Licensing — Developments In The Law You Need To Know

By David Healey

Patent licensing is governed largely by contract law.  Like any contract, you can do a lot by agreement: Stipulate to “ADR”,  shorten statutes of limitations, cap damages, eliminate consequential damages.  Now you have some new twists to work into your contracts as well as some developments that could impact patent value.  On my “Lessons and Learning” page, I will be posting two new power-points on new ideas and issues to be considered in your licensing program as both licensor and licensee. (The intelligent part of the power-points come from Fish & Richardson principals in other offices, but I am keeping their names confidential to protect the innocent).

The biggest impact I see for licensing are increased importance for portfolio licensing and a shift to “joint licensing”:

1) Portfolio licensing:  For the patent owner, the value of a portfolio license is more important than ever to maintain and justify pricing to prospective licensees, compared to the value of one or a few patents.  One school of thought is that portfolio licenses are really licenses to one or a few patents that carry the value of the group, but this valuation model is now subject to challenge.  Indeed, we have seen patent owners who thought they had “landmark, litigated, validated” patents lose them, as in Eolas.  The real problems are that uncertainty over the scope of claims, the increased cost and risk of litigation from the AIA’s “no joinder” rule, and faster PTO procedures under the AIA to challenge patents (post-grant review and inter partes review), now make individual patents more vulnerable and less valuable than in the past.   Even with MDL and consolidation of pre-trial proceedings, the “no joinder” provisions of the AIA (35 U.S.C. 299) make it more expensive and riskier for a patent owner to enforce an individual patent since each defendant typically will get its own trial.  This means the patentee must win infringement in every trial while an invalidity finding in one trial in favor of one defendant might kill the patent in every circumstance where no final judgment has been entered.  The value of a group of patents is much more than its individual component patents.

For the licensee: Portfolio licensing is more important than ever due to new risks they confront from patent owners with active patenting programs:  First, the new prioritized patent examination procedure, which allows certain applications to mature into issued patents in months rather than years, creates an incentive for licensing the portfolio where the patent owner has an active prosecution model, since making payment only to get hit with a new patent from the same owner is not a happy event for any executive.  The prospect of the European Patent Court and European Union Patent becoming a reality for an area with a population the size of the US, with much lower costs, less risk to the patent owner in enforcement, and faster times for enforcement, make it important to capture all relevant past and future PCT patents.  The ability of a patent owner to eliminate questions of invalidity or inequitable conduct for patents issued after September 16, 2012, through Supplemental Examination, give patent owners a powerful and fast tool to cure problems with their patents that come up in negotiations.

Long story short, I think for both sides of the table, the incentive is for portfolio licensing more so than paying on individual or a few patents.

2) Joint Licensing: Traditional wisdom is that when multiple patent owners get together to license the antitrust risks loom so large as to overshadow the benefit to the patent owners in working together.  However, since the DOJ-FTC Joint Guidelines for Licensing Intellectual Property in 1995, the regulatory view of joint licensing has shifted.  First, the 1995 Guidelines argued against risk of per se antitrust liability for patent pools and portfolio licensing (e.g., tying).  In the late 1990s, DOJ approved the MPEG and DVD patent pools in Business Review Letters. In 2007 DOJ issued Business Review Letters that condoned IEEE and VITA standards organization rules for disclosure of “standard license terms”.  In 2010, in In re Princo, the Federal Circuit effectively eliminated the risk of “patent misuse” for patent pools or portfolio licensors that sue on key patents when a prospective licensee refuses a portfolio license.  Today, there is increasing pressure from the EC, DOJ and FTC for standards groups to become more pro-active in licensing to curb abuses of “FRAND”.  MPEG and other licensing companies are now running and organizing more “neutral” patent pools than ever before.  Recently, one U.S. District Judge permitted a defendant in a patent case to use a “joint licensee hypothetical negotiation”.  Long story short, joint licensing now seems safer, more economical, and easier to justify in the current regulatory environment than it has been in the past.  No doubt, abuses in joint licensing are still antitrust “landmines”, and patent pools that are not carefully administered in selecting patents, setting terms and price, are still subject to attack.  Nonetheless, patent pools or “standards rules” for licensing standard-essential patents that are carefully constructed and administered are now recognized as important and valuable.  The joint licensing model also gives both patent owner and licensee the benefits of portfolio licensing.

So do the math, the ground is shifting, and you need to look hard at the evolving landscape in licensing negotiations.

[This post originally appeared at PATENTMATH.]