Sunday, 14 June 2009

Will the Licensor Warrant Non-Infringement?

Last week, I wrote that from time to time I will consider issues that arise in the drafting of licensing agreements. One reader has responded with the following:

"One issue that often causes problems when negotiating a licence is where a licensee seeks a warranty/indemnity that exercising their rights under the licence will not infringe the IP rights of a third party. It can be difficult to communicate to the licensee that the licensor is simply agreeing not to sue under its IP rights, not making a positive statement that there are no other IP rights which might affect what the licensee will be doing, and that it remains the licensee's responsibility to carry out any clearance searches that may be necessary to establish whether any such rights exist."
I would make the following comments:

1. As a starting point, I agree that the narrow import of the licence is that the licensor agrees not to exercise its negative right against the licensee with respect to the IP right being licensed. That said, since a full-fledged commercial licence consists of multiple elements in addition to the basic "covenant not to sue", whether or not the licensee's request is apt may ultimately depend upon the particular circumstances.

2. I must confess that, while I find this issue raised by a licensee from time to time, at least in my practice it arises less frequently than other licensing matters. It would seem to depend a lot upon the relative bargaining power of the two parties. A desperate patentee with one potential licensee, if requested to give the warranty by the licensee, may be more inclined than the licensee selected by a world-famous trade mark owner to serve as the licensee for a major territory.
Is she the licensor or the licensee?

3. An interesting twist is to migrate the issue from an IP licence to the warranties and representations given in a corporate acquisition with a major IP component. While here, as well, bargaining power may affect the extent to which the purchaser will be able to extract such an undertaking from the seller, in my experience the issue will be addressed in the agreement in some way, either with or without knowledge qualifiers or subject to other seller qualifications.

4. Following on the licence/acquisition comparison, it is not infrequent that a portion of the purchase price is held- ack for a certain period of time in connection with breach of a warranty or rep. When it comes to IP, as the purchaser, I like to carve out an additional hold-back directed specifically to IP. The greater the value of this IP hold-back, and the further out in time the IP warranty and rep extends, the more willing the seller may be to take care of IP clearance, even if not stated so explicitly in the agreement.

5. Back to the licence situation, while in my experience it is a rare for the licensor to agree to put a sum into escrow to cover potential violation of third party IP rights by the licensee under the licence, it is not unheard of.

6. Moreover, a licensee that is committing itself to a new ramp-up of facilities and resources may be well placed to expect from the licensor some form of IP clearance and/or a rep prior to entering into the agreement.

How do these observations comport with the experience of the readers? Comments are welcome.

15 comments:

Mark Anderson said...

In my experience, some knowledge-based warranties are often sought. Absolute warranties and indemnities are only rarely sought, usually by inexperienced licensees.

I am assuming we are talking about a sector such as pharmaceuticals where what is being licensed is IP. Different considerations apply in the grant of a commercial software licence, where non-infringement warranties/indemnities are often seen. I rationalise this by thinking of a software licence as a mixture of IP licence and product supply, and in the latter category supplying software is analogous to the sale of goods, where under English law there is an implied warrany of quiet possession. Case law holds that this warranty is breached if the purchaser is sued by a third party IP owner.

On one occasion a few years ago, the prospective licensee's lawyer sought full warranties and an indemnity from my client. This was in a relative backwater of the life sciences sector. I suspect the lawyer was inexperienced at licensing. His attitude was that he was "buying" IP from us, and therefore it should be "clean". Our attempts at persuasion were unsuccessful (although his commercial colleagues seemed to be convinced) and ultimately the deal failed as my client quite rightly was not prepared to take on this risk.

Neil Wilkof said...

Mark,

Thanks for the instructive and enlightening comments. As I recall, the UCC (Uniform Commercial Code) in the US contains a section that provides a warranty of non-IP infringement. I don't recall anymore how this has been applied to licenses.

Neil Wilkof

C.E. Petit said...

I'm afraid that my experience is almost exactly the opposite of Mr Anderson's (and Mr Wilkof's)... but most of my licensing work is with the publishing industry.

Licensing of copyrighted works virtually always requires a long series of absolute warranties, including not just noninfringement of third parties' IP rights, but libel/slander/privacy/publicity and of "civil rights" generally. This is virtually universal in English-language publishing, and is a frequent cause of eventual problems (e.g., Rachel Ehrenfeld). It's just as bad in music, in film, and in merchandising (e.g., t-shirts, toy phasers, plastic communicators, and anything else they can think of).

Of course, the publishing, film, and music industries try to claim that these aren't "licenses", but "rights purchases"...

Anonymous said...

Mr. Petit,

Small world--I did my Ph.D. (1982) at the U of I.

Neil Wilkof

Mark Robinson said...

I agree with your post and Mark's comments.

A licence agreement rarely consists of just a licence of IP. It will normally provide for a number of other commercial matters, such as payment of royalties, maintenance of the licensed IP, improvements, third party infringements, and warranties.

Thus, warranties are one element of what should be seen as a commercial agreement rather than just an IP licence. They apportion risk between the parties, and will vary according to the nature of the deal and bargaining strength of the parties. Knowledge qualified warranties are normally the default position, but anything is possible.

Not recognising the true nature of an 'IP licence' may be the reason for your reader being surprised by the approach of licensees.

Darren Olivier said...

Neil, thanks for your notes. Whether it be part of a corporate transaction or stand alone, my experience is that this type of warranty request frequently leads to considerable debate. I feel that, where possible, one should go further and actually spell out that the licensor does not warrant "quiet possession" especially if the licence covers multiple territories and is exclusive. Unless the licence is vetted by local lawyers in each territory and specific questions asked, there is a risk that exclusivity could be interpreted so as to imply a warranty of "quiet possession" or that the licensed right is a positive right. Related to this is an observation that trade marks are often (mis)described as conveying a monopoly right.

Mark Anderson said...

Very interesting idea from Darren about quiet possession. I suppose it depends on what law the contract is made under, as to whether this kind of disclaimer is needed.

In relation to publishing, I have looked back at the IP warranties of the last two publishing contracts that I have signed. The most relevant wording is as follows:

Contract A: the Editor’s contribution to the Work is in no way whatsoever a violation or infringement of any existing copyright or licence or duty of confidence or duty to respect privacy or any other right of any person or party whatsoever;

Contract B: the Material does not infringe any existing copyright or licence;

These warranties are of less concern than warranties of non-infringement of (all types of) third party IP. Non-infringement of copyright is a lot easier to warrant than non-infringement of patents.

Mark Anderson said...

I should clarify my last comment. The wording of the first warranty is potentially very broad, particularly the last few words (I have just noticed). However, in the publishing sector, infringement of patents is probably less of an issue than in some other sectors.

C.E. Petit said...

Mr Anderson, the quotations from your contracts probably reflect outliers, for two reasons:

Contract A is for an editor, not an author... and in the academic (as opposed to trade) world, such contracts are usually less onerous and less formal (in the Soviet literary criticism sense of "formal") than for trade authors. Even so, it's still close to what I mentioned above.

The quotation from Contract B appears quite incomplete. Let's just say that any author who turned in a manuscript as badly organized as the typical literary contract would probably be jailed at Her Majesty's pleasure for drivelling under the influence... or, at least, returned to him/her with extensive, harsh remarks from the editor. I strongly suspect that the remainder of the warranties make up for any seeming clarity offered in that clause.

Mark Anderson said...

Mr Petit

I agree with your comments about the quality of most publishing contracts. For what it is worth, here is the complete set of warranties from Contract B, which is based on the standard template of a well-known legal publisher. I accept that the stagnant backwater of legal book publishing may not reflect general publishing practice!

The Contributor warrants that:
(i) the Material does not infringe any existing copyright or licence;
(ii) the Material is original and no part has previously been published in any form (with the exception of copyright material not owned by the Contributor but included with the permission of the copyright holders);
(iii) the Material contains nothing defamatory or otherwise unlawful and no information obtained in contravention of the Official Secrets legislation from time to time in force;
(iv) he/she has full power to make this Agreement and this Agreement does not infringe the rights or licence of any other person;
(v) he/she has taken all due care and consideration taking into account the nature and potential readership of the Work to ensure that all statements presented as facts are true and accurate at the time of delivery of the typescript and that the Material contains no advice or instruction which if acted upon could cause injury damage or financial loss.

C.E. Petit said...

Mr Anderson, I think that (iii) and (v) take away anything that might have been left by apparently limiting the IPish restriction in (i) to "existing copyright or license." The manuscript must "contain[] nothing defamatory or otherwise unlawful", such as a trade secret, or infringement of a right of publicity, or invasion of privacy, or obscenity, or anything that might have gotten Mary Whitehead upset (if I'm remembering the name correctly), or that might constitute an unlawful interference in an election in a jurisdiction not otherwise considered relevant, or... And (v) isn't much better, considering what might constitute "advice or instruction", even in a work of fiction.

There's only one winner here:

The insurance company that demanded these warranties (ok, and its lawyers, so one-and-a-half winners).

Ron Laurie said...

A very interesting topic.

Having negotiated the IP reps in nearly a hundred M&A deals (totaling over $50B), I can attest that the language of the non-infringement rep is often the very last item in the entire negotiation to be resolved, usually in the wee hours of the morning before the deal is to be announced. As you note, it’s a matter of risk allocation between buyer and seller and the question is almost always whether the rep is to be knowledge-qualified or not. The conventional form of the knowledge-qualified rep is, “To Sellers knowledge, the conduct of the Business [a defined term] as currently conducted or as contemplated to be conducted does not infringe any third party patent rights.” I have found that the following alternate language can often resolve the infringement risk-allocation issue: “Seller is not aware of any facts that would lead a reasonable person to believe that the conduct of the Business would infringe any third party patent rights.” Translating this to a license context, “the conduct of the Business” would be replaced by “practicing the licensed Technology [or Patents].”

As a footnote, I pose the following legal question. How does a seller breach a conventional knowledge-qualified non-infringement rep as set forth above? In other words, since infringement is a matter of law, how would a seller ever “know” that conduct of the business [or practice of the licensed technology] infringes an unlicensed third party patent? I suggest that there are only two ways – an opinion letter from counsel to that effect (which suggests finding a new counsel) or a Federal Circuit (or equivalent foreign court) decision from which no appeal can be taken. In contrast, the proposed language above relates to what a reasonable person in the seller’s shoes would believe given all the relevant facts, rather than a legal conclusion.

Also, there’s an important difference between a patent license and a copyright (e.g., software or content) license vis-a-vis the propriety of a non-infringement rep by the licensor. Ownership of a valid copyright carries with it the legal presumption that the work is “original, “ i.e., not copied from a pre-existing work. Of course,the originality concept gets diluted in the case of a derivative work where the copyright only implies some non-trivial addition to, or rearrangement or recasting of, a prior work. In the case of patents, however, there is no implication or expectation whatever that ownership of a patent gives the owner the right to practice the invention(s) covered by the patent claims without exposure to infringement of third party patents. Rather, the right conferred by the patent is only to exclude others from practicing the patented invention, and thus there is far less justification for a patent licensee to ask a licensor for a non-infringement rep. On the other hand, as you have noted, it all comes down to a matter of negotiating leverage.

Anonymous said...

It is worthwhile to have a look at David Marchese's excellent article--"Warranties and Covenants in IP licenses"--which appeared in the March 2009 issue of Journal of Intellectual Property Law and Practice. There is a section that addresses the non-infringement issue.

John H said...
This comment has been removed by the author.
John Halton said...

As the person who raised this issue, I'm grateful for this post and its responses.

To clarify, this has tended to arise in the context of patent/know-how licences rather than publishing agreements or software licences, and with the "inexperienced licensees" mentioned by an earlier commenter. The problem is often compounded when one's client is itself an "inexperienced licensor".

So a typical example will be a UK company licensing a patent and/or know-how to a company in (say) the Far East. The licensee then demands an absolute warranty that products manufactured under that licence will not infringe any third party rights.

As others have noted, there is a difference between a copyright licence - where it's reasonable to expect assurances of originality - and a patent/know-how licence, where on a practical level it comes down to who is to bear the risk of infringing third-party patents (and who therefore should have the task of carrying out appropriate clearance searches).

Warranties of "actual knowledge" are a common compromise, but are still a risk for the licensor, as it will be deemed to "know" far more than those actually involved in the negotiations "know" (as someone said, "If only HP knew what HP knows").

@Anonymous: David Marchese's article sounds interesting. Will try to check it out.

(Reposting as posted from wrong account previously.)