Avoiding Ambiguity in Patent License Agreements

Recent publications indicate that intangible assets account for between 70 percent and 80 percent of the overall value of United States companies.  For companies that are involved in intellectual property licensing, a significant portion of this value is derived from licensing revenues.  This would lead one to believe that the agreements in which licenses are granted are carefully drafted to ensure that the agreement clearly explains the rights and obligations of each party.

Unfortunately, too often companies start a license discussion with a form document that does not anticipate issues that the parties may encounter during the licensing relationship.  In addition, a slight ambiguity in the agreement can create headaches for both parties down the road.

In early November I will have the opportunity to speak about patent licensing at a CLE seminar.  When preparing my comments I recalled several situations that I’ve seen where just a few words in the agreement caused the parties to significantly disagree about the scope of the license, the payment obligations, or other key terms. 

For example, when licensing a patent, the licensee also may expect to receive a license to general categories of “related know-how”  or “related intellectual property.”  For some companies, it may be relatively easy to identify exactly what falls into these general categories.  However, other licensors — such as large companies, research institutions, and contract manufacturers — may have a wide variety of projects that could be considered “related” to the licensed IP.  These licensors should avoid general categories like “related IP”, or at least narrowly define “related IP” to that developed by specific individual, at a specific time, or under specific conditions.

Another example can be found in a 2009 Seventh Circuit decision of Sunstar Inc. v. Alberto-Culver Company, which reviewed an agreement whereby Alberto-Culver granted Sunstar a senyoshiyoken in certain trademarks.  The parties differed as to whether the word senyoshiyoken — a Japanese word essentially meaning “exclusive use right” — allowed Sunstar to vary the trademark’s font.   The court analyzed the agreement and the term’s Japanese meaning and concluded that the right granted was broad enough to permit the licensee to change the font.

In a 2009 Federal Circuit decision, Corebrace LLC v. Star Seismic LLC, the Court considered whether a license to “make” a patented invention inherently includes the right to have the invention made by a third party contract manufacturer.   The court analyzed its own precedent, along with California state law, and concluded that a “have made” right is implicit in a right to “make, use and sell” an invention unless the agreement expressly says otherwise.

The licensing of intangible assets is big business.  Situations such as these show the importance of carefully drafting license agreements to avoid ambiguity.  Unless the agreement is clear, the parties can find themselves interpreting the agreement in vastly different ways, with a significant revenues riding on whose interpretation is correct.

4 responses to “Avoiding Ambiguity in Patent License Agreements

  1. I’ve been doing licensing for almost fifty years and taught a licensing seminar for ten. Here are some thoughts.
    – Do not write lengthy sentences or paragraphs. That makes it harder to understand what you’ve written. As I write this, I am looking at a non-exclusive license grant that is 2/3 of a single-spaced page long and I will pare down to 1/4 page or less.
    – Use “numbered” lists where possible in the body of the agreement. Again, that highlights the enumerated points and makes it easier to understand what you’ve written.
    -Definitions (up front, not peppered throughout the doc) make it easier to understand what you are writing and make the agreement shorter.
    – Many inexperienced lawyers feel compelled to say the same thing two or even three times (in different ways), because they are not comfortable with how they say it once. Mistake! That only creates ambiguity.
    -Understand what you’re doing: e.g the difference between a right of first refusal and a right of first negotiation.
    – Be careful about the use of subjective words. like “related,” “improvements,” “reasonable.” Of course, sometimes they are unavoidable.
    – Know what you’re writing. When I polled ninety IP lawyers at a recent meeting, over half did not know that a non-exclusive license is “personal” and does not transfer in the event of a statutory merger (unless permitted by the contract). Astonishing but true!
    Sounds simple and it is. But many lawyers don’t know or don’t follow these simple rules.

  2. This is an interesting and important topic, especially since patent licensing disputes can have further ramifications, such as unforeseen patent litigation. Unfortunately, I will not be able to attend your discussion, but I hope that you will post a summary of your talk later in November.

  3. Pingback: General Global Week in Review 1 November 2010 from IP Think Tank

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