Intellectual Property Clauses in Service Contracts
Intellectual property clauses convey the rights of prime contractors and subcontractors in licensing agreements. This article seeks to understand standard characteristics within the meaning of contracts between commercial entities.
Exclusive v. Non-Exclusive:
An exclusive license grants the licensee the sole right to use the IP and to exclude all others whereas a non-exclusive license allows continued use by the licensor. For prime contractors, a non-exclusive license is preferable to ensure continued use of the IP. Meanwhile subcontractors prefer an exclusive license to retain ownership rights to pre-existing and future technologies.
Recent case law demonstrates the intricacies of licensing involving sublicensees or subcontractors. For example, in Babcock & Wilcox Company v. Areva NP, Inc. the court held that a sublicensee was not required to pay royalties when using the original licensee’s exclusive nuclear technologies. Thus, at the outset of negotiation, entities should consider licensing goals and sublicensees’ potential role for performing deliverables.
Revocable v. Irrevocable
A licensor may terminate a revocable license anytime during the licensing agreement. However, a licensor generally cannot terminate an irrevocable license. If a government subcontractor grants a licensee permission to use intellectual property, a revocable license is optimal. Nevertheless, because the contracting party may disfavor at-will revocability, specific circumstances detailing a revocable license may be preferred. For example, in Pfizer Inc. v. Teva Pharmaceuticals USA, Inc., the licensing agreement specified that the licensor could only revoke an exclusive license within a certain percentage of the patent’s term. Accordingly, early in negotiations, entities should consider parties’ long-term objectives including revocability.
Royalty-Free
Licensees pay licensors royalties to protect licensors’ IP and claims of improper use. In government contracts, royalties are synonymous with license fees. Typically, a government contractor charges a fixed fee instead of usage-based royalties for license to use the IP. For example, in Robishaw Engineering Inc. v. U.S., the court noted that where the government held a royalty-free license in patents, the licensor could not claim improper use by the government. Consequently, it is paramount for licensing entities to determine accounting goals, sublicensee rights, and sales requiring usage-based royalties.
Fully Paid-Up
Royalties are unwarranted for fully paid-up licenses because consideration is given in advance. This type of license is prevalent in government contracts involving governmental use of intellectual property. For example, in United States v. Baker Hughes, the defendants were ordered to provide a non-exclusive royalty-free transferable software license to the government. Accordingly, a fully paid-up license refers to a royalty-free one.
Territory
Territory refers to the geographical area covered by a license.. In United States v. Studiengesellschaft Kohle, M. B. H., the court stated that when complying with antitrust laws, a patentee may restrict licenses territorially to parcel out portions of the patent monopoly. Thus, while it is beneficial for a licensor to territorially restrict licenses entities should ensure compliance with antitrust laws.
Sources:
· See M.D. Code Ann., Com. Law § 22–401 (West 2001); see also Va. Code Ann. § 59.1–504.1 (West 2001).
· 788 S.E.2d 237 (Va. 2016).
· See e.g., 35 U.S.C. § 261 (2018).
· 803 F. Supp. 2d 409 (2011).
· See e.g., M.D. Code Ann., Com. Law § 11–1403 (West 1995).
· 891 F. Supp. 1134 (E.D. Va. 1995).
· No. 1:10-CV-00659, 2010 WL 6537247, at *11 (D.D.C. July 26, 2010).
· See, e.g., 35 U.S.C. § 154 (2018).
· 426 F. Supp. 143 (D.D.C. 1976).