The Hard Issues in an Exclusive Field License 


Introduction

Field licenses can be difficult to negotiate. 

Some of the negotiation challenges arise because of the law that impacts upon a field license. 

Some of them arise because of the tensions that will always occur between an exclusive field licensee, that seeks and expects all the rights typically to be found in an exclusive license, and a licensor which retains rights outside the field, and therefore seeks to retain some of the rights that ordinarily would have been conferred on an exclusive licensee. 


Patent prosecution and decision making 

An exclusive licensee that has rights to all fields of application of the licensed IP, without any field restriction, will often seek to have the carriage of the prosecution of patents, as well as seek the freedom and discretions to make all decisions in relation to the prosecution of patents, including the scope of claims to be pursued, the negotiation of claims with examiners, the countries in which to pursue the grant of patents, as well as the conduct of opposition proceedings. 

An exclusive licensee in a field will often expect the same rights. 

This may conflict with the licensor’s interests. The licensor retains rights to the IP outside the field. The licensor will therefore want patent prosecution decision making to be responsive to its own needs outside the field. 

An exclusive licensee in a field that controls the prosecution of patents will primarily be motivated to make decisions having regard to its own interests in the licensed field. It will be less sensitive to the needs outside the field that are retained by the licensor. It may even not recognise that decisions it makes in relation to its own interests in its own field may impact negatively upon the licensor’s interests outside the field. 

So, how is this dilemma resolved? 

Prosecuting patents jointly, and jointly making decisions does not work. Patent prosecution “by committee” presumes that the parties will always have consensus on what is to be done. This would not normally be an acceptable option to either the licensor or the licensee. 

A mechanism for sharing information and consultation in relation to patent prosecution may be agreed. At the end of the day however, in the absence of consensus, one party will have to solely make patent prosecution decisions. Which party that will be will largely be determined by the relative bargaining strengths of the licensor and the licensee. 

A major factor influencing that negotiation will be the comparative value of the IP in the licensed field and the value of the IP outside the field. If the greater value is represented by the field that is licensed, the licensee may have the superior bargaining power to persuade that it should prosecute the patents and make decisions. If the licensor’s retained rights outside the field have the greater value, it should be in the stronger position to negotiate retaining the right to prosecute patents and make decisions.


Patent prosecution costs 

Patent prosecution costs can be expensive. If there are opposition proceedings, the cost of the proceedings can make the cost of prosecuting the patent significantly greater. 

A field licensee that is prosecuting patents will recognise that the benefit of the prosecution accrues not just to itself, but to the licensor as well. It may want patent costs to be shared, with the licensor reimbursing to the licensee one half of the costs or some other proportion. If the IP lent itself to three fields, the licensee might seek reimbursement of two-thirds of the costs. 

If the licensor is prosecuting the patents, the issue is in the same, in reverse. 

From the licensor’s point of view there is a further issue. While multiple field licensees may be anticipated, the reality is that there may only ever be one license ever granted. In that event, the field licensee being the only party to benefit, it should pay the whole of the patent prosecution costs. 

There is a solution: the first field licensee pays or reimburses 100% of the patent prosecution costs incurred, recognisng that this first field license may be the only license ever granted. If a second field license should subsequently be granted, the licensor refunds to the licensee 50% of the past expenses, which the licensor must recoup from the second field licensee. From that time, patent prosecution expenses, as well as patent maintenance expenses, are then shared 50% by the two field licensees. If a third field license should be granted, another similar adjustment would be made. 

Of course, a 50% split, or a split by another percentage is arbitrary, and it bears no relationship to the different values of the IP in the different fields. But being arbitrary for what is after all a relatively modest cost in the whole scheme of things, does not necessarily produce an unfair result. 


Prosecuting infringers 

An exclusive licensee granted rights in a field will want to be able to prosecute an infringer of the licensed IP. A licensee protecting its exclusive rights by prosecuting infringers is a core right that all exclusive licensees want to have. 

But a licensee that is exclusively licensed in a field does not have this right. 

The patent legislation of most countries requires the party prosecuting an infringer to have all the rights granted by the patent being infringed. 

This can only be:

  1. the patent owner, or
  2. an exclusive licensee under a license without a field restriction.

An exclusive license in a field grants only some of the patent's rights, not all of them.

An exclusive license in a field is therefore regarded, for the purpose of maintaining proceedings, a non-exclusive license.

A field licensee, just like a non-exclusive licensee, lacks standing, or legal capacity, to bring infringement proceedings.

To overcome this issue of standing or capacity, a field licensee that commences proceedings against an infringer will join the licensor as a party to the infringement proceedings, so that the requisite standing against the infringer is provided.

A licensor may therefore seek an indemnity from the licensee in relation to the legal fees that the licensor will as a result incur. A field licensee should be receptive to providing such an indemnity, to the extent that the licensor is passive in the proceedings, incurring minimal legal fees, and leaving the field licensee to make decisions concerning the proceedings.

If a licensor takes a more active role in the proceedings, for example, to protect its interests outside the field, it will incur more substantial legal fees which the prosecuting field licensee in that case may be unwilling to cover.