Authored by E. Robert Yoches
In the world of patents, there are two ways to obtain rights from a patent owner. One is by assignment, which is the transfer of all rights, and the other is by license, which involves the transfer of something less than all rights. In fact, a transaction could involve an assignment of patent rights to a company, with the original owner keeping, or having transferred back to it, a license.
Licenses are an integral part of the commerce of intellectual property rights. This article provides a high-level overview of different options available for licensing.
II. Licensing-In Scenarios
A. Obtain Technology
A classic reason for a company to take a patent license is to obtain associated technology that the company wants. Often such patent licenses will accompany the transfer of other assets, such as trade secrets, know how, and software. In this scenario, the licensee and licensor are usually collaborators, not competitors. They may be in a joint venture, or the licensee may be commercializing technology developed by the licensor, such as a university or a research organization.
In this scenario, patents may be less important than other portions of the deal. In addition, the licensee may view the patents as protection from unlicensed competitors, and may insist on rights to enforce the patents (discussed below) or may require the licensor to pursue infringers.
B. Licensing Standards-Essential Patents
A more common licensing scenario involves obtaining licenses to comply with standards. Countless organizations offer licenses to pools (i.e., collections) of patents considered “essential” to practicing one or more standards. Some examples of these organizations are MPEG-LA, Via Licensing, and DVD 6c Licensing Group. These organizations ideally make it easier and cheaper to obtain licenses under essential patents than it would to approach all the patent owners for licenses.
These organizations generally try to treat licensees equally, even though the patents in the pools often belong to competitors, who may also be competitors with the licensees. The patent owners recognize the need to license their patents to maintain standards, which certain technologies, such as mobile telephones and DVDs, require for interoperability.
C. Lawsuit Settlements or Avoidance
Licenses also often end or avoid lawsuits. Companies with large patent portfolios (e.g., IBM or TI) and non-practicing entities (NPEs), which have purchased patents to license, seek to make money from their patents. The first category generally seeks to license first and avoid lawsuits, and the second category often litigates first to force licenses in settlement.
The patent owners in this category simply seek to make money. They are generally not competitors to the potential licensees, and they have no need to treat all licensees equally. Companies with large portfolios may want to cross-license the licensee’s patents, and thus demand a lower royalty rate from companies with their own patents. NPEs, on the other hand, have no need for a cross license and simply want to maximize their revenue from the patents, and thus feel no obligation to treat all licensees the same.
III. Features of Licenses
Patent licenses can be exclusive or non-exclusive. In exclusive licenses, the licensor agrees not to grant anyone else the same license in the particular field and territory. A non-exclusive license merely constitutes a promise by the licensor not to enforce the patent against the licensee for activities within the scope of the license.
Exclusive licenses give the licensee the ability to sue infringers. They are unheard of in the standards arena, where licensors must license widely, or from owners of patent portfolios or NPEs, who are looking to maximize returns.
With both nonexclusive and exclusive licenses, the patent owner can carve up the bundle of exclusive rights according to the rights themselves, according to fields of use (e.g., only for a certain technology, for a certain market, or a certain product), and according to territories (e.g., only for China). In fact, a patent owner can actually license a patent claim-by-claim.
The carving can be with respect to one or more of these limitations. For example, a company could license a right to sell (but not make) the subject matter of claim 1, only for telecommunications devices, and only in California. One limitation on the licensor’s freedom is that the licensee must be able to use the right granted, and thus receives an implied right to do what is necessary to practice that right. The implied license, however, is limited just to what is necessary. For example, if there are two ways to practice a licensed right, and one would require an implied license and the other does not, there is no implied license.
In the United States, licenses cannot last beyond the life of a patent (twenty years from the first effective filing date, except some U.S. patents filed before June 8, 1995, can last for seventeen years from the date of issuance). A patent term can be extended to compensate for delays in the U.S. Patent and Trademark Office (USPTO) during prosecution, and can be shortened by failure to pay maintenance fees.
If a license covers more than patents, it can last beyond the life of the patent, but only for the other rights. For example, a combined trade secret and patent license can continue as long as the trade secrets remain.
IV. Alternatives to Licensing
When obtaining technology, it is not usually possible or practical to avoid taking a patent license because the patents usually cover the precise technology at issue. Moreover, if the licensee receives an exclusive license, the patents may allow it to exclude competitors.
Patent pools for standards contain a large number of patents that some party has determined cover that standard. Although it may be possible to argue that the patents are not “essential,” it is often impractical to do so.
Therefore alternatives to licensing are usually important only when settling or avoiding lawsuits. There are three main paths: noninfringement; invalidity; litigation.
A. Opinions of Non-Infringement and Design-Around Alternatives
A company does not need a license if it is not infringing the patents. A company should not conclude that it does not infringe, however, without obtaining an opinion of noninfringement from a qualified attorney under the laws of a country that issued the patent. Evaluating infringement involves a host of legal issues, and a company’s technical team may not be qualified to assess the legal issues involved.
A company can also change its design to avoid infringement. Most patent laws encourage this activity, called “designing around,” but doing so also requires the services of a qualified patent attorney to guide such effort.
A patent owner may disagree with a company’s conclusion of non-infringement. If the patent owner persists in alleging infringement, the company may have to defend a court action based on non-infringement.
B. Opinions of Invalidity and Reexaminations
Instead of (or in addition to) challenging infringement, a company can avoid the need for a license if it can to show the patent claims are invalid. Although there are several invalidity defenses, the most common involve prior art. A claim is invalid if it covers what is disclosed in a prior art reference, or would have been obvious to a person of ordinary skill when considering all prior art.
Unless the patent owner agrees that the patent is invalid, the company may have to prove it in court. A company can seek review of validity by the applicable patent office. In the U.S. this can be done through a reexamination proceeding. The new U.S. patent statute, however, has expanded the avenues for challenging patent validity.
Patent licensing is complex, and this article provides only an introduction. Companies spend a great deal on licenses, and should be prepared to understand the topic and accord it its proper appreciation.
Copyright © Finnegan, Henderson, Farabow, Garrett & Dunner, LLP. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm’s clients.