Sharing technology transfers should include IP protections

The ongoing economic crisis, while depressing valuations of a number of companies and increasing their need to raise capital, has created opportunities for companies with strong balance sheets seeking to expand their product lines and enhance their current offerings.

Similarly, rulings by the World Trade Organization involving perceived attempts by China to protect its market might have the result of increasing the number of collaborative business relationships between China-based and foreign companies. These relationships might include the right to share aspects of each other's intellectual property.

Companies negotiating over the scope of a license to share technology or other forms of intellectual property should consider the following issues:

Transfer/license: When a company seeks to acquire the rights to use technology developed by another entity, both entities are well advised to focus carefully on the description of the technology in question.

Too often the technology is described too generally, or by reference to trade names for the products that embody the technology, providing a fertile ground for later disputes.

Likewise, specificity regarding the nature of the transfer is very important, with an outright sale potentially triggering subsidiary issues such as the rights of creditors who have a security interest in the technology, or involving prior users to whom the transferor has on-going obligations.

Licenses give rise to different issues, with the broadest form of license typically providing for a perpetual, world-wide, non-exclusive, generally non-transferable license to use, reproduce and create derivative works based on the technology.

Typical restrictions sought by the licensing company include limitations on the right to distribute, sub-license or market the technology on a stand-alone basis. Other restrictions include geographical and use limitations, application (or market) specific limitations, and time-based limitations.

Change in control: When the companies are engaged in a licensing transaction, the licensor should carefully control the potential for unknown parties to gain the right to use through an acquisition of or merger with the licensee.

Rather than relying on language that results in a termination of the license in the event of a change in control, alternatives include further limiting the scope of use in the event of a change in control to the specified products being commercialized (or processes in use) at that point in time.

Should the right to continued use be considered, further protections should be specified in the license agreement regarding the surviving entity's confidentiality obligations. For example, in the case of source code for software a dedicated server can be required, without network connectivity and with access limited to specified employees.

Ownership rights: Generally speaking, a licensor should be very clear regarding retention of all of the various ownership rights to the technology being licensed, with no intellectual property (IP) rights other than what are specifically described in the license.

However, agreements that have cross-border applications must consider the different rights that inure to a transferee or licensee in each jurisdiction.

In addition, the license agreement should be explicit regarding the rights to own or use "derivative works" (a work based upon one or more pre-existing works, such as a software product that elaborates or improves upon all or a part of the licensed technology).

Terms: License agreements, by the nature of the relationship between the parties, have a number of ongoing rights and duties throughout the existence of the agreement and, in some cases (such as the duty of confidentiality), that extend beyond the termination of the agreement.

In addition to the primary right of the licensee to use the technology being licensed during the term of the license, other obligations such as the duty to provide various reports, the payment of periodic license fees and marking obligations (as in the case of licensing patented technology) should be clearly delineated.

Even technology transfer agreements, through which one company transfers full ownership to another, might have ongoing rights and obligations such as a payout based on sales revenues generated over a period of time.

Both parties must consider carefully the question of the duration of the specified obligations, the extent to which the failure to satisfy any of these obligations will give rise in the other party the right to terminate the agreement, and the consequences (to both parties) in case of termination.

For example, will the licensee have any further rights to sell products remaining in inventory that were developed through the use of the licensed technology once the license is terminated?

Will the licensee be able to provide support to its customers if that support requires use of the licensed technology? Will the licensor have any right to future payments, revenue streams or to service the former customers of the terminated licensee?

Liability: Transferors or licensors routinely seek a provision that limits liability, either by amount (such as the among being paid under the agreement) or by type of damages (to exclude, for example, consequential damages or lost profits).

In turn, the transferee/licensee should consider an indemnity provision that obligates the transferor/licensor, especially with respect to the potential that the technology in question infringes the intellectual property rights of third parties.

Export controls: There are many areas where the export of technology from the United States is subject to various restrictions.

For China-based companies seeking to obtain (by transfer or license) the technology from companies located within the United States, the agreement should specify that the transferor/licensor will comply with all US laws and regulations controlling the export of certain commodities and technical data.

This includes all Export Administrative Regulations of the United States Department of Commerce, and that the licensor bears sole responsibility for any violation of such laws and regulations.

Jurisdiction: Each party in a cross-border transaction has a reason to seek to apply the law of the jurisdiction in which they reside, and further to specify that the resolution of any dispute must take place in a court located within that jurisdiction.

The author is a Silicon Valley managing partner for the US law firm Dechert LLP. The opinions expressed in the article are his own

(China Daily 09/21/2009 page9)