Patent License Agreement: A Must-Read Guide

Introduction

A patent licensing agreement is a legal agreement between a patent owner (licensor) and a licensee. The agreement helps define the licensing terms, including details related to the make, sell, and use of the patent, along with the required details about the royalties to be paid to the patent owner. 

This agreement is usually entered for a fixed time, depending on the negotiations between the parties, with the licensor in a more dominant position. 

This article shall discuss the types, components, importance, and drafting of a patent license agreement, guiding anyone wanting to execute a patent license agreement with another potential licensor or licensee. 

Components of Patent License Agreement

Components of a patent license agreement

Below is a list of common components of a patent license agreement, which help in clarifying the terms and conditions, as negotiated and agreed between the parties:

Rights and Restrictions of the Licensee

Considering that the licensee is the one making use of the patent to generate profits and provide payments to the licensor in the form of royalties, it becomes vital to be as clear about the rights and restrictions of the licensee as possible. The primary obligation of the licensee is to make the royalty payments to the licensor, along with monitoring the infringing activities within the geographical area where the licensee operates. It also becomes the responsibility of the licensee to ensure that the use of the patent is conducted legally, with the best endeavours. 

Through the assurance of the abovementioned obligations, the licensee obtains the right to manufacture, import, and distribute the licensed patent within a specific jurisdictional area. If the agreement is non-exclusive, the licensee has agreed to share the license with other licensees, who shall use the patent in other jurisdictions. However, even in the case of exclusive patent licenses, it is preferable to mention the jurisdiction within which the patent shall be used. It might be possible for the licensee to sub-license the product to a third party for the use of the patent. However, this is dependent on the negotiations between the parties. 

However, these rights are temporary, and the existence of a patent licensing agreement does not mean that the licensee has obtained complete ownership of the licensed patent. Therefore, the licensee is bound to provide royalties to the licensor at the agreed time. 

Intellectual property rights

Even with a patent license agreement, the intellectual property rights remain with the owner of the patent, i.e., the licensor. In no way does the patent ownership get transferred to the licensee, and it is not possible for the licensee to make unauthorised use of the patent in any manner. 

Royalty and payment terms

They define how the licensor shall pay the royalties and in what terms. It is important to explain the nature of royalties and whether they would be computed based on net proceeds or the profits made by the patent sale. The former helps maintain a minimum or guaranteed payment to the licensor regularly, while the latter provides royalties based on profits or net proceeds as calculated. 

The parties are required to negotiate the nature of the payments, along with the period within which the payment shall be provided by the licensee to the licensor. 

Termination clause

This clause defines the conditions and situations for the termination of the patent license agreement. It is possible for the contract to automatically get terminated once the agreed time has exceeded the license. However, this clause also includes details about foreseeable conditions that could render the performance of the contract invalid (may also be included in a separate force majeure clause). 

The clause also includes situations when the parties to the agreement have violated their material or fundamental obligations as mentioned in the agreement, making it impossible to continue with the arrangement further. In such a case, the termination clause shall include the complete procedure for termination, such as the sending of a notice or providing a certain period for correcting the violation, in the absence of which the agreement shall be terminated by the other party. 

Governing Law and Jurisdiction

The governing law clause provides details about the law applicable to the agreement and its enforceability, and the jurisdiction clause provides details about the jurisdiction of the court to consider any disputes that may arise in relation to the agreement. It is recommended to keep the governing law and the jurisdiction similar to avoid legal problems in the future, considering that it may become difficult for the courts of one state to look into a contract enforced according to the laws of the other state.

Be careful with drafting this clause since this is the clause that you would fall back on in case of any disputes. Prefer to have the governing law and jurisdiction the same as the jurisdiction for which the patent licensing rights had been given by the licensor to the licensee. 

Duration of license agreements

Considering the nature of the invention, this clause provides details about the term of the agreement in the absence of any termination made by the parties to the agreement. Depending on the negotiations between the parties, the parties may decide to keep the duration short for the first time (like 1 year) and then extend or renew the term of the agreement according to the results of the first arrangement.

Types of Patent License Agreements

There are mainly 2 types of patent license agreements that the parties may enter into:

Exclusive Licensing 

Exclusive Licensing means that no person or company other than the named licensee in the agreement can exploit the patent during the term of the agreement. Here, the licensor is also excluded from the exploitation of the patent. Here, it is important to specifically include exceptions, if any, such as the fact that the licensor shall continue to exploit the patent or that the licensor has previously granted the patent licensing rights to someone else for a specified period. This helps in avoiding any disputes or legal hassles in the future. 

The risks involved in this type of licensing also need to be considered since the patent owner is giving up their right to commercialise the intellectual property. Furthermore, for the licensee, this license type is subject to meeting certain development milestones, commercialisation milestones, or sales targets. Therefore, while this might be appealing to the licensees considering the monopoly obtained over the intellectual property, along with appealing to licensors who tend to ask for premium compensations for giving away exclusive licenses; however, the parties must make an informed and diligent decision before going ahead with such an arrangement. 

Non-exclusive Licensing

Non-exclusive licensing is more advantageous for the parties, especially in the long term. This type of licensing allows the licensor to give away patent licensors to multiple different licensees while also allowing the licensor to retain their rights over the exploitation of their patent. This arrangement allows the licensor to earn greater returns for the patent licensing through multiple sources. 

Depending on the negotiations between the parties, the licensor may agree to provide an exclusive license within a specific jurisdiction and a non-exclusive license for licensees in other jurisdictions. This may help the licensee maintain a monopoly over the intent within the agreed-upon geography. However, this is completely dependent on the negotiations between the parties. 

Enforceability of Patent License Agreement

A patent license agreement is enforceable if it meets the legal requirements for a valid and enforceable contract. To be valid and enforceable, a patent license agreement must be in writing, signed by both parties and must include:

  • All essential terms and conditions, such as the scope of the license
  • The duration of the license
  • The royalty rates, and the field of use

The agreement must comply with applicable laws and regulations, including Intellectual Property laws. The enforceability of the agreement may also depend on whether the licensed patent is valid and enforceable and whether both the licensor and the licensee have complied with the terms of the agreement.

Factors Affecting the Enforceability

There are several factors that can affect the enforceability of a patent license agreement, including:

Scope of the license 

This is a critical factor in determining whether a license agreement is enforceable. The license should clearly define the rights and limitations of the licensee with respect to the licensed patent. The scope of the license should be clearly defined to avoid disputes and ambiguity.

Intellectual property rights of third parties 

The license agreement should expressly set out that the licensor owns the necessary intellectual property rights to use or license out the patent. If the patent infringes the intellectual property rights of third parties, the license agreement may not be enforceable.

Validity of the patent

If the licensed patent is not valid, the license agreement may not be enforceable. Therefore, it is essential for the licensee(s) to conduct due diligence or a thorough search and examination of the patent before entering into any license agreement.

Compliance with the relevant laws: Patent licensing agreements that violate relevant laws are unenforceable. Thus, it is important to ensure that the license agreement does not contain any provisions that could be construed as violating the relevant laws.

Court Decisions on Patent License Agreement Validity

Court decisions have established the legal requirements for a valid patent license agreement. These decisions provide guidance on interpreting and enforcing the terms of such agreements. Here are a few examples of court cases related to the validity of patent license agreements:

Gyro-Trac Corporation v. King Kong Tools, LLC

In this case, the court deemed the no-challenge clause unenforceable because the parties had not actually litigated the patent nor engaged in discovery about its validity or enforceability.

This case involves a dispute between Gyro-Trac Corporation and King Kong Tools, LLC over a pre-litigation settlement agreement. King Kong Tools agreed not to challenge the validity or enforceability of Gyro-Trac’s patents as part of the settlement. However, Gyro-Trac later sued King Kong Tools for patent infringement, and King Kong Tools asserted that Gyro-Trac’s patents were invalid and unenforceable. Gyro-Trac tried to strike King Kong Tools’ invalidity and unenforceability defences, but the district court denied the motion, relying on Supreme Court precedent from Lear, Inc. v. Adkins and Federal Circuit case Baseload Energy, Inc. v. Roberts. 

The court found that the no-challenge clause in the settlement agreement was unenforceable because the parties had not actually litigated the patent, nor had they engaged in discovery concerning the patent’s validity or enforceability. Accordingly, the court concluded that the agreement did not bar King Kong Tools’ claims and denied Gyro-Trac’s motions. 

MedImmune, Inc. v. Genentech, Inc.

This case revolved around a patent licensing agreement challenging the validity of the patent and seeking a declaratory judgment to prevent Genentech from enforcing it. In 1997, MedImmune licensed a patent from Genentech for the development of Synagis, a drug used to treat respiratory infections in infants. The license agreement required MedImmune to pay royalties to Genentech for the use of the patent. In 2001, Genentech sent a letter to MedImmune demanding royalties on Synagis and indicating that it might sue for infringement.

MedImmune responded by initiating a declaratory judgment action, claiming that Synagis did not infringe Genentech’s patent and was invalid and unenforceable. Genentech argued that by challenging the patent’s validity, MedImmune was breaching the license agreement. Both the district court and the Federal Circuit dismissed the case for lack of subject matter jurisdiction, but the Supreme Court eventually heard the case and reversed the lower court decisions.

In an 8-1 decision authored by Justice Scalia, the Supreme Court found that MedImmune had a sufficient basis for an “actual controversy” and that it had standing to challenge the patent’s validity. The court reasoned that MedImmune faced a significant threat of harm before making royalty payments, including the possibility of an injunction that could have foreclosed 80 per cent of its business and the potential for trebled damages if willfulness was found.

The court further drew an analogy to a doctrine relating to government action that allows an individual threatened with government action to challenge the constitutionality of a law without first violating that law and risking incarceration. The court concluded that MedImmune should not have to “bet the farm” prior to asserting its arguments in court and that its self-avoidance of imminent injury was coerced.

The court also rejected Genentech’s argument that MedImmune was breaching the license agreement by challenging the validity of the patent, noting that the license agreement did not include any express covenant not to challenge the validity of the patent. The court found that there was no reason for MedImmune to be required to “surrender its rights” in order to obtain standing to challenge the patent’s validity.

Importance of Patent License Agreement

Some of the reasons why a Patent License Agreement is important include:

  • A Patent License Agreement outlines the terms and conditions under which the licensee can use the patented technology. This helps the licensor to protect their technology by ensuring that the licensee does not misuse the technology or infringe upon the patent.
  • It facilitates technology transfer by allowing the licensee to use the patented technology in their products or services, thus helping the licensee to develop new products or improve existing ones while the licensor benefits from the licensee’s use of their technology.
  • It can help to mitigate the risk of infringement lawsuits. By licensing the technology to other parties (licensees), the licensor can reduce the likelihood of infringement by providing the licensees with the legal right to use the technology.
  • A Patent License Agreement can be a source of revenue for the licensor. By licensing their technology to other parties, the licensor can earn royalties or other forms of compensation.
  • The license agreement can provide opportunities to enter untapped markets. The terms of the agreement may allow for access to markets that may otherwise be restricted to imports, circumvent export taxes, or reduce the risks typically associated with expanding into international markets.

Creating a Patent License Agreement

Patent license agreement

A patent license agreement outlines the specific terms and conditions of the license, including the scope of the license, the rights granted, the duration of the license, any limitations on the use of the patented invention, and the royalties or fees to be paid by the licensee. A well-drafted license agreement can ensure that the patent owner is fairly compensated for using their invention while allowing the licensee to benefit from the invention without fear of infringement litigation.

  “PATENT LICENSE AGREEMENT SAMPLE”

PATENT LICENSE AGREEMENT

This patent license Agreement (hereinafter “Agreement”) is entered into as of the date of complete execution (the “Effective Date”) by and between [Patent Licensor Name] (hereinafter “Licensor”) having its principal place of business at [Licensor Address] and [Licensee Name], (hereinafter “Licensee”) having its principal place of business at [Licensee Address], hereinafter collectively referred to as the “Parties.”

WHEREAS, LICENSOR is the owner of certain patents related to [describe patents] (collectively, the “Patents”); and

WHEREAS, LICENSEE desires to obtain from the licensor a license to manufacture, use, and sell products incorporating the technology covered by the Patents;

NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein, Licensor and Licensee agree as follows:

Representations and Warranties

LICENSOR represents and warrants that it possesses ownership of the subject Patent (patent details) and has the legal authority to grant licenses as set forth in this agreement. 

Each party warrants that it possesses the requisite authority to enter into this agreement and that its performance of the obligations hereunder will not infringe upon any existing agreement between that party and any third party.

License Grant

Licensor grants to licensee a non-exclusive, non-transferable license, with the right to sublicense, under the Patents to manufacture, use, and sell products incorporating the technology covered by the Patents, solely within the licensed territory, as defined in Section 3 below. This grant shall be binding on the licensor, its Affiliates, successors, and assigns.

Licensed Territory 

The licensed territory shall be [insert territory].

Term and Termination 

This agreement shall commence on the Effective Date and shall continue for [insert term]. 

Either party may terminate this agreement upon written notice to the other party in the event of a material breach by the other party of any provision of this agreement, which breach is not cured within [insert notice period] after receipt of written notice of such breach.

Consideration

Initial Payment: At the start of this agreement, on the Effective Date, the licensee will make an initial payment of (insert agreed amount) to the licensor.

Annual License Fee: Following the Initial Payment, the licensee shall pay the licensor an Annual License Fee of (insert agreed amount) at the beginning of each calendar year. The Annual License Fee shall not apply to the Minimum Royalty Payments described in this agreement.

Royalties: Under this agreement, the licensee agrees to pay the licensor a royalty of (Insert agreed percentage) per cent (%) of the Net Selling Price. If the net sales for any calendar year exceed (insert agreed amount), the additional royalties incurred during that calendar year will be reduced to (Insert agreed amount) per cent (%) of the Net Selling Price. If net sales for any calendar year exceed (Insert agreed amount), additional royalties will be further reduced to (Insert agreed percentage) per cent (%) of the Net Selling Price.

Indemnification

The licensee shall indemnify and hold harmless the licensor and its affiliates, directors, officers, employees, and agents from and against any and all claims, damages, liabilities, costs, and expenses, including reasonable attorneys’ fees, arising out of or in connection with licensee’s exercise of the license granted herein.

Intellectual Property

Licensee acknowledges that all rights, titles, and interests in the Patents and any modifications or improvements thereto shall remain with the licensor. Licensee shall not challenge or contest the validity of the Patents or aid any third party in challenging or contesting the validity of the Patents.

Governing Law

This agreement shall be governed by and construed in accordance with the laws of the state of [insert state].

Termination

If either party fails to comply with a material term or condition of this agreement, the other party may terminate the agreement by providing written notice of the breach, in addition to any other available remedies. However, if a Party is unable to fulfil its obligations due to reasons such as war, Act of God, statutes or other requirements of legislative bodies, strikes, lockouts, or disturbances of a national character, such inability shall not be considered a breach. If the agreement is terminated due to a breach, it will automatically terminate 60 days after the notice is given unless the breaching party rectifies the breach within that period.

Severability

If any provision in this agreement is found invalid, illegal, or unenforceable, the remaining provisions shall still be considered valid, legal, and enforceable. The invalid provision shall be reformed to achieve the intention of the Parties as closely as possible. If reformation is not possible, the invalid provision shall be removed from this agreement.

Entire Agreement

This agreement constitutes the entire understanding of the parties and supersedes all prior negotiations, understandings, and agreements between the parties relating to the subject matter hereof.

IN WITNESS WHEREOF, the Licensor and the Licensee have executed this agreement as of the date first written above.

[licensor]

By: [Signature]

Name: (______________)

Title: (______________)

[Licensee]

By: [Signature]

Name: (______________)

Title: (________________)

Conclusion

A patent license agreement is an important document that establishes both terms and conditions of a patent license between a licensor and licensee. These agreements help licensors protect their intellectual property rights while allowing others to use their patented technology at an agreed fee. When drafting a patent license agreement, it is crucial to ensure that it is clear, unambiguous and covers all necessary aspects of the licensing relationship. Additionally, parties should be aware that a promise not to challenge the validity or enforceability of a patent in a pre-litigation settlement agreement may not be sufficient to prevent a party from asserting invalidity and unenforceability defences when sued for patent infringement, as seen in the Gyro-Trac v. King Kong Tools case. Therefore, parties should carefully consider the language and scope of their patent license agreements to avoid potential disputes and ensure that their rights and obligations are clearly defined.

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