TECHNOLOGY LICENSING TODAY (Highlights of Technology Licensing Course) Karl F. Jorda David Rines Professor of Intellectual Property Law & Industrial Innovation.

TECHNOLOGY LICENSING TODAY(Highlights of Technology Licensing Course)

Karl F. JordaDavid Rines Professor of Intellectual Property Law & Industrial Innovation

Director, Kenneth J. Germeshausen Center for the Law of Innovation & EntrepreneurshipFranklin Pierce Law Center

Two White Street, Concord, NH 03301 USA

SeminarSiam Cement GroupBangkok, Thailand

December 19-20, 2006

PATENT SYSTEM INCENTIVES

1) To invent2) To disclose inventions3) To “invent around” prior inventions — improvements4) To invest in innovation —

a) the most important incentive of all (CAFC Judge Giles Rich)b) ratio of requisite investment in the 3 phases of innovation from lab to market, i.e. research, development and commercialization is 1:100:1000. (This supports the thesis of investment incentive.)

TENETS AND TRUISMS on Intellectual Property Rights and

Technology Transfer

• Technology transfers, licensing and investments are ever so much easier to carry out and accomplish via patents and other IPRs as vehicles or bases.

• Importation of technology leads not only to export of products but also to export of adapted, improved technology (reverse technology transfer).

• The days when technology transferors took advantage of transferees (in developing countries) are gone, the realization having taken hold that the only viable license is one that results from a win/win approach and passes the fairness test.

REASONS FOR LICENSING

1) Unblock interlocking IPR’s

2) Settle IP litigation, interference

3) Grow and diversify the business

4) Deal with outside idea submission

5) Convert dormant IP portfolios into profits

HOW TO FACE THIRD-PARTY PATENTS

Starting point and first step in managing downside risk: company policy is not to infringe valid patents of others1. Determine scope — if outside, no problemCaveat: positive doctrine of equivalents(even if inside there may be no problem by dint of negative doctrine of

equivalents)2. Determine validity — invalid patent cannot be infringed3. Work around it, design around it, invent around it4. Wait till expiration, if not too far off5. Take a license or buy patent or whole businessN.B. Different kinds of patents have differentscope of protection

• Paper patent• Commercially-used-patent• Basic or pioneer patent

KINDS OF LICENSESI. Patent License

Trademark LicenseKnow-How License Trade Secret License Copyright LicenseSoftware License Hybrid License Franchise

II. Exclusive LicenseNon-Exclusive LicenseSole (semi-exclusive) License

III. Royalty-bearing License Royalty-free License

IV. U.S. (domestic) License(Specific country) LicenseWorld-wide License

KINDS OF LICENSES (cont.)V. Sublicense

Cross-LicensePackage LicenseLabel LicenseShrinkwrap LicenseGrantback LicenseGrant-forward License

VI. Implied LicenseCompulsory License

VII. ShoprightOption AgreementSecrecy AgreementConsultation AgreementsTechnical Assistance AgreementInvention AgreementEmployment AgreementReleases, Waivers

VIII. Assignments

DEVELOPMENTS AND TRENDS IN LICENSING/TECHNOLOGY

TRANSFER

• Companies that didn’t used to license at all, now do it (CIBA-GEIGY, DuPont, IBM, Westinghouse)

• Royalties are going through the roof• Option Agreements are on the increase• Other quid pro quos are preferred, e.g. cross licenses, products• Dormant IP portfolios are licensed for profit• Other arrangements have been developed, e.g. joint venturing,

corporate partnering, co-marketing, co-promotion, strategic alliances, consortium licensing (Sematech)

• No anti-trust enforcementNine no-nos are historyPositive anti-trust through legislation

• Above all — win/win philosophy, attitude more prevalent

INNOVATION: A THREE-STEP PROCESS

• one day an American firm announces a breakthrough invention;

• next day the Russians claim they made the same discovery twenty years ago; and

• on the third day the Japanese start exporting the new product.

KINDS OF PATENTSI. Utility Patents

Design PatentsPlant Patents

II. Mechanical PatentsChemical PatentsElectrical patentsBiotech PatentsSoftware PatentsBusiness Method Patents

III. Product PatentsComposition PatentsUse PatentsProcess Patents

IV. Pioneer PatentsBasic PatentsDominant PatentsImprovement PatentsPaper PatentsPicture PatentsSelection PatentsPoor Man’s PatentsSubmarine Patents

V. Petty Patents (Utility Models)Patents of ImportationPatents of Confirmation

LICENSING OF PATENT APPLICATIONS

1) Truism: a pending application confers no right of exclusion — only issued patent do.

2) So how can one license an application that at law grants no right to exclude? If one can’t license and exact royalties after patent term — why before?

3) Very commonly done — grammatical, substantive error?4) If error — business community lives with it very well.5) License is merely a withholding of a right to exclude others. License is not

grant of anything. 6) What’s rationale, rationalization, justification?

a) § 261 makes patent personal property, so application in and of itself is species of property. Thus right to license application is inherent in lawful right to assign application. Strained!Better:

b) Purported license = license of trade secret orc) Purported license = license of patent when issues or

d) Both7) “Licensing of patent applications is a hybrid animal which requires special

treatment to avoid (potential problems.” (David Hill)

IMPLIED LICENSE

1. Shopright — employer-employee relationship2. Via acquiescence of patent owner — sits on his/her

rights — laches3. Business relationship — close cooperation on

innovative projectSee Wang v. Mitsubishi, CAFC, 1997

4. Licensor-Licensee Relationship — under unlicensed but indispensable patent — e.g. dominant patent issued later to licensor or earlier-issued dominant patent acquired by licensor

5. Seller-Buyer relationship under combination or method patent of seller who sells a component or article for use in the patented combo or method

See Jacobson v. Cox, Dist. Ct., Arizona

COMPULSORY LICENSESIn Foreign CountriesCompulsory License

provisions universalParis Convention — Art. 5GATT TRIPS — Art. 31

(very restrictive)For non-workingFor dependent patentRarely used

In United StatesGeneral Rule: No duty to use or license patented

invention (§ 271(d)(4)Compulsory license notion = anathema in U.S.However,

Forcing patentee to license = compulsory licenseDenying patentee injunctive relief = tantamount to

compulsory licenseExamples:

Infringement by GovernmentInfringement by TVAInfringement via assistance under International

Development ActCompulsory license provisions in— Atomic Energy ActAir Pollution Control ActPlant Variety Protection ActBayh-Dole Act (march-in rights)As relief in Antitrust casesInjunction denied — Public Health & Safety, Unusual

hardship on infringer without benefit to patentee

TYPES OF LICENSE TRANSACTIONS

• Assignment– outright sale, transfer of title

• Exclusive license– permission to one party only (licensee)

• Sole (semi-exclusive)– permission to one other party (licensor and licensee)

• Non-exclusive– permission to one or more parties (licensor and any

number of licensees)• Covenant not to sue

– nonassertion agreement

NON-EXCLUSIVE LICENSES

• No statutory basis• Immunity from suit — covenant not to sue

– I.e. merely waiver of right to sue for conduct which would constitute infringement and would be actionable, absent license

• No affirmative rights go with it – e.g. re enforcement of licensed patent

• No freedom from competition – if there is infringement, it is no legal injury

SPECTRUM OF LICENSING

1) Option2) Option/License3) Covenant not to sue

Non-assertion agreement4) License — Non-exclusive

Immunity from suit5) License — Sole, Semi-exclusive, Co-exclusive6) License — Exclusive7) Assignment8) Acquisition

OPERATIVE LANGUAGE

A. AssignmentA sells, conveys, transfers and assigns to Ball its right, title and interestin and to certain Patent Rights.

B. License1) A grants to B2) a (non) exclusive license under certain Patent Rights3) to make, have made, use, offer to sell, sell or import Licensed Products (or to practice Licensed Methods)4) throughout the U.S.5) for the duration of the Agreement.

THE ALL-IMPORTANT GRANT CLAUSE

The most important clause in a license agreement.

A typical basic grant clause might have the following five elements:

1) A grants (or agrees to grant or grants and agrees to grant)2) a (non) exclusive (or sole) license under certain IP Rights3) to make, have made, use, offer to sell, sell or import Licensed

Products (or to practice Licensed Methods)4) throughout the territory5) for the duration of the Agreement.

Do not use such modifiers as “indivisible,” “irrevocable,” “non-transferable” and “perpetual.”

EXCLUSIVE LICENSE OR ASSIGNMENT?

Not uncommonly, what is perceived by the businessman as an “exclusive license,” is best negotiated into the form of a paten assignment perhaps with rights to reversions of title if royalties are not paid– this is because the exclusive license differs from assignments only in areas (like who sues infringers and has authority to compromise in settlement) which may be better born by the party actively in the business than by the passive transferor of the technology.

Tom Arnold, “Basic Considerations in Licensing,” p.128

PROTECTION OF (EXCLUSIVE) LICENSOR

1. Lumpsum payment — paid up license2. Minimum royalties3. Termination power — outright

• if a desired total not reached• if annual minimums not maintained

4. Conversion to non-exclusive license5. “Best efforts“ clause

• dubious language• variously interpreted

very strictly or leniently• better: reasonable diligence consistent with interests of

business• best: objective, quantitative criteria of performance

BETTER ALTERNATIVES FOR THE COMMON

“BEST EFFORTS” CLAUSEA “best efforts” clause to the effect that ABC ‘shall exercise its best

efforts to exploit the Licensed Products” is dubious language.

Better: “reasonable diligence consistent with the interests of the business”

Best:1. Best Efforts shall mean those efforts which a reasonably prudent person knowledgeable of such matters would consider desirable, necessary or commercially reasonable to further the intentions of the Parties hereunder”2. Objective, quantitative criteria of performance 3. Conversion from exclusive to non-exclusive status 4. Termination power if specific levels of performance or annual minimums are not maintained5. Lumpsum up-front payment

BEST EFFORTS OBLIGATION

Licensee shall exercise its best efforts to produce, sell and offer for sale Licensed Machines. “Best efforts” shall mean those efforts which are commercially reasonable to further the intentions of the Parties with respect to quality as well as quantity of the Licensed Machines produced. Production of 250 Licensed Machines per half year after March 1, 2001 of a quality that conforms with established industry standards, will satisfy Licensee’s best efforts obligation hereunder.

WAYS TO PROTECT LICENSEES FROM THIRD-PARTY DOMINANT

PATENT RISKS1)Hold-harmless clause with licensor

— getting licensee another license— providing a non-infringing alternative or— defending an infringement suit (but not

open-endedly)2)Cost-sharing arrangement

— if royalties have to be paid to third party— if infringement suit has to be defended

3)Renegotiation of royalty provision

A TROUBLE-FREE MFL CLAUSE

A very important clause in non-exclusive licenses.

Advisable 1. to stay away from vague phrases (such as,

“other terms and conditions,” 2. to include escape clauses or exceptions,

e.g. settlements,3. to give licensee the right to terminate and

negotiate the license, if a subsequent licensee has been overly favored.

PATLEX LICENSE ARTICLE XII – MOST FAVORED

LICENSEE If subsequent to the effective Date of this Agreement

another manufacturer of lasers, laser systems, or Low or High Power Laser Tubes similarly situated to LICENSEE is granted a license by PATLEX which provides to said another manufacturer a combined royalty rate and royalty base materially more favorable to said another manufacturer with respect to any of the Licensed Patents than that provided herein to LICENSEE for lasers, laser systems and Low or High Power Laser Tubes sold or leased in the United States, then LICENSEE may, at its option, adopt the subsequent license in its entirety, mutatis mutandis, as of the effective date of such subsequent license. PATLEX shall notify LICENSEE of any such subsequent license and provide LICENSEE an opportunity to exercise the option provided herein.

ADDITIONAL CLAUSES NEEDING CLOSE ATTENTION

Definitions — the second-most critical clause in licensesConfidentiality — crucial where trade secrets are involvedImprovements — “grant-back” by licensee to licensor or

“grant forward” by licensor to licensee where they continue their R&D, a narrow, precise definition, tied to the scope of the patent claims,in non-exclusive form

Sublicensing rights — especially important in exclusive licenses for practical and legal reasons

Termination — this third most important clause is a multipronged concept, each prong needs to be defined separately,a license never terminates over night,different rights and obligations of the parties continue

ROYALTIESRoyalty-freeRoyalty-bearing

Lump sum — single or installments

Running royaltiesFixedSlidingIncreasingDecreasingMaximum (Cap)MinimumCombination of both

Most common combination1) Initial lump sum (10%)2) Running royalty (on net sales)3) Minimum yearly royalty

Total royalty income depends on Royalty baseRoyalty rateDuration of agreement

ROYALTIESNon-exclusive Licenses

“Industry Standards”“Folklore — Suspect as Royalty-rate Guide”

Chemicals 1-5%Electronics 1-5%Computers 3-5%

Consumer Products 2%Pharmaceuticals 4-15%For exclusive licenses

20-50% premiumUp to 300% premium in pharma field

ROYALTIESMOST IMPORTANT FACTORS

a) the state of development of the subject technology (embryonic and untested v. tested and commercial),

b) the strength of the IP rights (solid v. weak, ease to design around vel non), and

c) the degree of exclusivity (exclusive v. non-exclusive).-----

d) the amount of, and value added by, trade secrets

“Trade secrets are a component of almost every technology license...(and) can increase the value of a license up to 3 to 10 times the value of the deal if no trade secrets are involved.” (Melvin Jager).

ROYALTY-FREE LICENSESThere is significant royalty-free licensing. Makes eminent business sens.There is indeed great virtue in royalty-free licensing in terms of good will

and good relationships, bringing about increased sales of goods and supplies and hence larger market share.

Examples.At one point in my career at CIBA-GEIGY Corp. (now Novartis), I prepared over 20 royalty-free non-exclusive licenses to carpet manufacturers under patents I had obtained in the U.S. and Canada on an important improvement in tufting carpets. CIBA-GEIGY was not in the business of manufacturing and selling carpets but dyestuffs. CIBA-GEIGY had no intention to practice this tufting method itself. Licensing was the best alternative. Rather than doing it for royalties, we did it for free with the expectation that this would induce grateful carpet manufacturers to buy more dyestuffs from CIBA-GEIGY. Carpet manufacturers were pleased to be licensed for free to practice an important new technique for tufting carpets.

ROYALTY-FREE LICENSES (2)

A more recent example is the royalty-free licensing by Iridian Technologies of iris-scan patents. Iridian owns a broad patent and another two dozen patents on iris-recognition software, which is able to accurately identify people at airport security or automated teller machiens. They licensed these patents also on a royalty-free basis after deciding that the “upside of software sales was greater than the downside of collecting royalties.” They won contracts with Schiphol Airport and the UAE government and expected other big government contracts. Iridian will “end up getting a lot of business” per US Today of August 15, 2005. This case also shows that giving away valuable patent rights for free can be a savvy business move.

ROYALTY-FREE LICENSES (3)

In the field of licensing law and practice there are other instances of, or occasions for, granting free licenses.

• Interference settlement agreements.• Grant-back provisions in license agreements often are royalty-free.• Releases of patent rights to employees, where a corporation or

university has no interest in the employee’s invention.• Hybrid patent/trade secret licenses with royalty based on the trade

secrets.• Corporations owning patents that would be infringed by university

research grant the university a royalty-free license.• In standard setting situations, assurances by patentees to license

on royalty-free terms.The conclusion is inescapable that royalty-free licensing of valuable

IP rights in preference to royalty-bearing licenses, is conducive to creating good will and establishing or cementing good relationships, with attendant increases in market share.

DUE DILIGENCEAn investigation undertaken in the course of an IP transaction.

The purpose of a due diligence investigation is to provide the data needed to analyze and assess the business and legal risks associated with the IP rights that are the subject of the transactions.

Due diligence procedures may include, among other things:

1) identification of all IPRs involved in the transaction,2) verification of ownership and inventorship of the IPRs,3) determination of the enforceability or strength of the IP assets,4) review and verification of all documentation associated with the

IPRs, including registrations, licenses, security liens, file wrappers, and claims of infringement; and

5) interviews of those persons with knowledge of the subject IPRs.

NEGOTIATION TACTICSPrepare thoroughly

• do research on other side• develop strategy• prepare draft agreement or outline

Choose third or fourth choice candidate for first roundForm a teamStage a dress rehearsalGo in with win/win approach — not “wimpy/wimpy”Assure comfort and convenienceTake good notesTake up less controversial issues firstTake up money matters at end

• agreement clauses have economic weightUse silence in negotiationsVolunteer to draft agreement

NEGOTIATION OF LICENSING AGREEMENTS

A. Object —1. Good deal for both sides: win-win

B. Necessary pre-negotiation homework — the more the better70% of negotiation is preparation1. Licensor’s information

a) about companyb) product or process descriptionc) proprietary positiond) sales history of producte) materials, components and equipment requiredf) cost datag) licenses already grantedh) other

2. Licensee’s informationa) place in market

1. names and volume of competitorsb) financial positionc) physical plant

1. availability of space and capital for expansiond) ownership

1. other affiliations2. other licenses

e) estimated costs for new license programf) estimated future marketg) annual sales volume for past few years for other products, related and non-

related

NEGOTIATION OF LICENSING AGREEMENTS (continued)

C. Pre-negotiation internal discussions.1. Selecting the team2. Who does what3. Practice negotiation – dress rehearsal

a) helps your people feel comfortableb) try to determine and understand other needsc) may discover your, or other’s, weak points

D. The negotiation1. With as high a level as possible2. With knowledgeable people on both sides.3. Convince other party of reasonableness of your position4. Listen to, and analyze, other party’s position5. Know what is important and what is not — what you can give and what you cannot6. Be creative and flexible7. Say enough, but not too much8. Caucus as often as necessary

a) some emphasize items agreed uponb) some emphasize items not agreed uponc) a above is better

9. At end of session, state current status and what is next10. Volunteer to prepare first draft

Homer O. Blair

INESCAPABLE UNCERTAINTY PRINCIPLE IN CONTRACT

DRAFTING1. Semantic Dilemma

— undefined terms — terms incapable of definition — few terms universally understood to have a single meaning

e.g. “public domain”, “line of business”if try to define, often substitute another uncertaintystiff definitions important

2. Human FrailtyImperfection of human intelligence and attentiveness, press of business — can be mitigatedCan lead to three defectsa.) ambiguity

— two possible meanings — — different from vagueness (imprecise boundaries)

e.g. “residence,” “period from June 15 to” can be eliminated — of different words — additional words

b.) excessive vagueness — e.g. “indivisible”c.) unclear modifier — most common, most dangeroussee p.46 of Brunsvold

ADMINISTRATION OF LICENSING PROGRAMPOST-SIGNING ISSUES

Distribution of license agreement — “working copies”Cooperation with Accounting re royalty set upContinuing contacts with and monitoring, notifications of other party re

– Quality control (in trademark licenses)– Royalty audits– Information exchange and technical assistance– Grantback and grantforwards– MFL clauses– Sublicenses– Patent activities– Patent markings– Bankruptcies — M& A’s– Renegotiation, revision– Termination — Multipronged– Breach of contract– `Other follow-through

BASIC CONSIDERATIONS• Some threshold considerations, principles and rules to keep in mind for drafting

technology license agreements.• The only viable license agreement is one that results from a win/win approach and

passes the “fairness test.” A win/lose license agreement has no future. It is by far better to “open a relationship” rather than “close a deal,” when concluding a technology license. Even a 500-page agreement may not cover all possible contingencies.

• Technology license agreements covering intellectual property rights (IPRs), and more particularly patents and trade secrets, are unlike other general contracts. The laws relating to IPRs have special characteristics and peculiarities, which leads to many misconceptions.

• In technology licensing the “merchandise” involved in the transaction are IPRs and hence it is imperative that one understands the nature of the “merchandise.” The IPRs, serving as the basis of the transaction, determine much of the substance of the license agreement.

• In drafting technology licenses, the grant clause is the most important one and hence requires special attention. It is formulaic and has five crucial elements. The definitions and termination clauses are the second and third most important clauses, respectively.

• The payment clause is the very last one to be negotiated and finalized, because most other operative clauses have economic weight and affect the size of the ultimate consideration.

BASIC CONSIDERATIONS (2)• In royalty-rate setting, so-called industry standards are suspect as royalty-rate guides;

instead such factors as the stage of development of the subject technology, the strength of the IPRs and the degree of exclusivity as well as many others among Tom Arnold’s “100 Factors Involved in Pricing the Technology License” are determinative.

• In drafting technology licenses and other IPR licenses, the trend is away from archaic formalistic legalese and the preferred format or sequence of clauses is as follows: preamble, background, definitions, grant of rights, royalties, payment of royalties, license restrictions, confidentiality, enforcement/defense, future IP, duty to use, term and termination, other miscellaneous provisions.

• Most technology licenses are hybrid agreements, covering both patents and trade secrets, because without collateral know-how patented technology often cannot be practiced. But because of the different characteristics of patents and trade secrets, especially as regards duration, there has to be a differentiation in the treatment of patents and trade secrets. Royalties have to be allocated separately to each, depending on their proportional value in the technology package and there has to be a corresponding reduction of the royalty rate if the patent expires, is declared invalid or the application does not issue, inasmuch as it is per se patent misuse to continue to exact royalty payments once patent rights cease or don’t materialize (Brulotte v. Thys, Supreme Court, 1964).

• Anent the question of what role lawyers should play in licensing negotiations, many business and licensing executives believe it is better to limit the lawyer’s role to cleaning up the contract language once the business terms have been settled.

LICENSING CASE HISTYORYCLOCK CALCULATOR PATENT

Four-Step Project

1. Exhaustive infringement search and study2. Exhaustive validity search and study3. Design of comprehensive Licensing Strategy

a) Patent ownership transferred to new subsidiaryb) Narrow royalty basec) Low royalty rated) Offer of paid-up licensese) Agreements prepared for both paid-up and running

royalty licenses4. Implementation

LICENSING CASE HISTORYGOULD LASTER PATENTS

CAST OF CHARACTERS

1.) Gordon GouldSole inventor as Columbia graduate student — Owns 20% of patent rights and has a

20% share of the royalties.

2.) Richard I. SamuelPartner of Lerner, David, Samuel, et al — prosecuted Gould applications — became

President and CEO of PATLEX which had acquired 80% ownership in Gould patent rights from REFAC, a New York City licensing outfit, initially retained by Gould/Lerner, David, Samuel, et al to exploit Gould patent rights. (REFAC receives 16% and PATLEX, 64% of royalty income.)

3.) Herbert Dwight, Jr.Entrepreneur and founder of Spectraphysics and its CEO till retirement in 1988.

4.) Frank BormanFormer Astronaut and Chairman of Eastern Airlines, became Board Chairman of

PATLEX in 1988.

LICENSING CASE HISTORYGOULD LASER PATENTS

THE PRINCIPAL PATENTS1.) USP 4,053,845

Optically Pumped Laser AmplifiersFiled 4/6/59 — issued 10/11/77 — expires 10/11/94

2.) USP 4,161,436Method of Energizing a MaterialFiled 4/6/59 — issued 7/17/79 — expires 7/17/96

3.) USP 4,704,583Gas Discharge Light AmplifierFiled 4/6/59 — issued 11/3/87 — expires 11/3/2004

4.) USP 4,746,201Brewster Angle Window Laser DeviceFiled 4/6/59 — issued 5/24/88 — expires 5/24/2005

(Canada — 907,110 — ‘89)


PATENT PROCUREMENT & LITIGATION

Difficult Prosecution

Multi-party Interferences

Three Re-examinations

Appeals from PTO to District Court and Federal Circuit

Infringment LitigationControl Laser FLQuantronix CAGeneral Photomics CA


STANDARD PATLEX LICENSE

1. User LicenseGrant: non-exclusive worldwide license under USP 4,161,436 on

“Method of Energizing and Material” — immunity under all Gould patents.

Royalty: 1) 3% of purchase price of all lasers — for past infringement — within 60 days of effective date.

2) 1% of purchase price on first, second and third anniversary of effective date.

3) 6% of purchase price for future purchases unless purchased from licensed source.

4) 8% for lasers which licensee hides. 5) In case of acquisitions of companies over $20M,

royalties as per 1) — 4) within 60 days of acquisition.



2 Manufacturer License

Grant: non-exclusive worldwide license under all Gould patents.Royalty:

For Past Infringement:1) 5% of net selling price upon signing under USP 4,053,845.2) 13% under USP 4,161,436.3) 5% under Can. Pat. 907,110..4) 6% under USP 3,562,662, 3,576,500 and 3,586,998.



As Future Royalties:1) 5% under USP 4,053,845

(Optically Pumped Lasers)2) 2% under USP 4,704,583

(Gas Discharge Laser) or3-1/2% or 5% depending on occurrence of certain conditions.

3.) 3-1/2% under Application No. 869,831(Brewster’s Nagle Window)

4) 3% under USP 4,161,436(User patent)

5) 5% under Can. patent 907,1006) 6% under USP 3,576,500

(Copper Vapor Laser)7) O% under any other Gould patent.

For multiple patents — highest rate.Other terms:

complicated provisions with respect to the above patents as to royalty base.No royalty on governmental sales.Licensee’s customers won’t be sued.


KEY PROVISIONS — CRUX OF THE AGREEMENTS

Step-up royalty

from 2% to 5% in 2 steps

Triggers:

1) when one competitor licensed or sued up to 3-1/2%

2) when both competitors licensed or sued up to 5%


PATLEX/COHERENT LICENSE

USA SalesSales Range Royalty Rate

$ O — $12.5 million 5.0% $12.5 million and above 4.0%

Foreign Sales

Sales Range Royalty Rate $ O — $7.5 million 2.0%

$7.5 million and above 1.6%

As long as Spectraphysics is neither licensed nor sued, royalty is only 3% of U.S. net sales and 1.2% of foreign net sales.

Annual cap of $125K under Use Patent License.

Contains MFL Clause.


VOLUME BREAKPOINTS OR DESCENDING ROYALTY SCALE

USA SalesSales Range Royalty Rate

$ 0-$15 million 5.0%$15-$20 million 3.0%$20-$25 million 1.0%$25 million and above 0.5%

Foreign SalesSales Range Royalty Rate$ 0-$ 5 million 2.0%$ 5-$10 million 1.0%$10-$15 milion 0.5%$15 million and above 0.25%


This case history clearly illustrates the dynamic interplay of step-up royalty/MFL clauses and a descending royalty scheme with the former inducing the smaller players to sign up when the bigger competitors—here Coherent and Spectra-Physics– are holdouts and thus have an additional competitive edge by not paying any royalties. And the descending royalty schedules entice the holdouts to take out licenses, inasmuch as their total royalty exposure is significantly reduced, e.g. down to about 1.7% in the case of Spectra-Physics

TECHNOLOGY LICENSING TODAY (Highlights of Technology Licensing Course) Karl F. Jorda David Rines Professor of Intellectual Property Law & Industrial Innovation.

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