IP License Agreements: General Contract Provisions

Lexis Practice Advisor

IP License Agreements:

General Contract Provisions

A Lexis Practice Advisor® Practice Note by Michael J. Kasdan, Wiggin and Dana LLP

Michael J. Kasdan

Wiggin and Dana LLP

Numerous provisions common in most agreements are

included in a carefully-drafted and complete license of

intellectual property. These are discussed briefly below.

Notice

The notice provision is a straight forward concept. In

the event of an issue under the agreement—whether it

is a change in ownership, the spinoff of a subsidiary, or a

suspected breach, for example —the parties must be able

to get in touch with one another. The term of a license

agreement may run for many years, and, in the case of

a lump sum payment, the parties may not have had any

communication since execution.

The notice provision provides the “to whom” and “how” of

communicating with the other party. The clause specifies how

legal notice may be accomplished and identifies the complete

contact information for a trusted recipient on each side. As a

backup, the parties should also list their outside counsel and

require that a copy also be sent to that counsel.

Confidentiality

In many cases, both sides to an agreement want the details

of the agreement to remain confidential. However, there are

situations where one side is eager to publicize the details of

the agreement while the other is not. For example, in a patent

license, a non-practicing entity (i.e., a patent holder that is in

the business of licensing patents rather than practicing the

underlying inventions) with an ongoing licensing program

may be eager to announce that it has signed a marquee

licensee (e.g., Microsoft, Apple, Toyota), while that licensee

would just as soon have no one know, particularly the non-

practicing entities of the world or competitors. Parties should

consider their goals during negotiations and be explicit in the

agreement. An agreement will not be considered confidential

unless it contains a clause stating that it should be treated as

such.

A standard confidentiality clause begins with the broad rule

that unless otherwise provided, the contents and existence of

the agreement remain confidential:

“The Parties shall retain as confidential and shall not

disclose to any third party the terms and conditions of

this Agreement except as provided herein.”

Standard exceptions to the obligation to maintain

confidentiality are described below:

1. Parties should be able to make limited disclosures in

response to a subpoena or court order, if the other parties

are provided with sufficient prior notice of the subpoena or

order to give an opportunity to move for a protective order.

2. Parties should be able to make limited disclosures

in connection with due diligence disclosures related to

acquisitions, divestitures, mergers, etc., so long as such

disclosures are protected by a written non-disclosure

agreement. Disclosure of other proprietary and privileged

documents should not be permitted.

3. Parties should be able to make disclosures to lawyers,

accountants, advisors, etc. who are subject to contractual or

professional obligations of confidentiality.

4. Any other disclosures otherwise agreed upon in writing

by the parties.

Where one party desires publicity and the other does not,

the parties may compromise with a limited disclosure of

information. One option is a press release that requires the

advance written consent of the other parties. Another is for

the parties to agree to specific language of a press release,

as set forth in an appendix or exhibit to the agreement.

Alternatively, the parties can explicitly permit limited

disclosure of certain information, as follows:

“Notwithstanding the prior paragraph, each Party may

inform any third party that the Parties have settled the

lawsuit between them and that licensee is licensed under

the Licensed Assets, without disclosing other terms or

conditions of this Agreement.”

This allows the licensee to use the existence of the license

as a tool in negotiations with third parties or disclose it

to customers or suppliers without requiring repeated

negotiation with the licensee over the disclosure.

Where the parties have exchanged technical or business

information or sensitive financials not disclosed in the

agreement, confidentiality concerns may go beyond the

content of the agreement, and the parties may wish to

include language to address this aspect of confidentiality as

well.

“All Parties hereto, and all those acting in concert or

privity therewith or otherwise affiliated in any way with

one or more of them, shall retain as confidential all non-

public information it learned or acquired in connection

with this Agreement.”

Severability/Survival Clause

Severability is not a concept that is unique to intellectual

property licensing. A severability clause provides that the

illegality or unenforceability of one paragraph, provision

or part of the agreement does not invalidate the entire

agreement.

Commonly, the severability clause limits survival of the

remainder of the agreement to situations where the

agreement is not materially altered by the removal of the

offending provision(s). This gives the parties some comfort

that the agreement would not be canceled outright if,

for example, the grant back clause or promise to cease

infringement were found unenforceable.

In more complex agreements, the parties may want to specify

what procedures will be taken in the event that the stricken

provision causes a material change, such as a renegotiation of

the unenforceable provision.

If the secondary negotiations to replace the stricken

provision(s) are unsuccessful, the party most impacted by the

material change may want the right to terminate the portions

of the agreement that have been materially impacted, and

may include language to that effect.

The second and third layers to the severability clause may

be unnecessary depending on the nature of the agreement,

the course of dealing between the parties, and their business

relationship. Nevertheless, in negotiating more complex

agreements with higher stakes, parties will want to consider

the worst-case scenario.

The survival clause specifically sets forth the sections of the

agreement that will survive the termination of the agreement,

whether by expiration, an affirmative termination by one of

the parties, or the unenforceability of one of the provisions

of the agreement. For example, the clause may state: “The

following provisions will survive termination or expiration of

this Agreement: Sections 1, 2 and 6-9.”

Typical surviving clauses include confidentiality provisions,

releases for past infringement, and terms related to the

interpretation of the agreement. Parties should consider

what terms remain important or logically should survive after

termination, such as reimbursements and other outstanding

payments, future transfers of materials, and requirements for

assignment of intellectual property.

Integration/Merger Clause

Another clause not unique to intellectual property licensing

is the integration clause, sometimes referred to as a merger

clause. This clause provides that the pages of the agreement

represent the complete understanding of the parties.

“This Agreement sets forth the entire agreement and

understanding between the Parties and supersedes

and cancels all previous negotiations and commitments,

whether oral or in writing, with respect to the subject

matter described herein and therein, and no Party shall be

bound by any term, clause, provision, or condition except

as expressly provided in this Agreement, or by a future

written instrument signed by duly authorized officers of

each Party.”

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Michael J. Kasdan, Partner, Wiggin and Dana LLP

Michael J. Kasdan is a partner in the Intellectual Property Practice at Wiggin and Dana LLP. Michael has spent his career handling litigations,

licensing matters, and transactional work, performing analyses and providing opinions, and advising companies on all aspects of intellectual

property. Trained in electrical engineering and with a business background as a technology consultant, Michael works with a broad range

of technologies, including consumer electronics, mobile devices, computer architecture, semiconductor chips, Internet and e-commerce, and

medical devices.

In addition to his diverse experience as outside counsel, Michael has served as in-house patent counsel to Panasonic Corporation in Japan while

working on secondment in Panasonic’s licensing center. In that role, he acted as lead counsel in numerous third-party patent assertions and

license negotiations, negotiated complex agreements, including portfolio cross-license agreements, and worked with the company to identify

high value patents and strengthen their protection.

Michael also teaches as an adjunct professor at his alma mater, NYU School of Law, and has served as an adjunct professor at Seton Hall

University School of Law, addressing topics such as patent and trade secret law, IP Licensing, global patent litigation, patent exhaustion,

and inequitable conduct. He also frequently writes and speaks on a range of topics including IP litigation, patent monetization and licensing

practices, strategic portfolio development, patent eligibility, patent exhaustion, willful infringement, patent misuse and standards estoppel,

standards essential patents, damages and patent valuation, inequitable conduct, social media and privacy issues, and legal ethics.

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Choice of Language

Where the parties reside in different countries, the choice

of language is a concern. Even though an agreement can be

translated into another language, only one language should

control.

Statute of Frauds – Written

Agreement Requirement

Given that patent license agreements, like other commercial

contracts, are primarily governed by state contract law, they

must satisfy any applicable statute of frauds. Although the

Patent Act contains a statute of frauds provision, 35 U.S.C.

§ 261, that requirement does not apply to many license

agreements because it has been interpreted to apply only

to assignments of patents and patent applications. Waymark

Corp. v. Porta Systems Corp., 334 F.3d 1358, 1364 (Fed. Cir.

2003). Even if the federal statute of frauds does not apply,

however, other statute of frauds provisions, such as those

arising under the Uniform Commercial Code or state law,

may apply.

UCC Statute of Frauds Provision

Transactions involving patent or other IP licenses as one

aspect of an asset sale may fall under the statute of frauds

provision of Article 2 of the Uniform Commercial Code

(U.C.C. § 2-201), which requires a writing for all contracts to

sell goods in excess of $500.

Most jurisdictions apply a “predominant factor” test to

determine whether a contract involving a mix of goods and

services is governed by the Uniform Commercial Code. If the

sale of goods predominates, then the UCC governs for all

issues, including the statute of frauds. For example, where a

settlement agreement involved a patent license and a sale of

goods, but the patent and license issues were predominant,

one court held that the UCC statute of frauds did not apply.

Tseng v. Home Depot USA, Inc., 2006 U.S. Dist. Lexis 37306,

*13-*15 (W.D. Wash. June 7, 2006).

State Statute of Frauds Law

Patent license agreements may fall under the applicable

statute of frauds in some states. General state statute

of frauds provisions may require that patent licenses be

evidenced by a writing, depending on the terms of the

agreement. Since many statutes apply to contracts that

cannot be performed within one year, the application of the

statutes may depend on the exact on-going obligations of

the parties under the license agreement and whether the

obligations inevitably will continue beyond the one-year

period.

In all events, due to the complexity of most patent license

agreements, and the potential for later disagreement

concerning each party’s obligations, it is advisable to

memorialize the terms of the license agreement in a clear and

integrated writing.