Editor: What enhances the probability of success in licensing a patent or trademark?
Lowney: Each licensing transaction differs from another. I always learn something new with each I negotiate.
From the outset, it is important to understand what each party wants to achieve from the licensing transaction. There are numerous reasons why a company may choose to license its patents rather than use them solely to prevent its competitors from gaining a market edge from the invention. For example, a company may develop a business model that favors licensing its technology to the world to generate a stream of revenue, rather than trying to be the only exploiter of the technology in making goods itself.
While the patent holder (the licensor) wants to maximize its revenues while granting a minimum of rights, the party hoping to gain use of the technology covered in the patent (the licensee) wants a broad scope of rights for relatively little money. One key to enhancing the probability of a successful conclusion to the transaction, as well as a relatively carefree license term, is for each party to understand its own needs (as opposed to wants) in the relationship, while also having an appreciation of what the other party must get in order to make the transaction worth its while.
Nichols: I agree with Karen that each licensing transaction is unique. I also agree that a successful transaction begins with defining your own goals and then putting yourself in the shoes of the other side to understand their wants and needs.
Flexibility and creativity can be the keys to resolving a trademark dispute through negotiation of a license agreement rather than litigation. Recently I heard about a unique trademark licensing agreement that settled a dispute between the U.S. Postal Service and Postal Service, an indie rock group. (For those not familiar with the music industry's lingo, an "indie" rock group is one that has not signed with a major recording company.)
The Postal Service's "Give Up" album became an indie rock hit, eventually selling some 400,000 copies on the Sub Pop label. The group then received a cease-and-desist letter complaining that the use of the "Postal Service" name violates the U.S. Postal Service's registered trademark.
Looking to promote its brand through a tie-in with popular culture, the U.S. Postal Service negotiated a three-year license agreement with the group. Under the agreement, the band will have free license to use the Postal Service name provided that it gives trademark recognition to the U.S. Postal Service. Future copies of the album will have a notice about the trademark, and the band will promote using the U.S. mail.
The U.S. Postal Service will sell the band's CDs on its web site, and the band may do some TV commercials for the U.S. Postal Service. The band also agreed to perform at the Postmaster General's annual National Executive Conference.
As well as aiming at the youth market, the U.S. Postal Service hopes to increase traffic to its website where stamps are sold. One of the band members said, "Doing promos for the post office seems a little bit weird, but it's a funny story for them to have - it's a good story of how you can still use normal snail mail."
Editor: What is the most important part of any license agreement?
Lowney: The fundamental goal of any license agreement is to reward each party proportionally to its contribution to the transaction; neither party feeling "cheated" is critical to the success of the transaction. For a licensor, the key issue is the consideration it receives. The simplest form of consideration is for the licensee to pay a one-time upfront fee for a fully paid-up license, but this normally is unfavorable to the licensor because it doesn't reflect the success of the licensed product. It is much more common for the licensor to require a more complex arrangement for payment based on any of a variety of formulas, such a percentage of net sales, a fixed payment per unit sold or percentage markup on a critical raw material used in the licensed product, which rewards the licensor proportionately to the success of the product. A clear definition of the triggering events and timing of payments is important so that the licensee cannot avoid or delay paying a license fee that might otherwise be due.
Under an exclusive license with fees based on product sales, the licensor will want motivations and safeguards so that the licensee does not languish. These might include a significant upfront fee or a best efforts clause, which may be hard to measure without something to hang on, such as industry performance standards.
The obligation to pay patent license fees should be limited to the time period during which the patents are still in force. However, the value of know-how and trade secret information may continue despite the expiration of a patent right. Therefore, it is preferable to have a provision calling for a reduction in the royalties upon the expiration of the last-to-expire patent, or to even have separate license agreements for patents and trade secrets, allowing the licensor to continue to receive revenue on the licensee's continued use of proprietary technical information, but to avoid antitrust problems by ceasing payment on expired or invalid patents.
Nichols: Payment provisions in international agreements warrant close attention as they should identify which country's currency will be used and how exchange rates will be determined.
In trademark license agreements, payment provisions are often tied to performance requirements. The licensee will be required to maintain the same quality standards for the goods and services associated with the trademark as those maintained by the licensor. A provision may also require the licensee to maintain an image and reputation consistent with the licensor's standards. (Note: These are not necessarily high standards, but rather the same standards.)
The parties to the agreement should also be aware that if the licensor imposes too much quality control, the trademark license agreement may be treated by the FTC and state regulatory bodies as a franchise agreement. Regulation of franchises requires extensive disclosure of information in advertising, offering, licensing, contracting, sale and other promotions.
There is no single, bright demarcation between a trademark license and a franchise agreement. A trademark license agreement may include detailed guidelines for site location, site design, uniforms to be worn by sales personnel, and details regarding accounting and business methods. Provisions might also require the licensee to obtain prior approval of usage of the trademark on business cards, invoices and other business-related printed materials or website. Restriction of trademark usage to specific regions may be viewed as one indication that it is a franchise arrangement.
On the other hand, if quality control is inadequate, the transaction may be viewed as "naked licensing" and result in the licensor being found to have abandoned its trademark. The risks of naked licensed were recently re-enunciated, in Barcamerica International USA Trust v. Tyfield Importers, Inc. in which the Ninth Circuit found abandonment of a trademark where the license agreement made no provision for the licensor's supervision of the licensee's production or testing.
Naked licensing has risks for the licensee as well as for the licensor. The licensee's rights depend on the continued viability of the trademark. Without it, competitors could freely use the trademark to their commercial advantage.
Editor: Please give an example or two of your favorite license provisions.
Nichols: While not necessarily a "favorite" provision, but rather an often overlooked provision in trademark licenses, relates to copyright ownership. The provision requires the licensee to assign to the licensor any and all copyrights in any sketch, design, package or other matter used in connection with the products and services associated with the trademark. Including such a provision in a trademark license can prevent an "ex-licensee" from owing valuable IP after the relationship has ended.
I also like to include a provision requiring the licensee to cooperate with the licensor in all efforts to prevent counterfeiting. For example, the licensor may require the licensee to use the specific counterfeit preventive systems, devices or labels designated by the licensor, such as holograms at its own expense. Obtaining the licensee's commitment to combat counterfeit products is absolutely necessary and should be required at the earliest states of the licensor/licensee relationship.
Lowney: I'd like to focus on the reverse - what provisions not to include. The licensor ordinarily wants to avoid giving a warranty of validity of the patent being licensed or that the practice of the licensed invention will not infringe a third party's patent rights. A licensor will not, however, be able to avoid warranting that (a) the patent is owned by the licensor (or if it is a sublicense that the licensor has the right to license the patent); (b) all appropriate corporate authorizations for granting the license are in place; and (c) no rights have been granted to any third party that would preclude the present grant of a license. To avoid any possibility of the licensee asserting implied warranties, the licensor will want to include a blanket disclaimer of warranties outside those expressly granted.
Editor: What final practical tips do you have for our readers?
Lowney: Before deciding to enter a license, the licensee should evaluate the validity of the licensor's intellectual property rights. While finding the patent to be invalid may not alter the decision (for example, the cost of a license would most likely be cheaper than litigating the patent's validity), it may give the licensee leverage in the negotiations and/or alter the license fees.
Because every licensee will insist that the licensor warrant that it has the right to grant the license, the licensor should ensure its ownership rights are well documented. Such documentation includes assignments from employees who have worked on the invention or an employment agreement that creates the obligation to make such an assignment. Contracts with consultants should include provisions assigning all intellectual property to the buyer of the consultants' services. Caution is needed if the consultant is a university employee working on university premises with university equipment. One solution is to get the university's acknowledgement of the assignment of intellectual property rights to the buyer.
Particularly when a university laboratory is involved, the existence of any government rights to an invention should be explored. Depending on the nature of the invention, the government may have "march-in" rights. This is most common in medical inventions. If the government sees that the public health may be affected because an invention is not being practiced, it may march in and license the practice of the invention itself.
Nichols: For trademarks used in international commerce, be aware that some jurisdictions still require recordation. In addition, make sure that your marking and warning notices conform with all the requirements of the jurisdictions where they're used.
Another practice pointer is to formalize the licensing arrangements between parent and its affiliated companies. It's surprising how often the need for a written agreement is overlooked.