Receiving a Cease & Desist letter – Part 3: exploring patent licenses

In Part 1 of this series on cease & desist letters, I explained that the first course of action should be to hire a patent attorney for an infringement opinion, which will determine whether or not the C&D has any merit. If it turns out that you are quite possibly infringing on someone’s patented invention, Part 2 of the series explained that the next step is to do your due diligence to gather all the information you can to evaluate your options. When this is complete, you are ready to negotiate a settlement. One of the best courses of action when you are the infringer is to offer to purchase a license to use the patented invention from the patent holder.

Your negotiations should focus on defining exactly “what” rights will be conveyed, how much the licensor will be paid, how the agreement will be terminated, and under what circumstance termination can happen. These major issues are preferably reduced to a term sheet (or letter of intent) by the parties. The next steps will include both due diligence (exploring the details of the deal, the technology, and the other party) and negotiating the remaining terms of the license agreement. These can be done sequentially or somewhat simultaneously depending on the needs and desire of the participants and their professional advisory team (attorneys, accountants, bankers, and others).

When approaching a license arrangement, you must contemplate what you want to be able to do. The licensor will be evaluating what the license limits should be: to a specific territory, to a certain industry or market segment, for a specified time period, or to use with only specified products. The licensor may also want to limit you to specific sales channels (wholesale, retail, internet) or under a specific brand trademark. The licensor will also want to limit competition with its own product. You will want to consider if the license will be exclusive or non-exclusive (will the licensor be able to grant licenses to others, potentially your competitors?). You will want to know if you can sublicense the technology to others and under what conditions. Another issue to address is if the technology is bundled and used with other technology because you will want to determine how the royalties will be calculated.

One of the most important terms of a license agreement is the description of the technology rights being conveyed in the agreement. The parties often focus so intently on other details of the contract that they overlook this provision and include an inadequate description. The general proposition is that licensors withhold all rights and technology not conveyed in the license agreement. This means that the more you include in the license, the more you get to do. Poorly drafted licenses can result in expensive litigation to clarify precisely what was – and was not – actually conveyed.

Ideally, the conveyance expressly addresses rights about (1) manufacturing, (2) selling, (3) distributing, (4) importing, and (5) enforcement. It is also prudent to address geographic, time and field of use restrictions of the conveyance.

Hybrid licenses for patents and trade secrets – best practice for patent-pending situations

Patent technology can generally only be licensed for the term of the patent. Under the federal Brulotte v. Thys case, the law was clearly set forth that the term of any patent license is strictly limited to the patent term. However, the federal case Aronson v. Quick Point Pencil establishes that a license for unpatented technology can have an indefinite term, even though there is no inherent exclusivity in the non-patent technology situation where knock-offs can enter the marketplace. In this situation, the court allowed the licensor to benefit from the bargain it negotiated and held the licensee to the deal even when it became clear it was not a good deal for the licensee. Given the current legal landscape, the most prudent practice is for patent-pending licensors to include a step down in royalty provision. If the patenting efforts are unsuccessful, the trade secrets can still be licensed. Using this hybrid license structure, both patents and trade secrets can be licensed in a simultaneous or alternative arrangement.

Patent licensing can be a viable option for infringers. While you may not have the freedom you enjoyed before receiving the fateful cease and desist letter, a patent license is a positive alternative to being excluded from the market altogether. A licensing agreement is not cut and dry, however. A well-drafted agreement takes time to investigate the issues, negotiate the terms and produce a document that reflects these terms, minimizes (or eliminates) the need for clarification and anticipates future conditions.