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Volume 22, No.

Fall 2010

Committee Chairs
Erick Howard
Shartsis Friese LLP
San Francisco, CA Published by the Intellectual Property Litigation Committee of the ABA Section of Litigation © 2010 American Bar Association, All Rights Reserved
ehoward@sflaw.com
John P. Hutchins This Issue: Licensing Disputes
Troutman Sanders LLP
Atlanta, GA
john.hutchins@troutmansanders.com
Current Law on Compulsory
Licenses for Post-Verdict
Joseph Drayton
Kaye Scholer
New York, NY
jdrayton@kayescholer.com
Patent Infringement
Newsletter Editors
Editor in Chief By Nicole D. Galli
Steve Gardner
Kilpatrick Stockton LLP

T
Winston-Salem, NC
sgardner@KilpatrickStockton.com o quote Shakespeare’s Romeo & congressional authority to use that which
Juliet: “What’s in a name? That is licensed. . . . By contrast, the ongoing-
Editor at Large which we call a rose by any other royalty order at issue here is limited to one
Brad P. Lyerla name would smell as sweet.” So goes the particular set of defendants.” However, in
Jenner & Block LLP
Chicago, IL
rose, so too goes the so-called compulsory his concurrence, Randall Rader, now chief
BLyerla@jenner.com license in patent infringement cases. In judge of the U.S. Court of Appeals for the
2007, in Paice, LLC v. Toyota Motor Federal Circuit, fairly commented that
Young Lawyer Oriented Editor Corp.,1 the Federal Circuit held that a dis- “calling a compulsory license an ‘ongoing
Elaine Y. Chow
trict court has the authority to award “an royalty’ does not make it any less a com-
K&L Gates LLP
San Francisco, CA ongoing royalty for patent infringement pulsory license.” Indeed, to Chief Judge
elaine.chow@klgates.com in lieu of an injunction.” In so holding, Rader’s point, at its core, an ongoing
the Federal Circuit distinguished the term royalty effectively requires the patentee
Litigation Tips Editor “compulsory license” on the grounds that to grant a license to practice the patent
Douglas N. Masters calling it a compulsory license “implies to the adjudged infringer in exchange for
Loeb & Loeb that anyone who meets certain criteria has Continued on page 18
Chicago, IL
dmasters@loeb.com
Editor at Large
David L. Marcus
Comcast Cable Communications
Philadelphia, PA
David_Marcus@Comcast.com
Covenants Not to Sue In Light
Associate Editor
Jason Hicks
of Federal Circuit Decisions
Art Director
Kelly Book By Donald W. Rupert and Gina M. Bicknell
Intellectual Property Litigation (ISSN 1936-7619) is
published quarterly by the Committee on Intellectual

M
Property Litigation, Section of Litigation, American
Bar Association, 321 N. Clark Street, Chicago, any, if not most, patent infringe- Corebrace, LLC v. Star Seismic, LLC2—
IL 60654. The views expressed within do not ment disputes are settled before counsel should pay particular attention
necessarily reflect the views of the American
Bar Association, the Section of Litigation, or final, unappealable judgments to the way these provisions are worded.
the Committee on Intellectual Property are entered by courts. Such settlements The court in TransCore held, in part, that
Litigation. © 2010 American Bar Association
often include licenses under the asserted covenants not to sue are authorizations
www.abanet.org/litigation/committees/intellectual patent(s) and standard provisions relat- and will be treated in the same manner
ing to covenants not to sue, and mutual as licensed sales under the doctrine of
releases are routinely included in such patent exhaustion, such that sales under a
agreements. In view of two recent Federal covenant exhaust a patentee’s rights unless
Circuit decisions—TransCore LP v. Elec- expressly conditioned otherwise. The court
tronic Transaction Consultants Corp.1 and Continued on page 21
Published in Intellectual Property Litigation, Volume 22, Number 1, Summer 2010. © 2009 American Bar Association. Reproduced with permission. All rights reserved.
This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without
the express written consent of the American Bar Association.
Message from the Chairs
Licensing is one of the foremost means certain language found in most licens- to you, our members. As always, we are
by which our clients exploit and realize ing agreements regarding limitations on looking for Committee members who are
value from their intellectual property. As the licensor’s ability to withhold certain interested in becoming more involved in
we all know, patents, trademarks, and consents; the possibly unintended effects our work, whether it’s through contributing
copyrights come with a bundle of rights of covenant not to sue provisions and the to the newsletter, webpage, or programs,
that their owners may license to others, in right of licensees to sublicense; the effect or through membership outreach. For more
whole or in part, in a myriad of ways. Of of bankruptcy laws, particularly in the information about opportunities to become
course, with that bundle of rights comes a United States and United Kingdom, on involved, please visit the Committee’s
bundle of issues that often arise when IP IP licensing; the current law governing webpage at www.abanet.org/litigation/
is licensed, including issues related to the so-called compulsory licenses in patent committees/intellectual.
scope of the license, the interpretation of infringement cases; the effect of the Fed- We also want to give very special
the parties’ license agreement, the admin- eral Circuit’s recent decision in ResQNet. thanks to Coke Morgan Stewart, who
istration and monitoring of the licensee’s com, Inc. v. Lansa, Inc., which appears to served as a chair of the Committee this
activities during the life of the license, and open the door to the discovery of settle- past year. Stewart has been appointed chair
the rights and obligations of the parties ment negotiations in certain cases involv- of the 2012 Section Annual Conference
at the end of the license’s life, especially ing patent licensing; and the issues that this year. Her colleague, Joseph Drayton,
where it has ended in the context of a may arise when licensing in China, widely has stepped in as our third Committee
dispute between the parties. Additional recognized as one of the most promis- chair, and we all look forward to work-
complications can (and often do) arise ing licensing markets. In this issue, then, ing with him over the next year. As a
when a license results from litigation or we tackle the world of IP licensing from testament to Stewart’s dedication to our
when licensing in foreign countries whose multiple fronts so that you can be better Committee, she’ll continue to be involved,
intellectual property laws may not be as prepared to assist your clients in avoiding particularly with our regional roundtable
developed or as robust as those in the its pitfalls. project.
United States. Our tradition of being one of the largest You can email any of us, the Commit-
This issue explores some of the issues and most active committees in the Section tee chairs, with questions. Thank you for
that may arise when IP owners license continues, and we are instituting even more your continuing support!
their rights. We will learn about strate- ambitious initiatives this year—including
gies for avoiding licensing disputes adding a new Hot Topics Subcommittee Erick Howard
by implementing effective monitoring and exploring providing regional round- John P. Hutchins
programs; how the courts have interpreted tables—to provide more and better benefits Joseph Drayton

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Published in Intellectual Property Litigation, Volume 22, Number 1, Summer 2010. © 2009 American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof
may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
Licensing Your Brand in China: Guidelines for
Brand Owners
By Marc Lieberstein and Tywanda Harris Lord

C
hina is widely recognized as one increase from 2008.7 first-to-file basis. Before embarking on
of the most promising licensing Despite the growth of its IP system, any brand extension in China, a com-
markets for prospective brand China still endures harsh criticism for the pany should find out if the brand name is
owners due to rapid growth in its econo- endemic and culturally accepted coun- eligible for trademark protection there. A
my. According to China’s National Bureau terfeiting activities that occur within its non-Chinese registrant must abide by the
of Statistics, total retail sales of consumer borders, the high threshold requirements Chinese Trademark Licensing Contract
goods in 2008 were approximately $1.6 for criminal prosecution for trademark and Recordal Procedures (TLCRP).10 Article
trillion (CNY 10.8 trillion). China has seen copyright infringement,8 and restrictions 8 of the TLCRP requires trademarks to be
a 4.8 percent increase in retail sales of on market access for foreign companies. submitted in both English and Chinese.
licensed merchandise from 2008 to 2009, The U.S. Trade Representative, which In addition, Chinese characters should
despite a 13.9 percent drop in worldwide placed China on its 2010 Priority Watch be filed in both the traditional and sim-
retail sales of licensed products.1 This list, expressed concern over China’s plified form. Similar-sounding marks,
does not come as a surprise, consider- continued inadequate IP infringement translations, and transliterations (using the
ing that sales from licensed products in penalties and oppressive market-access Chinese pinyin system) can also be filed
China have grown from $600 million in barriers.9 as a defensive measure.11 Always consult
2001 to more than $8 billion in 2008.2 The with native Chinese trademark counsel at
growth in consumer spending has more Brand Owner Concerns in China the initial stages of securing mark protec-
than doubled since 2004 and shows no Market conditions in China pose unique tion to avoid disputes about the validity of
signs of slowing.3 China’s urban popula- problems for companies seeking to enter the mark’s registration and the subsequent
tion growth will also continue to help fuel the country’s marketplace. Disputes ability to license the mark in China. Other
domestic consumption; it is anticipated to between brand owners and their Chinese steps brand owners may take to ensure
grow from 572 million people in 2005 to licensees can be especially challenging the proper registration and protection of a
more than 1 billion by 2030, of which half due to cultural differences and the distance mark in China include:
are estimated to be in the middle class.4 between China and many regions around
The rapid growth in consumer spending the world. When launching and licensing • monitoring the trademark registry in
and the trend toward urbanization make a brand in China, brand owners should China for similar mark filings;
China ripe for brand-driven marketing. To proactively identify any red flags before • filing oppositions against similar
take advantage of China’s dynamic and entering a relationship with a Chinese trademark applications;
relatively untapped market, brand owners licensee. At minimum, foreign brand own- • filing cancellation proceedings
should consider protecting their brands in ers should: against similar trademark applica-
China and devising brand licensing strate- tions that become registered; and
gies to target the unique Chinese market. • research the state of IP rights in their • monitoring the Internet for the po-
The potential for brand expansion in specific industry; tential unauthorized use and sale of
China has outpaced China’s development, • research the history of any potential infringing domain names and pirated
implementation, and execution of a system licensee; products in China.12
to protect intellectual property (IP) rights. • be cognizant of cultural differences;
As a member to the Paris Convention5 and • register the trademark in China; Key Licensing Provisions
the World Trade Organization (WTO), • conduct face-to-face contract nego- Brand owners often encounter problems in
China has strengthened its obligations to tiations and utilize a translator; China that are associated with counterfeit-
the international IP community by signing • travel to China before problems ing, the improper use of child labor, and
treaties such as the Agreement on Trade- arise, and certainly after they arise; the use of low-quality materials/shoddy
Related Aspects of Intellectual Property • periodically return to China to en- construction. In an effort to prevent these
(TRIPS Agreement).6 China’s recognition sure the terms of any license agree- problems, brand owners should focus on
of the need for IP rights and IP protection ment are being fulfilled; and thorough and effective license provisions
has contributed to the significant growth • establish a continuous presence in that address quality control, manufactur-
of China’s IP system. For example, in China to show that they are invested ing, and enforcement.
2009, there were 830,000 new trademark in the licensing outcome in China.
applications filed—a 20 percent increase Quality Control
from 2008—and there were approximately Protecting Brands in China Brand owners generally contract with
30,500 judgments rendered by Chinese The China Patent and Trademark Of- Chinese manufacturers, retailers, and
courts in IP cases, representing a 30 percent fice awards trademark registrations on a distributors to launch their brands in China
Published in Intellectual Property Litigation, Volume 22, Number 1, Summer 2010. © 2009 American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof
may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
because the cost of labor and materials the license agreement. Enforcement
is low, and these local entities generally • Reserve the right to monitor the China’s inadequate enforcement of trade-
know the Chinese marketplace better than licensee’s sales activity and distribu- mark and other IP rights is a key concern
foreign brand owners do. However, brand tion, including Internet activity. in deciding whether to expand in China
owners should routinely monitor and con- through a licensee. To manage these con-
trol the quality of all products sold under Manufacturing cerns, brand owners must craft strong en-
their brand. In China, this is especially Because foreign companies have come forcement provisions that will facilitate the
important, because in recent years, there to expect low prices when manufacturing resolution of disputes in a reasonable and
have been several cases requiring the re- goods in China, Chinese factory owners fair manner. The choice of law provisions
call of Chinese manufactured products due are caught between maximizing revenue in the licensing agreement is important
to health and safety hazards.13 In addition, and enduring the margin squeeze of higher to overcoming uncertainty when seeking
Chinese vendors sometimes substitute food and energy costs.15 As a result, Chi- relief for the breach of a license. There
cheaper materials, subcontract to third nese factories sometimes recruit under- are limitations in Chinese law regarding
parties without the licensor’s knowledge, age laborers and fail to maintain proper the brand owner’s ability to enforce the
or sell unauthorized quantities “out the safety and working conditions in their choice of law provisions against violators
back door.” Often, these subcontractors factories. To avoid these practices, brand in China. For example, public policy laws,
are subsequently untraceable or not legally owners should clearly define the expected such as the Chinese antimonopoly law,
liable for use of poor quality materials.14 “standards of manufacturing” and require often supersede choice of law provisions.16
As a result, brand owners should incorpo- that the licensee abide by these standards. Indeed, even if the parties agree to have
rate strict quality-control provisions when Brand owners should emphasize the all disputes adjudicated under U.S. law
licensing the manufacturing and sale of brand owner’s commitment to producing in U.S. courts, there is no guarantee that
branded goods in China. Below is a list high-quality goods and the licensee and/ the Chinese courts will enforce any orders
of suggested terms for a quality-control or third-party manufacturer’s responsibil- or judgments rendered by a U.S. court
license provision: ity to observe all international, national, against a Chinese national.
and local laws and regulations. Specifi- Accordingly, brand owners in China
cally, the license agreement should include should consider including arbitration
provisions that: provisions in a license with a Chinese
Brand owners should • reserve the right to disapprove of
entity doing business in China. The New
York Convention on the Recognition and
any/all products not complying Enforcement of Foreign Arbitral Awards,17
routinely monitor and with the “standards of manufactur- which China recognizes and has signed,
ing,” even if they were previously has made enforcing arbitral awards more
control the quality of approved;
• reserve the right to review employee
likely in China than an order issued by
a U.S. court. The New York Convention
complaints; requires contracting countries to enforce
all products sold under • require that products meet or exceed arbitration awards entered in other territo-
the industry’s highest quality stan- ries and mandates the recognition of writ-
their brand. dards and specifications for products ten arbitration agreements. The arbitration
similar to the licensed products that provision in a license should specify:
are sold in the same distribution
channels; • that the parties consent to applying
• Retain approval rights prior to, dur- • require the licensee to report the brand owner’s local law or some
ing, and after manufacturing, sale inventory and sales quantities on a other neutral state or country law
and use, as well as for channels of monthly, quarterly, and annual basis; to govern all disputes to avoid the
distribution, quality-control checks, • require that all manufacturing be uncertainty of China law;
and the advertising and marketing of done in accordance with any and all • that arbitration is the mandated form
licensed products. applicable laws, rules, and regula- of dispute resolution;
• Require approval of preproduc- tions, including, but not limited to, • the location for resolution, e.g., the
tion samples and postproduction product safety laws, human rights brand owner’s place of business, or
samples. laws, child labor laws, and health some other neutral location such as
• Specify the grade and quality of and safety laws; New York, Los Angeles, Hong Kong
materials to be used. • reserve the right to inspect the fac- or Singapore;
• Specify when the licensee should tory at which the products are made • the specific arbitration body to be
submit all samples, to whom they at any given point in the production used, e.g., American Arbitration As-
should be submitted, and by when and distribution process; and sociation (AAA) or the International
approval will be given. • require that remedial action be taken Chamber of Commerce (ICC);
• Reserve the right to require the for any breach of the foregoing • the rules chosen under the arbitra-
licensee to recall any/all products if provisions, and specify that if none is tion body, e.g., under the AAA,
they do not meet the requirements of taken, the license may be terminated. the International Arbitration and
Published in Intellectual Property Litigation, Volume 22, Number 1, Summer 2010. © 2009 American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof
may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
Mediation Rules; the People’s Court of China20 or through Civil Proceedings
• a time limit for the completion of administrative adjudication by using the Brand owners may also seek relief from
arbitration proceedings, e.g., six Trademark Office. If the infringement is trademark infringement resulting from the
months; and serious, Article 53 of the Trademark Law breach of a trademark license agreement in
• the type of relief the arbitrators shall requires the Trademark Office to refer the People’s Court through civil litigation.
have the power to award, e.g., dam- the complaint to China’s Public Security The People’s Court can award not only the
ages, injunctive relief, preliminary Bureau for criminal prosecution. permanent injunctive relief available from
relief, temporary restraining orders, an AIC, but it can also award preliminary
reasonable attorney’s fees, etc. Administrative Adjudication injunctions and compensatory damages.24
China’s State Administration for Industry
Arbitration clauses in licensing agree- and Commerce (SAIC)21 is responsible
ments are often a central issue in nego- for handling trademark infringement
tiating licensing terms. Therefore, it is
important to choose a neutral arbitration
complaints. The Trademark Divisions of
the provincial and municipal AICs have
Because there is no
institution and be aware of Chinese law the authority to investigate trademark
addressing arbitration.18 infringement within their geographic formal discovery, the
jurisdictions. Administrative adjudica-
Brand Enforcement in Chinese Law
In addition to incorporating an arbitration
tion of trademark infringement is an
attractive option for a brand owner if
brand owner is required
provision in a license agreement, a brand the infringement is contained to a small
owner may also use the Chinese legal geographic area and the primary goal is to investigate and
system to address disputes with licensees. to stop the infringing activity quickly.
Similar to U.S. laws, the Trademark Law of In fact, the AIC will determine within collect all the evidence.
the People’s Republic of China19 proscribes seven days whether it will accept the
unauthorized use of a trademark. Article 52 complaint, and a resolution of the dispute
of the Trademark Law, supplemented by is generally announced within 90 days.22
Article 50 of the Trademark Law’s Imple- The remedies imposed by the AIC can To obtain a preliminary injunction,
menting Regulations, provides that the also quickly provide injunctive relief to a the brand owner must provide sufficient
following acts constitute infringement: trademark licensor, because the AIC has evidence that the continued infringement
the authority to: is likely to cause irreparable harm to its
• using a trademark that is the same reputation or will erode its market share.
as or similar to a registered trade- • issue cease-and-desist orders; Similar to the United States, China re-
mark on the same or similar goods • confiscate and obliterate trademark quires brand owners granted a preliminary
without the authorization of the logos from infringing goods; injunction to provide a deposit for guar-
registered trademark holder; • confiscate and destroy infringing anty. According to the Interpretation by
• selling products that violate the goods where the trademark cannot the Supreme People’s Court of the Issues
exclusive right to use a registered be obliterated; and Relating to Application of Law to Pre-
trademark; • confiscate materials, tools, and Trial Suspension of Acts of Infringement
• counterfeiting or fabricating without equipment used mainly for the of Exclusive Rights to use Trademarks and
authorization a mark or a symbol production of infringing goods and to Evidence Preservation,25 the People’s
that is part of a registered trademark trademark representations.23 Court should rule on a prelitigation
of another party, or selling marks preliminary injunction within 48 hours,
or symbols that have been made or However, the swift action of the AIC and, if entered, the injunction should be
fabricated without permission; comes at a price, especially for a foreign executed without delay. In turn, the brand
• modifying a registered mark without company. Many foreign companies owner is required to commence litiga-
the authorization of the registered complain that the AIC has refused to in- tion within 15 days after the injunction is
owner and distributing products vestigate complaints due to local protec- ordered or the suit will be dismissed.
bearing the modified mark; tionism, corruption, or a lack of resources. Litigating in the People’s Court is not
• causing harm in other respects to the Even when infringement is found by without its challenges. First, it is expen-
registered trademark holder’s right the AIC, a trademark owner’s remedy is sive. Because there is no formal discovery
to exclusive use; and limited to injunctive relief. While the AIC process in civil litigation, the brand owner
• providing transport, storage, mail- can impose fines upon an infringer, those is required to investigate and collect all
ing, hiding or other conveniences to fines are not collected for the benefit of the evidence of infringement and damage.
facilitate others in the infringement the brand owner but are instead retained This can be a daunting task for foreign
of the exclusive rights of a registered by the collecting AIC. While the fines are companies. Second, like administrative
trademark holder. likely intended to punish the infringer, proceedings in China, local protectionism
they are often not substantial enough to is also an issue in civil litigation. More-
If a licensee commits any of these acts, put the infringer out of business or deter over, the level of training and experience
the brand owner can seek redress from future infringement. of judges in civil litigation varies widely,
Published in Intellectual Property Litigation, Volume 22, Number 1, Summer 2010. © 2009 American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof
may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
especially for jurisdictions outside the Tywanda Harris Lord is a partner 9. United States Trade Organization
major cities in China. Nonetheless, the at Kilpatrick Stockton, LLP, Atlanta, Special 301 Report (2010), available at http://
tide of enforcement of IP rights in China Georgia, and can be reached at tlord@ www.ustr.gov/webfm_send/1906 at 21.
appears to be changing, with 30 percent kilpatrickstockton.com. They would like 10. Trademark Licensing Contract
more IP actions adjudicated in its courts in to thank Tina Mepani, a summer associ- Recordal Procedures, (Promulgated by the
2009 than in 2008. Companies operating ate from Benjamin N. Cardozo School of Trademark Office of the State Administration
in China have also reported more success Law, and Anne Knox Morton, a summer for Industry and Commerce on and effective as
in enforcing IP rights than ever before, associate from Harvard Law School, for of August 1, 1997) (1997) (P.R.C.) available
and, consequently, are more willing to their assistance. at http://www.shcontractlaw.com/English/
utilize the court system in China. Regulations.Asp?Action=Content&ID=302.
Endnotes 11. See Elizabeth Chien-Hale, Doing
Criminal Prosecution 1. See Emerging territories grow in 2008, Business in China: Resolving the Challenges
Criminal prosecution for trademark in- but worldwide retail sales down, 33 Licensing in Today’s Environment, Corporate Law and
fringement is available in China, although Letter 5, available at 2009 WLNR 7820501 Practice Course Handbook Series, Inst. for
it is not a remedy trademark owners can (Mar. 2, 2009). Intell. Prop. in Asia (2007).
seek directly. Rather, the AICs must refer 2. Allan Feldman, Top 10 Trends in Brand Elizabeth Chien-Hale, Doing Business in
cases involving “serious” infringement Licensing, The Licensing Journal, May 2010, China: Resolving the Challenges in Today’s
for criminal prosecution. However, what at 22. Environment, 109 (Practicing Law Institute,
constitutes a “serious” infringement is not 3. See National Bureau of Statistics of 2007)
defined in the Trademark Law, leading China, http://www.stats.gov.cn/English 12. See Justin Pierce, Trademark
many foreign brand owners to complain (Retail sales in 2004 were reported at Enforcement in China, INTA Annual Meeting
that the Trademark Law is thus vague CNY 5.95 trillion, and retail sales in 2007 were (2010).
and too subjective. Indeed, foreign brand reported at CNY 8.92 trillion (approximately 13. See Julia A. Phillips, “Does ‘Made
owners complain that the vague language $1.3 trillion)). in China’ Translate to ‘Watch Out’ for
of the Trademark Law results in the AICs 4. See William O. Hennessey, Sixth Consumers?” The U.S. Congressional Response
rarely referring cases to criminal pros- Annual Baker Botts Lecture at the Intellectual to Consumer Product Safety Concerns, Penn
ecution. Interagency conflicts with local Property in International Perspective: Institute St. Int’l L. Rev. (2008).
government have also been cited as a rea- for Intellectual Property & Information Law 14. Harry Rubin, Outsourcing to China: Risk
son for the AICs’ failure to refer cases for Symposium: Protection of Intellectual Property Management and Strategies, The Licensing
criminal prosecution. In addition, the AICs in China (30 Years and More): A Personal Journal, Nov./Dec. 2009, at 8.
are financially motivated to adjudicate Reflection (available in 46 Hous. L. Rev. 1257, 15. David Barboza, Child Labor Rings
cases within their agency because they can 1292 (2009)). Reach China’s Distant Villages, NY Times,
retain any fines paid by the infringer. 5. Paris Convention for the Protection of May 10, 2009, available at http://www.nytimes.
Nevertheless, criminal prosecution Intellectual Property, Mar. 20, 1883, 21 U.S.T. com/2008/05/10/world/asia/10CHINA.html.
for trademark infringement does occur 1583, 828 U.N.T.S. 305, available at http:// 16. Rubin, supra note 14 at 8.
in China, and the punishment includes www.wipo.int/treaties/en/ip/paris/. The treaty 17. Convention on the Recognition and
imprisonment for up to seven years and has been amended several times, most recently Enforcement of Foreign Arbitral Awards, Jun.
a fine. in 1979. 10, 1958, 330 UNTS 38, 21 UST 2517, 7
6. Agreement on Trade-Related Aspects ILM 1046, available at http://www.uncitral
Conclusion of Intellectual Property Rights, Marrakesh .org/uncitral/en/uncitral_texts/arbitration/
There is no magic formula for launching Agreement Establishing the World Trade NYConvention.html.
and licensing a brand in China. There Organization, Annex 1C, Legal Instruments— 18. See Jian Zhou, Judicial Intervention in
have been significant improvements in Results of the Uruguay Round, Part II, Section International Arbitration: A Comparative Study
China’s willingness and ability to pro- 5, Apr. 15, 1994, 1869 U.N.T.S. 299, 33 I.L.M. of the Scope of the New York Convention in U.S.
tect IP rights, but the implementation 1125, 1197, available at http://www.wto.org/ and Chinese Courts, 17 Pac. Rim L. Pol’y J.
and execution of its laws are not without english/docs_e/legal_e/27-trips.pdf. 41, 46 (2006) (Article 260 of China’s 1991 Civil
flaws and pitfalls. With that in mind, 7. Gary Zhang, Xiang An, Jinhua Lu and Procedure Law provides criteria that, if present,
foreign brand owners looking to expand Guangliang Zhang, China’s IP System Comes allow Chinese Courts to invalidate foreign
in China must take the time to investigate of Age, Managing Intellectual Property, arbitration awards).
prospective business partners in China, (2010), available at http://www.managingip 19. Trademark Law of the People’s Republic
understand the Chinese culture, and draft .com/Article/2460070/Chinas-IP-system-comes- of China (adopted by the 24th Session of the
enforceable license agreements that ad- of-age.html. Standing Comm. of the Fifth Nat’l People’s
dress potential problems with Chinese 8. Hennessey, supra note 4 (citing David Cong. Feb. 22, 1993, rev. according to the
licensees before they arise. l Lague, U.S. Presses Chinese on Piracy, Int’l Decision on the Amendment of the Trademark
Herald Trib., Nov. 15, 2006, at 15 (“The Law of the People’s Republic of China adopted
Marc Lieberstein is a partner at estimated loss that a U.S. business faces as a at the 24th Session of the Standing Comm. of
Kilpatrick Stockton, LLP, New York, result of the rampant counterfeiting in China the Ninth National People’s Cong. Oct. 27,
New York, and can be reached at was estimated at approximately $2.3 billion a 2001) Judicial Protection of IPR in China
mlieberstein@kilpatrickstockton.com. year in 2006.”). (last visited Jun. 9, 2010) (P.R.C.).

Published in Intellectual Property Litigation, Volume 22, Number 1, Summer 2010. © 2009 American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof
may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
20. Chinese judicial courts of similar (e.g., Beijing AIC, Shanghai AIC, etc.). SAIC 25. Interpretation by the Supreme People’s
jurisdictional status as a U.S. federal/state also promulgated a set of rules that officially Court of the Issues Relating to Application
district court or court of appeals. Local People’s grants the local AIC the power to confirm of Law to Pre-Trial Suspension of Acts of
Courts are made up of three regionally divided and approve registration of Foreign-Invested Infringement of Exclusive Rights to use
levels: the High People’s Court (provincial Partnerships. Trademarks and to Evidence Preservation
level), Intermediate People’s Courts (prefecture 22. http://www.saic.gov.cn/sjpdq/sjpd/nsjg/ (adopted at the 1203rd Meeting of the Judicial
level), and Basic People’s Courts (county level). fgs/gzdt/t20070914_23979.htm. Committee of the Supreme People’s Court on
A party can only bring one appeal to the next 23. Trademark Law (P.R.C.), supra note 19 December 25, 2001, and enters into force on
highest court. at Article 55. January 22, 2002) (2001) (P.R.C.), available at
21. The SAIC regulates and allocates its 24. Trademark Law (P.R.C.), supra note 19 http://www.wipo.int/clea/docs_new/pdf/en/cn/
trademark enforcement measure to the local AIC at Articles 56–57. cn058en.pdf.

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Published in Intellectual Property Litigation, Volume 22, Number 1, Summer 2010. © 2009 American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof
may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
How to Avoid Licensing Disputes
By Michele M. Riley and Debora R. Stewart

T
he reasons behind entering into an • Do the calculations include sales by develop and foster a healthy and productive
intellectual property (IP) license are sublicensees? relationship with its licensees. To that end,
numerous and include dissemination of • Does the calculation include sales from licensors should:
knowledge and technology for the greater good all relevant geographies?
as well as the expansion of market share for the • A desk audit should also compare • Contact licensees regularly. Know
IP holder. Much time is spent by the parties on data from various sources to identify who is submitting royalty and other
the license in the negotiation stages, discuss- anomalies. For example: reports and when those reports should
ing minute details regarding fields of use • If a product catalog or other marketing be submitted. Make sure the individual
and indemnity clauses. Arguably, the license materials of the licensee are accessible, responsible for preparing the royalty
would never be consummated if it was not for are all relevant product names/codes report has detailed knowledge of the li-
the consideration paid for the license, but IP included on the royalty report? cense agreement. Request to be notified
holders often do not receive the full amount of • Do public statements about sales of changes in royalty reporting staff.
monies due under license agreements. growth (e.g., press releases) agree with • Follow up immediately in cases of
In fact, the latest statistics from Invotex the royalty report? delayed, insufficient, or incorrect data.
Group’s royalty audit practice show alarming • How does the performance of licensed • Call licensees to acknowledge the
results. Invotex has found that in 86 percent products compare to the performance receipt of reports, thank them for their
of the licenses it audits, there are instances of of other products sold by the licensee? timeliness, and discuss any relevant
misreporting. The most common causes of • How do the royalty payments made developments.
misreporting are issues of license interpreta- by one licensee compare to the royalty • Perform audits early in the licensing
tion, followed by oversights relating to the payments made by other licensees? relationship so that potential misun-
launch of new products or sales made in new derstandings regarding the terms of the
territories. According to Invotex, 47 percent of A royalty audit is designed to determine license agreement can be taken care of
the dollars associated with the total amount of whether or not a licensor is receiving the as soon as possible.
understated royalties it has uncovered during payments he or she is due under the license • Make audits routine rather than reac-
its royalty audits are related to questionable agreement. A royalty audit typically involves tive. Make it clear that all licenses that
license interpretation. three phases: pre-site research, site investiga- meet a certain threshold or are of a
One of the tactics IP holders can employ to tion, and post-site analysis and reporting. certain type will be audited. If a formal
avoid disputes over consideration is the imple- The first phase typically includes an monitoring program is implemented,
mentation of a robust and consistent monitor- analysis of all of the relevant information advise each licensee of the program so
ing program designed to deter complications from public sources and the licensee avail- that no licensee feels targeted.
such as questionable license interpretation. able prior to the site visit. The second phase
involves investigative interviews—typically in Dealing with Suspected
Preventing Underpayment and the accounting, finance, technical, marketing, Underpayments
Avoiding Disputes business development, and royalty reporting It is not uncommon for individuals who did
A license agreement that is monitored areas. A facility tour may also be deemed ap- not participate in the original negotiation of a
consistently is generally less likely to result propriate. The focus for this phase is to gain a license agreement to be in charge of prepar-
in significant underpayment of royalties. A thorough understanding of
compliance program should include desk the accounting and report- Dollar Impact of Royalty Reporting Errors
audits and full royalty audits. ing systems the licensee Description Percent
A desk audit is a monitoring activity that uses for royalty reporting.
Questionable License Interpretation 47%
can be performed without visiting a licensee The third phase involves
location. Within the context of a desk audit, continued analysis and Royalties from Underreported Sales 23%
licensors should analyze royalty payments for development of the audit Royalties from Disallowed Deductions 11%
accuracy. For example: report.
A license-monitoring Unreported Sublicenses 7%
• If royalty payments suddenly decrease, program will not suc- Math Errors 6%
is there a valid explanation? ceed without active and
• If there are cost deductions from the meaningful communica- Royalty Rate Errors 3%
royalty base, are those cost deductions tion between the licen- Transfer Prices 2%
appropriate? sor and the licensee. As
• Are any of the calculations unsupported such, another preemptive Unreported Benchmarks or Milestones 1%
or lacking in sufficient detail? strategy is for a licensor to —Invotex Group, April 2010
Published in Intellectual Property Litigation, Volume 22, Number 1, Summer 2010. © 2009 American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof
may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
ing the royalty report. Therefore, misreporting suspicions of misreporting, the next step is potential for recovery. Perhaps a negoti-
is almost de rigueur. Although all licenses to confirm the underpayment via a royalty ated settlement, even if reduced from the
should be part of a comprehensive monitoring audit. This should be done promptly, before amount of the underpayment, will still
program, certain red flags will indicate that any additional loss is incurred, or the busi- outweigh any recovery via the legal system
there is an increased potential for misreporting ness relationship is further compromised. once attorney costs and court fees are taken
royalties and that immediate follow-up will be It will enable the licensor to negotiate from into consideration.
required. Red flags can be identified through a position of full information rather than
analyzing a royalty report or by scrutinizing negotiate in the dark. How Valuable Is the Business Relationship?
the licensee’s performance in the marketplace. License agreements typically state that A litigation proceeding can be an efficient
These red flags, some of which have been a third-party auditor will perform the audit. and effective way to terminate a business
touched on above, include the following: A licensee will likely feel more comfort- relationship. If commencing litigation
able being audited by a third party due to against the licensee will serve as a lethal
• There are unsupported calculations, or the unbiased and nonadversarial nature of dose of poison to the business relationship,
there is an insufficient level of detail the relationship. The selected auditor must the licensee will need to think long and hard
surrounding the calculations. have significant royalty audit experience and about whether the recovery of any underpay-
• The licensor is not able to respond to expertise to communicate effectively with ment via the legal process (after attorney,
questions about its royalty calculation. licensee personnel, analyze complex contract court, and other possible fees) outweighs the
• Royalty payments are late. provisions, and uncover sales that can be anticipated value stemming from a profitable
• Minimum payments are not in masked by product combinations or complex business relationship into the future.
complete compliance with the license distribution channels. A royalty audit is a dif- But if the licensee refuses to acknowl-
agreement. ferent animal than a financial statement audit. edge the underpayment or takes an unaccept-
• Royalty payments are not as high as The required expertise is very distinct. able position vis-à-vis the interpretation of
anticipated or are not in line with cur- If a royalty audit uncovers an understate- language within the agreement, the next step
rent market expectations. ment of royalties, the auditor can provide a may be legal action if such action is deemed
• The royalty report demonstrates quantification of the unreported sales dollars necessary in order to recoup losses. Taking
inconsistent sales in relation to market or units and a quantification of the amount of legal action may also be warranted if the IP
performance. royalties owed. The next step is for the auditor is licensed out to many parties and the licen-
• The royalty report shows poor perfor- and/or licensor to work alongside the licensee sor, along with legal counsel, deems it neces-
mance of a licensed product compared to identify any flaws in the royalty-tracking sary (and value-added) to send a message to
to other licensee products. system and develop measures that can be all licensees that underpayments will not be
• The royalty report indicates a poor taken to prevent future misreporting. tolerated and will be dealt with through the
or failing financial condition for the A licensor who suspects an understate- legal process.
licensee. ment of royalties may be inclined to im-
• The royalty reports continuously con- mediately pursue legal action against the Conclusion
tain miscalculations of amounts owed. licensee. Even if an alleged understatement is Whether instances of misreporting relate to
• The licensee operates with poor inter- confirmed via preliminary audit results from intentional omissions of product sales, pure
nal controls. an independent auditor, the licensor should human error, some ambiguity within the
• The royalty report contains evidence of complete all of his due diligence before com- license agreement, or something else, the
product combinations. mencing legal action. The licensor should frequency of misreporting suggests that licen-
• The licensee uses complex distribution consider the following issues. sors need to take more proactive measures to
channels for the licensed product. prevent misreporting.
• There is an inconsistent or nonexistent Is the Audit Final? Implementing a robust and consistent
contact person for the licensee who Whether or not the audit is final is critical. monitoring program will help prevent
possesses comprehensive knowledge of Obtaining information through the audit instances of misreporting, as will develop-
the license agreement. process is less costly than obtaining infor- ing and fostering a healthy and productive
mation through discovery. It may achieve relationship with licensees.
What happens when a licensor receives a the same result in terms of the collection of When misreporting is uncovered, a licen-
royalty report and suspects that royalties are relevant documents, but without the myriad sor will need to determine the most effective
underpaid? What tactics can be used to remedy of legal requirements surrounding discovery. and appropriate method for the collection of
the situation? The first step is to communicate In addition, the licensee will likely be more underpayments—whether that is a negotiated
with the licensee in an effort to resolve any forthcoming with information than he would settlement or taking legal action. l
questions or concerns that have arisen. It may be through interrogatories and depositions. As
be the case that there is a straightforward and such, if the audit is not yet final, care should Michele M. Riley, CPA, CFF, CFE,
acceptable answer that can assuage the licen- be taken to ensure that all documents associ- and Debora R. Stewart, CPA, CFF, are
sor’s suspicions of misreporting. Or it may be ated with the underpayment are collected. managing directors at Invotex Group,
the case that there is a difference in language Baltimore, Maryland. Riley can be
interpretation within the license agreement that How Much Money Is at Issue? reached at mriley@invotex.com, and
can be amicably and quickly resolved. The key here is to consider whether the Stewart can be reached at dstewart@
If communication efforts do not resolve anticipated cost of litigation outweighs the invotex.com.
Published in Intellectual Property Litigation, Volume 22, Number 1, Summer 2010. © 2009 American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof
may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
Licensing Disputes and Insolvency in the
United States and United Kingdom
By Matthew E. Hoffman, Gregory J. Urbanchuk, Kenneth L. Dorsney, and James R. Tumbridge

T
he convergence of global markets replace the Bankruptcy Act of 1898.4 The provisions that sometimes function to the
and the growth of intellectual prop- overarching goals of the U.S. Bankruptcy detriment of particular creditors in the
erty over the last 30 years have cre- Code are providing a uniform mechanism name of fairness to all. For example, Sec-
ated unique challenges for inventors and for maximizing and preserving the assets tion 363(f) permits a trustee or debtor in
companies seeking to develop, monetize, of a debtor and an efficient means of liqui- possession to sell property free and clear
and enforce their IP rights, which are dating claims against the debtor’s bank- of an interest in the property under certain
becoming an increasingly more significant ruptcy estate equitably among creditors. circumstances, namely, if applicable non-
part of their businesses. Recent statis- Section 101(35A) of the U.S. Bank- bankruptcy law permits the sale of such
tics published by the World Intellectual ruptcy Code defines “intellectual prop- property free and clear of such interest, the
Property Organization (WIPO) suggest erty” as including patents, copyrights, and nondebtor interest holder consents, the in-
that patent applications increased from ap- trade secrets. The treatment of IP license terest is a lien “and the price at which such
proximately 926,000 in 1985 to more than agreements is often governed by Sec- property is to be sold is greater than the
1.8 million in 2007.1 tion 365 of the U.S. Bankruptcy Code, aggregate value of all liens on such prop-
While an increase in patent filings which addresses assumption, assignment, erty,” the interest is in bona fide dispute,
is somewhat abstract when viewed in a and rejection of executory contracts and or the nondebtor interest holder could be
vacuum, a working paper published by unexpired leases.5 In addition, Section 363 compelled to accept a money satisfac-
the Federal Reserve Bank of Philadelphia of the U.S. Bankruptcy Code, which ad- tion of the interest. Thus, under certain
provides two estimates that are useful in dresses the use, sale, or lease of property, circumstances, if a debtor sells IP pursuant
assessing the magnitude of this growth and may come into play in respect to the sale to Section 363, nondebtor licensees of the
the relative importance of intangibles to of the underlying IP that is the subject of IP may find their licenses extinguished.
companies: U.S. private gross investment the license agreement. The most debtor-friendly creation of
in intangibles was at least $1 trillion in the U.S. Bankruptcy Code is the automatic
2000, and intangibles represented a third U.K. Insolvency Law stay, which, pursuant to Section 362, arises
or more of the market valuation of all U.K. insolvency law is derived primarily upon the filing of a petition for bankruptcy
U.S. stocks at the end of the first quarter from the amended Insolvency Act of 1986. relief. This stays, among other things, the
of 2001.2 Given the relative importance The overarching goal of U.K. insolvency commencement or continuation of all judi-
of intangibles to the market value of law is to free the debtor from overwhelm- cial, administrative, or other actions against
companies, it’s not surprising that licens- ing debts so that a fresh start can be made a debtor that were or could have been com-
ing disputes involving IP often result in (subject to some restrictions) and to ensure menced prior to the bankruptcy, as well as
high-stakes, “bet-the-company” litigation, that the debtor’s assets are shared out any act to collect, assess, or recover a claim
which increasingly involves jurisdictions fairly among the creditors. Under U.K. against the debtor, with certain enumerated
outside of the U.S. For example, the U.K. law, there are three key persons in insol- exceptions. Bankruptcy judges typically
case of Nokia v. InterDigital Corp. [2004] vency matters: an administrator who is apply the automatic stay broadly, which
EWHC 2920 (Pat) and [2005] EWCA appointed to run the insolvent business, a stays termination of an IP license agree-
Civ 614 involved a dispute regarding the liquidator who is appointed to manage the ment and possibly even provides notice
royalties associated with the licensing of winding up and sale of the debtor’s assets, of a default. In an effort to circumvent the
certain mobile phone patents, resulting and a licensed insolvency practitioner automatic stay and bankruptcy process in
in a payment of nearly $300 million to who can act as an administrator, liquida- general, parties to IP license agreements
InterDigital. tor, or advisor to parties in the insolvency often draft their agreements to include de-
proceedings. Unlike in the United States, fault provisions triggered by the insolvency
Bankruptcy Law and License there are no specific statutory protections or commencement of a bankruptcy case by
Agreements related to IP license agreements under either party, but such “ipso facto clauses”
U.S. Bankruptcy Code U.K. insolvency law. generally are not enforceable in bankruptcy
Article 1, section 8, clause 4 of the U.S. pursuant to Section 365(e).
Constitution provides Congress with the Bankruptcy by a Licensor/Licensee Bankruptcy judges often punish viola-
power to enact “uniform Laws on the sub- U.S. Perspective tions of the automatic stay severely, so
ject of Bankruptcies throughout the United The purpose of the U.S. Bankruptcy nondebtor counterparties to IP license
States.” U.S. bankruptcy law is codified Code—to maximize the size of a debtor’s agreements must be careful not to violate
in title 11 of the U.S. Code.3 Congress en- estate and distribute property of the estate the stay. Accordingly, nondebtor counter-
acted the U.S. Bankruptcy Code in 1978 to equitably among creditors—results in parties embroiled in patent litigation, or
Published in Intellectual Property Litigation, Volume 22, Number 1, Summer 2010. © 2009 American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof
may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
those contemplating the commencement assign an executory contract if applicable the bankruptcy, trustees or DIPs may file
thereof, would be advised to move for re- nonbankruptcy law excuses the nondebtor omnibus objections to multiple claims
lief from the automatic stay to commence party from accepting performance from or for a given set of reasons enumerated
or continue such litigation, regardless of rendering performance to an entity other in Rule 3007(d) of the Federal Rules of
whether the nondebtor counterparty is li- than the debtor or debtor-in-possession Bankruptcy Procedure. Thereafter, trustees
censor or licensee under the license agree- and the nondebtor party does not consent or DIPs typically object to claims on a
ment. Nondebtor counterparties may and to such assumption or assignment. This case-by-case basis, and attorneys often
often do seek relief from the automatic provision is designed to protect licensors negotiate the terms upon which claims will
stay pursuant to Section 362(d) for cause, from being forced to license their IP to be allowed, including the dollar amount
including lack of adequate protection of a party with which they did not contract and priority of such claims, though under
an interest in property, or where the debtor absent their consent. certain circumstances, they may litigate
does not have equity in the property in There is a split of authority among the these issues.
question and the property is not necessary courts of appeals as to whether Section Nondebtor counterparties to execu-
for an effective reorganization. 365(c)(1) prohibits a licensee from assum- tory contracts—specifically, IP license
Because of the automatic stay, non- ing an executory contract, and much of the agreements—are given further flexibility
debtor parties to executory contracts are litigation over this provision arises in the
typically limited in what actions they can context of IP license agreements. Closely
take relative to such contracts—even if the tracking the language of the statute, the
debtor is in breach of the contract—until
the trustee or DIP decides to assume or
courts of appeals in the Third, Fourth, and
Ninth Circuits (and arguably the Eleventh
Nondebtor
reject such contracts. A trustee or DIP
has the option to assume (i.e., honor) or
Circuit) abide by the “hypothetical” test,
prohibiting assumption of an executory counterparties to
reject an executory contract, such as an IP contract by a licensee even if the debtor
license agreement, assuming the parties does not “actually” intend to assign it.6 executory contracts are
have material obligations due and owing The First Circuit permits a debtor licensee
to each other. After a petition for bank-
ruptcy relief is filed but before the trustee
to assume an executory contract if the
debtor does not “actually” intend to as-
given further flexibility
or DIP assumes or rejects an executory sign it.7 The Fifth Circuit has construed
contract, the contract remains in existence, the language of Section 365(e)(2), which by Section 365(n).
enforceable by but not against a debtor, on is substantially similar to that of Section
account of the automatic stay. 365(c)(1), in accordance with the “actual
A nondebtor counterparty to an execu- test,”8 and bankruptcy courts in the Eighth
tory contract may move the court to compel and Tenth Circuits have applied the “actual by Section 365(n), which provides that
the debtor to assume or reject its contract, test” in construing Section 365(c)(1).9 where the trustee or DIP rejects an IP
although such motions are not typically Should the trustee or DIP ultimately license agreement under which the debtor
granted, particularly in the early stages of a reject the contract, the contract is deemed is licensor, the nondebtor licensee may
chapter 11 case. But if the debtor continues to have been breached as of immediately elect to treat the agreement as terminated
to receive benefits under the contract before before the date of filing the petition. This if rejection amounts to a breach that would
it makes a decision to assume or reject the typically gives rise to a general unsecured entitle the licensee to treat the agreement
contract, then the debtor is obligated to claim with damages calculable under as terminated by its terms or under ap-
pay the reasonable value of those ben- applicable state law. A counterparty to a plicable nonbankruptcy law. Alternatively,
efits, which may be determined to be the rejected executory contract typically has the nondebtor licensee may elect to retain
amount specified in the contract. To assume 30 days after rejection to file a proof of its rights under the agreement and any
an executory contract, the trustee or DIP claim pursuant to Section 501; rejection supplementary agreement for the duration
must cure any default under the contract or orders typically specify the deadline to file of the contract and any extension right
provide adequate assurance of cure (with such claims. If a contract is assumed and available under applicable law. These
limited exceptions) and provide adequate later rejected, the breach is deemed to be retained rights include the right to enforce
assurance of future performance under at the time of rejection (i.e., post-petition), any exclusivity provision but exclude any
the contract. If the trustee or DIP elects to unless the case was converted to a chapter other right under applicable nonbankruptcy
assume the contract, it generally has the op- 7, in which case the breach is deemed law to specific performance.
tion to assign the contract to a third party. to be immediately before the date of the If the licensee elects to retain its rights
Despite the fact that Section 365 grants conversion (i.e., post-petition, pre- under the license agreement, it must make
a significant amount of leeway to debt- conversion), though if the assumption itself all royalty payments due under the agree-
ors with regard to executory contracts, takes place after conversion, the breach is ment for its duration. Further, the licensee is
seemingly at the expense of nondebtor deemed to be at the time of rejection (i.e., deemed to have waived any right of setoff
counterparties, there are certain balances post-petition, post-conversion). it may have with respect to the agreement
built into this section of the U.S. Bank- To the further benefit of creditors, under the U.S. Bankruptcy Code or appli-
ruptcy Code. Section 365(c)(1) provides claims are allowed unless a party in cable nonbankruptcy law, and any prior-
that the trustee or DIP may not assume or interest objects. Depending on the size of ity administrative expense claim pursuant
Published in Intellectual Property Litigation, Volume 22, Number 1, Summer 2010. © 2009 American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof
may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
to Section 503(b). In addition, when the fair value should take into account the fact A common issue arising in the United
nondebtor licensee elects to retain its rights, that BBCW was obliged to buy Wool- Kingdom is the identification of unregis-
Section 365(n)(3) requires the trustee or worths’ shares. However, the administra- tered IP and its valuation. Typical scenarios
DIP, upon written request by the licensee, to tor’s challenges were unsuccessful, and the involving IP are either the desire of a
furnish to the licensee any IP (including any contractual position was honored. licensee to maintain its rights or the desire
embodiment of the IP) held by the trustee Distinguishing the decision in Per- of those with a security interest over the IP
or DIP and not interfere with the rights of petual Trustee Co. Ltd. v. BNY Corporate to ensure the insolvency practitioner/ad-
the licensee as provided in the IP license Trustee Servs. [2009] EWHC 1912, the ministrator or liquidator does not dispose of
agreement or any supplementary agreement, court found that the deprivation principle the underlying IP without their being able
including any right to obtain such IP. did apply, but it agreed with BBCW that to claim their entitlement. As mentioned
In sum, while the U.S. Bankruptcy Code the effect of the principle in the present earlier, IP may have been used for security,
provides trustees and DIPs with significant case was only to avoid part of the relevant and it is important to check whether the
flexibility vis-à-vis nondebtor counterpar- clause. The result was that the master charge/security interest has been registered
ties to IP license agreements, it does con- license had terminated and the valuation at Companies House, because any security
tain a number of protective balances. was to be determined on that basis. The that is not registered is void against a liqui-
court also found that given the hypotheti- dator or an administrator per section 874 of
U.K. Perspective cal basis of the assessment of “fair value” the U.K. Companies Act 2006. It is of equal
Consistent with the United States, many established by longstanding jurisprudence, importance to check the national registry
license agreements in the United Kingdom it was not permissible to take into account for IP at the U.K. Intellectual Property
include default provisions triggered by the the fact that BBCW was obliged to buy Office (IPO) to determine what interests,
insolvency of the licensee. However, the Woolworths’ shares. The key lesson from if any, against the IP are registered. This
U.S. treatment of these provisions is quite this dispute is to ensure the agreement is can be very important, as failure to register
different from that of the United King- balanced and fair—had BBCW been seen with the U.K. IPO can have significant
dom, where the termination of the license to take excessive advantage, the court may impact on rights and the ability to bring
agreement is unlikely to be prohibited by not have found as it did. infringement actions or recover costs and
the moratorium against creditor action that If the IP is not critical to the debtor, may affect title. Patent licenses in particular
applies in U.K. insolvency proceedings. In a liquidator may consider disclaiming a should be registered at the U.K. IPO, as
addition, some license agreements include license as onerous property. Section 178 of failure to do so can have cost consequences.
provisions whereby, in the event that one of the U.K. Insolvency Act 1986 confers on For example, under Section 68 (Patents Act
the parties becomes insolvent, the IP trans- liquidators the power to disclaim onerous 1977) a proprietor or an exclusive licensee
fers to the solvent party. property, which is defined as “any unprofit- may not be able to obtain damages or an
This position has recently come under able contract, and any other property of the account of profits in an infringement action
scrutiny in Butters v. BBC Worldwide Ltd. company which is unsalable or not readily where a registration does not occur. Ad-
[2009] EWHC 1954 (Ch), where BBC saleable or is such that it may give rise to a ditionally, unlike in the United States, the
Worldwide (BBCW), the BBC’s commer- liability to pay money or perform any other United Kingdom does not have established
cial arm, was successful in its dispute with onerous act.” An IP license, which may be protection for licensees who continue to
the administrators of Woolworths Group, of limited value to creditors but requires the make payments under their license, and
a retail chain that collapsed. The dispute insolvent company to pay a license fee is, whether the license under which they oper-
concerned the appropriate basis on which to potentially, an onerous contract. However, ate will be maintained is a primary concern.
value Woolworths’ shares in its 2Entertain where a license agreement is disclaimed,
joint venture on DVD and video distribu- the counterparty, assuming it has suffered Conclusion
tion. BBCW had granted the joint venture a loss, would become a creditor of the The importance of intangibles to the market
a perpetual master license of rights over debtor to the extent of the loss. If a licensor value of companies will likely continue to
BBC content. Following the insolvency debtor disclaims a license agreement, the result in high-stakes, “bet-the-company”
of Woolworths, BBCW served notice to licensee would retain the right to use any litigation in the United States, United
buy out Woolworths’ shares in 2Entertain. licensed IP, as the disclaimer only operates Kingdom, and other foreign jurisdictions.
Under the relevant contractual provisions, to release the insolvent company from its Accordingly, the threat of insolvency,
BBCW was obliged to pay “fair value” for obligations and does not affect the rights of whether real or perceived, may be pur-
the shares, as determined by an independent the licensee. Furthermore, where a liquida- sued by a party in a licensing dispute as a
valuer, and could terminate the master li- tor disclaims registered IP, an entity with mechanism to resolve the proceedings. A
cense. However, the administrators objected an “interest” in the IP (e.g., an exclusive basic understanding of the laws governing
and cited the “deprivation principle” of licensee) can appeal to the court to have the IP license agreements in insolvency can
insolvency law that certain provisions in the IP vested in it. It should be noted that only provide a mechanism for assessing the risks
relevant agreements were void, obligating a liquidator may disclaim onerous property. associated with the threat of insolvency
BBCW to buy the shares on the basis that However, an administrator can cause a and the potential outcomes of the litigation.
the master license subsisted and had not debtor to breach the terms of a license and Although some similarities exist, the laws
been terminated and raising the price for allow the counterparty to file a suit to re- governing IP license agreements in insol-
the shares. Additionally, the administrators cover damages, which, if successful, would vency are markedly different between the
contended that the valuer’s assessment of become an unsecured creditor’s claim. United States and the United Kingdom. As
Published in Intellectual Property Litigation, Volume 22, Number 1, Summer 2010. © 2009 American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof
may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
such, the complexity related to IP license
agreements in insolvency is further ampli-

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and Facebook.
Matthew E. Hoffman is an associ-
ate at Duane Morris, LLP, Philadelphia,
Pennsylvania. He can be reached at
mehoffman@duanemorris.com. Gregory
J. Urbanchuk is a principal at Asterion,
Inc., Philadelphia, Pennsylvania. He can be
reached at gurbanchuk@asterion-consulting
.com. Kenneth L. Dorsney is counsel and
“Like” The ABA Section
intellectual property practice coordinator at of Litigation on Facebook
Elliott Greenleaf, Wilmington, Delaware. He
can be reached at kld@elliottgreenleaf.com.
James R. Tumbridge is counsel at Gowlings
UK, LLP, London, United Kingdom. He can
be reached at james.tumbridge@gowlings Follow @ABALitigation
.com.
on Twitter
Endnotes
1. World Intellectual Property
Organization, WIPO Statistics Database,
June 2009, http://www.wipo.int/ipstats/en/
statistics/patents/ (last visited May 14, 2010).
2. Nakamura, L.I., What Is the U.S. Gross Find timely articles
Investment in Intangibles? (At Least) One

and news updates,


Trillion Dollars a Year! (Federal Reserve Bank
of Philadelphia, Working Paper No. 01-15).
3. See 11 U.S.C. § 101, et seq. Debtors
and creditors are also governed by other
nonbankruptcy laws and state common law,
which are not addressed in this article.
CLE program information,
4. Congress has amended the U.S.
Bankruptcy Code several times since 1998, with
the most recent significant amendments arising
and recent podcasts
under the Bankruptcy Abuse Prevention and
Consumer Protection Act of 2005.
5. It is generally agreed that an executory for litigators.
contract is one under which both parties have
material obligations due and owing to each
other, though the U.S. Bankruptcy Code does
not define “executory contract.”
6. See In re West Elecs., Inc., 852 F.2d 79 (3d
Cir. 1988); RCI Tech. Corp. v. Sunterra Corp. (In
re Sunterra Corp.), 361 F.3d 257 (4th Cir. 2004);
Perlman v. Catapult Entm’t (In re Catapult Entm’t),
165 F.3d 747 (9th Cir. 1999), cert. denied, Catapult
Entm’t, Inc. v. Perlman, 528 U.S. 924 (1999).
7. See Institut Pasteur v. Cambridge Biotech
Corp., 104 F.3d 489 (1st Cir. 1997), cert.
denied, 521 U.S. 1120 (1997).
8. See Bonneville Power Admin. v. Mirant
Corp. (In re Mirant Corp.), 440 F.3d 238 (5th
Cir. 2006).
9. See In re GP Express Airlines, Inc., 200
B.R. 222 (Bankr. D. Neb. 1996); In re Aerobox,
373 B.R. 135 (Bankr. D.N.M. 2007).

Published in Intellectual Property Litigation, Volume 22, Number 1, Summer 2010. © 2009 American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof
may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
ResQNet: Rescuer or Wrecking Ball in
Patent-Licensing Negotiations?
By David Swetnam-Burland and Stacy O. Stitham

F
or years—decades, even—it has been today often exclude evidence of proposed Power Supply, Inc.,6 Judge Ward found that
an accepted truth that patent licenses or accepted patent licenses offered to settle the Goodyear doctrine had been undermined
resulting from a settlement agreement litigation when offered for the purpose of by ResQNet and departed from his long-
to end a patent infringement lawsuit cannot establishing a reasonable royalty. Although standing practice of adopting a “bright-line
serve as evidence of a reasonable royalty often excluding from trial such litigation- rule that settlement negotiations are privi-
rate. In this year’s decision in ResQNet.com, induced agreements, a number of courts leged while the resulting license agreement
Inc. v. Lansa, Inc., however, the Federal have allowed discovery of the same. is discoverable.”7 Accordingly, the floodgates
Circuit suggested that litigation-induced of discovery in Tyco opened to documents
settlement agreements might nevertheless Reincarnation in ResQNet and other evidence of negotiations leading
have some evidentiary value to fact-finders In February 2010, the Federal Circuit up to settlements covering the same patent
charged with deciding how to measure vacated the district court’s damages award or comparable technology. Defense counsel
infringement damages. in ResQNet (based on a hypothetical royalty in infringement cases pending in the Eastern
Whether you believe that the Federal of 12.5 percent) and remanded. Heavily District of Texas have duly taken note.
Circuit has laudably refused to throw out the criticizing the plaintiff’s expert for relying Proving that turnabout is fair play in
baby with the bathwater or you are skeptical on certain bundled licenses as a touchstone patent litigation, the decision handed down
that there can be any evidentiary value to an for the proposed royalty rate without ac- by Judge Folsom a few days later in Data-
agreement signed at gunpoint, ResQNet has counting for the technological and economic treasury Corp. v. Wells Fargo & Co., et al.8
inspired a flurry of activity in the Eastern differences between the patents covered by applied ResQNet in a similar fashion, but
District of Texas, opening the doors of those licenses and the patent at issue in the with a result skewed in favor of the plain-
discovery, and potentially the subsequent use litigation, the court observed that “the most tiffs. Denying a motion in limine to exclude
at trial, of evidence regarding past settlement reliable license in this record arose out of evidence pertaining to litigation-related li-
agreements and their underlying negotia- litigation,”3 since that license, at least, related censes at trial, the court relied on ResQNet to
tions. The implications, at least in this popu- to the patent in suit. Though cautioning conclude that evidence of litigation-induced
lar patent venue, are clear: Your settlement that “the hypothetical reasonable royalty settlements was admissible at trial not only
communications may be discoverable and calculation occurs before litigation and that to prove or disprove a “reasonable royalty”
may someday function as your opponent’s litigation itself can skew the results of the measure of damages, but also to prove that
trial exhibits (or your own). Awareness that hypothetical negotiation,”4 the court never- the plaintiff’s patent was commercially suc-
not only license agreements, but also the ne- theless invited the district court on remand to cessful (and therefore nonobvious) or that
gotiation documents that underlie them, may recalculate a reasonable royalty with a closer the plaintiff had complied with its marking
be discoverable will undoubtedly influence eye to such settlement-oriented licensing obligations. The court determined that the
patent-licensing behavior, both in and out of agreements to the extent such license agree- licenses were relevant and admissible, and
litigation. ments covered the technology at issue. that it was up to the defendants to dispute
their evidentiary weight during trial and in
The Rules of Rude ResQNet Revolution: Tyco, proposed jury instructions.
In the 1889 decision of Rude v. Westcott, Datatreasury, and Abbott Labs In a different jurisdiction a few months
the U.S. Supreme Court noted that “a pay- The Eastern District of Texas, with its later, Judge Coar of the Northern District of
ment of any sum in settlement of a claim patent-heavy docket, responded quickly to Illinois in Abbott Labs., et al. v. Sandoz, Inc.9
for an alleged infringement cannot be taken this decision. In an order granting a motion denied a motion in limine and introduced a
as a standard to measure the value of the to compel in Tyco Healthcare Group LP, et further wrinkle—plaintiffs opening the door
improvements patented, in determining the al. v. E–Z–EM, Inc., et al., Judge Ward con- to a defendant’s introduction of litigation-
damages sustained by the owners of the cluded that the logical import of ResQNet induced settlements at trial. Noting the gen-
patent in other cases of infringement.”1 The was that underlying settlement and licensing eral practice of excluding license agreements
justification offered was simple: “Many negotiations relating to the same patent (or contained in litigation settlements from trial,
considerations other than the value of the comparable technology) may be relevant the court nonetheless left this door open to
improvements patented may induce the pay- to the calculation of a reasonable royalty the defendant because the plaintiffs’ expert
ment in such cases. The avoidance of the risk and, thus, should be discoverable under the had relied on certain litigation-related license
and expense of litigation will always be a broad definition of relevance applicable agreements in coming up with his reason-
potential motive for a settlement.”2 in discovery.5 Though he had previously able royalty figure. Framing the choice as
Just as true in the era of Barack Obama considered such materials privileged under one between allowing both parties to rely on
as in that of Benjamin Harrison, courts Goodyear Tire & Rubber Co. v. Chiles such evidence or permitting neither to do so,
Published in Intellectual Property Litigation, Volume 22, Number 1, Summer 2010. © 2009 American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof
may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
the court opted for the former. because they were not formed in the context may be required to produce, copies of
Then, on June 24, 2010, Magistrate of litigation and ignoring other, more recent litigation-induced settlement agreements and
Judge Love of the Eastern District of Texas agreements that were litigation-induced may any documents underlying the settlement
ruled in Software Tree, LLC v. Red Hat, Inc., indicate that the winds of change sweep- negotiations. Given ResQNet and the broad
et al. that evidence of litigation-induced ing through the patent world may blow out definition of relevance applicable to discov-
license agreements was not discoverable and soon—at least when it comes to the use of ery, licensors should enter litigation knowing
endorsed the Goodyear rule, thereby effec- litigation-induced licenses and settlement that their licensing efforts will be sought dur-
tively generating a split within the district on negotiation documents at trial. ing case preparation (and likewise, licensees
the discoverability of evidence of litigation- Magistrate Judge Everingham’s terse may expect to be the recipient of third-party
induced license agreements.10 order in Commil USA, LLC v. Cisco Systems, subpoenas). Even if the documents produced
Inc., et al. provides some confirmation of never see a courtroom, the knowledge that
Retreat from ResQNet?: Fenner and this view. Without mentioning ResQNet, a litigation opponent will ask for, and likely
IP Innovation Judge Everingham indicated that he would receive, them in discovery will have some ef-
While it appears to have altered the com- allow the defense to introduce evidence of fect on licensing and litigation conduct.
plexion of discovery, it’s much less appar- the purchase price of the patent in suit, but
ent whether ResQNet will turn out to be not “evidence of the negotiations undertaken
a mountain or molehill at trial. Departing to arrive at that price” because such evidence
from Datatreasury, Magistrate Judge Love
granted in part a motion in limine in Fenner
was “relevant, if at all, in only a remote
way,” and any such relevance “is substan-
Licensors should know
Investments, Ltd. v. Hewlett-Packard Co., et tially outweighed by the danger of unfair
al. to preclude testimony or exhibits relat- prejudice and confusion of the issues.”13 that their licensing
ing to settlement licenses entered into as a
result of prior litigation with third parties.
The court found that “the recent ResQNet
The Impact of ResQNet and Progeny
on Licensing Behavior
efforts will be sought
decision has not altered the admissibility Given the prominence of the Eastern District
of agreements entered into under the threat of Texas as a forum for patent litigation, the during case preparation.
of litigation.”11 ResQNet was distinguished rulings of this court interpreting ResQNet
on grounds that the question of the admis- will likely reverberate, whether or not they
sibility of the licenses into evidence was not are ultimately endorsed by other courts or
before the appellate court. Such licenses had the Federal Circuit. First, there is a division This knowledge may affect prelitigation
been admitted during a bench trial, negating of opinion on the discoverability of evidence licensing talks. The routine practice of a
any concern about jury confusion, and their of litigation-induced license agreements in patent holder asking a potential licensee to
admissibility was not contested on appeal. the Eastern District of Texas, Tyco stand- sign a nondisclosure agreement concern-
Moreover, the same day that Judge Ward ing for the proposition that evidence of ing any settlement discussions may now
issued his order in Tyco Healthcare, Judge litigation-induced settlements and settlement lead to second thoughts. If such settlement
Rader—a member of the panel that issued negotiation documents are discoverable in communications may properly be sought in
the per curiam opinion in ResQNet—while order to allow litigants the opportunity to discovery and possibly admitted at trial one
sitting by designation in the Eastern District determine whether settlements might be day, many prospective licensees will hesitate
of Texas, suggested in IP Innovation, LLC v. relevant to any fact issue at trial, and Red before signing away their rights to use these
Red Hat, Inc. that the Federal Circuit had not Hat standing for the opposite conclusion. documents in subsequent litigation at the
intended to use ResQNet to raze the land- Second, in cases where discovery is al- outset of prelitigation talks with a licensor
scape on the relevancy of settlement agree- lowed, while there appears at present to be a who may one day become a plaintiff.
ments in the hypothetical negotiation used to judicial willingness to consider whether such For their part, licensors may be reluctant
calculate a reasonable royalty. In IP Innova- evidence may be relevant at trial, east Texas to commit details of their negotiations to
tion, Judge Rader struck the testimony of the courts continue to be reluctant to allow such paper (or email) out of concern that such
patentee’s damages expert as unreliable. One evidence into the record at trial absent a details may come back to bite them later.
of Judge Rader’s criticisms of the expert’s showing of specific relevance on damages, To that end, licensors may increasingly turn
analysis was the exclusion of certain prior nonobviousness, marking, or some other to the use of standard form agreements, the
license agreements from consideration as issue. This reluctance may be even stronger terms of which do not vary from license to
outdated because they had occurred 10 in jury cases. license (thus greatly reducing the ability
years before the date of the hypothetical With recent case law signaling a poten- of a would-be licensee to negotiate more
negotiation. Noting the relevance of these tial shift in the landscape, parties entering favorable provisions or creative releases).
earlier agreements, Judge Rader wrote “[a]t into patent-licensing agreements would do Such an outcome may lead to more lawsuit
least two of these agreements were entered well to expect that such licenses—as well filings and longer litigation before settle-
into outside of the context of litigation and as the underlying communications—may ment, as parties conclude it is more favor-
thus [were] appropriate as touchstones for be admissible. What will the effect of this able to fight within the context of litigation
determining the appropriate royalty rate in phenomenon be on licensing behavior? than agree to an ill-fitting, one-size-fits-all
this case.”12 Judge Rader’s focus on reviving As matters currently stand, parties should form agreement.
decade-old licenses for evidentiary purposes anticipate that they will be asked for, and Continued on page 17

Published in Intellectual Property Litigation, Volume 22, Number 1, Summer 2010. © 2009 American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof
may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
Reasonably Withheld Consent in License
Agreements
By Hon-Man Lee, Lauren Korshalla, and Albert Wai-Kit Chan

I
t’s common to restrict or limit licensee the intellectual property would be seriously subjective) for disapproving a product. The
activity in a license agreement by includ- compromised, and the licensor, under this licensor could not disapprove for reasons
ing such language as “Licensee may not situation, would certainly have reasonable immaterial to the mark, its proposed use or
grant sublicenses without consent from licen- basis to withhold consent. Similarly, if the commercial potential, or reasons unrelated to
sor, which consent shall not be unreasonably licensee’s assignment or sublicense would the creator/licensor’s artistic and reputational
withheld.” However, many license agree- jeopardize the licensor’s ongoing royalty identification with the mark and ancillary
ments do not further state what the standards stream, then the licensor may reasonably products. Disapproval needs to be commu-
of reasonableness are. Hence, there remains a withhold consent. nicated, consistent with contractual speci-
question of when it’s reasonable to withhold In trademark licensing, a licensor may fications, within a reasonable time and in a
consent and when it’s not. If the licensor only reasonably withhold consent when the reasonable manner so as to let the licensee
provides consent under the condition that the licensor is exercising quality control over the rework the product to gain approval. Finally,
licensee accept certain arrangements of roy- mark. For example, a trademark holder has the reason for withholding product approval
alty sharing, is it reasonable or unreasonable? the right to control the quality of the goods could not be so preclusive as to frustrate
manufactured and sold under its trademark, the fundamental contractual assumptions
It’s Reasonable When . . . wherein the protection of the mark may be upon which the license was formed. In
One reasonable basis for a licensor to refuse lost if the trademark licensor fails to control other words, the licensor could not impose
consent is when the licensor’s consideration the quality of the licensed goods. approval standards that would effectively
for entering into the license agreement is eliminate all potential for profitable use of the
being impaired. In the Federal Circuit case trademark.
of Speedplay v. Bebop,1 the licensors and the Similarly, copyright licensors may reason-
licensee entered into an agreement wherein Copyright licensors ably withhold consent when it is based on the
the licensee could not assign its interest in the exercise of quality control over the intel-
license without the consent of the licensors. may reasonably lectual property. Although copyright holders
Under the agreement, however, the licensors’ in the United States do not possess moral
consent to an assignment by the licensee
could not “be withheld unreasonably.” The withhold consent rights, they may insist, contractually, on
approval provisions to assure quality control
court reasoned that the “[licensors’] only and high standards in the exploitation of the
reasonable basis for refusing consent would when it is based on creative work.5 In Clifford Ross, a contractual
be the impairment of their consideration for provision calling for the copyright holder’s
entering the [license agreement].”2
Speedplay raises the question of what the
quality control. participation in selecting licensing agents
and enjoining the issuance of further licenses
licensor’s considerations are for a license absent the copyright holder’s approval was
agreement. A licensor may enter into a upheld because the court concluded that
license agreement for further development or The First Circuit case of Rey v. Lafferty4 there would be irreparable harm to the future
commercialization of an intellectual property involved creator and licensor Margaret Rey’s profitability of the intellectual property and
or invention. A licensor may also grant a rejection of proposed merchandise bear- the artistic reputation of the copyright holder
license for monetary reasons. For example, ing the children’s book character Curious if the exploitation of the intellectual property
a license may be granted for the purpose of George. In Rey, the licensing contract stated continued without regard to the licensor’s
obtaining funding for continual development that licensor’s approval “shall not be unrea- high standards of quality control.6
of the invention. The court in Speedplay sonably withheld.” Rey had rejected various
recognized that an ongoing royalty stream is items for merchandising, such as pajamas, It’s Unreasonable When . . .
an example of a licensor’s consideration for a plush toys, and software. In certain instances, On the other hand, it would be unreasonable
license agreement.3 other manufacturers disengaged from propos- to withhold consent to coerce a licensee into
A licensor may reasonably withhold con- als for the manufacture of Curious George accepting certain concessions in an attempt to
sent for a sublicense or an assignment when merchandise after hearing of Rey’s harshly renegotiate the license agreement. In Orange
one of the above considerations is being jeop- worded rejections of prototypes. The court County Choppers v. Olaes Enterprises, Inc.,7
ardized. If the licensee wants to grant a sub- concluded that the rejection was reasonable the licensor granted the licensee an exclusive
license to a competitor of the licensor, then if the licensor could, at a minimum, articulate license to use the licensor’s logos, trade-
the licensor’s goal of further development of a material reason (even if the reason was marks, and controlled designs. Under the
Published in Intellectual Property Litigation, Volume 22, Number 1, Summer 2010. © 2009 American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof
may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
license, the licensee could submit proposed consent unreasonably. Absent any deficiency what is agreed in the license agreement,
designs to the licensor, and the licensor was or fraud in the original license agreement, the licensor cannot reasonably withhold
required under the license agreement to use and without any evidence that the sublicense consent.” l
reasonable efforts to notify the licensee of may jeopardize the licensor’s ongoing royalty
its approval or disapproval of any materi- stream, the licensor cannot arguably maintain Hon-Man Lee and Lauren Korshalla are
als submitted. The licensee alleged that the a reasonable basis of withholding consent. patent attorneys and Albert Wai-Kit Chan
licensor intentionally delayed approval of the Instead, the conditions put forth by the licen- is a partner at the Law Offices of Albert
licensee’s designs to force renegotiation of sor upon receiving a consent request from the Wai-Kit Chan, PLLC. They can be reached
the license agreement to obtain more money licensee are most likely conditions that are at leehm@kitchanlaw.com, korshallal@
and concessions from the licensee than that more favorable to the licensor than originally kitchanlaw.com, and akitchan@aol.com,
to which the parties had previously agreed. agreed to in the license. Thus, conditioning respectively.
The licensee claimed that it was coerced into the granting of consent on the licensee’s ac-
signing three amendments to the license to ceptance of the new licensor-friendly condi- Endnotes
limit the scope of the license in exchange tions would arguably amount to unreasonably 1. Speedplay v. Bebop, 211 F.3d 1245 (Fed.
for the licensor’s approval of its designs.8 withholding consent to coerce renegotiation Cir. 2000).
The court ruled that the licensor failed to use of the license agreement. 2. Id. at 1251-52.
reasonable effort to notify the licensee of its Furthermore, it may be advisable, from 3. Id. at 1251.
approval or disapproval when the licensor the licensee’s perspective, to include certain 4. Rey v. Lafferty, 990 F.2d 1379, 1393 (1st
withheld notice to force renegotiation of the standards of reasonableness when withhold- Cir. 1993).
license agreement.9 ing consent in the license agreement. It may 5. See Rey, 990 F.2d 1379, 1393 (1st Cir.
benefit the licensee if the agreement includes 1993), citing Clifford Ross Co. v. Nelvana,
Application language that indicates the licensor cannot Ltd., 710 F. Supp. 517 (S.D.N.Y. 1989), aff’d
Applying the above standards of reasonable- claim to have reasonably withheld consent without opinion, 883 F.2d 1022 (2d Cir. 1989).
ness to the scenario posted at the beginning unless the licensor’s considerations for 6. Clifford Ross, 710 F. Supp. at 520.
of this article, i.e., when the licensor condi- entering into the license agreement are being 7. County Choppers v. Olaes Enterprises,
tions his consent on having the licensee ac- impaired. For example, the license agreement Inc., 497 F. Supp. 2d 541 (S.D.N.Y. 2007).
cept certain arrangements of royalty sharing, might read “Unless the licensor reasonably 8. Id. at 548–49.
one can argue that the licensor has withheld believes that the sublicensee cannot fulfill 9. Id. at 559.

of the Federal Circuit’s holding play out J. Brann, a partner at Brann & Isaacson,
ResQNet in ongoing litigation. The Federal Circuit also contributed to this article and can be
Continued from page 15 has signaled that past license agreements contacted at pbrann@brannlaw.com.
must have some clear connection to the
No doubt licensors will also consider patents or technology, and at least one Endnotes
ways in which they can use such evidence district court in east Texas has interpreted 1. Rude v. Westcott, 130 U.S. 152, 164 (1889).
to their advantage down the line, as the that holding to entail that the scope of 2. Id.
plaintiffs did in Datatreasury on the issues of discovery must allow the parties to de- 3. 594 F.3d 860, 872 (Fed. Cir. 2010).
commercial success and marking. Likewise, velop evidence proving (or disproving) 4. Id.
they will consider ways in which they do the existence of such a connection through 5. 2010 WL 774878 (E.D. Tex. Mar 2, 2010).
not want to use such evidence, to avoid the a review of documents underlying prior 6. 332 F.3d 976 (6th Cir. 2003).
Abbott Labs scenario in which the plaintiffs’ license or settlement negotiations. Mean- 7. 2010 WL 774878 at *2; see also Order,
reliance on litigation-induced license agree- while, the jury is out on whether expanded Alexsam, Inc. v. Unitedhealth Group Inc., et
ments in calculating a reasonable royalty discovery will lead to increased admission al., Case No. 2:07-cv-512-CE (E.D. Tex. May
ensured that the defendant could introduce of licenses and license-related documents 26, 2010) (ordering production of settlement
those agreements in evidence at trial. Finally, at trial, and if so, for what purposes. It also negotiation documents in light of ResQNet).
if courts continue to be reluctant to admit ev- remains to be seen whether allowing par- 8. 2010 WL 903259 (E.D. Tex. Mar. 4, 2010).
idence of litigation-induced licenses at trial, ties to inquire more deeply into litigation- 9. Order, Case No. 05 C 5373 (N.D. Ill. May
patent holders may have a further incen- related settlement documents will assist 24, 2010) (slip op.).
tive to sue first and then negotiate, thereby fact-finders in tethering a reasonable 10. Mem. Op. & Order, Software Tree, LLC v.
potentially minimizing the chance that their royalty to the real value of the underlying Red Hat, Inc., et al., Case No. 6:09–cv–97 (E.D.
negotiation documents will be introduced in inventions. l Tex. June 24, 2010) (slip op.).
evidence at trial. 11. 2010 WL 1727916, *3 (E.D. Tex. Apr. 28,
David Swetnam-Burland is a partner 2010).
Conclusion and Stacy O. Stitham is an associate at 12. 2010 WL 986620, *3 (E.D. Tex. Mar. 2,
Further repercussions of ResQNet bear Brann & Isaacson, Lewiston, Maine. They 2010) (emphasis added).
watching, both inside and outside the East- may be reached at dsb@brannlaw.com and 13. Order, Case No. 2:07-cv-341-CE (E.D.
ern District of Texas, as the implications sstitham@brannlaw.com, respectively. Peter Tex. May 10, 2010) (slip op.).

Published in Intellectual Property Litigation, Volume 22, Number 1, Summer 2010. © 2009 American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof
may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
Compulsory Licenses suffered an irreparable injury; (2) that explained that although ongoing royalties
remedies available at law, such as mon- are monetary relief, they are equitable
Continued from page 1
etary damages, are inadequate to compen- relief and not “properly characterized
sate for that injury; (3) that considering the as ‘damages.’” Thus, the right to such
balance of hardships between the plaintiff relief “does not, standing alone, warrant
compensation—just because that grant is and defendant, a remedy in equity is a jury trial,” such that there is no Seventh
limited to one defendant as opposed to the warranted; and (4) that the public interest Amendment violation if a court rather
entire universe of potential infringers does would not be disserved by a permanent than a jury decides the issue. The Federal
not make it any less a license. injunction.” Circuit’s position on both these points
That being said, apart from the Federal In the wake of eBay, courts have has been the subject of some criticism by
Circuit’s reasoning for using the term grappled with applying the four-factor test commentators, but thus far there has been
“ongoing royalty” instead of “compulsory in patent cases, and in many cases, they no case law authority to the contrary, nor
license,” there is a rational basis for doing have concluded that an injunction is not has there been any attempt in the legis-
so in light of recent district court opinions appropriate in certain circumstances. In lature to change this result. Accordingly,
attempting to apply this concept. Aside most of the cases where an injunction is this holding stands, and district courts are
from a few monitoring requirements, the not granted, the court then instead orders empowered to determine whether and how
post-verdict relief granted in lieu of an an ongoing royalty. This body of law is to award an ongoing royalty in an appro-
injunction in these cases thus far typically still evolving, however, and numerous priate case.
covers little more than the amount of the questions have been raised about both the Interestingly, notwithstanding this
ongoing royalty and the royalty base to authority and the mechanism for impos- precedent, at least one judge—Judge Clark
which it is applied. Indeed, several district ing an ongoing royalty for post-verdict of the Eastern District of Texas—has taken
courts (in addition to the Federal Circuit, infringement, including: the view that it is nonetheless preferable to
particularly Chief Judge Rader) have submit the question of an ongoing royalty
strongly encouraged litigants to negoti- • The source of the court’s authority to the jury and has done so on a number of
ate their own licenses for post-verdict to grant such relief; occasions.5 In his view, an ongoing royalty
infringement precisely to address the other • Whether or not there is a Seventh should be calculated in much the same
points that are generally covered in a pat- Amendment right to a jury trial manner as a prejudgment royalty under
ent license. regarding such relief; Georgia-Pacific, so a jury should be just
As the Federal Circuit noted in Paice • The appropriate procedural mecha- as capable of awarding a post-judgment
and has been further noted by commen- nism for determining the relief; royalty as it is a prejudgment one. How-
tators, the imposition of post-verdict • The factors to be considered for as- ever, Judge Clark is mindful of the Federal
royalties by courts in patent cases is not sessing such relief regardless of the Circuit’s charge to the district court judge
new. There is precedent for such royalties procedural mechanism; to determine the ongoing royalty if the
that predates the founding of the Federal • The complete scope of the relief parties cannot agree, and thus attempts to
Circuit,2 and, as relied upon in Paice, the (e.g., the products to which the harmonize his view with the holding of the
Federal Circuit itself previously upheld royalty should be applied and/or the Federal Circuit in Paice, saying, “Because
the imposition of an ongoing royalty for scope of the terms of the license/ the parties will have an opportunity to
continued patent infringement in lieu of remedy); and confer on the issue of future damages
an injunction in Shatterproof Glass Corp. • Remedies available to address a post-verdict and before final judgment
v. Libbey-Owens Ford Co.,3 where the violation of an order of an ongoing is entered, the court’s submission of this
royalty was styled as a compulsory license royalty or compulsory license. question to the jury does not run afoul of
by the court. What is new is the frequency the Federal Court’s statement in Paice,”
with which such a mechanism is being Some, but not all, of these questions and that the parties should have the op-
used by district courts. This can be directly have been answered, at least in part, by portunity to negotiate the royalty them-
correlated to the Supreme Court’s 2006 one of three Federal Circuit decisions selves post-judgment.6 Judge Clark further
decision in eBay Inc. v. Mercexchange, since eBay, starting with Paice. In Paice, explained that “a question submitted to
LLC,4 which reversed the previously the Federal Circuit held that an award of the jury on the issue of future damages
held “general rule that courts will issue ongoing royalties has its basis in a court’s neither helps nor hurts Plaintiff’s case for
permanent injunctions against patent power to grant equitable relief in patent an injunction; it merely provides the court
infringement absent exceptional circum- cases, as delineated in Section 283 of the with a guide, if the court determines that
stances.” In eBay, the Supreme Court held Patent Act (35 U.S.C. § 283), which pro- monetary damages are appropriate either
that injunctions in patent cases are not vides that “courts [that] have jurisdiction in full or during a temporary stay.”
to be presumed, and instead, a plaintiff of cases under this title may grant injunc- Judge Clark also distinguished the
must demonstrate that it can satisfy the tions in accordance with the principles of holding in the Federal Circuit’s second
traditional four-factor test before a court equity to prevent the violation of any right case on this topic, Innogenetics, N.V. v.
may grant an injunction. Specifically, “[a] secured by patent, on such terms as the Abbott Laboratories.7 In Innogenetics,
plaintiff must demonstrate: (1) that it has court deems reasonable.” The court further the Federal Circuit held that the district
Published in Intellectual Property Litigation, Volume 22, Number 1, Summer 2010. © 2009 American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof
may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
court could not grant an injunction where ongoing royalty.” The Federal Circuit also the court’s. Another outlier is those cases in
the jury award in the case provided for an indicated that “[t]his process will also, which courts have ordered that the plaintiff
ongoing royalty payment for post-verdict presumably, allow the parties . . . the op- file a new complaint to address the post-
infringement. As the Federal Circuit portunity to negotiate their own rate prior judgment infringement. This procedure
explained, “[W]hen a patentee requests to the imposition of one by the court, as was adopted by Judge Davis of the Eastern
and receives such compensation, it can- the concurrence [by Chief Judge Rader] District of Texas in z4 Technologies, Inc.
not be heard to complain that it will be suggests.” In its final case thus far in this v. Microsoft Corp.9 in 2006, prior to the
irreparably harmed by future sales.” In area, the Federal Circuit also remanded Federal Circuit’s rulings in this area. This
Cummins-Allison, Judge Clark explained for further consideration of the ongoing procedure was more recently also adopted
that in Innogenetics, “the jury’s award of royalty rate in Amado v. Microsoft Corp. by Judge Ward in 2008 in Saffran v. Boston
future damages negated any potential for The focus in Amado was on the specific Scientific Corp.10 Similarly, in another
irreparable harm resulting from future amount of the ongoing royalty and the 2006 decision, Voda v. Cordis Corp.,11
sales.” Further, he stated that “the Plaintiff extent to which, if any, it should be higher Judge Leonard of the Western District
in Innogenetics automatically received than the prejudgment royalty rate. In this of Oklahoma severed the post-judgment
future damages based on the jury’s verdict, regard, the Federal Circuit cited with ap- damages issue from the main case so that
and according to the Federal Circuit, proval the views of Chief Judge Rader that it could remain alive as a continuing action
was already adequately compensated for he expressed in his concurrence in Paice and allow for monitoring of the ongoing
future infringement.” In contrast, under his and held that “[t]here is a fundamental dif- royalty payments.
procedure, Judge Clark also explained that ference . . . between a reasonable royalty In a number of cases since Paice and
an injunction may still be necessary even for pre-verdict infringement and damages Amado, the court has ordered the parties
if the jury provides for an amount of future for post-verdict infringement . . . because to first negotiate the post-judgment royalty
damages, and “merely because experts different economic factors are involved.” rate and held an evidentiary hearing on the
can opine on, and a jury can arrive at, a Accordingly, a different rate may be ap- matter if the parties failed to arrive at an
future royalty rate does not mean that such propriate. agreement on the rate.12 The most notable
compensation would automatically be ad- recent case to use this process is Boston
equate. Some amount of money could be Scientific Corp. v. Johnson & Johnson
calculated for any interference with prop- from the Northern District of California.
erty rights; that does not necessarily make There is currently no In that case, the court provided the parties
the amount an adequate legal remedy.” with a 60-day period in which to negoti-
Thus, in Cummins-Allison, Judge Clark
described his procedure as “efficient” and
single pattern in the ate a license agreement and then set a
schedule for briefing the issue of whether
indicated that it recognized “the vital role a permanent injunction should issue or,
of jury as fact-finding partner” while meet- cases beyond following alternatively, briefing and submitting evi-
ing all legal requirements. Indeed, in an dence as to what a reasonable royalty rate
interview in 2008, Judge Clark explained the general guidance would be.13 In 2009, after the parties were
that “having juries address the future dam- unable to agree on a license agreement, the
ages issue is a way to avoid having law-
yers prepare, and the court hear, damages
from the Federal Circuit. court held an evidentiary hearing and is-
sued an order setting the royalty rate based
testimony twice, before and after a verdict, on the evidence and arguments adduced at
saving ‘the time and the resources of the that hearing.14
court and the parties.’”8 Commentators The Federal Circuit has not opined on Even once the procedural mechanism
have opined that Judge Clark’s procedure the proper procedures and test for de- for setting the post-judgment royalty rate
is also beneficial to the extent that there re- termining an ongoing royalty, however, is determined, the question still remains as
main any lingering doubts about the right beyond the general guidance discussed to the appropriate method for setting the
to a jury trial on future damages, notwith- above. Accordingly, this area has been the rate. Imbedded in Judge Clark’s process
standing the Federal Circuit’s precedents subject of much discussion in the district of having the rate determined by the jury
in this area. court cases in this area and by commenta- is the view that an ongoing royalty should
The Federal Circuit has also provided tors. While there is some detailed guidance be set using the same Georgia-Pacific15
guidance on several of the remaining is- emerging in certain courts, there is cur- factors used in setting the prejudgment
sues relating how to determine the award, rently no single pattern in the cases beyond royalty rate. In this regard, Judge Clark
and these issues have been the focus of following, in some fashion, the general noted in Cummins-Allison that the dam-
district court decisions in this area. In guidance from the Federal Circuit on these ages analysis already assumes validity
Paice, the Federal Circuit remanded the issues. For example, as discussed above, at and infringement, but opined that “[i]t is
case “for the limited purpose of having least one judge, Judge Clark, has decided true that some factors such as the rela-
the district court reevaluate the ongo- to send the question of ongoing royalties to tive importance of the technology or the
ing royalty rate. Upon remand, the court the jury in the first instance, although even availability of a design-around may have
may take additional evidence if necessary he affirms that the parties should have a changed since the date of first infringe-
to account for any additional economic post-verdict opportunity to negotiate the ment. To the extent these were not consid-
factors arising out of the imposition of an issue and that the final decision on this is ered in the ‘book of wisdom’ analysis and
Published in Intellectual Property Litigation, Volume 22, Number 1, Summer 2010. © 2009 American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof
may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
will not be accounted for in total future parties to formulate their own licensing ngalli@feldmangale.com. Scott E. Scioli,
sales, these factors can be explained [to agreement, incorporating the terms set by an associate with Feldman Gale, P.A. in
the jurors] without a great deal of diffi- the court. As the court explained, “[i]t is Philadelphia, Pennsylvania, contributed
culty.” This approach was also followed by anticipated that, as sophisticated entities to the research in this article.
Judge Illston in the Boston Scientific case, with experience in licensing agreements,
where she utilized “the Georgia-Pacific the parties may wish to agree to more Endnotes
factors but . . . consider[ed] whether cer- comprehensive or convenient terms.” 1. 504 F.2d 1293, 1314 (Fed. Cir. 2007).
tain factors should be weighed differently Finally, in terms of enforcing the ongoing 2. See, e.g., Foster v. American Machine &
in the context of post-verdict royalties.” royalty provisions, courts have generally Foundry Co., 492 F.2d 1317, 1324 (2nd Cir.
Finally, the Georgia-Pacific factors also retained jurisdiction to enforce that portion 1974).
formed the basis for Judge Folsom’s of their judgment, such as in Finisar. 3. 758 F.2d 613, 628 (Fed. Cir. 1985).
analysis on remand in Paice,16 although 4. 547 U.S. 388 (2006).
the court noted that “[a] post-judgment, 5. E.g., Cummins-Allison Corp. v. SBM
ongoing royalty negotiation . . . is logically Co., 584 F. Supp. 2d 916 (E.D. Tex. 2008);
different from the pre-trial hypothetical
negotiation discussed in Georgia-Pacific,”
At least one court, Ariba, Inc. v. Emptoris, Inc., 567 F. Supp. 914
(E.D. Tex. 2008).
and the “changed circumstances in this
case warrant a different ongoing royalty in Finisar Corp. v. 6. Cummins-Allison, 584 F. Supp.2d at 920.
7. 512 F.3d 1363 (Fed. Cir. 2008).
rate,” than the pre-judgment royalty rate 8. Marek, Juries May Take up Future
awarded at trial. DirecTV Group, Inc., Damages in Patent Cases, Nat’l L.J. (Aug. 4,
Perhaps one of the most interesting 2008).
cases in this area is the decision of Mag-
istrate Judge Love of the Eastern District
has invited the parties 9. 434 F. Supp. 2d 437 (E.D. Tex. 2006).
10. Case No. 2:05-cv-00547-TJW (E.D.
of Texas in Creative Internet Advertising Tex. Feb. 14, 2008).
Corp. v. Yahoo! Inc.17 In that case, which to formulate their own 11. No. Civ-03-1512-L, 2006 WL 2570614
followed the pattern of allowing the parties (W.D. Okla. Sept. 5, 2006).
to negotiate a royalty rate first and then
imposing one after considering the parties’
licensing agreement, 12. E.g., Ricoh Co. v. Quanta Computer,
Inc., No. 06-cv-462-bbc, 2010 WL
submissions and utilizing “a modified 1607908 (W.D. Wis. Apr. 19, 2010); Hynix
Georgia-Pacific analysis,” like the courts incorporating the terms Semiconductor Inc. v. Rambus Inc., 609 F.
above, the court grappled with the issue Supp. 2d 951 (N.D. Cal. 2009); Telcordia
of what rate, if any, should be applied to set by the court. Tech., Inc. v. Cisco Sys., Inc., 592 F. Supp. 2d
products sold post-verdict that were modi- 727 (D. Del. 2009); but cf. Presido Components
fied from those products that had been Inc. v. American Tech. Ceramics Corp., No.
adjudged infringing. In that case, Yahoo! 08-CV-335-IEG (NLS), 2010 WL 1462757
argued that it had modified its product In the absence of additional guidance (S.D. Cal. Apr. 13, 2010) (ordering the parties
and thus ceased infringement, while the from the Federal Circuit, while there is to brief the issue of “whether the court should
plaintiff argued that the product in ques- some diversity in how courts are imple- allow them to negotiate their own license
tion was, nonetheless, still infringing. The menting the current guidance of the Fed- agreement, or whether the Court should impose
court addressed the issue as to whether eral Circuit in ordering ongoing royalties a specific amount of ‘ongoing royalty.’”).
it could determine whether the project in for post-judgment infringement in patent Also, in two cases, the courts appear to have
question was infringing. In this regard, it cases, it is clear that a reasoned analysis of simply held hearings on the appropriate rate
applied the analysis used for determin- some sort will be required to set the rate. and do not indicate whether the parties were
ing if an injunction would apply to the While the parties will generally be given given an opportunity to negotiate first. See
product, i.e., the patentee must establish little guidance from the courts for manag- Bard Peripheral Vascular, Inc. v. W.L. Gore &
“that the products for which the royalty is ing their post-verdict relationship beyond Assocs., Inc., No. CV-03-0597-PHX-MHM,
based are at least a ‘colorable variation’ the royalty rate to be applied to particular 2009 WL 920300 (D. Ariz. Mar. 31, 2009);
of the adjudicated product.” Determining products, the courts should be open to the Joyal Prods. Inc. v. Johnson Elec. Inc., Civ. A.
that the product did meet that standard, the parties agreeing to additional terms that No. 05-5172 (JAP), 2009 WL 512156 (D.N.J.
court then went on to set the appropriate would allow for the more efficient and Feb. 27, 2009).
royalty rate. effective management of the relationship. 13. 550 F. Supp. 2d 1102 (N.D. Cal. 2008).
In each of these cases, except for some Should problems arise, it is likely that the 14. No. C 02-00790 SI, 2009 WL 975424
instructions as to when payments are due parties would be able to return to the court (N.D. Cal. Apr. 9, 2009).
and whether or not there are audit rights for resolution as an enforcement of the 15. Georgia-Pacific Corp. v. U.S. Plywood
or the like, the orders from the district order. l Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970).
courts generally contain little more than 16. 609 F. Supp. 2d 620 (E.D. Tex. 2009).
setting the rate to be paid. Indeed, for this Nicole D. Galli is a partner at 17. 674 F. Supp. 2d 847 (E.D. Tex. 2009).
reason, at least one court, in Finisar Corp. Feldman Gale, P.A. in Philadelphia, 18. Case No. 1:05-cv-00264-RC (E.D. Tex.
v. DirecTV Group, Inc.,18 has invited the Pennsylvania. She may be reached at July 7, 2006).

Published in Intellectual Property Litigation, Volume 22, Number 1, Summer 2010. © 2009 American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof
may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
Covenants Not to Sue produce and sell the infringing products.7 on the scope of the covenant, the licensee/
Continued from page 1 However, TransCore maintained that the covenantee will receive an unconditioned,
covenant applied only to Mark IV and nonexclusive license authorizing all acts,
did not flow to or protect any of Mark including downstream sales and use of the
IV’s downstream customers and users.8 purchased article, both through the doc-
in Corebrace held that the right to have To address this point, the Federal Circuit trine of patent exhaustion and also poten-
a licensed product made by a third party considered whether, under the patent tially because such a covenant may divest a
is implied in licenses unless expressly exhaustion doctrine, an unconditional trial court of subject matter jurisdiction in
excluded. Together, these decisions provide covenant not to sue is an “authorization” declaratory judgment actions.13
the potential for patentees to inadvertently of the sale made by the covenantee. The
open the door to unanticipated and unen- court first looked at the nature of patent Corebrace
cumbered competition. rights, which are negative rights (i.e., the “Have made” rights give a licensee the
right to exclude others from infringing right to have a third party manufacture the
TransCore activity, not the affirmative right to make, licensed product on the licensee’s behalf,
TransCore, LP and TC License, Ltd. have made, use, import, offer for sale, or an act that would, but for the license
(collectively “TransCore”) owned certain sell), and concluded that patentees cannot agreement, constitute infringement. In
patents for automated vehicle identification grant affirmative rights to practice inven- Corebrace, the Federal Circuit affirmed the
systems.3 TransCore sued its competitor, tions because “one cannot convey what district court’s holding that “have made”
Mark IV Industries, another manufacturer one does not own.”9 Instead, a license rights are implied in licenses that entitle
of such systems, for patent infringement in merely permits an entity to engage in an the licensee to “make, use, and sell” a
2000. The parties later settled the case for activity that the patent holder has a right patented product.14
$4.5 million. In the settlement agreement, to prevent.10 Similarly, a covenant not to Corebrace had granted Star Seismic,
TransCore covenanted not to sue Mark IV sue is merely a forbearance of the ability LLC a nonexclusive license to “make,
under certain patents: “TCI hereby agrees to sue for infringement. The difference use, and sell” the licensed products, but
and covenants not to bring any demand, between the two, the court held, “is only reserved “all rights not expressly granted
claim, lawsuit or action against MARK IV one of form, not substance—both are to [Star].” Although “have made” rights
for future infringement of any [listed patent properly viewed as ‘authorizations.’” were not included in the license grant
rights].”4 Therefore, the primary issue was what language,15 Star nevertheless used third-
Several years later, TransCore sued TransCore had authorized Mark IV to do. party contractors to manufacture licensed
Electronic Transaction Consultants Corp. The settlement language provided that products for it. Corebrace sued Star for,
(ETC) in the Northern District of Texas TransCore would not “bring any demand, among other things, breaching the license
for patent infringement. ETC installed claim, lawsuit, or action against Mark by using the third-party contractors to
toll-collection systems for the Illinois IV for future infringement.” Under the make the licensed products.
State Toll Highway Authority (ISTHA), patent statute, infringement occurs when In affirming the district court’s hold-
which ISTHA had purchased from Mark an unauthorized party makes, uses, sells, ing, the Federal Circuit primarily relied
IV. TransCore asserted four patents against offers for sale, or imports the subject mat- on Carey v. United States,16 an early Court
ETC, three of which were included in ter claimed in the patent.11 Honing in on of Claims case that held that “have made”
the covenant not to sue and release found the “future infringement” wording in the rights were included in a license despite
in the TransCore-Mark IV settlement covenant not to sue, the Federal Circuit there being no express granting of such
agreement. ETC sought summary judg- concluded that “[t]his term, without rights. The court’s reliance on this case
ment on the theory that the doctrines of apparent restriction or limitation, thus was surprising because the license granted
patent exhaustion, implied license, and authorizes all acts that would otherwise in Carey was exclusive with the right to
legal estoppel barred TransCore’s suit. The be infringements: making, using, offering grant sublicenses. Under this type of grant,
district court granted ETC’s motion, not- for sale, selling, or importing.”12 Because it would be more understandable that the
ing particularly that with respect to patent this language “authorized” Mark IV to, exclusive licensee also received “have
exhaustion, the covenant would be “com- for example, sell the patented products, made” rights. However, the Corebrace
mercially worthless” if TransCore could any such sale would fall within the patent court felt that the exclusive rights in Carey
sue Mark IV’s customers.5 On appeal, the exhaustion doctrine. Thus, Mark IV’s had “no relevance” to the question of
Federal Circuit affirmed. customers could use the patented systems, whether “have made” rights were included
It is well established that the first free from any infringement liability. in the license grant in Corebrace.17 First,
unconditional sale of a patented product The point of TransCore to bear in mind the court noted that “a right to have made
that is authorized by the patent owner when drafting a settlement or license is not a sublicense.” While correct, the
exhausts the patentee’s rights over the agreement containing a covenant not to sue court ignored the practical matter that if a
downstream use, offer for sale, importa- is whether any conditions should be placed licensee has sublicensing rights, it could
tion, or resale of the patented product.6 on the scope of the covenant that the pat- sublicense its manufacturers and achieve
TransCore did not dispute that the entee conveys and, if so, the extent of those the same effect as provided with “have
covenant not to sue allowed Mark IV to conditions. Without express limitations made” rights.
Published in Intellectual Property Litigation, Volume 22, Number 1, Summer 2010. © 2009 American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof
may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
general reservation of rights clauses to
Practice Tips to Prevent the preserve for the licensor all rights not

Granting of Unintended Rights otherwise expressly granted.18 When


drafting conveyances, counsel should
Under TransCore, covenantees are “licensees” and will receive all rights provided now consider whether the “have made”
under the patent statute unless the patentee places express conditions on the cov- rights should be expressly excluded from
enant not to sue.i Under Corebrace, a license grant to “make” licensed products the license (or the covenant not to sue) or,
includes the right to “have made” unless expressly disclaimed. Finally, foundry if included, whether the patentee has been
rights may be implied if the definition of products and the granting of rights is adequately compensated for such rights.
not narrowly tailored. In view of these principles, consider the following drafting
approaches: Foundry Rights: Additional Drafting
Considerations
• Where possible, expressly limit a covenant not to sue to the actions of While “have made” rights grant the
the covenantee and expressly exclude the right to sell to prevent patent licensee the right to have its own prod-
exhaustion. ucts made by a third party under the
• Where possible, expressly exclude “have made” rights, for example, by licensed patents, foundry rights give
limiting the grant language (“The Licensor hereby grants to Licensee the the licensee the right to make or have
right to make (but not the right to have made), use and sell . . .”) or expressly made another entity’s products under the
stating in the reservation of rights clause that “[a]ny right, including without patents licensed to that other party. For
limitation, the right to have product made or methods practiced, that is not example, assume both Party A and Party
expressly stated in the grant of rights is not granted, is not be impliedly B are competitors of Party C. Party A
granted, and instead is expressly reserved solely to the licensor.”ii and C settle a dispute by entering into
• When granting the right to have products made by subcontractors, limit these an agreement whereby Party C grants
“have made” rights to only those products of the licensee, perhaps referencing Party A (either via an express license or
a product code or trademark or specifying that the products must be owned by a covenant not to sue) the right to make,
the licensee and sold by the licensee only to end-users.iii use, import, and sell products covered by
Party C’s patents. Party B, hearing that
i. TransCore, 563 F.3d at 1276. With respect to all rights being granted to covenantees Party A is now licensed, decides to do an
under covenants not to sue, the court clarified that this applied to unconditioned covenants end run around Party C and either makes
because “TransCore did not, as it could have, limit this authorization to, for example, products for Party A to sell under Party
‘making’ or ‘using.’” B’s branded name (because Party A has
ii. See Milgrim, supra note 31, at n.3(2010). the unrestricted right to “have made” and
iii. With respect to preventing “have made” rights, the court stated in Corebrace that “sell” any product covered by the licensed
although “have made” rights are inherent in licenses that grant the right to “make” a licensed patents) or gives Party A the design for
product, “[a] clear intent shown in a contract to exclude ‘have made’ rights can negate what Party B’s products and has Party A make
would otherwise be inherent.” Corebrace, 566 F.3d at 1074–75. those products, which Party B then buys
and resells to its customers (because Party
The Corebrace court also reasoned separate stick in a bundle of rights, a stick A has the unrestricted right to “make” and
that exclusivity does not affect whether that no longer separately exists as a result “sell” any product covered by the licensed
a licensee can have a product made for of the Federal Circuit’s holding: patents).
it. While it is true that both exclusive One does not typically see express
and nonexclusive licenses can grant such Because the right to “make, grants of foundry rights in license agree-
rights, in practice, it’s far more typical use, and sell” a product inherently ments, and such rights are more often
for exclusive licensees to have the right includes the right to have it made, granted unintentionally through unre-
to have products made on their behalf as “have made” rights are included in stricted license grants to make and sell
opposed to conveying such rights under the License and not excluded by the products covered by the licensed pat-
the personal nature of a nonexclusive reservation of rights clause. A grant ents.19 The danger of such broad rights is
license. This is the practice for a number of a right to “make, use, and sell” a that unless the remuneration was negoti-
of reasons, such as a licensor’s concerns product, without more, inherently ated to take this into account, unlicensed
about foundry rights, discussed below, includes a right to have a third party parties can “cash in” on the licensed
and the licensor’s reliance on the exclu- make the product. party’s rights, enjoying the immunity
sive licensee to provide the method for the licensor probably only priced for the
products to get to market. It would thus The notion that the “have made” licensee’s benefit.20 Such arrangements
be undesirable for the licensor to limit rights, unless expressly disclaimed, are circumvent the very nature of nonex-
the manner in which products enter the now part and parcel of licensees’ (in- clusive licenses, essentially transferring
stream of commerce by requiring that the cluding nonexclusive licensees’) right to the personal nature of the nonexclusive
exclusive licensee manufacture all of the make a licensed product disrupts long- license to a third party.21
products itself. Whatever the case, prior standing drafting practice that treated While one would think that such
to Corebrace, “have made” rights were a these rights as distinct and relied on activities by third parties would require
Published in Intellectual Property Litigation, Volume 22, Number 1, Summer 2010. © 2009 American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof
may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
an express sublicense, the Federal Circuit not, but because it received its chips from at *8.
has rejected such a requirement in certain HP, a licensed supplier. The message from 8. Id. TransCore wished to introduce parol
cases. For example, in Intel Corp. v. Intel is loud and clear—drafters should evidence to show that the parties intended
ULSI Sys. Tech., Inc., Intel and Hewlett- appreciate the details of the business models to exclude customers and other downstream
Packard (HP) granted nonexclusive embodied in the license agreements, users, but the district court would not consider
cross-licenses, without the right to sub- expressly state what the models mean by such evidence because the contract was
license, to each other to make, use, and clearly describing permitted activities, “unambiguous” and the covenant language was
sell any product covered by the respec- and expressly exclude what the agree- unconditioned. Id. at *11–14.
tive licensed patents.22 HP subsequently ments are not intended to permit. Doing 9. TransCore, 563 F.3d at 1275.
entered into an agreement with ULSI, a so would go a long way in avoiding com- 10. Id. at 1276 (citing W. Elec. Co. v. Pacent
competitor of Intel’s, whereby HP manu- ments such as those delivered by the Intel Reproducer Corp., 42 F.2d 116, 118 (2d Cir.
factured coprocessors for ULSI, using the court: “While Intel may not in retrospect 1930)).
design specifications provided by ULSI, be pleased with the deal that it made in 11. 35 U.S.C. § 271(a).
and ULSI resold these as ULSI products. permitting HP to make unrestricted sales, 12. TransCore, 563 F.3d at 1276.
Intel sued ULSI for making, selling, and it nevertheless granted HP that right in 13. A covenant not to sue eliminates any
inducing others to make, use, and sell the 1983, presumably for consideration it case or controversy between the parties. The
allegedly infringing ULSI coprocessor. believed to be of value at that time. It can- question of how far that covenant not to sue
ULSI argued that HP was permitted to act not now renege on that grant to avoid its extends, however, is an interesting one. A recent
as a foundry under the license agreement consequences.”23 Federal Circuit decision, Dow Jones & Co.,
from Intel, and that HP’s sale of ULSI’s Inc. v. Ablaise Ltd., 2009-1524 (Fed. Cir. May
coprocessors to ULSI constituted a “first Conclusion 28, 2010) addressed this issue in terms of a
sale,” and therefore extinguished Intel’s Drafting settlement and license agree- covenantee’s affiliate. In view of TransCore,
rights to those products. ments in the wake of the Federal Circuit’s it is likely that this issue may also arise with
On appeal, Intel argued that HP merely decisions regarding covenants not to sue, respect to customers of covenantees.
provided “fabrication services” to ULSI “have made” rights, and foundry rights 14. Corebrace, 566 F.3d at 1070.
and did not sell any products. However, require more express articulation in agree- 15. Although the license did, somewhat
the Federal Circuit held that the licensed ment language than ever before. While past confusingly, include a statement that Star
seller of a patented product need not own agreement language may be tempting to would own improvements made by third-party
the intellectual property rights to a product use in terms of efficiency and familiarity, contractors, the grant language itself did not
in order for there to be a first sale. The such language is unlikely to address these permit such third-party contractors. Id.
court further noted that Intel’s inability new developments in case law. At a mini- 16. 326 F.2d 975 (Ct. Cl. 1964).
to enforce its patent rights was of its own mum, the implications of each exclusion, 17. Corebrace, 566 F.3d at 1074.
making: restriction, and reservation of patent rights 18. Roger M. Milgrim, 2–15 Milgrim on
contained in any settlement or license Licensing § 15.13, n.3 (2010).
To the extent that Intel had a pat- agreement must be viewed critically and 19. Brunsvold, Brian G. et al., Drafting
ent covering the chips, HP’s con- their application understood fully. l Patent License Agreements, § 3.06 (“A
ceded right to sell the chips deprives foundry agreement is not a type of license
Intel of any claim of infringement, Donald W. Rupert is a partner at intentionally granted by a licensor; it is more
as long as HP sold the chips. If it Marshall, Gerstein & Borun, LLP, the result of inattention to the consequences of a
had not granted that license or if the Chicago, IL. He may be reached at broad, unrestricted license.”).
license had been limited in some drupert@marshallip.com. Gina M. 20. Amber L. Hatfield, Patent Exhaustion,
relevant way, that would be a differ- Bicknell is an associate at Marshall, Implied Licenses, and Have-Made Rights:
ent case from the one before us. Intel Gerstein & Borun, LLP, Chicago, IL. Gold Mines or Mine Fields?, Comp. L. Rev. &
might thereby have retained its right She may be reached at gbicknell@ Tech. J. 1, 9 (2000) (“The development of the
to proceed against those who entered marshallip.com exhaustion doctrine has been most notable in its
into foundry agreements such as the application to foundry arrangements, because
present one. there, the opportunity most neatly presents itself
Endnotes for unlicensed third parties to gain the benefits
The Federal Circuit also rejected 1. 563 F.3d 1271 (Fed. Cir. 2009). of the underlying license agreement”).
Intel’s argument that HP’s making mi- 2. 566 F.3d 1069 (Fed. Cir. 2009). 21. Regarding the personal nature of
croprocessors for ULSI constituted an un- 3. TransCore, 563 F.3d at 1273. nonexclusive licenses, see TransCore, 563 F.3d
authorized sublicense. The Federal Circuit 4. Id. (emphasis added) at 1276 (collecting cases).
found that HP did not grant a sublicense, 5. TransCore, LP v. Electronic Transaction 22. Intel Corp. v. ULSI Sys. Tech., Inc., 995
but rather sold a product designed by its Consultants Corp., No. 3:05CV2316K, 2008 F.2d 1566, 1567 (Fed. Cir. 1993).
purchaser (ULSI) and that ULSI did not U.S. Dist. LEXIS 41812, at *16 (N.D. Tex. May 23. Id. See Hatfield, supra note 33, at 12
need a sublicense to provide such a design 22, 2008). (discussing the “vigorous” dissent, where
to HP. Therefore, ULSI was immune from 6. Quanta Computer, Inc. v .LG Electronics, Judge Plager, joined by Judge Rader and
claims of patent infringement by Intel not Inc., 128 S. Ct. 2109, 2115 (2008). Judge Newman, raised public policy concerns
because it was a sublicensee, which it was 7. TransCore, 2008 U.S. Dist. LEXIS 41812, regarding immunizing third-party products).

Published in Intellectual Property Litigation, Volume 22, Number 1, Summer 2010. © 2009 American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof
may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
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In This Issue...
Current Law on Compulsory Licenses for Post-Verdict Patent
Infringement
By Nicole D. Galli.................................................................................................... 1

Covenants Not to Sue In Light of Federal Circuit Decisions


By Donald W. Rupert and Gina M. Bicknell............................................................ 1

Licensing Your Brand in China: Guidelines for Brand Owners


By Marc Lieberstein and Tywanda Harris Lord....................................................... 3

How to Avoid Licensing Disputes


By Michele M. Riley and Debora R. Stewart........................................................... 8

Licensing Disputes and Insolvency in the United States and the United
Kingdom
By Matthew E. Hoffman, Gregory J. Urbanchuk, Kenneth L. Dorsney,
and James R. Tumbridge..................................................................................... 10

ResQNet: Rescuer or Wrecking Ball in Patent-Licensing Negotiations?


By David Swetnam-Burland and Stacy O. Stitham............................................... 14

Reasonably Withheld Consent in License Agreements


By Hon-Man Lee, Lauren Korshalla, and Albert Wai-Kit Chan.............................. 16

Published in Intellectual Property Litigation, Volume 22, Number 1, Summer 2010. © 2009 American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof
may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.