1. Customer Contracting/Licensing Obstacles & Pitfalls By: Mark E
Customer Contracting/Licensing Obstacles & Pitfalls By: Mark E. Stallion Contact Info

2. Introduction What Should I Know
What’s The Nature Of The Deal ?
Who Is Bringing What To The Table ?
Who Is Taking What Risk ?
Who Stands To Profit The Most ?
If No License - What Are The Alternatives ?
What to Watch ?
Grant Clause; Limitations On Use; Term & Termination; Royalties/Fixed Fees; Reporting/Accounting Requirements; Quality Control; Indemnification; Reps & Warranties; Confidentiality; Dispute Resolution

3. Licensing Obstacles JOINT OWNERSHIP
a. Exploitation Of Patented Technology In U.S.
i. Each joint owner can exploit without permission of others
ii. No duty to share royalties
b. Enforcement In U.S.
i. Usually All joint owners must join suit
ii. Other owners can grant license thereby circumventing suit
b. Possible Solution (1) Contractual Allocation (2) Assignment w/ License Back

4. Licensing Obstacles
Technology (Products; Processes or Know-How) Intermingled w/ Intellectual Property Rights (Legal Rights = Patent, Trademark, etc..)
If “Technology” defined as “Product/Deliverable” + Patents; Then A “Grant To Practice Technology” gives right to practice patents independent of product/deliverable
If Non-Infringement Guarantee given; Then Protects Licensee’s own implementations under patent unrelated to the product/deliverable
Possible Solution: Clearly Segregate Definition & Grant Clauses

5. Licensing Pitfalls Grant Clause Does Not Convey What Was Intended
Assignment – Must be in writing; transfer “entire right, title and interest”
Problems – Limitations On Use; Limitations On Right To Assign or License; etc…
Exclusive License - Must have beneficial ownership of right to prevent others from making/using/selling (exclusivity can be – geographic, field of use, or temporal)
Avoid ambiguity – Exclusive even as to licensor? – Be Explicit
Non - Exclusive License

6. Licensing Pitfalls Lack Of Planning For Mergers, Acquisitions, Etc...
Make sure ability to transfer is clear and under what conditions
Plan for Potential Bankruptcy
If Licensor does not want to accept performance from another party in the case of licensee bankrupt – Licensor should specify in case of bankruptcy, the license is personal and performance by another is not acceptable.

7. Licensing Pitfalls Representations, Warranties & Indemnification
Technology Licenses – Performance To Specs (have detailed specifications)
Non-Infringement – Indemnification (be specific and provide specific remedies)
No Encumbrances (licenses, security interests, etc…)
In case of IP rights – will maintain rights

8. Licensing Pitfalls Patent Exhaustion/First Sale Doctrine
Authorized sale of product made under patent license exhausts the patent rights against downstream users
Applies to both device and method claims
If product made/sold under license to patent A also “substantially embodies” patent B (Same Owner), then B exhausted too
Avoiding Exhaustion: License, don’t sell; make and use only – not resell

9. Licensing Pitfalls Sublicenses
Sublicense should be no broader than Licensee’s rights
Be specific regarding termination of sublicense upon termination of primary license
If sublicensing is allowed – require notification and providing copy of sublicense
Avoid automatic renewal of sublicenses base on automatic renewal of primary license

10. Licensing Pitfalls Royalty Based Licenses
Provisions for on-site hands on accounting
Specific and Periodic Reporting requirements
Easier to base royalty on selling price rather than calculation based on net profit
If sublicenses are involved – easier to used fixed fee per unit rather than percent royalty
When accounting watch out for (packaged sales; non-sale transfer of goods such as payment in kind deals; using sales price from parent to subsidiary rather than price to user)

11. Licensing Pitfalls NEGOTIATIONS
Counsel – Get appropriate counsel involved early at the term sheet stage
Term Sheet Stage – Try to resolve most of the major issues at the term sheet stage
Negotiation Stage – Understand the overall nature of the deal and negotiate issues collectively; Have a clear objective; Understand your alternatives going in and be prepared to walk away from a bad deal; Understand the value to you and avoid bidding with no basis
Soft Cease & Desist w/ Offer For License – can give cause for DJ action

12. Licensing Pitfalls Trademark Licenses – Quality Control
A licensor must exercise quality control, otherwise it is a “naked license”, which may result in trademark abandonment
Best Practices:
Include in your trademark licenses a quality control provision that:
Sets forth the quality standard (e.g., quality of products
or services must be at least as high as licensor’s
products or services);
Grants licensor the right to inspect the Licensee’s
products/services and facilities; and
Imposes strict trademark usage guidelines
Not Over-Reaching - Too much control over licensee increases licensor’s exposure to products liability claims and to regulation as a franchise