Licensing Intellectual Property

As a further commentary on questions about patent exhaustion:

Sample Facts: XYZ holds a patent for a machine that makes widgets. Every year it manufactures 2 or 3 of these machines for a wholly-owned subsidiary which manufactures widgets. It has, however, been unable to increase its market share of widgets sufficiently to recover its costs of development of the patented machine. It decides, therefore, to either sell the machine to ABC or to license the patent to ABC, ABC is in the business of manufacturing widgets for sale both in the United States and in foreign countries

If XYZ sells the machine to ABC, unless that sale is made under a limiting license, ABC could make whatever use of the machine it wishes, but could not duplicate the machine. Once the machine is sold to ABC, the doctrine of patent exhaustion would preclude a suit against ABC arguing that its use infringed XYZ’s patent. However, if the license states, for example, that ABC could not use the machine to manufacture widgets other contract with other widget sellers, XYZ could argue, in addition to a claim for breach of contract, that ABC was infringing XYZ’s patent on the theory that they were practicing XYZ’s patent with XYZ’s consent.

What we learned from the cases is that the line between licenses which prevent a finding of patent exhaustion and licenses which leave patent exhaustion in effect but give rise to a claim for breach of contract is somewhat indistinct. The consequences for our client of this observation are not trivial. If there is no patent exhaustion and if a claim for infringement will lie against ABC, we have a far better chance of being awarded a preliminary injunction and we will not have to prove damages to get a damage award against ABC. If our claim lies in contract, we may well have to go to trial (if there are any factual issues in dispute – including proof of the intentions of the contracting parties) and our damages will be measured by expectation damage. That might require us to prove the the manufacturing of widgets for other widget sellers resulted in a loss of profits XYZ would otherwise have made from selling widgets.

XYZ’s alternative – licensing the patent to ABC so that ABC could make the patented machine – does not raise the patent exhaustion problem if it contains limitations on the use of the license. The license could, for example, say that ABC could only make use of the license to make copies of the widget-making machine for its own production of widgets. If ABC then tried to sub-license the patent or to make instances of the widget making machines for sale to other widget makers, a court would clearly find that ABC was infringing XYZ’s patent. However a more difficult question could be raised about acting as a “foundry” for others – that is, manufacturing widgets for sale to other widget manufacturers. Our proposed license would, of course, not authorize such conduct, but the question might be whether the doctrine of patent exhaustion precluded an infringement action against ABC and limits XYZ to a breach of contract claim.

Moral: (1) make the limitations of the license clear and include them in the grant clause; (2) the reach of the doctrine of patent exhaustion remains unclear and therefore in a litigation situation one should claim both infringement and breach of contract.

Use the “comments” link at the bottom of this post to ask questions and make comments about the contents of Chapter 7.

A number of the questions raise issues about the grant clause. That term is used to identify the “action” clause in the license – it is the clause that states what right are being granted to the licensee by the licensor. The grant clause identifies which of the rights of the intellectual property holder the licensee is being permitted to use without infringing the intellectual property rights of the owner. Think of it this way. I make a contract with a plumber to come in to my house and fix the sink in my bathroom. I arrange for my neighbor to open the door for the plumber. The plumber, without our contract, would be trespassing if he entered my house. Our contract permits him to enter my house and walk to the bathroom to fix the sink. If the plumber comes in to my house and goes into my living room, the plumber is trespassing. Why is it a trespass to go to my living room when it is not a trespass to go to my bathroom? Obviously because permission to come on to my property was limited to the area between the front door and the bathroom. If I license someone to make use of my software, and do not limit which of the rights of a copyright owner I am permitting my licensee to use, the licensee can make copies of the software, can incorporate my software in their own projects, can sell copies of my software, and can exercise any of the other powers of a copyright holder – not because they are the copyright holder, which they are not. They are a licensee and I have not identified which of my copyright rights I am licensing. Maybe I could persuade a court that the license was more limited, but that is a risk no sensible person (or good lawyer) would undertake. I probably am authorizing my licensee to copy my software to their computer’s hard drive and to employ the software in their work (or play). I probably am not authorizing them to make copies to distribute to their friends and I probably am not authorizing them to combine my code into their own code nor to alter my code. But if I want the license to be limited in that fashion, I must say so – in the grant clause.

Of course the problem that we saw in a number of cases is that the licensor and licensee may not foresee other possible uses of the intellectual property being licensed. What is preferable is to limit the license narrowly to the known uses to preclude a court, via “interpretation” from deciding that the unforeseen use was intended to be licensed, an understanding which would have to be derived from some general language in the grant clause. Of course that may not be negotiable and, as always in contract negotiations, in order to come to agreement, the parties may include nonspecific language. If you as an attorney draft such general language that both parties can agree upon, you need to advise your client about the possibility that the language may be used by a court to include in the license a use of the intellectual property which was not foreseen by either of the parties to the license. The problem of the unknowable future can arise in all contracting of course, But it is most difficult in long-term contracts, and licenses of intellectual property are most frequently long-term arrangements.

During class, I did make one other more particular statement about grant clauses – and that was based on the Microsoft/Apple license case. I said, and I believe this is good advice, do not depend upon other provisions in a license to be the basis for limiting the rights which are otherwise included in the grant clause. If the license is to be limited, those limits should be part of the description of what is granted – in the grant clause itself.

Professor Kalodner

Several of the questions ask not about licensing but about assignment. Our focus, as the name of the course suggests, is on licensing and not on assignment. It is for that reason that we are not, in general, talking about exclusive licenses because these are, in truth more like assignments of the intellectual property and not licenses. As assignment is, of course, an alienation to another of the intellectual property right. If you are the patent holder or owner of a copyright or trademark, you can assign them (either as a gift or as a sale) to another person who will then have all the rights and privileges of the owner of the intellectual property. These transactions are not within the scope of this course. We are concerned with the practice of non-exclusive licensing of intellectual property. In non-exclusive licensing, the owner of that property is not alienating ownership, they are instead permitting a use of their intellectual property which would otherwise be prohibited by anyone other than you. What use you are permitting is, of course, dependent upon the language of the grant clause. The owner of the intellectual property is free to license others to use in some fashion their intellectual property.

There is certainly law surrounding assignments of intellectual property and similar but not identical law on exclusive licensing. The latter is included in our casebook in Chapter 4 which we omitted. If you would like to know more about both assignment and exclusive license, you may wish to read the introductory page and a half to Chapter 4.

Professor Kalodner

This blog entry consists of the questions on chapters 5 and 6 that I received from class members. Not surprisingly, there are a few overlapping questions. My plan is to set out the questions first and then, in subsequent blogs, I will do the best I can to respond. The responses will come piecemeal over the next four or five days. Although I have not tried to organize the questions, you will notice that the substantive questions mostly are in the areas of interpretation of licenses of intellectual property, assignment of intellectual property rights, when the doctrines of first sale and patent exhaustion become applicable and how do courts cope with conflicting claims about matters that are not specifically dealt with in the licenses (this includes, among other things, changes in technology unanticipated or at least not expressly dealt with in the license agreement). A few (very few) of the substantive questions are really beyond the scope of this course. There are also questions and comments which deal with what we cover in class, what I want you to learn, and teaching methodology. I will, of course, respond to those questions as well.

1. What intellectual property rights can and can’t be assigned?

2. What rules govern the interpretation of the contract/grant clause?

3. When should the Bartsch test (reasonable and foreseeable outcomes should be put into agreement) be used? (The questioner is referring to the case of Bartsch v. Metro-Goldwyn-Mayer discussed in Boosey & Hawkes Music Publishers v The Walt Disney Company, Casebook page 226)

5. Does the bona fide purchaser defense apply to exclusive licenses? I know this defense doesn’t apply to non-exclusive licenses.

6. Could you please review the differences between an implied-in-fact contract and an implied-in-law contract and why this distinction is important for intellectual property considerations.

7. Could you please review the law regarding the assignability of patents.

8. One of the main questions I have is on First Sale and Patent Exhaustion. I understand their basic purpose and their effect, but the technological background and computer-based facts of the cases make it hard to completely grasp the elements of each doctrine. If there was some way to explain the elements of the first sale and patent exhaustion doctrines that would be extremely helpful .

To expand on my first question, in regard to Quanta, I am still slightly confused on precisely what language in the agreement triggered the first sale doctrine. Further, it would be helpful to know or see more example of language that triggers the first sale doctrine and patent exhaustion.

With Chapter 5, I have a similar question about the granting clauses. I understand their effect, but an further explanation, maybe in a more theoretical sense, of its framework and elements would be helpful.

9. a)  Chapter 5, Section III:  Changing Technology and Context.  Having been in the business for a number of years now, I’ve seen a lot of changes in technology.  When I first started out, nobody “normal” used the Internet, and the WWW, HTTP, and HTML really didn’t exist.  I helped put the first web server up in the state of Oregon, and one of the first few hundred on the net.  Technology changes all the time, and while I am in support of open standards, you have to feed yourself somehow.  I’m interested in preventative measures in contract drafting to retain control of “intellectual property” so that I can feed myself off my inventions.  How do I account for the fact that my code may be useful in ways that I didn’t imagine?

b)  Chapter 6, Section III:  First Sale.  The first sale doctrine has been floating around the net among technical professionals for a while now, and I think there are a lot of misconceptions.  Given that software is licensed, but is generally sold like any other widget, I think there’s a lot of tension in how the first sale doctrine operates with software.  I think that the original rulings that copying a  piece of software from permanent media into memory was making a “copy” for use of copyright law was flawed, and has cause a lot of the issues, but with regards to first sale, I just don’t see going down to buy a copy of Halo 3 as any different than going down to buy a copy of Tom Clancy’s “Red Storm Rising” or a copy of The Beatles’ “Abby Road.”  How has software gotten to be “special” and why?  Are music and books becoming more like software with regards to the law (I think probably yes), and is this a good or a bad thing?

10. I have more a request about approach to material rather than what substantive material I’d like to cover.  I would like to do a couple simulations — even if its outside class, not-required work. Although, for substantive material, I would like to stick to copyrightable subject matter and trademarks.  Sorry this isn’t much help — I guess I defer to my peers.

11. Patent Exhaustion/ First-Sale – what triggers it exactly?

Can we walk through a hypothetical in detail to look at which point the patent exhaustion kicks in.  I’m confused especially where the patent owner provides a license to someone who has the freedom to then sell the item, and whether they’re selling it as a sublicense (no patent exhaustion/first-sale – i.e. Adobe I think) or whether they’re selling it outright (patent exhaustion – ULSI).

Also, what triggers patent exhaustion when someone sells a component part that will then be turned into something using the patented process, like in so many of these computer cases?  I sort of understand the lens case, but then when they extrapolate that into other areas I kind of get lost, although this also borders on implied license questions.

Overall I guess my question is:  is there an analytical framework that we can work through with one of these questions in order to at least understand the arguments on both sides if not reach a conclusion.  Ideally I imagine a framework that looks at the relationship between the owner of the copyright/patent as compared to the licensee, then the relationship between the licensee and the sublicensee and what issues to look at in relation to each stage of the relationship, identifying where along this process the doctrine of patent exhaustion may or may not be triggered based on the determination of a given issue.

12. I was wondering a bit about the issue of patent exhaustion, as it applies to process/method patents.  Maybe I just missed it, but I’m not sure how a process can be “exhausted” like an actual item can.

13. You have imparted various practical tips for drafting agreements (i.e. never refer back to anything preceding in the agreement – be self-containing and specific, never including “these” and “the above-listed” (from the Apple Computer case on page 204)). What other practical advice have you for us regarding drafting (or, any other issues)?

In the last couple classes, we have debated issues about which body of law to apply when problems arise between licensor and licensee.  As an attorney, it seems prudent to avoid these issues, since these issues seem very prevalent. What preventative steps can be made to better facilitate these legal issues?  Would it be wise for parties of a contract to make a provision in their contract which specifies which body of law should be used if certain issues arise, similar to a provision about choice of jurisdiction?

~mc