Licensing: How to Avoid Entering into a Badly Drafted Agreement


LICENSING:HOWTOAVOIDENTERINGINTOABADLYDRAFTEDAGREEMENT

By
FrançoisPainchaudandPanagiotaKoutsogiannis*
LEGERROBICRICHARD,Lawyers,
ROBIC,Patent&TrademarkAgents
CentreCDPCapital
1001Square-Victoria-BlocE–8
thFloor
Montreal,Quebec,CanadaH2Z2B7
Tel.(514)9876242-Fax(514)8457874
www.robic.ca-info@robic.com

Theextentoftherightsgrantedtoalicenseeisoftendeterminedbythetypes
ofclausesfoundinthelicensingagreementbetweenthelicensorandthe
licensee.Theknowledgeandunderstandingofsuchclausesisessentialtothe
draftingandinterpretationoflicensingagreements.Thefollowingarticle
describestypesofclauseswhichcanbeincludedinlicensingagreements.
Grantofrights
Thegrantprovisionistheessenceofalicensingagreementbecauseit
establishesthesubjectmatterofthelicenceandtherightsthataretobe
extendedtothelicensee.Itisveryimportanttoadequatelydefinethe
technologythatwillbetransferred.Ifthisclauseisunclearorimproperly
understood,itcouldresultinadisputebetweenthepartieswhichmay
eventuallyrequiretheinterventionofthecourts.
Thelanguageusedinlicensingagreementscansometimesbeambiguous.A
termthatisknowntomeanonethinginonecountrymaynotbeknownto
havethesamemeaninginanothercountry.Thisisespeciallytruewhen
distinguishingbetweenthegrantofan”exclusive”,”sole”,and”non-exclusive”
licence.Thegrantofanexclusivelicencecustomarilyprecludesthepossibility
ofwithholdingaright.
However,insomecountries,theword”exclusive”standingalonecanbe
ambiguousbecausealthoughitcertainlymeansthatnootherlicensees
canbecontemplated,itisnotalwaysclearwhetherthelicensorhasalso




























































©LEGERROBICRICHARD,1999
*Lawyer,FrançoisPainchaudisaseniorpartnerinthelawfirmLEGERROBICRICHARD,g.p.
andinthepatentandtrademarkagencyfirmROBIC,g.p.;PanagiotaKoutsogiannisisa
lawyerwiththesefirms.Publication237E.


reservedforhimselfanyofthelicensedrights(thisisusuallyreferredtoasa
“sole”licence).
Thewords”soleandexclusive”aresometimesusedtogethertodescribean
exclusivelicencebutshouldbeavoidedbecauseinfactthetermsare
contradictory.Furthermore,anexpressionsuchas”openexclusivelicence”
whichissometimesusedwillnotnecessarilymeanthesamethingforone
personasitwillforanother.Insuchcasesitisessentialtoincludefurther
descriptivelanguageinordertoleavenodoubtastothelegalcharacterof
thelicencebeinggranted.
Thegrantprovisionmustalsoforeseetherighttoeithermake,useorsellthe
licensedproductoracombinationoftheserights.Whenthegrantprovides
fortherightto”make,useandsell”,apatenteeiscompletelywaivinghisright
toexcludethelicenseefromenjoymentofthepatentedinventionwithinthe
territorytowhichthepatentpertains.Itisthereforeviewedasnotnecessary
tousewordssuchas”havemade,…lease,…orotherwisedisposeof”.Ifsuch
wordsareused,thecourtsmaybeforcedtointerprettheclauserestrictively
sincetherehasbeenadeparturefromthecommonlanguageusedinthese
clauses.Hence,itisnotalwayswisetotrytoclarifybyaddingmorelegal
termswhicharenotnecessary,becausethiscouldhavetheoppositeeffect
andmaycauseconfusion.Ifsuchtermsmustbeusedbecauseofsurrounding
circumstances,theyshouldbeusedinanon-limitativelist.
Therightstomake,useandsell,althoughoftenseentogether,areseparable.
Howeveragrantthatonlyprovidesfortherighttomaketheproductwould
beuselesswithouttheadditionalrighttoeitheruseorsellsuchaproduct.Itis
thereforeverylikelythatwhenthegrantprovidesonlyfortherighttomake
theproduct,thecourtswillalsoimplyarighttouseorsell.
FIELDOFUSE
Thefieldofuseprovisionrequirescarefulandprecisedraftinginorderto
clearlyseparatethevariousfieldsofusewhichareoftentoofinelydivided.
Thedifficultyliesintryingtodividefieldsofuseinareaswherethe
technologiesarecomplexandthereisahighpotentialforoverlapbetween
thelicensedproducts.Thetaskbecomesevenmorechallengingwhenthe
usefulnessoftechnologyhasyettobeproven.
Inordertoavoiddisputes,thelicensorshouldattempttolicenceusesthatare
indeedseparableandnoncompetitive.Aproblemthatmayresultfromthe
inclusionofafieldofuseclauseinthelicensingagreementisthedivisionofa
naturallycompetitivemarket,whichintheU.S.givesrisetoantitrustissues.


Whenthedivisionisacommercialoneinsteadofatechnicalone,the
interferenceinnaturalcompetitionisevenmoreapparent.Forexample,ifthe
licenseeisprohibitedfromsellingtocompaniesandcanonlysellto
individuals,heisbeingrefusedaccesstoasubstantialpartofthemarket.
Nevertheless,thistypeofseparationhasbeenfoundtobelegalbytheU.S.
Courts.Furthermore,thistypeofprovisionrestrictsthepotentialforinitiative
andexpansiononthepartofthelicenseewhoislimitedtoaspecificuseof
thelicensedproduct.Ineffect,itprohibitsthelicenseefromrealizingthe
benefitsofthelicenceincertaintechnicalfields.
Whenthefieldofusecoveredbythelicenceisnotclearlydefined,the
licenseemaybetemptedtoexploitunexpectedusesofthelicensed
technologywhichmightdevelop.Thiswillbedisadvantageoustothelicensor
whonegotiatedtheoriginalagreementwithonlyacertainuseinmind,and
whoisreceivingroyaltypaymentstoreflectonlythatportionoftheuse,while
thelicenseeisreceivingmorethanhebargainedfor.Afieldofuseclause
shouldthereforeidentifytheprecisefieldagreeduponbythepartiesand
maintaintheLicensor’srightsinanynewfieldnotforeseenorforeseeableon
thedaytheagreementisexecuted.
Restrictionontheuseofaproductwillnotbeinferredifthereisnoexpress
termintheagreementtoimposeapossiblerestriction.InUnionIndustriesInc.
v.BeckettPackagingLtd.(1993),48C.P.R.(3d)523(Ont.C.G.D.),theCourt
cametotheconclusionthatintheabsenceofanyexplicitrestrictions,when
apurchaseracquiresalicenceforapatenteditem,heorshereceivesa
licencetodealwiththeiteminanyway.
MOSTFAVOURED-LICENSEE
Thelicensorwhoentersintoalicensingagreementshoulddoeverything
possibletoavoidincludingamost-favoured-licenseeprovisioninthe
agreement.Thelicenseeontheotherhandwillwanttomakesurethathe
includesaprovisionwhereheistreatedaswellasasubsequentlicensee,if
notmoreadvantageously.Ifthepartiesdodecidetoincludesuchaclausein
theagreement,itshouldbedraftedverycarefully.
InarecentAmericandecision,StudiengesellschaftKohle,m.b.v.HerculesInc,
105F.3d629(Fed.Cir.1997),weseethedisadvantagesthatcouldarisefora
licensorwhoincludesamost-favoured-licenseeprovisioninthelicensing
agreement.Inthiscase,theCourtwasforcedtoconcludethatthelicensor
hadbreachedthelicensingagreementwhenhehadfailedtoinformthe
licenseeofalicencethathehadgrantedtoasubsequentlicensee.The


originallicenseehadmanagedtohaveincludedintheagreementavery
broadmost-favoured-licenseeprovisionandwhenthetimecametohaveit
interpreted,theCourthadnochoicebuttoruleinthelicensee’sfavour.
Thebiggestproblemwiththistypeofprovisionisthatnotenoughthoughtis
giventothecontentandnotenoughlimitationsareplacedonits
applicability.Innegotiatingthistypeofclausetherearecertainfactorsthat
needtobetakenintoconsiderationaspossiblerestrictionstotheclause:i)a
timeconstraintcouldbeplacedinthelicence;ii)therecouldbealimitation
tospecificpatentsand/orpendingapplications;iii)themost-favoured-
licenseeclausemaybelimitedtonon-litigationrelatedlicenses.
Ifsuchaclauseistobeincludedintheagreement,thelicensorshouldrequire
thatthelicenseebeforcedtoacceptallthetermsthatappearinthemore
favourableagreement,ratherthanallowinghimtochooseonlyselected
termsthataretohisadvantage.
BESTEFFORTS
Thedifficultyarisingfromthistypeofprovisionisindefiningtheterm”best
effort”andindecidingwhattypeofeffortcanbeconsideredasthe”best”
effort.Althoughthistermiswidelyusedinlicensingagreements,the
uncertaintyoverlegaltreatmentofsuchaprovisionimpedestheabilityof
partiestocontracteffectively.
Overtheyears,thecourtsintheUnitedStatesandCanadahavebeencalled
upononseveraloccasionstointerpret”bestefforts”clauses.Eachtime,the
courtshavebeeninconsistentinthetreatmentofsuchaclauseanditis
thereforedifficulttoappreciatetheextentoftheobligationplacedona
licensee(orlicensor)whoisboundtoputforwardhisbesteffortinmarketing
ordevelopingacertainproduct.
InBloorv.FalstaffBrewingCorp.,601F.2d609(2ndCir.1979)theCourtwasof
theopinionthatthebesteffortsobligationwasviolatedeventhoughthesale
oftheproductwashighlyunprofitable.However,inWesternGeophysicalCo.
v.BoltAssociates,Inc.,584F.2d1164(2ndCir.1978),thebesteffortsobligation
washeldtobesatisfiedeventhoughnodevicehadbeenmadeorsold.This
wasduetothefactthatthedevicewasnotmechanicallysoundand
Westernwastryingtoimprovethemechanicalreliabilityofthedevicebefore
puttingitonthemarket.Howevertheeffortsputintodevelopingtheproduct
wereseenbytheCourtasbeingsufficienttosatisfythecontractualobligation
ofusing”bestefforts”.


InZilgv.Prentice-Hall,Inc.,717F.2d671,cert.denied,466U.S.938(2ndCir.
1983),thetestusedfordecidingwhether”bestefforts”hadbeenusedwas
limitedtowhethertheproducthadbeengivenareasonablechanceof
achievingmarketsuccess.
Anothertestusedbythecourtsindeterminingwhethertheobligationof”best
efforts”isbeingsatisfiedisasubjectivetestasopposedtoanobjectiveone.
Thistestwouldtakeintoconsiderationthepotentialitiesofthelicensee’s
businessandthecircumstancesthatmightarisetoaffectit.Thepartywith
suchanobligationcanonlybeaskedtodothatwhichisreasonably
expectedunderthecircumstances(RespirexofCanadaLtd.v.Flynn(1975),
22C.P.R.(2d)104(Ont.H.C.)affirmed(1978)41C.P.R.(2d)74(Ont.C.A.)).
InCanada,thereiscaselawdefiningtheterm”bestefforts”usedincontracts
otherthantechnologytransferagreements.Thecourtsinsuchcasesseemto
equatethebesteffortsprovisiontoanobligationto”leavenostone
unturned”:C.A.E.IndustriesLtd.v.R.(1983),2F.C.616(F.C.T.D.).Thiswould
imposeatremendousobligationuponthelicenseetoensurethateverysingle
possibilityforexploitingorefficientlymarketingtheproducthasbeenthought
ofandthatnoanglehasbeenneglected.Suchanobligationwouldimplya
substantiallygreaterefforttobegivenbythelicenseethanthatwhichis
usuallyrequiredtosatisfythistypeofobligationbytheAmericancourts.
ImpliedObligationofBestEfforts
Thecourtshavesometimeshadtodecidewhether,intheabsenceofan
expressobligationtothateffectinacontract,thelicenseeisboundtothe
performanceof”bestefforts”arisingfromanimpliedobligation.Thisissuewas
dealtwithindetailbytheU.S.CourtofAppealsinPermanenceCorporation
v.Kennametal,Inc.,908F.2d98(6thCir.1990).TheCourtacknowledgedthat
suchanobligationhassometimesbeeninferredincertaincircumstances
whereforexample”noadvancepaymentsweremadeandthelicensorhad
torelyentirelyonthegoodfaithofthelicenseeinordertoreceiveany
considerationinreturnforthegrantoftheexclusiveagency.”
Theargumentofthelicensorinthiscasewasthattheprovisionforroyalty
paymentsimpliesabesteffortsobligationbecauseroyaltieswillonlybe
generatedifthedefendantisunderadutytoexploitthepatentedprocess.
HowevertheCourtcametotheconclusionthatasubstantialminimumor
advanceroyaltypaymentprovidessufficientincentiveanddemonstrationof
goodfaithbythelicenseetodevotebesteffortsforthedevelopmentofthe
technology,andthattheimplicationofabesteffortsobligationneednotbe
made.Inaddition,theCourtstated:”Especially,asistrueinthepresentcase,


whenaninventorgrantsalicencetopatentedtechnology,theapplication
ofwhichisunknown,acommitmentonthepartofthelicenseetodevote
besteffortstothedevelopmentofthetechnologyisasubstantial
commitmentwhichshouldnotbeautomaticallyinferred”.
Inlightofthis,itwouldseemthatalicensororlicenseewhowishestoobtain
anobligationofbesteffortsfromtheotherpartyshouldmakesuretoinclude
anexpressobligationtothiseffectintheagreementitself.
Alternativestothe”BestEfforts”Clause
Thefollowingarealternativestothe”bestefforts”clause:i)thepriorityof
developingthelicensedproductcanbestatedinrelationtootherproducts
andtechnologiesthatarebeingdevelopedatthetimeofformationofthe
contract;ii)thepriorityofthenewproducttobedevelopedcouldbestated
relativetotheproductlinesofthecompanyintermsofperitemprofit,sales
volume,historicalimportancetothecompanyetc;iii)thelimitationsofthe
budgetandworkforceofthecompanycouldbestatedaslimitationsona
“bestefforts”obligation;iv)minimumandmaximumcommitmentsof
manhoursandexpensescouldbedetailed;andv)worktobeperformed
couldbeoutlinedinsomedetail,etc.
Itisthereforepreferabletospecifyminimumperformancerequirementsrather
thanbroad,vaguetermssuchas”bestefforts”or”reasonableefforts”.
Inconclusion,itisimportanttonotethatusingastandardmodelmaybe
helpfulbutmaynotalwaysbesuitableforallclientswhohavedifferent
needsandobjectives.Itisessentialtoreadeachclauseandcarefullyadapt
ittotheparticularcaseinquestioninordertoprovidetheclientwitha
licensingagreementsuitableforhisorherneeds.



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