CAN EXCLUSIVE LICENSEES SUE FOR INFRINGEMENT OF LICENSED IP RIGHTS? A CASE STUDY CONFIRMING THE NEED TO CREATE GLOBAL IP LICENSING RULES.

• Author: de Werra, Jacques
• Position: Symposium: Intellectual Property and the New Private Law

TABLE OF CONTENTS I. INTRODUCTION 189 II. THE ABSENCE OF A GLOBAL UNIFORM SOLUTION 191 A. When Is a License Sufficiently Exclusive to Grant the Licensee the Right to Sue? 192 B. Conflict of Law Rules Create Fragmentation 196 C. The Diversity of Solutions Within the European Union 197 III. TOWARD A UNIFIED FRAMEWORK 200 A. Private Autonomy 201 B. Global Default Rules in the Absence of a Contractual Solution 203 1. Right of Exclusive Licensees to Sue for Infringement 204 2. Right to Sue for Infringement After Notification of the Licensor 205 3. Right of the Licensor to Prevent the Initiation of an Infringement Suit 207 4. Obligation to Keep the Licensor Informed About the Proceedings 207 5. Financial Consequences of Proceedings Initiated by the Exclusive Licensee 208 IV. CONCLUSION 208 I. INTRODUCTION

It is no secret that global intellectual property ("IP") licensing transactions are pervasive in today's interconnected business environment. (1) These transactions represent perhaps the most evanescent form of all international business transactions given that they frequently do not materialize in any tangible manner. (2) This may create the impression that such transactions evolve in a global legal environment that is uniform and totally independent from any geographic constraints and local regulations. This is, however, not the case as local laws significantly affect IP licensing transactions. Local laws greatly affect how licensed IP rights can be enforced against third-party infringers, which is of key interest to the parties, particularly to an exclusive licensee who will legitimately expect to enjoy a monopoly-like ability to use the licensed IP right within the scope of the exclusive use covered by the license agreement. This Article will focus on the right of exclusive licensees to sue third-party infringers (3) and will use this question as a case study to confirm the need for a global framework governing IP licensing transactions. (4) The issue of the exclusive licensee's right to sue can be illustrated by the following scenario: (5) a U.S. company, the licensor ("USLOR") enters into a worldwide exclusive trademark license agreement governed by Swiss law with a Japanese company, the exclusive licensee ("JLEE"). (6) JLEE is facing large scale infringing activities, which are committed by various third parties in several countries, and the license agreement does not specify whether, and under what conditions, JLEE has the right to sue for the infringement of the licensed trademarks. (7) The question, therefore, is whether JLEE has the right to sue third parties who infringe on the licensed trademark in different countries. To date, there is surprisingly no single answer to this question. JLEE may have the right to sue infringers in certain countries but not in others as a result of the application of local laws and of potentially conflicting decisions delivered by different local courts (which will have to decide whether an exclusive licensee shall have the right to sue infringers). Even if one would expect local laws and decisions to present a high degree of harmonization given that the issue at stake originates from a single legal document, this is regrettably not the case, as will be shown in Part II.

The application of potentially conflicting local rules can lead to an undesired fragmentation, which sharply conflicts with the inherently global nature of international IP licensing transactions as well as with the contracting parties' legitimate expectations. (8) This Article will demonstrate the need to prevent such fragmentation and to create a globally unified framework governing the right of exclusive licensees to sue. First, the parties to an international exclusive IP license agreement should be free to decide whether, and under what conditions, the exclusive licensee has the right to initiate infringement proceedings against third parties based on the general principle of party autonomy. Second, in the absence of a contractual solution, global default rules defining the conditions under which an exclusive licensee is entitled to sue for IP infringement should apply.

2. THE ABSENCE OF A GLOBAL UNIFORM SOLUTION

   Several reasons can explain why there is no single global answer to the question of whether an exclusive licensee has the right to sue for infringement of licensed IP rights. The first and most obvious one is that this issue is not addressed, and therefore not harmonized, in any global IP convention. As a result, local regulators and local courts have used various methods to deal with this issue, which has led to different outcomes. (9) However, in spite of such local divergences, courts (10) and regulators generally tend to find that an exclusive licensee has the right to sue under certain conditions. (11)

   The lack of harmonization between local approaches and the resulting fragmentation has different causes and manifests itself in different ways. First, as Section II.A explains, fragmentation results from the widely diverging methods used by national courts to decide whether a license is sufficiently exclusive to grant the licensee the right to sue for infringement. Section II.B outlines how further fragmentation results from the application of traditional conflict of law principles under which the legal impact of a license agreement on third parties must be determined on a country-by-country basis. Though this may appear surprising in view of the high level of harmonization of IP law within the European Union, fragmentation still exists within the European Union, as is demonstrated in Section II.C.

   1. When Is a License Sufficiently Exclusive to Grant the Licensee the Right to Sue?

      To decide whether an exclusive licensee has the right to sue for the infringement of a licensed IP right, courts often first interpret the intent of the parties to the exclusive license agreement in order to determine whether or not the license at issue is in fact an exclusive license. (12)

      The diversity of local solutions regarding the concept of exclusivity stems from the fact that it is a concept that is not uniformly defined at the global level. There is indeed no definition of what constitutes an exclusive license in binding international IP instruments. (13) The WIPO Joint Recommendation Concerning Trademark Licenses (14) is, however, a relevant (albeit nonbinding) international source applicable to trademark licenses. (15) This recommendation provides certain definitions and distinguishes between three types of licenses: (16) (1) The "exclusive license," which "is only granted to one licensee, and excludes the holder from using the mark and from granting licenses to any other person;" (17) (2) The "sole license," which "is only granted to one licensee and excludes the holder from granting licenses to any other person, but does not exclude the holder from using the mark;" (18) and (3) The "non-exclusive license," which "does not exclude the holder from using the mark or from granting licenses to any other person." (19)

      The lack of a uniform definition of an exclusive license means that each local court in each of the countries in which infringement actions are initiated will have to interpret the nature of the license agreement by reference to the law governing the agreement. In the scenario described in Part I above, this means that different national courts will have to interpret the nature of a license granted under one license agreement governed by Swiss law in order to assess whether or not the license can be deemed exclusive and thereby justify the right of the licensee to sue third-party infringers. (20) This task is a tedious one. Indeed, it can be highly challenging for local courts to interpret foreign contracts, particularly because contract interpretation methods can differ significantly from one system to another--especially between common law and civil law systems. (21) This also raises the general question of how local courts should ascertain the content of foreign law. It seems reasonable to require local courts to pay due consideration to the specificities of foreign law (22) and, consequently, to avoid minimizing any differences with their more familiar local laws.

      Local courts analyzing foreign law to determine whether a license agreement is exclusive or not face additional practical obstacles. The courts will have to interpret the meaning and the nature of the license agreement that was entered into between the licensor and the licensee without necessarily being able to hear the position of the licensor on the issue. This is because the licensor, who is frequently the IP owner, (23) is generally not a party to the legal proceedings in which the exclusive licensee's right to sue is disputed. (24) In many cases, these proceedings will be initiated by the exclusive licensee against a third-party infringer, without the participation or involvement of the licensor. (25) The interpretation of the nature of the license agreement may constitute a rather complex and uncertain undertaking in the absence of any information from one of the contracting parties. This holds true particularly from a civil law perspective where the primary method of contract interpretation is to look at the subjective intent of the parties, which in our case would include the licensor and not at the wording of the contract. (26)

      Even if the parties to the international license agreement have chosen the applicable law in the case of a dispute, such choice is not yet sufficient to ensure that local courts will not have recourse to local IP concepts to assess the legal nature of the license granted under the relevant license agreement. This is illustrated by the U.S. case Sunstar, Inc. v. Alberto-Culver Co., (27) in which the Seventh Circuit Court of Appeals had to interpret the meaning of the term "Senyo - shiyo--ken," a concept under Japanese trademark law, in order to define the scope of the license...