This is the much anticipated sequel to SPARK’s smash hit IP–1 session last Fall. In this installment, we have assembled a star-studded cast of IP experts to discuss the ins and outs of licensing intellectual property (IP), as well as a “best practices” approach to avoiding the dreaded “cease & desist” letter from a competitor. Matt Bell from the UofM Tech Transfer Office will talk about the many opportunities that exist for entrepreneurs to acquire cutting edge technology from universities, and to engage university researchers to solve specific technical problems. Attorney Mark G. Malven will cover IP licensing for entrepreneurs. Attorney Richard (Rick) Hoffmann will share ways that startups and emerging businesses can reduce the risk of infringing third-party IP rights.

1. IP Licensing Issues for Small and Emerging
Businesses
Ann Arbor Spark: Business Law & Order Series
April 18, 2011
Mark G. Malven
California | Illinois | Michigan | Texas | Washington, D.C.
www.dykema.com

2. Agenda
 Overview of IP licensing
 Common, avoidable mistakes
• Financial matters
• Legal terms
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3. Intellectual Property Licensing
 A grant of certain rights from one party
(the licensor) to another (the licensee)
 IP rights also critical in joint ventures
and alliances
 Be rigorous in your approach
• Watch out for sloppy thinking /
language
• Get good counsel, and do it early
• Overarching goals are to maximize
value and to prevent surprises
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4.  Need to understand the differences
between assignments and licenses
 Labels not determinative
 Assignment
• Must be in writing
• Entire right, title and interest (or
undivided part of same for JO)
• Cannot be done by Field of Use
• Limitations on recipient can be
problematic
– OK: License back
– Not OK: enforcement rights, step in
rights, usage or transfer limitations
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5.  Exclusive License
• Express or implied promise that others
will be excluded – good to make
explicit – i.e. statement licensor will not
license 3rd parties
• Can be limited by geography, field of
use, time
• Exclusive as to licensor?
– Silence is somewhat ambiguous
– Need to be explicit
• Critical Tip for Licensor: Must have
measurable performance requirements
for exclusive licensees – “commercially
reasonable efforts” not enough!
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6.  Non-Exclusive License
• Freedom from infringement suit
• Personal to licensee
– non-transferable unless clearly
stated otherwise
• Encumbers IP
 Covenant Not to Sue
• Similar to above, but
• Personal from “licensor”
– Does not encumber IP
– Need to consider transfer issues
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7. Technology vs. Intellectual
Property
 Not the same thing
 Technology
• Tangibles and intangibles = Stuff
 Intellectual Property = Legal Rights
• 4 kinds - patents, copyrights, trade
secrets and trademarks
• Registrations of, applications for, and
priority rights based on the foregoing
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8.  Technology License vs. IP License?
 Pure Technology License – appropriate for
a finished product
• “I license you to use my equipment”
• Includes an implied license to use the
necessary IP of licensor
 Pure IP License – appropriate if no tech
transfer
• “I license you to make and sell widgets
covered by U.S. Patent 1,234,567”
 Often you will have a combination
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9.  Agreements need to be specific
• What is licensed (IP type, technology,
and what rights)
– Patent: make, use, sell, offer for
sale, import
– Copyright: copy, create derivative
works, distribute, etc.
– Trade Secret: use
– Trademark: use
• Ownership/exclusivity
• Licensed Field
• Territory
• Transferability
• License Term
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10. Avoidable Mistake #1 – Pay
Attention to the Royalty Base!
 “Net Sales” vs. Net Profit vs. Fixed $ Per
Unit
 Net Profit generally a bad idea – harder to
determine, and subject to disputes
 Parties frequently obsess over the royalty
rate and pay too little attention to the size
of the royalty base.
 Even a low royalty percentage, multiplied
against a large royalty base, can still be a
lot of $$
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11.  The smart licensor (and/or its lawyer) will
have an agreement that addresses:
• Bundling/package sales
• Payments in kind
• Related party sales
• Promotional giveaways
• Loss leaders
• Demos/samples/internal use
 Possible ways to address the above:
• Fixed $ per unit
• Pro rata allocations, based on list prices
• Royalty as % of total price
• % Royalty with floor $ per unit
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12. Avoidable Mistake #2 – Other
Payment Problems
 Currency/Tax Issues
 Need to specify recordkeeping and
reporting requirements:
• Quantities made and sold
• Returns
• Bundling/package sales
• Payments in kind
• Related party sales
• Promotional giveaways
• [See Royalty issues above]
• Reports should be certified
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13.  Audit rights – think these through
 Licensors:
• Don’t forget interest on late or non-
payment
• Escalating consequences for repeated
Licensee failures to pay
 MFN: Most Favored Licensee clauses
• Generally a bad idea
• Overbroad = trouble
• Carefully circumscribe – field/
territory/notice and timeframe
• Limit to substantially similar terms
• Special circumstances – affiliates,
settlements, cross-licenses
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14. Avoidable Mistake #3 – Joint
Ownership of Developed IP
 A common “solution” that is, in fact, a
“problem”
 Leads to significant unintended
consequences
 How created (under US law)
• Patent: any contributor to a patent
claim owns a pro rata undivided
interest in whole patent – even a
1% contributor will be a joint owner
with full rights to use/grant licenses
• Copyright: contributor to “joint work”
• By agreement
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15. THE PROBLEMS:
 What did the parties really intend?
• Actions to maintain value of the IP?
• Who will file applications, sue infringers?
• Who decides whether to keep as trade
secrets or publish pursuant to a patent
application?
– Trade secret value generally
destroyed by disclosure
 Different results for (a) different IP types,
and (b) different countries
• Joint owners in different countries have
different expectations
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16. Example Problem #1: U.S. patent law
 Exploitation (which includes granting non-
exclusive licenses):
• Each joint owner can exploit without
permission of others
• No duty to share proceeds
• Problem: race to offer best deal
 Enforcement:
• All owners must join suit
• Problem: race to agree not to sue
(e.g. grant a license)
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17.  Bottom Line: Each joint owner at the
mercy of the others because easy to
license (and reap the proceeds), but hard
to sue infringers to protect the IP
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18. Example problem #2: Differing treatment under
U.S. law for patents and copyrights
 Each joint owner can fully exploit (including
the right to grant non-exclusive licenses):
• Patents: without permission or sharing
of the proceeds
• Copyrights: without permission, but
with a duty to share proceeds
 How do you treat products that have both
patent and copyright, such as software?
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19. Example #3: Differing treatment among U.S.,
U.K and Japan
Patents – Right to Exploit
By Co-owner By License to 3rd Party
U.K. No Permission Need Permission
[Similar to U.S.] [Different from U.S.]
Japan No Permission Need Permission
[Similar to U.S.] [Different from U.S.]
Copyrights – Right to Exploit
By Co-owner By License to 3rd Party
U.K. Need Permission Need Permission
[Different from U.S.] [Different from U.S.]
Japan Need Permission, cannot Need Permission, cannot
be unreasonably withheld be unreasonably withheld
[Middle ground between [Middle ground between
U.S. and U.K.] U.S. and U.K.]
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20. Alternatives to Joint Ownership:
 Parties create a separate JV entity that
owns the developed IP
• Entity licenses parties and 3d parties
• Management/ownership structures
would govern
• Good for complicated deals
 Ownership allocated to one party and
licensed to other
• Good for complicated deals
• Can be cleanest (i.e. best) solution
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21.  Allocate ownership item by item in
accordance with specified criteria
• Need fair/ unambiguous criteria
 Address structural issues early!
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22. Avoidable Mistake #4 –
Prosecution Issues
 Licenses frequently involve technology
developments at a time when patents have
not yet issued
 Common to include rights to applications
and patents that issue from them
 Unless/until an application becomes a
patent - no legal right of exclusion
 For pending/future applications
• Who picks the countries and controls prosecution?
• Does the other party participate in the process?
• Who pays for it?
• Step-in rights?
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23. Avoidable Mistake #5 –
Enforcement Issues
 Generally 2 big issues
• Control
• Standing
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24.  Control – often overlooked, or have
inconsistent enforcement provisions
• Who decides whether or not to sue?
(e.g., a first shot, chance to step in?)
• Who pays for the litigation?
• If licensee pays, can it recoup/offset
costs from royalty payments?
• If licensee wins, who gets the $$$?
• Are royalties paid on the award?
• If licensee sues, can it name licensor?
Who pays licensors costs?
• If licensee sues, does licensor
participate in litigation?
• Must licensor consent to a settlement?
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25.  Standing to sue – follows grant type
• Patents – generally:
– patentee (35 USC 281),
– successors in title (35 USC 100(d)),
– exclusive licensees (Ortho)
• Exclusive licensee – needs “all
substantial rights”; commonly joins
patent owner
• Non-exclusive – no standing to sue
• Copyright – less joinder problems –
need an exclusive right (any)
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26. Avoidable Mistake #6 – Change
of Control
 Need to plan for mergers, acquisitions, etc.
 Non-exclusive patent and copyright
licenses are by default non-transferable
(under federal common law)
• Contrast with generally free
transferability of non-IP agreements
• Very different treatment of assignability
issues in merger context
 Exclusive licenses – some variation in the
courts
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27. Avoidable Mistake #7 – Bankruptcy
Matters
 Basic concepts
• Ipso facto clauses are unenforceable
because trustee can reject or assume
any executory contract
• Reject – terminate license
– Usually when licensor bankrupt
– Done to increase the value of the IP
asset prior to sale
• Assume – keep or assign
– Usually when licensee bankrupt
– May be transferred to 3d party for
value
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28.  Exception protecting licensors:
• Trustee may not assume/assign when
non-bankruptcy law excuses accepting
another’s performance
• Non-exclusive patent and copyright
licenses are personal and therefore
licensor need not accept performance
from other than original licensee (Courts
are split re exclusive licenses)
• Unless agreement indicates parties
clearly intended to permit assignment
 Licensor: draft to emphasize personal nature
(and prevent assignment by licensee)
 Licensee: generally wants to permit
assignment
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29.  Section 365(n) of U.S. Bankruptcy Code (An
exception protecting licensees)
• If trustee terminates, licensee has choice
of:
– Treating as breach and seeking
damages
– Continuing to use (existing) IP and
continuing to pay royalties
 Important limitations re Section 365(n)
• Does not apply to trademarks
• Does not apply to non-U.S. IP
• Licensee will not have right to support,
future developments, etc.
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30. Thank You
(Speaker biography follows)
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31. Speaker Biography - Mark G. Malven
www.dykema.com/bio/markmalven.htm
Mr. Malven is the Leader of our Technology Transactions Practice and is known for
his skill in the negotiation of technology transactions and the representation of
technology-based businesses. He has many years' experience acting as the
outside general counsel and trusted strategic advisor for organizations in a variety of
industries, with a particular focus on information technology, biotechnology,
entertainment and manufacturing. He serves as Chair of the Information
Technology Law Section of the State Bar of Michigan and is recognized as a
Michigan Super Lawyer by the publishers of Law & Politics.
He has handled hundreds of strategic technology transactions involving
development, consulting, sponsored university research, manufacturing, licensing,
distribution, value-added reseller, private-label, content licensing, e-commerce,
acquisition, and joint venture relationships. Mr. Malven was one of the primary
negotiators for two of the largest outsourcing transactions of their kind ever
undertaken, involving billions of dollars in services.
Mr. Malven's business and finance law experience includes representing both
businesses and investors in enterprise formation, venture capital and other private
financing, public financing, acquisitions and divestitures, and strategic alliances.
Mr. Malven also has first-hand experience as an entrepreneur. He served as Vice
President of Business Development and General Counsel for a dotcom startup and
subsequently founded and managed his own law firm. He has guided emerging
technology and Internet companies through the early stages of business plan
creation, multiple rounds of venture and other funding, customer acquisition, joint
venture and partnering arrangements.
Mr. Malven was an engineer at Chrysler Motors before attending law school and is
also a licensed patent attorney.
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32. Representative projects Mr. Malven has handled include:
• One of two lead negotiators for one of the largest-ever outsourcing relationships, on behalf of
a large multinational, that will involve more than $10 billion in revenue over the course of the
relationship.
• One of three lead negotiators for the $1.2 billion, "whole of government" IT outsourcing to be
done by a state government. This effort was the first of its kind. Leader of the teams
responsible for development and negotiation of the Statement of Work (the detailed
description of the services and deliverables to be provided) and Service Levels (the specific
performance requirements), among others.
• Represented a BPO pioneer in creating the commercial agreements for its outsourced
document processing, print-and-mail and data archiving services.
• Represented customers in BPO sourcing transactions for human resources, finance and
accounting, customer service, call center, online learning, and other business processes.
• Negotiated a joint venture/licensing arrangement with a major Tier 1 Supplier for the
development and sale of advanced automotive components. Sales of several billion dollars
are expected over the course of the relationship.
• Negotiated agreements to provide National Health Portal for Government of Singapore.
• Prepared comprehensive domain name strategy for large multinational company with
thousands of registered domains.
• Negotiated substantial sponsored research relationships between technology-based
companies and leading universities.
• Represented large companies and government entities in multi-million dollar acquisitions of
IT systems and/or services.
• Represented companies and investors in venture capital and other private equity
transactions ranging in size from $500k to $15 million.
• Represented buyers and sellers of businesses in a variety of industries, with purchase prices
ranging from $400k to $100 million.
• Represented commercial lenders in secured loan transactions ranging in amount from $5
million to $100 million.
• Key member of team that took Gustafson v. Alloyd, a case brought under the Securities Act
of 1933, to a 5-4 victory in the United States Supreme Court.
• Invented a patentable structure that significantly increased the duration of an automobile's
deceleration pulse, thereby improving crashworthiness.
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