International Licensing Transactions

Protection Of Patents & Know-How

Transfer of technology from its owner to other parties through licensing is an attractive alternative to exports, joint ventures and wholly owned subsidiaries and is often a constituent of these structures.  Several areas of technology may be involved such as:  the sale, leasing, operation and maintenance of machinery and equipment and blueprints;  training and engineering assistance;  supply of components and raw materials;  marketing and promotion programs;  and management contracts.
International technology transfers often occur through patent and know-how or trade secret licensing.  Patents may be obtained in all countries in which the owner anticipates that there will be parties interested in purchasing the technology.
Know-how is commercially valuable knowledge which may or may not constitute a trade secret and may or may not be patentable.  Maintaining confidentiality of the owner's know-how may be a critical strategy to protect the market position of the business.  For example, Coca Cola has successfully protected its formula religiously for several decades through a variety of methods.
Legal protection of know-how varies from country to country.  Protection of know-how involves contract, tort and trade secret law.  Employees with access to important know-how should be bound by non-disclosure agreements.  Certain industries, such as the chemical industry, rely upon trade secret law due to the concerns over public disclosure and time limitations associated with patent rights.

Licensing permits companies of all sizes to lower risks and costs associated with direct investment. Licensing offers an intermediate solution between exporting from the owner's own country and direct investment in the new market.  It may be the initial step toward expansion through acquisition or joint ventures.  In many markets, licensing may be the most efficient way to expand overseas and maximize earnings from proprietary technology.
Exports may face high tariffs and other barriers and direct investment is often costly, risky and subject to various legal restrictions.  Shortage of capital and human resources may preclude acquisition or new investment.  In a licensing agreement, no capital outlay is usually required by the licensor nor are substantial management and technical resources required.
For some companies, protection of technology is the most important benefit from licensing.  A license may be granted as a shield against patent or trademark infringement, especially in markets where infringement is common.  After issuing licenses, the licensor's best protection against competition may be its ability to continually make new technological advances to its technology.
The technology owner can obtain access to the licensee’s marketing strengths.  A licensee may improve the owner’s technology and offer related technology and offer new marketing strategies.

Licensing and selling know-how may also pose legal risks.  The licensee bears risk that the licensed technology is obsolete.  The licensor suffers legal risks, including the risk of losing royalty payments due to currency exchange regulations, high tax rates on royalties.   Also, the licensee may produce gray market goods which compete with the licensor in other markets.  Upon expiration of a patent, the technology becomes part of the world domain so that the licensee may compete independently.  There may be concern that the licensee will seek direct sales or sublicenses outside its permitted region, thereby competing with the licensor or other licensees.  Provisions restricting the licensee’s markets in some markets may violate antitrust laws.
When technology is transferred to a subsidiary in a foreign country, the corporate parent should provide for technology transfer at arms length under a written agreement.  The separate nature of the parent and subsidiary must be maintained in order to avoid the parent from bearing liability for the debts of the subsidiary if the corporate veil is pierced.
Third world countries have often regulated patent and know-how licensing agreements.  For example, Brazilian and Mexican laws regulated technology transfers by limiting royalty levels, prohibiting certain terms such as export restraints and resale price maintenance.    If there are no technology transfer rules in the transferee's country, the intellectual property transfer agreement must be negotiated by the parties.  The transfer may involve property protected by patents, copyrights and trademarks.  In nations which do not protect know-how, it must be protected in the transfer agreement.  The transferee must agree to the conditions of usage and assume responsibility for its improper release to other persons, particularly competitors. 

Foreign Joint Ventures
A foreign joint venture needs technical assistance and know-how to commence operations.  Licensing terms typically constitute a part of a joint venture agreement.  A trade agreement may also be involved in which the licensor provides necessary supplies to the licensee or joint venture.  A form of transfer pricing may be used to mark up the price of goods to allocate revenues to preferred parties.
If technology is transferred in a joint venture agreement, the agreement should specify the rights of access of the licensee joint venture partner to sensitive technology.

License Obligations
The licensee typically bears various obligations.  The licensee typically must use its best efforts to exploit the license in terms of manufacture, development, marketing, advertising, servicing, etc.  The licensee must keep the licensor informed of the production, sales and prices.  Pricing controls may run afoul of antitrust laws in the foreign country.  Licensing of sales know-how in the sale of a product typically includes regulation of advertising, participation in promotional efforts, sales training, etc. 
Many agreements require the licensee to disclose and grantback to the licensor any improvements to the technology.  The licensee is prevented from disclosing information learned from the technology transfer.  The agreement should specify which employees are entitled to access to the technology in order to carry out the license obligations.
The licensee is typically required to meet quality standards set by the licensor because poor standards would cause the product bearing the trademark of the licensor to harm licensor's reputation for high quality.  Quality control may be monitored by allowing the licensor to inspect the operations of the licensee, obtain samples and require corrections to be made promptly.
There are various methods of payment required, including an up-front payment, lump-sum payments, royalties, payments for imports and payments for purchase of raw materials and services uch as advertising and technical assistance.
Often, the most difficult aspect of international licensing agreements is the question of termination.  Many agreements provide a specific duration and obligations at the end of the term such as licensee's obligations to return materials relative to the technology.  The agreement usually provides for events of termination prior to the expiration of the stated term.  The licensee will be concerned about prematurely losing its financial investment by early termination by the licensor.  The parties may agree upon termination for cause and specify the events which constitute cause.  Some licensors desire termination rights at will based upon a reasonable notice period.  Upon termination, there are continuing rights and duties.  The licensor will demand return of all books, notes, drawings, documents, samples and models provided to the licensee.  The licensee will be required to cease all manufacturing and marketing.  Accrued rights such as payment obligations and unconveyed grantbacks may not terminate.  The obligation to maintain secrecy and confidentiality of the know-how will continue. 

Dispute Resolution
Another major provision involves the agreement to the choice of law and forum in the event of disputes.  American licensors typically request provisions providing for resolution in Unites States and application of American law.  In the past, foreign laws often stipulated that disputes must be resolved in courts of the licensee's country under its local laws.  A partial resolution is to provide for arbitration.  Many developing nations are relying upon UNCITRAL rules for arbitration.
In U.S. transactions having no international components, arbitration is an efficient alternative to litigation to avoid many problems of litigation, including lengthy court delays, high costs, substantial client time participation, intense animosity among the parties, and unpredictability of juries.  These factors are heightened in international transactions because a party may forced into overseas litigation in a foreign forum chosen by the other party and there may be high costs of executive time spent, travel expenses, and lodging in the foreign venue.  Additional expenses may be incurred due to language translation and fees of the law firm representing the client in the country of litigation.  These considerations generally weigh in favor of arbitration in lieu of litigation.
ADR (alternative dispute resolution), JAMS (private Judicial and Mediation Services) and UNCITRAL (United Nations Commission on International Trade Law) offer alternative methods of dispute resolution to avoid litigation.  In international business agreements, dispute resolution by arbitration offers several advantages.  However, there may be certain drawbacks in particular cases.
Initially, the major issues of a business agreement should be reviewed.  In a technology agreement involving  transfer to a foreign business, the U.S. business may be concerned that the foreign party will breach the non-competition clause after the agreement end by selling products in the U.S.  The American business may desire to obtain an injunction through an American court.  A temporary injunction may be readily obtained to stop the foreign party.  Arbitration would probably not offer such a speedy remedy.
The costs of arbitration include the arbitrator's which are often based on high hourly rates.  In a panel of three or more arbitrators, the costs may mount quickly.  International contracts should provide that in any dispute between the parties involving a claim of damages of $100,000 or less (for example), only one arbitrator will be chosen.  If the claim exceeds the specified amount, three arbitrators will be chosen.
Arbitration clauses should specify that arbitrators must be experienced in the subject area of the contract.  In a specialized and technical dispute, an arbitrator with experience in the particular field could expedite the process substantially.  A judge may obtain assistance of court-appointed experts using the Federal Rules which allow a federal district court to appoint an expert witness in connection with a specific issue.
Evidentiary rules in arbitrations are more relaxed.  International arbitrators typically prefer written materials to live witness testimony.  In certain cases, live testimony may be desired which dictates that jury litigation should be selected.  Certain arbitration rules, such as those of UNCITRAL, do not give subpoena powers to arbitrators.  Therefore, if live testimony by a reluctant witness is an essential element of a case, litigation may be desired to take advantage of the trial court's subpoena powers.
The selection of counsel in an arbitration matter may be important.  Many countries prevent an attorney not admitted to practice law in that jurisdiction to represent a party in an arbitration.  Until recently, Japanese rules did not permit American attorneys to represent parties in arbitrations.  A client may be compelled to retain an attorney not well known to the client, and to bear the expense of the attorney's orientation to the case.  These difficulties may force the client to compromise its claim unfairly.
It is essential that the potential arbitrator be neutral and unbiased.  The recent Statement of Independence of prospective arbitrators of the International Chamber of Commerce Court ("ICC Court") requires disclosure of facts which could influence the arbitrator's neutrality.  An international contract should allow a party to challenge an arbitrator's impartiality in the event of circumstances which raise questions regarding the arbitrator's impartiality.  The contract should also provide which tribunal would review the challenge, on what occasions the challenge may be made, and whether the tribunal's decision is appealable.

Other Provisions
There are a variety of other important provisions in licensing agreements which must be addressed.  For example, a variety of important questions must be negotiated in each license agreement covering important topics such as assignment clauses, force majeure, notice of infringement, warranty of title, government approvals and non-competition arrangements.
Transfers may be involved in various international legal arrangements, including franchises, computer software and management contracts.  Because of the various legal and technological issues involved, no two technology agreements will be alike.  However, many of the most common elements in these agreements are described above.

Arbitration vs. Litigation Remedies

Discovery is not permitted in most arbitration procedures, which is a prime reason why arbitration is quicker and less expensive than litigation.  However, discovery may assist the attorney to discover the merits of the case for both parties.  Arbitrations may result in an unfocussed arbitration, with each side presenting numerous claims, including facts which may not have been disclosed to the other party.  In certain cases, the lack of focus and the surprise element may make arbitrations imprecise and unfair.    Pretrial motions are typically not available in arbitration proceedings.  In court cases, a party may bring a pre-trial motion for summary judgment.  A non-meritorious claim may be terminated before trial, thereby saving time and attorney fees.  In a foreign arbitration without pre-trial motions, expenses and time may be incurred in a non-meritorious case.
Parties to international contracts should learn the arbitration rules of the forum that will hear the matter.  Certain states, such as New York, do not allow punitive damages awards in arbitration matters.  If punitive damage claims may be made, litigation may be desired.
It is essential that the potential arbitrator be neutral and unbiased.  The recent Statement of Independence of prospective arbitrators of the International Chamber of Commerce Court ("ICC Court") requires disclosure of facts which could influence the arbitrator's neutrality.  An international contract should allow a party to challenge an arbitrator's impartiality in the event of circumstances which raise questions regarding the arbitrator's impartiality.  The contract should also provide which tribunal would review the challenge, on what occasions the challenge may be made, and whether the tribunal's decision is appealable.

Know-how may involve technical or scientific services, but also may involve marketing and management skills, all of which constitute valuable business assets. Licensing provides a low cost and expeditious method of penetrating new markets.  In our current economic conditions of slow growth and high competition, businesses must be able to reduce costs and increase efficiency to survive.  Today, licensing provides a sound alternative strategy

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