In the current economy, more and more companies are seeking to monetize their patent portfolios. If your involved in the utilization of patents as business assets, you know that understanding patent transactions has never been more important. Earlier this week, I had an opportunity to attend PLI’s Advanced Patent Licensing 2011 via webcast (available soon on demand) where an impressive group of experts offered an abundance of advice on patent licensing. I found Mark S. Holmes’, CEO at PatentBridge and Co-Chair of the program, segment where he offered practice tips for patent licensing particularly useful. Here is an excerpt from his presentation materials:
What is a “Suitable” Confidentiality Agreement?
-Includes basic terms such as that anything said or written as part of the negotiations would not be disclosed to third parties
-Could a potential licensee file pleadings sufficient to establish a declaratory judgment without disclosing the confidential information?
-One approach:
- File complaint under seal
- Request court hold closed hearings
- Request court issue “gag order” preventing the parties, witnesses, and counsel from discussing the case.
-Would a federal court – consistent with First Amendment considerations favoring public trials – allow secret civil proceeding? Would press intervene?
-Inclusion of a “nonuse” provision – Provide that communications related to the negotiations would not be used for any purpose other than in furtherance of the negotiations
-Patentee’s response to infringer’s request for non-litigation provision
- Limit period of time
- Infringer may want obligation mutual… a receprocal promise patentee will not file infringement action during standstill period
- Prevailing party receive attorneys’ fees in enforcing
Infringer Opportunities
-Become a Licensee and Sue
- Infringer enters into patent license with patentee
- Infringer files suit against licensor seeking DJ that infringed patent is invalid
- Benefits: Infringer – now licensee – no longer concerned about being enjoined, treble damagaes, attorneys’ fees or “Reasonable royalties” as determined by a court
Licensee Opportunities
Renegotiate License Terms
-Licensee unhappy with the terms of license (e.g., minimum royalties, royalty rates, etc.) could challenge or threaten to challenge validity of licensed patents to bring patentee back to bargaining table
-Success may depend on strength of challenge (e.g., strength of prior art cited licensee to invalidate the patent)
Licensor Opportunities
Prohibition of Challenges
-Contractually prohibiting licensee from bringing action challenging patent
-Enforceable?
- Would Supreme Court’s Lear v. Adkins, 395 U.S. 653 (1969), decision prohibit attempt to restrict licensee from challenging licensed patent?
- In Medimmune Supreme Court noted absence of contractual prohibition against challenges (Court found that a prohibition against challenges could not be “implied from the mere promise to pay royalties on patents” not found to be invalid.). Does this mean that if there had been a contractual prohibition, the Court would have ruled differently?
Termination For Challenge
-Provide contractually that any challenge by licensee of validity of licensed patents constitutes material breach and is grounds for termination
-Unlike an absolute prohibition, this provision allows the licensee to challenge the validity of the licensed patents, but the licensor in turn may terminate the license agreement.
-Consider if termination more likely to be enforceable if triggered automatically upon licensee’s filing of DJ or if discretionary to licensor
Prepaid Royalties
-Royalties paid up-front may act as disincentive to licensee challenges
- If licensee has already paid all royalties…little licensee to gain from challenging the patent
- No running royalties to end from successful challenge
- Prepaid royalties “non-refundable”
- Prepaid royalties not a credit for future royalties
-Push back to all royalties paid up front
-Licensee may not have the cash
-Licensee who pays in advance takes risk that patent will not subsequently be invalidated by a third party on the basis of prior art that neither the patentee nor the licensee was aware of
Royalties Continue During DJ Action
-Include provision that licensee will continue to make royalty payments during period of DJ challenge
Royalty Payments Not Escrowed
-Licensee may not pay the royalties into escrow… must pay directly to licensor…without deduction or offset
Must Licensee Repudiate License?
-Whether licensee who does not repudiate license but challenges licensed patent can recover royalties paid during pendency of DJ action was specifically left unanswered by Supreme Court in Medimmune
Increase Royalties If DJ Brought
-Increase royalty rate if licensee brings DJ action
-Provision not contingent on success or failure of DJ action
-Increases of 150%… 200%…250%, etc.
-Further provide that increased rate would remain in effect during pendency of the action and any appeals
Increased Royalties If DJ Lost
-Royalty escalation triggered by finding patent valid and infringed
-If any claim — just one claim — held valid and infringed… then royalty rate increases
-Increase could be substantial – 200%, 250%, 300%, 350%, etc.
-Perceived by court as punitive?
-Acceptable contractual discouragement?
File First, Negotiate Later
-Patentee files patent infringement suit against infringer in patentee’s hometown or a preferred venue
-Patentee need not serve complaint for 120 days giving patentee four months to negotiate a license before alerting the infringer to lawsuit
-Strategy is particularly effective against infringers who ar known to be hard-nosed or litigous
-Faced with lawsuit in distant or unfriendly forum, infringer may take the negotiation more seriously
Click here to learn more about PLI’s Advanced Patent Licensing program on demand.
Tags: confidentiality agreement, licensee, licensing agreement, licensor, MedImmune, Patent Licensing, PatentBridge, royalties
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