Patented Technology: Issues in Drafting a License

• Publication year: 2003
• Pages: 97
• Citation: Vol. 32 No. 9 Pg. 97

32 Colo.Law. 97 Colorado Lawyer 2003.

2003, September, Pg. 97. Patented Technology: Issues in Drafting a License

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97

Vol. 32, No. 9, Pg. 97

The Colorado Lawyer
September 2003
Vol. 32, No. 9 [Page 97]

Specialty Law Columns
Intellectual Property and Technology Law
Patented Technology: Issues in Drafting a License
by C. Ben Huber

This column is prepared by the CBA Technology Law and Policy Forum Committee. The column provides information of interest to intellectual property attorneys and other attorneys who counsel technology companies, by focusing on developing law applicable to technology businesses

Column Editors

Nathaniel T. Trelease, WebCredenza, Inc., Denver - (720) 937-9930, ntrelease@webcredenza.com; Jim Brogan, Cooley Godward, LLP, Broomfield - (720) 566-4190, jbrogan@cooley.com

C. Ben Huber

About The Author

This month's article was written by C. Ben Huber, a senior associate in the Denver office of Dorsey & Whitney, LLP - (303) 628-1505, huber.ben@dorseylaw.com. The author gratefully acknowledges the comments of Marc Musyl and Lee Osman on an earlier draft of this article.

Licensing is an important strategy used by patent owners to exploit the value of their technology. This article examines some of the fundamental issues involved in negotiating a license to patented technology.

Technological advances have become increasingly costly to achieve and protect, whether they seek to enhance computing through nanotechnology, improve golf games with novel club designs, or decrease organ rejection with sophisticated transplantation therapies. The research and development ("R&D") of innovative technologies requires substantial investments of time, money, and creativity. It is no surprise that R&D investments are the single most important assets of many companies. Exploiting the value of these assets often is done in the form of licensing transactions.

There are several pitfalls that can catch the uninitiated off guard when drafting technology license agreements. Not only are there countless technologies, each with its own set of technical and business issues, but each technology usually is protected by various intellectual property ("IP") rights arising out of patent, copyright, trademark, trade secret, and other common law. Thus, technology licensing generally requires more than fine legal drafting. It also requires an understanding of the technology, the applicable IP rights, and the client's short- and long-term business objectives.

This article focuses on licensing patented technology and the related information or know-how necessary to exploit such technology. It does not, however, address matters of copyright or trademark.1 In particular, this article discusses properly identifying the technology to be licensed, which rights to license, exclusivity, sublicensing, field of use and territorial restrictions, termination, treatment of improvements, compensation structures, infringement litigation, and a few other miscellaneous issues that generally should be addressed in a license agreement.

Definition and Purpose
Of a License

A license constitutes a grant of permission by one party to another to do something that would be illegal without such permission.2 In the technology-licensing context, a license is an agreement by the owner of a technology ("Licensor") not to hold another party ("Licensee") liable for violations of the Licensor's rights in and to such technology under certain conditions and for a certain period of time.3 In some circumstances, a license also may contain an implied or express agreement not to license the technology to anyone else. The Licensor even may be required to refrain from using the technology itself. However, a technology license does not transfer ownership from one party to another.4

There are myriad reasons why a technology owner may license technology to another. A Licensee may be better situated than the Licensor to manufacture, distribute, sell, or market the technology in question. For example, the Licensee may have more access than the Licensor to capital, necessary equipment, adequate supply and distribution chains, a dedicated sales force, or knowledge of the applicable industry. Further, the participation of a Licensee might be necessary to expand or legitimize a particular geographic or product market for the Licensor's technology or to exploit new markets in which the Licensor does not operate. This is especially true for companies with scarce resources that can use licensing to leverage the resources of others.

Licensing may provide a means for a Licensor to recover its capital investments in technology or to generate additional revenue from one or multiple sources while maintaining some amount of control over the technology, future improvements to it, and commercialization efforts. Licensing also provides a structure for the parties to offset the risk of undervaluing or overvaluing the licensed technology through the use of flexible payment regimes that might not be feasible in a straight sale of the technology. For example, such arrangements might be based on fixed fees, percentages of sales, or milestone payments.

Finally, it is not uncommon for technology to be licensed to defend or settle claims of infringement by third parties. By agreeing to license the technology, the Licensor or Licensee, as the case may be, thereby avoids or reduces the risks and costs of protracted litigation or arbitration.

Issues to Address
In a License

The following discussion provides an introduction to some of the fundamental issues involved in licensing patented technology. Such aspects of a transaction must be thoughtfully considered to serve a client's best interests. In fact, the failure to consider and address these matters up front can lead to drastic consequences for Licensors and Licensees alike.

Scope of the License:
Grant Clause

Perhaps the single most important provision of a technology license, and one that differentiates it from most other commercial agreements, is the grant clause. In one sentence, the grant clause conveys the licensed rights to the Licensee and, in most instances, also defines the full scope of the license (subject to certain specifics being detailed elsewhere in the license). A typical grant clause might read:

Licensor hereby grants to Licensee an exclusive, sublicensable license under the Licensed Patents and the Licensed Know-How to make, use, sell, offer for sale and import Licensed Products throughout the Field of Use anywhere within the United States, all subject to the terms and conditions set forth herein.

Although a grant clause does not need to contain this much information, it is both customary and useful to have the grant clause state most, if not all, of the principal terms of the grant. If nothing else, a grant clause must recite that it grants a license in the subject technology to the Licensee.

Patented Technology
And Know-How

Prior to granting a license, it is critical to identify precisely the technology that will be the subject of the license. Given the potentially disastrous consequences of licensing too much or too little technology or of licensing the wrong technology, this matter should be discussed among management, counsel and, if necessary, appropriate technical personnel. In doing so, each party to a licensing transaction also should consider their future plans and needs. Once the technology to be licensed has been fully identified, it should be unambiguously defined.

If the technology to be licensed is (or is expected to be) protected by a patent or patents, it typically will be defined as the inventions or processes covered by particular U.S. or foreign patents, pending patent applications, or specific claims contained in such patents or patent applications.5 The license usually contains a brief description of the inventions or processes as well.

Sometimes, the technology is further defined in terms of prospective patents and patent applications relating to the inventions or processes in question. This may include reissued patents, reexamined patents, provisional patent applications, continuation applications, continuation-in-part applications, divisional applications, and future patents that may issue from any of these types of applications.

A full explanation of the differences among these patents and patent applications is beyond the scope of this article. However, it is worth noting that Licensors should be cautious in choosing which types of patents and patent applications are used to define the licensed technology. For example, a "continuation-in-part application" can add new inventions to a pending patent application.6 Thus, if the licensed technology is defined as "technology covered by a [particular] patent application and any continuations-in-part thereof," the Licensor would be bound to license to the Licensee - on the same terms as the originally licensed technology - any new technology contained in a continuation-in-part application. This would apply even if the new technology constituted a significant invention or improvement and was substantially more valuable than the originally licensed technology.

Other technology and information may not be covered by a patent or patent application but nonetheless may be necessary for a Licensee to realize its business objectives. Commonly referred to as "know-how," this technology often takes the form of proprietary or trade secret information Know-how can encompass all manner of tangible and intangible things, including trade secrets, proprietary information, technical information, techniques, practices, methods, designs, information,...