Treasury department and IRS launch review of cross licensing arrangements: detailed information requested from business community.

• Author: DeNovio, Nicholas J.

On March 15, 2006, the U.S. Department of the Treasury and the Internal Revenue Service issued Notice 2006-34 (1) requesting public comments on cross licensing arrangements (CLAs). The Notice requests information across a broad range of issues, including the commercial circumstances that underpin the decision for companies to enter into CLAs, the parameters of CLAs, other agreements to which CLAs might be analogized, the methods by which industry sets values on the rights to CLAs and the appropriate U.S. federal tax treatment and consequences of CLAs. The Notice states that the Treasury and the IRS have "received requests" for guidance on the tax treatment of CLAs and that the agencies expect to issue guidance regarding certain tax issues related to CLAs. (2)

The Notice also posits three theories by which CLAs might be characterized and briefly discusses the very significant tax consequences that would flow from each characterization. The consequences may include tax accounting income and deductions, and withholding, under the U.S. statutory regime for taxing foreign persons on certain items of U.S. source income, on cash payments along with the full value of intellectual property rights transferred to a foreign person under a CLA.

Cross Licensing Arrangements

The Notice describes a CLA as:

[A] contract between two parties that own intellectual property, typically patents, under which each party grants to the other a license with respect to specified property. These rights in the respective patents are often licensed on a nonexclusive and nontransferable basis. One party may make to the other party one or more cash payments representing the difference in value, in the parties' estimation, between the parties' respective rights covered by the cross license. As in one-way patent licenses, other intellectual property related to the exploitation of the patented invention such as know how, trademarks, and copyrights, may also be licensed between the parties.... In some cases each of the parties may intend to exploit the cross licensed patents by making, selling, or otherwise using the patented inventions in its own business. In other cases, the parties may operate their businesses with their own patents, but seek to avoid the risk of patent infringement claims that each might make against the other as a result of the exploitation of their own patents. In between, there may be cases of varying degrees of interdependency on each other's intellectual property in which the parties may seek both to gain access to each other's technology as well as to mutually avoid infringement claims. Various authorities on intellectual property law contain discussions of CLAs and similar arrangements. CLAs are common where parties to a prospective licensing agreement have patent rights that the other party wants, or where there is a cluster of patents in a field to such an extent that no individual...