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As some recent cases illustrate, the most important job of the attorney specializing in the licensing of intellectual property is to understand the business deal, reasonably allocate the risks and memorialize the understanding of both parties in writing. If the parties are amicable and the attorneys reasonable, the task is not complex. The lawyers should make sure the written agreement accurately reflects the business deal and that all important contract terms are clear and unambiguous. They should also avoid technical and other jargon that can only be understood by lawyers or engineers. Litigation is most often the result of one party failing to meet its end of the bargain along with ambiguous terms that do not make it entirely clear whether or not a breach has occurred. A court or trier of fact should not be left to determine a missing contract term or to interpret otherwise ambiguous contract provisions. For example, Intel Corp. v. VIA Technologies Inc. 174 F. Supp. 2d 1038 (N.D. Calif. 2001), involved the scope of a royalty-free license covering an industry-wide standard for certain computer-chip specifications. Intel alleged that a certain protocol known as FastWrite was covered by an Intel patent and was outside of the scope of the royalty-free license granted to VIA. According to Intel, the royalty-free license covered only “base line features.” The license agreement itself, however, did not use the term “base line.” VIA, on the other hand, argued that the license granted it the right to use all necessary technology and not just “base line” features. The court agreed with VIA and stated that “even if there is an ambiguity in the license, such ambiguity must be resolved against Intel, the drafter of the license, given that solely Intel drafted the license and offered it on a take-it-or-leave-it basis, i.e., it was not a product of bi-lateral negotiations.” CLARITY COUNTS Even a neophyte to the world of licensing can appreciate the basic lesson learned from this case: Avoid ambiguity and clarify terms. Another recent case further bolsters the argument for clarity. In Gardner v. Nike Inc., 279 F.3d 774 (9th Cir. 2002), the 9th U.S. Circuit Court of Appeals held that an exclusive licensee did not have the right to resell or sublicense the copyright without the consent of the owner. This case involved a license agreement between Nike and Sony for a Nike cartoon character called NC Teach. Nike transferred the exclusive, perpetual, worldwide rights to Sony. The license agreement was silent as to Sony’s ability to assign. Sony then assigned all of its rights to Gardner “as-is” on a quit-claim basis. The court held that absent explicit contractual language to the contrary, exclusive licenses are assignable only with the consent of the licensor. This case offers another basic licensing tip: Get important rights and obligations in writing. If acquiring rights to copyrightable subject matter by way of a license and the right to assign the license to a third party, make sure to cover explicitly such right to assign in the agreement. Obtaining an exclusive license may seem the same as an outright purchase. As evidenced by this case, however, the copyright owner as the licensor still retains certain rights to control further disposition of the copyrightable subject matter. It would certainly appear from these two cases and others that the freedom of parties to reach an understanding and articulate their agreement in the form of a written document is encouraged by the courts. So long as the parties are able to effectively and unambiguously document their understanding, the courts will be reluctant to interfere and suggest new or different terms. THE ‘SCHEIBER’ RULING Then along comes a case like Scheiber v. Dolby Laboratories Inc. 2002 WL 1307414 (7th Cir. 2002). Peter Scheiber was a musician turned inventor who held U.S. and Canadian patents on the audio technology known as “surround sound.” In 1983, Scheiber sued Dolby for patent infringement, and the parties agreed to settle their dispute with a license agreement. Scheiber’s U.S. patents were scheduled to expire in May 1993, and his Canadian patents were to expire in September 1995. Dolby suggested, in the course of negotiating the license agreement, that, in exchange for a lower royalty rate payable to Scheiber, the license agreement would provide that royalties would continue beyond expiration of the U.S. patents. Scheiber agreed to Dolby’s payment plan, and the license agreement was drafted accordingly to allow for such payments. As soon as the first U.S. patent expired, Dolby refused to pay Scheiber. Dolby argued that its duty to pay royalties on any patent covered by the license expired as soon as the patent expired. Since royalties were based on Dolby’s sales of equipment that were within the scope of the patents, once the Scheiber patent expired there were no longer Dolby sales of equipment covered by any patent claims. But the principal argument of Dolby was based on the U.S. Supreme Court decision in Brulotte v. Thys Co., 379 U.S. 29 (1964), that a patent owner may not enforce a contract for payment of patent royalties beyond the expiration of the patent. Brulotte, which has never been overruled but is often criticized, also involved a license agreement covering patents that expired on different dates. According to the Supreme Court, by extracting a promise to continue paying royalties beyond expiration, the owner of the patent is extending the patent beyond the term fixed by statute and therefore is in violation of the law. CRITICISM OF ‘BRULOTTE’ The Scheiber court harshly criticized the Supreme Court reasoning in Brulotte and suggested that upon expiration of a patent anyone can make the patented process or product without infringing, so that the ongoing payment of royalties by a licensee does not, in fact, extend the patent term at all. Whether the royalties are paid at a higher rate over a shorter period of time or a lower rate over a longer period of time should not matter. Charging royalties beyond the term of the patent does not lengthen the patent owner’s monopoly, but merely alters the timing of the royalty payments. Despite the Scheiber court’s criticism of Brulotte, it still found that it had no authority to override a U.S. Supreme Court decision “no matter how dubious its reasoning strikes us.” The Scheiber court cited another U.S. Supreme Court case, Aronson v. Quick Point Pencil Co., 440 U.S. 257 (1979), which was decided several years after Brulotte. Aronson upheld a license similar to the one in both Brulotte and Scheiber. Aronson, however, involved a patent applicant who was granted a license for an as-yet unissued patent with royalties payable for as long as the licensee continued to sell products embodying the invention. Since no patent was ever granted, the doctrine of patent misuse did not invalidate the license. The “leverage” that a patent owner exercised in Brulotte to extract royalties beyond the patent term was, according to the Supreme Court, absent in Aronson. AN UNUSUAL DILEMMA Scheiber was facing a double-edged sword. He could not sue Dolby for patent infringement since his patents had already expired. He could only sue Dolby to enforce the license, which according to the court was invalid based on Brulotte. What about fairness and equity? Scheiber unsuccessfully argued that Dolby had “unclean hands,” as it was Dolby that had asked him to stretch out the payments beyond the patent term and now sought to get out of the obligation it “not only accepted but volunteered to shoulder.” The court, however, found that the doctrine of unclean hands would apply only if Dolby was seeking equitable relief. Dolby simply did not want to pay on the grounds that its duty to pay on the license was unlawful and therefore unenforceable. The Scheiber court tried its best to find a way around the Supreme Court decision in Brulotte but reluctantly affirmed the summary judgment in favor of Dolby. What lesson can be learned from this case? If the parties want to extend payment beyond the patent term, they could consider a hybrid license that includes trade secrets with separate royalties payable for the patent. While royalties may end for the patent, they can continue for the trade secrets licensed. In good faith, two parties reached a reasonable accommodation and agreement that ended a patent infringement dispute. Neither party ever argued that the written agreement failed to capture the purpose and intent of the parties. The lawyers who drafted the license agreement did what they were expected to do and memorialized the understanding. There was no ambiguity and the terms were clear. Yet, despite a meeting of the minds between two parties achieved through arms-length negotiations, one party was able to walk away from the bargain that it had made in good faith, while the other party was left to wonder what might have been. Scheiber and Dolby had dared to define the payment terms in their license agreement. To protect us all from patent misuse and in the name of Brulotte and the U.S. Supreme Court, the 7th Circuit chose to invalidate a fair and reasonable agreement. Michael Cohen focuses his practice on transactional matters related to intellectual property in the Minneapolis/St. Paul office of Merchant & Gould (www.merchant-gould.com).

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