Posts Tagged: "IP Licensing"

It continually amazes me that many business folks who negotiate tons of IP license agreements, fail to understand the difference between covenants, representations, and warranties that are “standard” in many such agreements.  Well, that is not too surprising.  What is very surprising, however, is that many of their lawyers fail to appreciate the differences as well!  Many think the terms are synonymous and thus use them interchangeably. They are not.  So, for those of you tired of faking the funk, here is some (either fresh or refresher) Contracts 101!

Swedish multinational telecommunications company Ericsson and South Korean consumer electronics firm LG Electronics announced that they had entered into a global licensing agreement to cross-license patent portfolios held by both companies. The patents in these portfolios include standard-essential patents (SEPs) related to various cellular technologies, including those related to second generation (2G), third generation (3G) and fourth generation (4G) cellular standards.

A group of 16 leaders from politically conservative institutions sent a letter addressed to President Donald Trump lauding the Trump Administration’s decision last summer to initiate an investigation into Chinese trade practices regarding intellectual property. The investigation, authorized under Section 301 of the Trade Act of 1974, was aimed at identifying instances where U.S. technologies have been forcibly transferred to Chinese entities as a cost of entering the Chinese domestic market as a foreign entity… The recent letter to President Trump from conservative leaders is the latest indication that right-leaning institutions and think tanks have been more engaged with the debate surrounding the current U.S. intellectual property system.

Transfer pricing refers to the prices charged for goods, services, and intellectual property (IP) between or among legal entities of a corporation, including a parent company and its domestic and foreign subsidiaries and other controlled entities (each entity a “Taxpayer”)… Many transfer pricing analyses are nuanced in nature, relying upon datasets, models, computations, comparisons, assumptions, and interpretations. When controlled entities are domiciled in respective different jurisdictions, multiple transfer pricing systems may apply. Transfer pricing determinations may substantially impact Taxpayers’ tax burden and profitability. In other words, though challenging to perform, transfer pricing analyses offer opportunities to obtain more favorable tax treatment.

Concerns about the ability of academic institutions to keep contributing to the U.S. innovation economy go well beyond federal funding stagnation according to the recent AUTM survey. In an executive summary section entitled The Perils of Eroding Patent Rights, AUTM notes that a slight decrease in options and exclusive license agreements compared to the number of non-exclusive license agreements could be due to fears that licensing companies have over protecting the intellectual property under the current iteration of the U.S. patent system. In 2016, option agreements were down year-over-year by 7 percent while exclusive licenses dropped 2.1 percent. Non-exclusive license totals, however, rose by 2.1 percent to 4,201 such license agreements in 2016. A sharp increase in startups ceasing business activity, up 37.4 percent to a total of 331 such startups, is another “ominous trend” which AUTM notes is likely attributable to eroding patent rights.

A cross-licensing patent agreement is a contract between at least two parties that grants mutual rights to both parties’ intellectual property. The agreement may be a private one between two specific companies or a small consortium of companies. Or it may be a public agreement such as a patent pool, in which IP management is shared amongst a relatively large group of patent holders who share patents. Patent pools are typically industry-based, and companies active in the sector are free to join the pool.

Globally, a total of 3.1 million patent applications were filed with patent offices worldwide during 2016, an increase of 8.3 percent over 2015’s filing numbers and the seventh straight year in which saw a year-over-year increase in global patent application filings. About 1.3 million patent applications were filed with China’s State Intellectual Property Office (SIPO), a record number of patent applications received by any patent office in a single year. China’s 2016 patent application total is greater than the combined total of patent applications filed in 2016 in the United States (605,571), Japan (318,381), South Korea (208,830) and Europe (159,358). These five jurisdictions accounted for 84 percent of all patent applications filed during 2016.

The clear consensus seems to be that the patent licensing market is not dead, but that the U.S. market is in decline and due to a weakening of patent rights capital will go elsewhere.

Patent monetization has become nearly impossible for middle-market technology companies without engaging in some level of legal action. Management teams have consequently shied away from pursuing licensing opportunities, even when the revenue potential of a company’s intellectual property is compelling. While traditional debt and equity investors have an aversion to patent monetization stories, there are specialized investors willing to underwrite capital raises aimed at financing licensing revenue initiatives. By structuring these financings in a way that isolates monetization risk to the patent investor, companies can pursue licensing initiatives that have the potential to generate significant residual value for all stakeholders in the capital stack. In addition to capital, patent investors bring monetization expertise that can play a critical role in the success of a licensing revenue strategy… In many contexts, licensing revenues will only persist so long as the underlying patents remain valid. Increasingly, however, licensees and strategic third parties seek to invalidate patents in Inter Partes Review, rather than continue to pay or renew patent licenses. The uncertainty of future revenue streams further justifies financing structures that ameliorate such risk.

Licensing a product instead of selling it may also be a tool for avoiding international patent exhaustion. It is common to distribute software via license, and this might avoid international exhaustion, although it will not work for all products. For example, licensing a drug makes little sense. However, re-importation of a drug would be regulated by the FDA, and the conditions and chain of control of drugs might mitigate some of the international exhaustion issues there. As such, many companies are evaluating the extent of the decision on international exhaustion and how it affects their industries. Since companies have thousands of contracts already in place and the parties will have to reevaluate their positions going forward, this is causing mass confusion and restructuring of contracts and relationships.

Today (TTOs) are increasingly being run by professionals who are experienced in startups, licensing, monetizing and have tremendous depth of technical knowledge in a variety of fields. But they are all waging a losing battle in an industry where 73% of the offices are losing money and an additional 16% just breakeven. It is not because of the efficiency of these offices, it is because of the underlying business model… But the impact of technology transfer on the US economy has been enormous. Since 1980 more than 5,000 startups have been created. From 1996-2013 technology transfer has contributed $518 billion on the US gross domestic product, and $1.1 trillion on the US gross industrial output.

As businesses rapidly outsource their IT functions to the cloud, customers seeking cloud computing or cloud services must understand the risks, especially when sensitive, regulated or confidential data is stored in the cloud. Sensitive data carries business risk and may be subject to a host of legal and regulatory requirements. Cloud service agreements usually are based on the cloud services provider’s standard form agreement… The customer must read the indemnification terms closely, not just for the explicit language in the agreement, but for what the customer is really getting from the cloud services supplier and whether the indemnification terms will be of any help to the customer’s business if sued by a third party.

The art of preventive negotiation in a license agreement is not practiced solely by means of pen and paper (or word processor); but instead, starts much earlier. The care and attention devoted to the earliest stages of a deal are highly worthwhile. A friend and fellow LES member is fond of saying: “No deal without a meal.” This is emblematic of the fact that a license agreement is no more than an attempt to put in writing what the parties have agreed they are desirous of achieving, and how they propose allocating rights and responsibilities to achieve those ends. Trust is an essential component, and this is built up over time… The term sheet should be focused only on the major terms of consequence. It should not descend to tactics and operations or else it runs the risk of invading the rightful province of detailed negotiation and drafting of the agreement itself, and a needless redundancy. Tactical details are for later, when the investment is clearly justified. Likewise, premature focus on the tactical raises the risk that negotiation of the ultimate agreement becomes a rehash of the term sheet, which risks not only duplication of effort, but inconsistency, misunderstanding, and deviation from the strategic objectives underlying the alliance.

“The key ingredient needed for the prisoner’s dilemma to work its destructive magic is a lack of transparency between the parties involved,” Siino writes. The article goes on to discuss how the lack of transparency in patent licensing transactions is disrupting the the patent marketplace, and threatens “to break licensing’s virtuous circle of innovation leading to commercialisation, which in turn funds more innovation.”