The American Bar Association Section of International Law and ABA Center for Continuing Legal Education Russian IP Laws and Commercialization: The New Part IV of the Civil Code Commercialization of Intellectual Property. Licensing and Technology Transfer October 1, 2008 Presentation by Vladislav Zabrodin Managing Partner © 2008 Capital Legal Services

Legal Grounds for Commercialization of Intellectual Property ABA-CLE Seminar 2008 Legal Grounds for Commercialization of Intellectual Property Part 4 of the Civil Code acknowledged exclusive right to intellectual property as a material right; Amendments to the current federal laws, adoption of new federal laws and regulations of the government of the Russian Federation in connection with the Part 4 of the Civil Code. For example, since May 2008 - new edition of the Federal Law “On court enforcement proceedings” – IP may be alienated from right-holder to creditors for the debts © 2008 Capital Legal Services 2

Variants of Managing Intellectual Property Rights ABA-CLE Seminar 2008 Variants of Managing Intellectual Property Rights The Civil Code provides two main possibilities to manage the exclusive rights: - Assignment agreement, when the exclusive right is fully transferred (similar to sales and purchase agreement); License agreement, when the exclusive right is kept by the right-holder and a licensee obtains a right to use the intellectual property within the framework set by the agreement; Other possible deals with intellectual property rights: - Conclusion of a franchising agreement; - Contribution of the exclusive right to the charter capital of a legal entity; - Pledge agreements; - Transfer of intellectual property items into trust management, etc. © 2008 Capital Legal Services 2

Franchising Agreements ABA-CLE Seminar 2008 Franchising Agreements The conclusion of franchise agreements is regulated not by the Part 4, but Part 2 of the Civil Code. However, since 2008 these provisions were also amended due to the enactment of Part 4. The list of objects to be transferred under the franchise agreements has been defined. This is a complex of exclusive rights, including the rights to trademarks, service marks, and trade names and know-how; Since 2008 the rights to company names are not transferred under franchise agreements; Rules of the license agreements are applied to franchise agreements; - Franchise agreements are registered only in the Russian patent office. Before 2008 franchise agreements were subject to obligatory registration with the tax body as well. © 2008 Capital Legal Services 2

Contributing Intellectual Property to Charter Capital ABA-CLE Seminar 2008 Contributing Intellectual Property to Charter Capital When contributing intellectual property into the charter capital the following aspects should be noted: Transfer of rights should be fulfilled on the basis of an assignment agreement (if the rights are transferred in full) or license agreement (if only a right to use is transferred); Agreement is subject to mandatory registration at the Russian patent office; Exclusive right must be evaluated by an independent appraiser in order to define the cost of the intellectual property; - The rights to use intellectual property, which were contributed to the charter capital, can be alienated from the company and transferred to the creditors. © 2008 Capital Legal Services 2

ABA-CLE Seminar 2008 Pledge Agreements These agreements are subject to obligatory registration; Special regulatory legal acts governing pledge agreements in respect to intellectual property are not yet introduced in Russia. © 2008 Capital Legal Services 5

Transfer of Intellectual Property Items ABA-CLE Seminar 2008 Transfer of Intellectual Property Items to Trust Management (Trust Agreements) In the event an intellectual property item is owned by several right-holders: one of the right-holders transfers into trust of another right-holder its share in the joint property; In the event right-holder(s) transfers the right to manage exclusive rights to a trust company that specializes in provision of such services; The trust agreement is not subject to any registration, but is required by patent office to confirm powers to sign assignment and license agreements. © 2008 Capital Legal Services 6

Assignment Agreements ABA-CLE Seminar 2008 Assignment Agreements Obligatory term regarding price of the assignment; Mandatory execution in writing; Mandatory state registration; The rights are considered as transferred at the date of registration by the patent office; Handback of rights, provided material breach of terms and conditions of the agreement in the event of failure to pay the reward. © 2008 Capital Legal Services 7

ABA-CLE Seminar 2008 Assignment of Invention Based on “Public Offering” – Unique Provision of the Part IV of the Civil Code It is a voluntary choice of a patent holder who is entitled to file an application to Rospatent in respect of the obligation to conclude an agreement on alienation of a patent, with any citizen of the RF or Russian legal entity whichever expresses such wish first and to notify the patent holder and indicated federal body of same. In exchange, it is released from payment of patent duties. A patent acquirer is obliged to pay all patent duties the applicant was released from and pay them in the future in compliance with the established procedure. © 2008 Capital Legal Services 8

License Agreement ­ Reason for Concluding in Russia ABA-CLE Seminar 2008 License Agreement ­ Reason for Concluding in Russia Provision of permission to use an intellectual property item; Pertaining to trademarks – allows eliminating the risk of terminating legal protection, given that a trademark is used by an improper party; - License agreement is a legal form and basis for commercialization of intellectual property in the field of technology transfer. © 2008 Capital Legal Services 9

Terms of a License Agreement ABA-CLE Seminar 2008 Terms of a License Agreement - Subject of the agreement (number and date of registration of the intellectual property item); - Manners of use; - In the event a license agreement is for a fee, a condition pertaining to the amount of compensation or procedure for determining it is obligatory. License agreement can also be gratuitous. - Territory. In the event the territory is not specified the territory is deemed to be all of the Russian Federation. - Effective term. In the event the term is not specified, the agreement is deemed being concluded for 5 years. © 2008 Capital Legal Services 10

Terms of the license agreement ABA-CLE Seminar 2008 Terms of the license agreement License type – exclusive or nonexclusive; In agreements in regard to trademarks – a condition on quality of goods; - The quality of such goods is to simply meet the requirements established by a licensor. - No obligation for a Licensor to control the quality of goods. Assignment to a new right-holder is not grounds for alteration or termination of a license agreement. © 2008 Capital Legal Services 11

ABA-CLE Seminar 2008 License Payment Starting from 2008, VAT of 18% is not applicable to exercising rights to using inventions, utility models, industrial designs, software, databases, semiconductor topologies, and know-how based on a license agreement. © 2008 Capital Legal Services 12

Export of Technologies to Russia - ABA-CLE Seminar 2008 Export of Technologies to Russia - Risks of Right-Holders and Peculiarities of License Agreement A right-holder loses control over a new technology; Conditions for termination or suspension of the agreement in the event the parties do not fulfill the established requirements, in particular in respect of quality and territory of a technology. Confidentiality issue. The condition of safeguarding confidential information should be an indispensable provision of a license agreement or subject of a separate agreement on non-disclosure and confidentiality. © 2008 Capital Legal Services 13

ABA-CLE Seminar 2008 Types of License Agreements Applicable in Russia in the Context of Technology Transfer (by Subject) - Patent licenses, whose subject is provision of right of use, e.g. to an invention; - Non-patent license, whose subject is provision of right of use to know-how, technical information and other similar data; - Complex licenses, where the right of use to patented inventions is combined with the right of use to know‑how. © 2008 Capital Legal Services 14

Special Types of Licenses in the Field of Patents ABA-CLE Seminar 2008 Special Types of Licenses in the Field of Patents - Open license It is a public offering in respect of possibility to provide any party with a right of use to an invention, utility model, or industrial design. In return, a patent holder gets a 50% discount on the patent fee. - Compulsory license - In the event of insufficient use of a registered invention, utility model or industrial design by a right-holder; - In the event use of one patent to an invention is impossible without use of another invention registered earlier (dependent inventions). © 2008 Capital Legal Services 15

New Type of Intellectual Property ABA-CLE Seminar 2008 Complex Technology - New Type of Intellectual Property Part 4 of the Civil Code introduced the new term “complex technology” through acceptance of foreign experience in respect of transfer from an intellectual property market (patent package) to a technology market (complex solutions including patents that constitute a ready-for-sale product on the technology market). © 2008 Capital Legal Services 16

State Regulation of Technology Transfer – ABA-CLE Seminar 2008 State Regulation of Technology Transfer – Bill “On Technology Transfer” The bill “On Technology Transfer” will be reviewed by the State Duma (lower parliament) in October, 2008. - Intellectual property created using state funds should be owned by the developers and transferred to markets through open tenders; - Transfer of rights abroad in regard to technologies of non-military nature shall be approved by a state customer and registered with the Russian patent office, and without such registration such transactions shall be deemed invalid; Necessity of this Law: In Russia 90% of all research is performed by Science and Research Institutes and universities upon request and funded by the state, but under effective legislation they are not entitled to commercialize technologies invented upon the order of the state. © 2008 Capital Legal Services 17

State Control over Commercialization and Technology Transfer in Russia ABA-CLE Seminar 2008 State Control over Commercialization and Technology Transfer in Russia At execution of license agreements in respect of intellectual property, in particular, when transferring technology, it is necessary to take into account that the state (Russia) has control over transactions in the following areas: System of export control; Control over unfair competition; Quality control; - Control over retaining state secrets. © 2008 Capital Legal Services 18

System of Export Control and Restrictions ABA-CLE Seminar 2008 System of Export Control and Restrictions Federal Law “On Export Control” - Lists of controlled goods and technologies; Control for export of raw materials, equipment, technologies, scientific and technical information and other results of intellectual activity which are used or can be applied for creation of arms and defense technologies and in manufacturing nuclear, chemical or other kind of weapons; In respect of technologies of non-military value there is a bill “On technology transfer”. © 2008 Capital Legal Services 19

Control of Unfair Competition ABA-CLE Seminar 2008 Control of Unfair Competition Federal Law “On Competition” - Dominant position based on exclusive rights to objects of intellectual property is not considered improper use; No special requirements established in relation to agreements connected to intellectual property Establishment of general rules of the Law on competition for such agreements. Part 4 of the Civil Code - The list of provisions limiting competition that are not supposed to be included in license agreements is not established, which is not in compliance with provisions and recommendations of the TRIPS Agreement. Exception: Articles relating to franchising agreements that regulate limitation of rights of the parties during conclusion of this type of agreement. © 2008 Capital Legal Services 20

The Concept of “Abuse of Rights” in Russian Legislation ABA-CLE Seminar 2008 The Concept of “Abuse of Rights” in Russian Legislation The concept of “abuse of rights” is introduced in Article 10 Part 1 of the Civil Code of Russia. Pursuant to Part 4 of the Civil Code, abuse of rights may arise as a result of effectuation of exclusive rights: For patents – non-use of invention and refusal of license provision; in this case Part 4 of the Civil Code envisions compulsory licensing in order to prevent abuse; - For trademarks – in the case of state registration of a trademark with fraudulent intentions; in this case Part 4 of the Civil Code envisions invalidation of such registration provided that abuse of rights or fraudulent activity is established by the Federal Antimonopoly service or in court. © 2008 Capital Legal Services 21

Control of Product Quality ABA-CLE Seminar 2008 Control of Product Quality Enforcement of quality pertains to legal relations under license agreements; - For assignment agreements court practice has established that production of low grade products by the new owner of the trademark is not grounds for invalidation of the trademark assignment transaction concluded with the initial owner since a provision on product quality is not the content of such a transaction, as opposed to that of a license agreement. © 2008 Capital Legal Services 22

Control over Retaining State Secrets Law “On State Secret” ABA-CLE Seminar 2008 Control over Retaining State Secrets Law “On State Secret” The legislation on state secret applies to secret inventions containing information pertaining to state military, foreign policy, economic, intelligence, counterintelligence, and criminal investigation activity dissemination of which may be damaging to the security of the Russian Federation. Transfer with permission of the of state authority body; Recipient must have license for conducting works using information of any given level of sensitivity; assignment or license agreement for secret invention is subject to mandatory registration with the entity that issued the patent; A public offer to conclude an assignment agreement for the patent or open license announcement is not allowed; - Compulsory license for the secret invention is not provided. © 2008 Capital Legal Services 23

Contacts ABA-CLE Seminar 2008 St. Petersburg Office Moscow Office Northern Capital House Chaplygina House 36 Moika Embankment 20/7 Chaplygina Street 191186 St. Petersburg 103062 Moscow Russia Russia Tel: + 7 812 346 79 90 Tel: +7 495 970 10 90 Fax: + 7 812 346 79 91 Fax: +7 495 970 10 91 www.cls.ru © 2008 Capital Legal Services