The facts below will be the subject of the first question on the Licensing of Intellectual Property Exam. This question will represent 60% of the final examination grade. The question you need to address will be set out in a final paragraph that is not included below. There will be one additional question on the examination which will also be based, in part, on these facts.

C (Client) has developed a specialized handheld computing device which can translate from English to Spanish and Spanish to English. It operates both with text input and voice input and in either mode can respond either in text or in voice, at the option of the user. The voice output can either be from sounds sampled from the user or from a male or female voice at the user’s option. C has patented the device and has a copyright on the software. C calls the hardware device “MobileTranslingue” and the software “Translingue.” Both names are registered trademarks. The voice recognition part of the software makes use of a patent held by VX Corporation which has expressed a willingness to license C for the use of its patent at a price not yet discussed by C and VX. C’s device could be configured without voice recognition (that is, the voice input could be eliminated) so as to avoid VX’s patent.  C knows of no other patent that would be infringed by its device. C is continuing development work on the software with special emphasis on including other languages. C is nearing completion of work on French, German and Italian, but work on Asian and Eastern European languages has not even begun. This work requires more resources than C can presently afford, but there is no particular technological challenge in adding other languages. C notes, however, that adding other languages, or making any other changes in the software, requires a 12 “word” pass phrase which, at this moment, is only known to C and to a programmer who works with C and who has signed a nondisclosure and confidentiality agreement.

C’s original business plan was to manufacture the device and offer it for sale to end users and to electronics distributors. After investigating the cost of such an undertaking, C made a fundamental change in the business plan. This new business plan called for licensing the device patent and the software copyright to other companies on a nonexclusive basis. The plan calls for licensing either both the device and the software or licensing just the software. C believes that some software companies could be interested in adapting the software to other hardware including desktop and laptop computers and to mobile devices like mp3 players and mobile phones. Adaptation of the software would be necessary because at the present time the software is designed only to operate on C’s patented device. C does not anticipate any licensee expressing interest in licensing the device patent without also licensing the software.

In the initial, now discarded, business plan in which C was contemplating manufacturing and distributing the device and software, C had planned to provide these devices to high schools and colleges without charge for language instruction courses. C would still like to achieve this result, but is uncertain how to accomplish it in the context of the revised business plan to license others to manufacture the hardware and to distribute the software. He has considered the possibility of a free download of the software if it were modified to operate on Windows or Macintosh based computers.

C’s initial conversations with a number of potential licensees have led C to conclude that interest in both the hardware and software is substantial, but that all potential licensees believed that the addition of other languages would be critical to the device becoming an important product. While some of these potential licensees expressed modest interest in the device and software without the voice input capability, most believed that voice input would be critical to their interest in becoming licensees.

1. Identify the provisions which relate to the topics we have discussed during this course and

2. Form a view about the probable effectiveness of each of these provisions in the accomplishment of its apparent goal.

2. Do the licenses effectively create a contract?

3. What terms are present regarding warranties?

4. How to the licenses deal with patent claims?

5. What restrictions are placed on the licensee regarding use of the licensed software in its own business?

6. How to the licenses cover modifications by the licensee?

7. What restrictions exist on redistribution?

8. What effect do the license terms have on the licensee’s own software blended or included with the original software?

• Raymond T. Nimmer and Jeff Dodd, Modern Licensing Law (West 2005)
• Jay Dratler, Licensing of Intellectual Property (1999)
• Roger Milgrim, Milgrim on Licensing (1999)

Of these, the Nimmer treatise, as you might guess, bears the closest relationship to our casebook.

Professor Kalodner

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.

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

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