1. IBT – Problem 9.4 Patent and Know-how Licensing Victor H. Bouganim WCL, American University

2. Victor H. Bouganim, WCL, American University, Spring 2001 Patent and Know-how Licensing Problem 9.4, Textbook p. 865 F Drill-Bit Manufacturing Company, Inc. –Delaware Corporation. Formed in 1949 –Manufactures drilling cutting bits for oil rigs for the U.S. market –Success is largely dependent on patented several style of drilling bits –Has a larger share of the high end quality market F Event I - Licensing production in Germany F Event II - Establishing subsidiary in Mexico

3. Victor H. Bouganim, WCL, American University, Spring 2001 Licensing Production in Germany F NordMetall in Hamburg, a German company, is the potential licensee F Drill-Bit will move cautiously into Germany seeking a transfer of technology via a licensing agreement rather than a wholly owned subsidiary F Drill-Bit proposes a draft of the licensing agreement to NordMetall F EU has adopted regulations on transfer of technology agreements

4. Victor H. Bouganim, WCL, American University, Spring 2001 Draft License Agreement F Grant –Sub licensing –No Competition F Supply of Know- How –Technical Assistance –Engineering Development F Production and Marketing –Manufacturing and sales responsibility –Quality control –Marketing Requirements F Licensing –Trademarks –Patents –Know-how u Confidential relations –Royalty u Initial Payment u Records F Term –Termination –Continuing rights and obligations –Surrender of rights F Governmental Approval

5. Victor H. Bouganim, WCL, American University, Spring 2001 EU Competition Rules F In its 1982 Maize Seed judgment, the European Court of Justice addressed patent license restrictions under the Community’s competition rules. F Article 81(3) of The Treaty of Rome establishing the European Common Market [formerly Article 85(3)] addresses: –Actions affecting trade among member states –Actions restraining competition within the Common Market F Regulation 17 –Sets up the investigatory and law enforcement institutes for European competition law

6. Victor H. Bouganim, WCL, American University, Spring 2001 Licensing and Competition Maize Seed Case, ECJ, 1982 Open License Agreement F Do not involve third parties –including restrictions on parties for non- competition –Necessary for the dissemination of new technology F Valid Closed License Agreement F Involve third parties –e.g. preventing third- parties from export/import –impact on free competition F Violates European competition law

7. Victor H. Bouganim, WCL, American University, Spring 2001 EU Commission Approval Regulation 17 F Individual Exemptions –Businesses may prevent enforcement action by the Commission by notifying the Commission in advance –Notification suspends the possibility of fines –Granted by the Commission for a limited period of time F Negative Clearances –Agreements which are not violating competition rules –Granted on the basis of the factual and legal background –Indicates that the Commission sees no grounds at present to intervene

8. Victor H. Bouganim, WCL, American University, Spring 2001 Group Exemptions Regulation 17 F Inapplicability of competition rules may be done for “Group Exemptions”: I.e. for certain types of agreements F Also known as policy notices F Eliminate the need for individual exemptions and negative clearance F Rely upon business self regulation F Example: Commission Regulations 240/96 on certain types of technology transfer

9. Victor H. Bouganim, WCL, American University, Spring 2001 EU Technology Transfer Regulations Commission Regulation 240/96 F Effective”: 31 January 1996 F Regulates technology transfer agreements and practices to avoid violations of competition rules F Covers technology transfer agreements –Pure patent agreements u Acquisition and use of industrial property rights including patents, designs and trademarks. –Pure know-how agreements u “Rights arising out of contracts for assignment of, or the right to use a method of manufacture of knowledge relating to use or application of industrial processes” –mixed agreements

10. Victor H. Bouganim, WCL, American University, Spring 2001 EU Technology Transfer Regulations Regulation 240/96 - The Lists F White List –Clauses in technology agreements that will not be challenged for anticompetitive reasons F Permissible List –Clauses in technology transfer agreements that are “generally not restrictive of competition” F Black List –Clauses in technology agreements that require review because they usually violate competition rules F Gray List –All clauses restrictive of competition within the scope of the ‘white’ or ‘permissible’ lists and not listed in the ‘black’ list. –Subject to special procedure

11. Victor H. Bouganim, WCL, American University, Spring 2001 EU Technology Transfer Regulations White List Examples F Exclusive licensing agreements –“an obligation on the licensor not to license other undertakings to exploit the licensed technology” F Competition clauses –“an obligation on the licensor not to exploit the licensed technology in licensed territory himself” –“an obligation on the licensee not to put the licensed product on the market in the territories licensed to other licensees within the common market in response to unsolicited order”

12. Victor H. Bouganim, WCL, American University, Spring 2001 EU Technology Transfer Regulations Permissible List Examples F Confidentiality agreement –“an obligation on the licensee not to divulge the know-how communicated by the licensor…” F Assignment clauses –“an obligation on the licensee not to grant sublicenses or assign the license” F Trademark and source indicator agreements –“an obligation on the licensee to mark the licensed product with an indication of the licensor’s name”

13. Victor H. Bouganim, WCL, American University, Spring 2001 EU Technology Transfer Regulations Black List examples F Price dictation by licensor –“one party is restricted in the determination of prices…” F Manufacturing limitation clauses –“the quantity of the licensed products one party may manufacture or sell or the number of operations exploiting the licensed technology he may carry out are subject to limitations…” F New development assignment clauses - “Grant-back” –“the licensee is obliged to assign in whole or in part to the licensor rights to improvements to or new applications of the licensed technology”

14. Victor H. Bouganim, WCL, American University, Spring 2001 EU Technology Transfer Regulations Gray List Procedure F Parties may notify the Commission on any ‘gray’ clause in their licensing agreements for exemption. F The Commission may exempt such clauses or opposed them. F The Commission has four months to oppose such exemptions. The four month period begins upon notification. F Opposition by the Commission may be withdrawn if the undertakings concerned have shown that the conditions of the competition rules are satisfied.

15. Victor H. Bouganim, WCL, American University, Spring 2001 EU Regulations - Analysis F Are there any provisions in the proposed draft licensing agreement which might be objectionable to the EU Commission under the Regulations? –Refer to the “Black” and “Gray” Lists. F Can you assume that practices listed as the “White” and “Permissible” Lists can be safely incorporated in the agreement? –Must they be incorporated in a licensing agreement? F Is Regulation 240/9 consistent with EU obligations under TRIPS?

16. Victor H. Bouganim, WCL, American University, Spring 2001 Control of Anti-Competitive Practices TRIPS, Article 40 F Acknowledgement that some licensing practices pertaining to IPR which restrain competition may have adverse effects on trade and may impede technology transfer. F WTO Members may adopt measures to regulate such practices, which may include - –exclusive grant-back of IPR by licensee –preventing challenge to the validity of IPR –coercive package licensing

17. Victor H. Bouganim, WCL, American University, Spring 2001 Patent and Know-how Licensing Problem 9.4, Textbook p. 865 F Drill-Bit Manufacturing Company, Inc. –Delaware Corporation. Formed in 1949 –Manufactures drilling cutting bits for oil rigs for the U.S. market –Success is largely dependent on patented several style of drilling bits –Has a larger share of the high end quality market F Event I - Licensing production in Germany F Event II - Establishing subsidiary in Mexico

18. Victor H. Bouganim, WCL, American University, Spring 2001 Technology Transfer Laws in Mexico F Transfer of Technology Act, 1972 –Restrictive to IPR owners –Full-scope regulation and supervision of technology transfer agreements –Repealed in 1991 by the following new IP regime F Industrial Property Law, 1991 –In line with the views of IPR in developing nations –Deregulation of technology transfer: Requires registration of licenses, but not approval of their conditions –Comply with TRIPS and NAFTA

19. Victor H. Bouganim, WCL, American University, Spring 2001 Technology Transfer Registration in Mexico F Requires the recordation of patent and trademark licenses and transfers F Does not extend to other types of technology transfer agreements F Concern over public disclosure of terms of the licensing agreement during the registration process F License must be recorded in order to receive legal protection

20. Victor H. Bouganim, WCL, American University, Spring 2001 Mexico’s Industrial Property Law F Signals a significant step forward in Mexico’s efforts to join the global economy F Increases the industrial protection afforded most industrialized nations F Has improved the business climate in Mexico and removed a barrier to direct foreign investment and technology transfer F Compulsory licensing provisions for patents –If the patent has not been worked in Mexico within 4 years from the patent application or 3 years from the patent grant –Subject to public interest reasons u Where production, supply or distribution of basic commodities would otherwise be impeded

21. Victor H. Bouganim, WCL, American University, Spring 2001 Intellectual Property Controversy Industrialized Nations F Technology exporters F Patent, trademark, copyright and trade secrets protection is an essential part of their modern technology driven economies Developing Nations F Technology importers F Intellectual property rights are seen as expensive barriers to economic improvement

22. Victor H. Bouganim, WCL, American University, Spring 2001 NAFTA North America Free Trade Agreement F Current parties include –Canada –United States –Mexico F Accession: Article 2204 –The agreement is not limited to the current parties –Other countries are able to join NAFTA F Implemented on 1 January 1994

23. Victor H. Bouganim, WCL, American University, Spring 2001 NAFTA IP Regime Chapter 17 F Minimum standards for IP rights –Art. 1702 allows parties to enact higher standards in their national laws. F IPR covered by the IP Chapter of the NAFTA Agreement –Copyright –Patents –Trade secrets –Trademarks u Geographical indications u Industrial designs –Layout designs of semiconductor integrated circuits

24. Victor H. Bouganim, WCL, American University, Spring 2001 NAFTA IP - Overview F Enforcement –Articles 1714 through 1719 F Dispute settlement –Chapter 20 u Dispute resolution procedures –Article 1714(5) u parties are not required to “establish a judicial system for the enforcement of IP rights distinct from” their existing systems. F Substantially similar to TRIPS

25. Victor H. Bouganim, WCL, American University, Spring 2001 NAFTA IP Principles F National Treatment Article 1703 –“each party shall accord to nationals of another Party no less favorable than that it accords to its own nationals with regard to the protection and enforcement of all IP rights” F Compare: TRIPS Art. 3 F Article 1704 Control of Abusive or Anticompetitive Practices or Conditions –Parties may enact anti- trust laws as long as they are consistent with NAFTA’s provisions F Compare: TRIPS, Art. 40

26. Victor H. Bouganim, WCL, American University, Spring 2001 NAFTA and TRIPS F Substantially similar –Both attempt a harmonization through minimum standards of IP protection –Both give effect to IP Conventions as a starting point and National Treatment principle –Both applies principles for dispute resolution F Minor differences in some details of the provisions

27. Victor H. Bouganim, WCL, American University, Spring 2001 Problem 9.4 Analysis Drill-Bit Mexican Subsidiary F Do you see any reason why Drill-Bit should not go forth with licensing technology to Mexico? F What steps should Drill-Bit take to secure its interest in transferring technology to Mexico?