is a “naked license”, which may result in trademark abandonment Best Practices: • Include in your trademark licenses a quality control provision that: Sets forth the quality standard (e.g., quality of products or services must be at least as high as licensor’s products or services); Grants licensor the right to inspect the Licensee’s products/services and facilities; and Imposes strict trademark usage guidelines • Not Over-Reaching - Too much control over licensee increases licensor’s exposure to products liability claims and to regulation as a franchise