Simon Harper discusses the points to watch for when acquiring rights to use other people's intellectual property.

Simon Harper discusses the points to watch for when acquiring rights to use other people's intellectual property

The abolition of stamp duty on assignments of intellectual property announced in March's Budget and the Inland Revenue's consultation paper on the reform of the taxation of intellectual property published at the end of June W have highlighted the importance of intellectual property to business. In this brave new world of e-com-merce and global brands, how should you arrange the licensing-in of intellectual property rights (IPR) on which your business growth may depend? The answer is, as ever, "carefully". Traditionally, English courts have been reluctant to intervene between two commercial parties when one of them seeks to imply terms into an agreement. The licensing of IPR is no exception. If you negotiate a bad bargain, and do not carry out proper due diligence, then your business is likely to be stuck with it. You may hope to rely on an ambiguity in the licence. However, the contra profer-entem rule applies. The court will construe the licence in a way least beneficial to the party seeking to rely on the ambiguity.

What rights do you need?
The scope of the licence will dictate two fundamentals. The first, of course, is price: the wider the licence, thp more you'll have to pay. How much more is a matter for negotiation. One thing is certain. If you do not get it right first time and subsequently decide you need a right that the licensor has not already granted, you will pay more for that right than if you had asked for it during the original negotiations.

The second fundamental is that the wider the licence, the more you can do before infringing the licensor's rights. This goes to the heart of the matter. The U K Patents Act 1977 indicates acts which, carried out without the patent proprietor's consent, would amount to an infringement. These include making, importing, using, keeping or selling a product and, where the patent is for a process, using that process or importing a product obtained directly by means of it(2). Similarly, a licence of know-how is only needed to the extent that its use would otherwise amount to a misuse of confidential information.

Be careful not to seek too narrow a licence in order to keep royalty payments down. This carries with it a risk. For instance, a licence "to make" has been held not to extend to a licence to use the product or to sell \v3'. Similarly, although the UK Patents Act includes an exemption for experimental use. it does not apply to the use of the invention for the experimental research and development of new products. This would amount to an infringement.

Licensees are traditionally keen to obtain exclusive licences, particularly where the IPR involved are expected to act as a springboard into a particular market. Unfortunately, there are exclusive licences and exclusive licences! The European Commission, for example, has given its blessing to the division of IPR in the Technology Transfer Regulation Commission Regulation^). Article 2(8) confirms that it is acceptable, in certain technology licences between two undertakings, to restrict a licensee's "exploitation of the licensed technology to one or more technical fields of application covered by the licensed technology or to one or more product markets". You should therefore take great care during negotiations to ensure that the licensor has not licensed the technology to a third party for use in a different technical field of application. Suitably worded warranties may be appropriate. Alternatively, if it is clear that such licences have been granted, this may affect the price you pay.

Due diligence
It is important to carry out adequate due diligence. Ensure that:

  • the licensor is the registered proprietor of the IPR it purports to hold
  • renewal fees have been paid
  • there are no other licences or charges recorded on the register.

    You may require detailed reports on the validity of the IPR being licensed. These can take a number of weeks and ultimately may prove of little value. If the validity of the IPR has already been defended in litigation,

    that will offer you some comfort. But there is no implied warranty as to the validity of the licensed patent. The rule of caveat emp-tor (buyer beware) applies.

    In the case of patents, it may be worth making a broader check against the name of the licensor. This will show whether there are any other IPR which could usefully be included in the proposed licence or which may be necessary to produce a particular (licensed) product which is covered by more than one IPR. You should include a warranty in the licence that the licensor owns the right that it is purporting to grant and that it has the right to grant the licence.

    There is no implied warranty that working a patent, for example, does not infringe the rights of any third parties. Therefore, if you are being granted a licence of IPR to make and sell a particular product, you should seek broad warranties. These should say

    that the licensed IPR are sufficient for the acts contemplated by the licence and that those acts do not infringe the rights of thii parties. If the licensed acts do infringe the rights of others, an indemnity should protect you from damages and legal expense; Conversely, if either you or the licensor dis cover that a third party is infringing the licensed IPR, the licence should cover whc takes action. Most licences require the licensor to bring proceedings, at its own cost. Some licences provide for a contribu tion from the licensee. You should include provision allowing you to bring infringement proceedings at your own cost in the licensor's name, if the licensor declines to do so.

    The UK Patents Act 1977 (567) and sioi of the UK Copyright Designs and Patents Act 1988 make it clear that you have this option. The UK Registered Designs Act 1949, as amended, does not contain this provision. This was illustrated in the recen case of Oren and Another v Red Box Toy Lt and Others; Oren and Another v Martin Yaffe International Ltd and Another [1999] All ER (D) 98. The claimant contended that an exclusive licensee of a registered design could sue, even though there was no statutory provision permitting it to do so, provided that the defendant had been given notice of the exclusive licence. The judge (Mr Justice Jacob) disagreed.

    Obviously, if you are funding the action, you should expect to recover not only your costs if successful, but also a sum covering damages or an amount of the infringer's profits.

    Obliging a licensor to bring proceedings can be a real bar to reaching agreement, particularly where the licensor is relatively impecunious. In such cases, it may be possible to arrange legal expenses insurance for a premium that preserves the commercial viability of the intended licence.

    Maintenance and regulation
    In return for the royalties that you will almost certainly be paying, you will want to be sure that the licensor is promptly paying all renewals on the I PR. However, the licensor will be reluctant to continue paying renewal fees, particularly as the IPR get older and income from them drops off. The reduction in royalties may be compounded by the increase in patent renewal fees as a patent nears the end of its 20 year life. Some licences, especially exclusive licences, therefore provide that the licensee is responsible for renewal, deducting the fees from royalties due.

    Unlike licences for registered trade marks, there is no requirement for a UK patent licence to be in writing. Clearly, a written licence is preferable, not least for the certainty that it brings. Sub-licences are an example. Unless the licence provides otherwise, you can sub-license the patent rights licensed to you. You are likely to be reluctant to leave matters of assignability and termination on a change of control undefined. If your company is part of a group, there will almost certainly come a time when the ownership of IPR is to be centralised, usually for tax reasons. You will want to be entirely free to make such an assignment. Similarly, you will want to be able to assign the licence to a "Newco", should your business be sold or taken over, without threat of termination. Such provisions, often overlooked, need careful drafting.

    Third party rights
    The Contracts (Rights of Third Parties) Act, which came into force in November 1999, governs third party rights in the UK. It reformed the common law rule of privity of contract under which a person could only take action to enforce a contract if they were a party to it. As all licences granted within the UK are governed by ordinary contractual rules, you must consider this Act when arranging a licence. It provides that a third party will have the right to enforce a term of the contract either where

    the contract expressly provides that it should, or where they are expressly identified by a contract which purports to confer a benefit on them. The second test does not apply where, on a true construction of the contract, the contracting parties did not intend the third party to have the right of enforcement.

    Your rights are improving
    Successfully drafting and negotiating a licence of IPR has always involved careful planning and checking. These days, you need to take even greater care, with the principles of Articles 81 and 82 of the Treaty of Rome fe), enshrined in UK domestic legislation by the UK Competition Act 1998. Both European and domestic competition law are aimed at eradicating a number of provisions which have almost always benefited the licensor. So it is not all doom and gloom - at least not for licensees.--

    Simon Harper is a lawyer, intellectual property and technology department, Lovells, London.

    (i) Reform of the taxation of intellectual property, goodwill and other intangibles, Inland Revenue, 29 June 2000.
    (2) Directly means without intermediary: Pioneer v Warner, CA[i997] RPC 757.
    (3) Huntoon Co. v Kolynos (Inc.) [1930] 47 RPC 403.
    (4) Commission Regulation 96/240/EC. (5) Formerly Articles 85 and 86.

    Key points

  • Make sure the licence covers everything you want to do
  • If exclusivity is important, check you are getting it. If you are not, make sure the price you are paying reflects this
  • Carry out due diligence, including basic checking that the licensor owns the IPR and has the right to grant a licence
  • Get warranties that your use of the IPR will not infringe other people's rights » Clarify who takes action if a third party infringes
  • Specify who pays the IPR renewal fees » Allow for the fact that you may want to assign ownership
  • Be aware of possible third party rights