Licensing and Technology Transfer to and Within the USA
By Aaron N. Wise, Attorney at Law © 2009
• The Meaning/Pros and Cons of Licensing. In practical, non-legal terms, licensing means granting to someone the right to use, normally for commercial purposes, certain intellectual property. A non-exhaustive list of the types of intellectual property that can be licensed are: patents and patent applications, trademarks (whether or not registered) and trademark applications, internet domain names, copyrights (including to computer software), trade secrets and know-how. Except for computer software, the license will normally permit the licensee to produce or manufacture or have produced or manufactured, in whole or in part, particular products or components, to assemble them (where applicable), and to sell them in an agreed territory. In most instances, the licensee is granted the agreed rights for a specified time period; or, alternatively, the agreement will have no fixed term but can be terminated by the licensor (or both parties) for specified causes or without cause. Typically, the licensee will agree to make certain payments for the rights granted (and possibly for services the licensor will render). The term “technology transfer”, in the American context, has no specific meaning. It is mentioned only because in some circles the term is loosely used. There are positive and negative features of selecting licensing as a way of doing business in the USA. You should be well aware of them before deciding to embark on the licensing path.
• Protecting Your Intellectual Property. The foreign party’s intellectual property to be licensed should, to the extent possible, be registered (or filed, as appropriate) or at least applied for, in the USA (and where applicable, in other Western Hemisphere countries). That should, whenever possible, be done prior to negotiating the license agreement. You, the licensor, are likely to negotiate a better deal in that posture. Trade secrets and know-how are not filed or registered with any governmental agency.
• “Due Diligence” Review of Licensee Candidates. You should do a careful due diligence review of each licensee candidate. That will include reviewing the prospect’s financial and legal condition, its capability to produce the licensed products, and its ability to market them expeditiously in the contractual territory. Your U.S. lawyer can assist you in obtaining certain important information regarding licensee candidates and evaluating them.
• License Agreements for the U.S. Market. For the licensor’s protection and benefit, there is no substitute for a carefully drafted license agreement prepared by a American lawyer experienced in that field. Without that, the results can be a failed deal; placing your intellectual property rights at risk; a legal dispute or an actual lawsuit; and unnecessary expense. Most properly prepared license agreements for the U.S. market will be rather detailed, complicated and fairly lengthy, and not easy to negotiate. The reason is that there are a considerable number of points to be covered, negotiated and drafted.
• The “NB-SOT”. As with any other contract, it is often useful not start with a draft license agreement, but rather, with a non-binding summary of key terms (“NB-SOT”) as the first negotiation document. Your U.S. lawyer, with your input, will bring an NB-SOT to the point where both of you are satisfied with it and are ready to submit it to the licensee.
• The Drafting Initiative. You should do your utmost to seize and retain the drafting initiative both for NB-SOTs and contract drafts. To the extent avoidable, you should insist on the U.S. side only commenting on yours. Losing the drafting initiative can make it difficult to conclude a binding license agreement on terms that are advantageous to you. Also, once the potential licensee has submitted its draft, it is difficult, and often more expensive, to reformulate it to satisfy your concerns.
• Competitive Restrictions on Licensee: Potential Illegal or Dangerous Terms. Certain competitive restrictions imposed on a licensee and certain other contractual terms may 1. violate the U.S. federal or state antitrust or analogous laws; and/or 2. if you are licensing U.S.patent rights, be a patent misuse and put your patent at risk. Moreover, whether or not there is an actual violation or misuse, a poorly drafted or inappropriate restriction can lead a licensee to bring or threaten to bring a legal claim or counterclaim against you, typically to retaliate when you sue or try to terminate the license. A party who successfully pursues an antitrust claim can collect treble damages, actual damages times three. Also, the court can award the winner its legal fees and costs. Experienced U.S. counsel will know how to draft the agreement to minimize this type of risk.
• Exclusive Licenses; Non-Exclusive Licenses. As a general rule, nothing prohibits an exclusive license covering all of the USA. Like all general statements, there are a few exceptions. But the general rule will apply to most foreign companies. Sales by a licensee outside of its territory can lead to problems that – while thorny – can be solved. The granting of one or more non-exclusive licenses will not normally pose any problem under U.S. law.
• Clauses Protecting Licensed Trademarks. Under U.S. law, an agreement licensing or permitting a third party to use a trademark should contain certain clauses designed (among other things) to protect the licensor’s rights in the mark. Without such clauses, the licensor’s trademark may be jeopardized.
• Royalties; Up-Front Payments, etc. With few exceptions, the licensor and licensee can freely agree on the royalties, including, where applicable, an up-front payment (payment upon the license agreement being signed or very shortly thereafter). The same applies for minimum royalties, which the licensor will often want. The “few exceptions” just mentioned are points about which you may wish to question your U.S. lawyer.
• Trade Secret and Know-how Licensing and Protection. These can be licensed, and in general, clauses prohibiting the licensee’s unauthorized use and disclosure during the contract’s term and after the contract ends are enforceable, at least if the technology is not in the public domain. With a clear contract, even technology or knowledge that is not secret at the time of contracting, or ceases to be, can be the subject to royalty or similar payments. That is, with concise drafting, the licensee will not usually be able to convince a court that it can stop paying because the licensed technology or data is in the public domain or is known to all competitors. U.S. courts grant strong protection to trade secrets and proprietary data. In appropriate circumstances, U.S. courts will issue injunctions to protect trade secrets and other proprietary information. Under the arbitration rules of the American Arbitration Association, arbitrators too can issue preliminary and final injunctive-type orders.
• Sale of Intellectual Property. Instead of licensing the right to use for a limited time period, it is possible to sell outright intellectual property. In the case of trade secrets and know- how, the sale can be confined to the rights for a particular country or territory (e.g., the entire USA, or the USA and Canada). The tax aspects of intellectual property sales should be examined carefully.
• Choice of Tribunal and Choice of Law. These points are not just “legal points for the lawyers and of secondary importance to the economics of the license deal. They are very often critical business-legal points. What the agreement states on these points can be crucial for the licensor if it wishes to consider attacking, for example, if the licensee does not pay the agreed royalties, abuses or steals the licensor’s intellectual property or engages in some other wrongdoing. When the licensor may be defending a claim by the licensee (for example, for the licensor’s alleged breach of contract or a product liability or similar claim), what tribunal located where will decide the claim under which law is of paramount importance. Review these issues in detail with experienced U.S. counsel, arrive at the best solution and fall back position, and attempt to negotiate the most favorable provisions on these points.
• Tax Aspects. The foreign licensor should, with the aid of experts, examine in advance the tax ramifications of the particular license or other intellectual property deal. Among other sources, the relevant income tax treaty should be consulted (if any). As a general rule, a foreign party should do everything possible to avoid having what U.S. tax treaties defines as a “permanent establishment” in the USA or a “fixed base” used for the rendering of services in the USA. Absent a relevant tax treaty, the foreign licensor should avoid acts that would cause it to be “doing business” in the USA (or a particular U.S. state or city), for income tax purposes. Other U.S. state and local taxes, such as sales and use taxes, may also be relevant.
• Clauses Often Difficult to Negotiate and/or Draft in License Agreements. Here are a few examples (without much explanation given here):
1. When exclusivity will be granted for only a part of the USA and that will be the licensee’s entire contractual territory, the issue of under what conditions the licensee can sell the licensed products in other parts of the USA.
2. Royalty clauses, particularly: A. Up-front payment; B. minimum royalties; C. running royalties: the percentage, the base on which they are calculated, when they accrue and when they are payable.
3. Improvements or modifications of the licensed technology or licensed products made: A. by the licensee: To whom do they belong? What rights therein should the each party receive? B. by the licensor: Are they part of the licensee’s rights? What if the licensor’s improvement is a “major development”?
4. Infringements of the licensed intellectual property rights by third parties: which party has which obligations, if any, to prosecute infringers and under what terms and conditions?
5. If the licensed products infringe the intellectual property rights of a third party, how will the license agreement deal with that?
6. The duration of the license agreement, and in particular, the termination clauses. One especially tricky issue relates to the licensor’s right to terminate should the licensee enter into bankruptcy proceedings.
7. Others mentioned above.
• Computer Software Licenses and Authorized Reseller Agreements. A great many of the points made in this Chapter and in Chapter 1 of this Guide apply, either directly or with some adaptation, to computer software licenses and authorized software reseller agreements. Chapters 7 (Internet Business: An Overview of U.S. Cyberlaw), 11 (Litigation and Arbitration in the USA) and 12 (Errors Frequently Made by Non-US Parties) also contain relevant points.
Here are a few points pertinent to such agreements for the USA not specifically covered in those other places:
1. U.S. Franchise Laws: There are federal regulations applicable to “franchises; and U.S. state legislation governing “franchises.” Frequently, a software license even more so, a software reseller’s agreement can constitute a “franchise” for purposes under the federal and certain state franchise legislation. The consequences thereof can be negative, even grave, for the licensor. Many of the franchise statutes define quite broadly what is a “franchise”. It is not possible in this short guide to discuss this subject in detail. Citing one example, New Jersey’s franchise act brings captures, as a “franchise”, many software licenses and especially authorized reseller agreements. That act prohibits the licensor (franchisor) from terminating or modifying the “franchise” agreement without good cause, defined in the act, and lists a number of other no-no's----violations. That act accords the injured or potentially injured franchisee a number of remedies, from injunctive relief, to damages, including possible punitive damages, recovery of its legal fees, to even possible reinstatement. This author has dealt with several cases of this type.
2. Improper Termination by Licensor: Even if the software license or reseller’s Agreement does not constitute a “franchise” under state franchise legislation, some U.S. states will require “good cause” for franchisor termination; and/or will require a sufficient notice period to the licensee especially where the termination is without cause.
3. Poorly Drafted Software Licenses and Reseller Agreements: It occurs rather Frequently that software licenses and authorized reseller agreements prepared by foreign (non-US) companies and their local advisors are just not well drafted or are not suitable for the USA or risk violating US law. Frequently, they also do not offer sufficient protection to the licensor. Preparing the agreements properly for the US market may involve some costs to the licensor (including legal research by US counsel), but its risks outweigh those costs.
4. Non-US Style License, Reseller and Other Computer Software Agreements: Foreign software agreements should not be used in the USA ----at least without adaptation. Many legal and some practical business points of substance contained in agreements of this type that are not prepared by U.S. counsel will not be suitable for the US market. That is the main point. Plus, when marketing software to US resellers or customers, the agreements should be in proper, US style English.
5. Policing the Agreement: Not infrequently, the licensor does not require the licensee or reseller to comply with certain of its contractual obligations, or the licensor itself does not comply with certain of its own obligations. When the time comes that the licensor wants to terminate the agreement, such non-compliance can pose a potential problem or obstacle.
6. Trademark Protection: Sometimes, the licensor does not bother to register its trademark(s) in the USA, Canada and other important markets (e.g., Mexico or South American countries, maybe not even in its home country). The licensee becomes aware of that and decides to register the one or more of those marks in its own name, without informing the licensor. The licensee then has an important bargaining chip to ward off a potential licensor termination, or to obtain better contract terms, or a payout on licensor’s termination, for the licensor to get back its trademark rights. The licensor might well be able to challenge at the trademark office level or in court, the licensee’s application or registration, but may be reluctant due to the costs.
7. Copyright Protection for Computer Software and Manuals. Filing timely copyright applications in the USA very important for software owners and licensees. See earlier in this Chapter under the major heading “INTELLECTUAL PROPERTY IN THE USA” for more detailed comments about that and related points.