IP Basics: Patent transactions

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Hello and welcome to the latest episode of Gowling WLG's global intellectual property podcast where we discuss a range of topics to help you protect your brands, creations and inventions.

Christopher Freeth: Hello and welcome to this latest podcast in Gowling WLG's IP Basics podcast series. I am Christopher Freeth, a Principal Associate in our team here at Gowling WLG and with me today is Hannah Barnett, an Associate in our team. We're two of Gowling WLG's IP transactions experts. We act on a range of agreements of shapes and sizes focusing on deals involving patents.

Today's podcast is about patent transactions and considerations for such agreements. We will be diving in straightaway, but if you would like to take a step back first and learn more about what patents are and what they do, please do have a listen to the other podcasts in this series from our colleagues who will explain this.

For today, we will assume you or a potential business partner has a patent, hopefully it is a very strong and valuable patent, and now you are considering either granting or receiving a right to it. We have, in a sense, a difficult task today in that agreements are (or certainly should be) written and we have an audio medium in which to explain them, so we are going to focus on identifying some of the key concepts you need to understand and where you to focus your attention if you are reviewing or drafting a patent agreement.

Hannah Barnett: As you may know, patents are a protective tool. They grant a monopoly over a piece of technology, stopping other people from using it. But they also provide an opportunity to generate business. As patents are property, like any property, patent owners can make money by giving others, rights to them or even selling them.

And patents protect innovation, so acquiring the rights to the right patent means companies can innovate, creating new products and services that they would otherwise be prevented from doing. Since they are a monopoly right, they can be used to maintain exclusivity over a new product area. Patents can therefore be a very valuable and important asset, and the best patent owners will exploit their patent portfolio through a combination of different transactions.

Christopher: Some IP transactions may be simple and relatively modest, perhaps a licence of a manufacturing technology from a company to a new manufacturer. But in some industries, for example, life sciences or tech, this can lead to IP transactions being very high value indeed. We here at Gowling see licences that range from no specific value being attached, beyond that required under contract law to provide good consideration to licences worth quite literally, billions of pounds.

A licence might be standalone or, particularly for high value deals, they might be a part of a much larger agreement, often this is some form of commercial agreement such an R&D collaboration, but you might also see IP being dealt with in all sorts of other agreements such as settlement agreements made in context of a dispute. They come in all shapes and sizes.

To give you some examples, a simple license might be where someone has come up with a new way of manufacturing automotive parts, and they may then licence this process out to car companies. In the telecoms sector, cellular technology, such as 5G, is often licensed to device providers. In the life sciences sector, platform-based biotechnology is often licensed to pharma companies to develop new drugs. Each of these could form part of a wider collaboration such as a commercial development agreement or an R&D collaboration, but a core part of each would be the patent licence within them. Of course, patent transactions may crop up in any field, not just these examples.

Hannah: So, turning to some common types of IP agreement.

We will focus on patents today as part of our patents podcast series, but patents are of course just one type of IP. In any patent transaction you need to consider any other IP that needs to be transferred too. As a minimum there may be know-how, that is, the necessary knowledge that surrounds the patents and enables you to use them. Know-how is very common to see included in a patent licence. Going back to our automotive parts manufacturer example, the patent being licenced might set out the process for the manufacture, but the know-how might be the knowledge of the staff who actually do the manufacture. Perhaps certain types of machines are needed, or they need to be set up a certain way, or you get the best results if you use certain settings. Now that sort of information might be know-how. You can see why it would be useful to receive this information when taking a license to the patent because it helps you use the patented technology. So, keep in mind that when you see a patent agreement, you might see other IP too, most commonly, know-how.

The two key types of patent agreement are licences and assignments. This podcast will focus on licences as the most common type of patent-focussed agreement. Licences essentially give a party rights to use the IP, but do not give away the ownership.

Christopher: What is a license agreement? Well on to the licences themselves, much of what we will be discussing is also applicable to assignments but as Hannah said, licences are the most common type of agreement so let's start with some basic terminology. The person giving the licence is a "licensor" that's or and the recipient of a licence is called a "licensee", that is double ee. We will try and over-pronounce this as this is an audio podcast.

So, what is a licence? Well, it is right to use something, in this case a patent. Patents are monopoly rights. They claim an invention and for a time-period that the patent remains valid, nobody else can perform that invention without the patentee's permission. That can be for up to 20 years, longer in some pharmaceutical and plant varieties industries.

A license is where the patent owner, or someone who is already a licensee of the patent owner, gives a new recipient, the licensee, the right to use a patent. And be aware that the patent does not need to have been registered yet, it is extremely common for agreements to be about patents that have been applied for and not yet registered. So, expect to see patent applications within your agreements, as well as granted patents, that is very common. For the purposes of this podcast, we will refer to granted patents and applications as, simply, patents.

There might be a number of reasons to grant a license to a patent. You can get licenses that are a licensor selling access to the technology so the licensee can create a new product that uses the invention. You get licenses that are two companies getting together and cross-licensing their patents so that they can collaborate to develop new products together. Or sometimes you get what are called "freedom to operate" or "FTO" licences. These are more about making sure that you avoid patent infringement. It is not unusual to have a mix of these types of licences all in one agreement.

You also get all shapes and sizes of licence agreements. I mentioned earlier the financial value can vary greatly, but so can the legal complexity. Some licences may be 10 to 20 pages relatively simple agreements dealing with just a patent licence. Some may be 100 to150 pages and deal in detail with not just the patent licence but how the companies will work together to use the patented technology, those might be the sort of R&D collaborations I spoke about earlier. How you will work together can get really complicated and you will need a lot of internal input from stakeholders on that in addition to how we deal with the patents.

One of those shapes of a licence agreement that you might see, and that we often see so it is well worth being aware of, is an "option" to take a licence. This is essentially the right to take a licence if certain events occur. This could be if a product satisfies certain technical parameters, or a certain number of sales are made. For example, I might say that if you can produce a prototype of your technology and it is 10% better than my competitors, then I have the option to take a licence to your technology. Usually these will involve paying a fee just to have the option, in addition to paying for any current licence. Options are both a way to secure an ability to get future rights and avoid competitors coming in before you, whilst also managing the risk that the product or technology might not work out the way you ultimately want.

Hannah: So, in these next sections we are going to focus on the points most unique to an IP licence. We will look at the licence to the IP itself and, also how IP is managed. Let's start with the licence clause. Licence agreements give rights to use IP. But what does that licence clause look like? In the agreement there will be that operative clause that deals with this. It will often, unsurprisingly, be titled something like "Licence" and is often towards the front of the agreement.

It may not be very long, but it will be dense, and loaded with quite important words, which we will go through now. If you are trying to think about how to structure a licence, or what sort of deals you can do, these are the sorts of things you should consider.

First, exclusivity: one of the most important points is whether this is an "exclusive" or a "non-exclusive" licence. Exclusive means only the licensee can use the patent. It excludes anyone else. That also means the licensor, the party that owns the patent and is granting the licence will not be able to use their patent anymore either. Non-exclusive means the licensee can use the patent, but so can the licensor and anyone else who gets their own licence. There are other less common options here, like a "sole licence" which gives the licensee the right to use it, and means the licensor can still use it too, but nobody else can. But by far the most common are exclusive or non-exclusive licences, and the difference is absolutely key, o understand and get right.

Second, sublicensing: the licence clause should say whether it is sublicensable. That means, should the licensee be able to sublicense the IP to other entities. This is possible in combination with either an exclusive or non-exclusive, or sole, licence. If the licensee needs to engage a third party to do a piece of development work, or needs a partner to help sell the product, these are examples where the licence will need to be sublicensable. Often the licence clause will say if the licence is sublicensable, but there might also be more detail on the rules around that sublicensing right elsewhere in the agreement in a "sublicensing" clause.

Third, territory: the licence clause may set out a "territory" for which the licensee has the licence. This may be "worldwide" or it may only specify countries. In that way there can be multiple licences of the same IP. Even multiple exclusive ones. This could be something like a company has developed a product and is now licensing a number of different distributors worldwide to sell the products in different countries. In that case, perhaps distributor A gets a licence to the US, distributor B gets Europe, distributor C gets Asia, and so on.

Christopher: So, if you are looking at a licence check that the territory is what you expect and, if it is not worldwide, consider what that means. If you are the licensee, could it mean that a competitor in another country could also get a license. Is your business OK with that. If you are the licensor, are you giving away rights that you do not need to, for example if the licensee is really active in Europe, but has never sold a thing in China, do you want to give them rights to China or do you maybe want to find someone else to sell in China, who has the right experience and ability to do so.

Hannah: Fourth, activities: patent owners, under English law, are the only ones allowed to make, sell, offer to sell, use, import, or keep, a product covered by their patent. If it is a process, they are the only ones allowed to use it or sell it for use, or use, sell, import, or keep products obtained from that process. That is a lot of words, and they all come from the Patents Act. What that means in practice is that patent owners can choose which of the long list of activities they want to licence out. So going back to our distributors example, you may say the licensee has a licence, but only to sell products, not to manufacture (or make) them. That way the licensor can still make the products, and the distributor only gets the right to sell.

Christopher: Again, as a licensee think about whether you are getting all the rights you need. Does the licence grant you the right to all the uses or activities your business will do. Do not assume that if something is not mentioned it will be OK and you will get the right, for example, if the licence does not say you can manufacture, then you may indeed not be able to manufacture. That is a problem if that is what your business was intending to do. And again, if you are the licensor, are you giving away rights that you do not need to and you might want to keep it for yourself or you might want to give to someone else.

Fifth, Field of Use: yet another way licences are limited in scope is to what we often call the "Field". For example, we do a lot of life sciences work, this could involve something like the licensee can make products, but only for the field of headaches. That way they can make a product for headaches, but the licensor can find someone else to make products using the same IP for treating heart disease. That might be because the headaches company is not a specialist in heart disease.

Sixth, IP: you also need to consider what the exact IP is that is being licensed. If you want to minimise the risk of future dispute, the clearer you can be about what IP is included in a license, the better. It maybe that you set out a defined list of patents. That the clearest option but it can have risks for the licensee, is the defined list definitely all of the patents it needs? If you are not sure, then another way to define the IP is all the IP that is "necessary or useful" to develop "x" type of product. That is more uncomfortable for the licensor, were they really giving away and does a licensee need "useful" IP, or is just "necessary" IP enough? The common answer to this issue is a hybrid that is, a defined list of IP and then all other necessary IP.

Remember that it is important to understand what IP you are getting and consider very carefully what you need, and make sure the licence includes everything you need.

Seventh: products, you could also limit a licence to specific types of “Licensed Products”. Coming back to life sciences, you might have a licence to make a small molecule that uses the IP, but not an antibody. For the licensee make sure what you get is wide enough and consider your future plans, you should think about not just what is the most immediate type of product you will deal in, but what else might you want to do in the future.

Christopher: As we have said, with all of these ways to limit a licence, what you need to think about is am I getting all the rights the business needs, or am I giving away more rights than I should.

 

Hannah: Eighth, royalties and payments: financials may be hinted at in the licence clause too. You will usually have a clause elsewhere dealing with details of the financial payments for the licence, but the license clause itself may say whether the licence is royalty-bearing or free of charge, etc. Remember that when people hear IP they may think first of royalties, but you can structure payments many ways, there could be upfront payments, royalties, milestone payments are not uncommon so a payment that occurs on certain events or "milestones" being met, like a stage of development of a product being passed or a certain number of sales.

Christopher: Of course, we do not need to tell you that this is an area you need to spend time on and pay close attention to when you are drafting. This is an area where we see things go wrong, particularly on royalties where unclear drafting or misalignment between the parties can lead to disputes, we see that happen in practice. If there is one thing companies will fight about, it is the money.

Hannah: Hopefully that gives you an idea of what to expect to see in that licence clause of an agreement and what the ingredients are that you need to be thinking about. It is a really important clause to look at very closely. The takeaway message is that there are a lot of important concepts tied up in the precise wording, and what you need to do is consider very carefully , if you are the licensee, receiving the licence, is the scope of the licence if what your business needs, and if you are the licensor, granting the licence, are you giving away more of your valuable rights than you should. Study each word carefully, look at those definitions carefully, make sure you understand what the scope of that licence is.

Christopher: Next up, let's consider how we are going to deal with the IP in more detail. We have our licence clause, and it is loaded with important information, but we also need to think about how is the IP going to be managed between the parties. This is particularly important if we are not just dealing with a licence to existing patents and technology, but we might develop new technology, patentable technology, together. If that is going to happen, we should set out in the agreement how we will manage it.

Let's introduce a couple of further concepts here. IP that already exists, so that might be a patent that a party already has, is commonly called "background" IP. IP that is yet to be created is commonly called "foreground" IP. Those are very common concepts in patent agreements. So "background" is what already exists. "Foreground" is something new. To make things nice and clear between the parties we need to set out in our agreement who is going to be responsible for enforcing patents, making sure they get granted, and protecting them if someone challenges them and this might be, and often is, different for background patents and foreground patents.

As we discussed earlier, a patent is a monopoly right, it is a right to stop people doing things and a right under which you can be permitted to do things. But it only stops someone doing something, if someone actually enforces it. So often when we deal with patents, we want to set out in the agreement who is in charge of stopping people doing things, who is in charge of enforcing the patent. This is often a point where there can be a lot of negotiation. For example, maybe a worldwide exclusive licensee of a patent should have the right to enforce the patent, remember that exclusive means that they have the only right to use the patent so maybe they should be the party in charge of enforcing it. That makes sense. But a non-exclusive licensee of a patent, they are not the only party who has a right to use the patent, so maybe they should not be in charge of enforcing it, by doing so they could put the patent at risk and that creates a risk for all of the other licensees of the licensor as well. So maybe the licensor would want to be in charge of enforcement, so it can act in all its licensees' interests.

Those are a couple of the positions parties may take. The point is, who controls enforcement of a patent sounds like it should be very simple, but often it is not quite so straightforward so this is something to pay attention to and speak with IP advisors about if you need to understand the risks better.

Similar to this, who gets to control the process of applying for the patents and making sure they get granted and this is called prosecution, who controls the prosecution of the patents? Again, there are different ways to structure this like there are for enforcement, and who controls prosecution and who controls enforcement may not be the same.

The same is also true for who defends the patents if someone challenges them.

These concepts to do with the control of patents, prosecution, enforcement, defence are all usually together in a clause again perhaps unsurprisingly called "Intellectual Property". You will usually want internal or external or both, IP advisors to be looking at this in some detail. It is an area where there can be a lot of negotiation.

Hannah: We hope that gives you an idea of the two most unique aspects to an IP deal, the licence clause itself and how IP is dealt with. There are usually lots of other ingredients in a licence agreement, many of which will be the standard commercial terms or legal boilerplate that you see in other agreements. There are a few more clauses to focus on from an IP perspective, and where you might want to consider taking IP advice.

The first is representations and warranties: there are common IP specific reps and warranties, they could be a podcast in themselves, you have to think carefully about what you can and cannot say about the IP and may need to take advice here. For example, a classic warranty where people slip up is a warranty that a patent is valid. No-one knows this for certain and you should not give this warranty.

That creates a positive obligation on the licensee to actually use the IP to do something. These clauses can be heavily negotiated. Often, they refer to the licensee using its Commercially Reasonable Efforts to do something, this can be defined several ways so if you see that term, make sure you understand exactly what it is saying.

Third, confidentiality: you need to keep information you want to patent confidential, so confidentiality between the parties is of very high importance. This does not tend to be as heavily negotiated as it is in both parties' interests to have clear confidentiality between them, but we do see the length of time it applies for being negotiated, so pay close attention to that.

Termination: as part of the termination clause you should consider what will happen to the IP on termination, remember it is property, so that means that for example if a licensor becomes insolvent that property may be sold off or otherwise lost so even an exclusive licensee who has been the only party who can use the patents for many years, maybe for many years, could suddenly find it loses its rights to the patents. So, you need to think about addressing how to approach this in the agreement.

Christopher: We hope that gives you an overview of the IP-specific issues in licence agreements. To sum up, getting the scope for licence right is really important, there are lots of ways it can be limited, and you need to make sure you understand them. You may have to deal with both existing, background, IP and new, foreground, IP. They may be dealt with differently. Make sure to consider any clauses dealing with the financials very carefully, particularly royalties, these can be difficult to get right, and parties do fight about money. Consider any representations and warranties, you might need specialist IP advice to understand what they are really saying. Remember, a licence is not an obligation to do anything, you might need to write one into your agreement if that is what you intend and remember the importance of confidentiality and termination. If you focus on these things, you will be thinking the right way and well placed to do a great deal.

Hannah: Thanks Chris, and thank you again to everyone listening for your time.

Thanks for joining Gowling WLG for this podcast. If you enjoyed this episode, be sure to check out our website at Gowlingwlg.com for useful insights and resources and do not forget to subscribe to ensure you join us for our next episode.

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