Volume 22, No.

Fall 2010

Committee Chairs
Erick Howard
Shartsis Friese LLP
San Francisco, CA Published by the Intellectual Property Litigation Committee of the ABA Section of Litigation © 2010 American Bar Association, All Rights Reserved
ehoward@sflaw.com
John P. Hutchins This Issue: Licensing Disputes
Troutman Sanders LLP
Atlanta, GA
john.hutchins@troutmansanders.com
Current Law on Compulsory
Licenses for Post-Verdict
Joseph Drayton
Kaye Scholer
New York, NY
jdrayton@kayescholer.com
Patent Infringement
Newsletter Editors
Editor in Chief By Nicole D. Galli
Steve Gardner
Kilpatrick Stockton LLP

T
Winston-Salem, NC
sgardner@KilpatrickStockton.com o quote Shakespeare’s Romeo & congressional authority to use that which
Juliet: “What’s in a name? That is licensed. . . . By contrast, the ongoing-
Editor at Large which we call a rose by any other royalty order at issue here is limited to one
Brad P. Lyerla name would smell as sweet.” So goes the particular set of defendants.” However, in
Jenner & Block LLP
Chicago, IL
rose, so too goes the so-called compulsory his concurrence, Randall Rader, now chief
BLyerla@jenner.com license in patent infringement cases. In judge of the U.S. Court of Appeals for the
2007, in Paice, LLC v. Toyota Motor Federal Circuit, fairly commented that
Young Lawyer Oriented Editor Corp.,1 the Federal Circuit held that a dis- “calling a compulsory license an ‘ongoing
Elaine Y. Chow
trict court has the authority to award “an royalty’ does not make it any less a com-
K&L Gates LLP
San Francisco, CA ongoing royalty for patent infringement pulsory license.” Indeed, to Chief Judge
elaine.chow@klgates.com in lieu of an injunction.” In so holding, Rader’s point, at its core, an ongoing
the Federal Circuit distinguished the term royalty effectively requires the patentee
Litigation Tips Editor “compulsory license” on the grounds that to grant a license to practice the patent
Douglas N. Masters calling it a compulsory license “implies to the adjudged infringer in exchange for
Loeb & Loeb that anyone who meets certain criteria has Continued on page 18
Chicago, IL
dmasters@loeb.com
Editor at Large
David L. Marcus
Comcast Cable Communications
Philadelphia, PA
David_Marcus@Comcast.com
Covenants Not to Sue In Light
Associate Editor
Jason Hicks
of Federal Circuit Decisions
Art Director
Kelly Book By Donald W. Rupert and Gina M. Bicknell
Intellectual Property Litigation (ISSN 1936-7619) is
published quarterly by the Committee on Intellectual

M
Property Litigation, Section of Litigation, American
Bar Association, 321 N. Clark Street, Chicago, any, if not most, patent infringe- Corebrace, LLC v. Star Seismic, LLC2—
IL 60654. The views expressed within do not ment disputes are settled before counsel should pay particular attention
necessarily reflect the views of the American
Bar Association, the Section of Litigation, or final, unappealable judgments to the way these provisions are worded.
the Committee on Intellectual Property are entered by courts. Such settlements The court in TransCore held, in part, that
Litigation. © 2010 American Bar Association
often include licenses under the asserted covenants not to sue are authorizations
www.abanet.org/litigation/committees/intellectual patent(s) and standard provisions relat- and will be treated in the same manner
ing to covenants not to sue, and mutual as licensed sales under the doctrine of
releases are routinely included in such patent exhaustion, such that sales under a
agreements. In view of two recent Federal covenant exhaust a patentee’s rights unless
Circuit decisions—TransCore LP v. Elec- expressly conditioned otherwise. The court
tronic Transaction Consultants Corp.1 and Continued on page 21
Published in Intellectual Property Litigation, Volume 22, Number 1, Summer 2010. © 2009 American Bar Association. Reproduced with permission. All rights reserved.
This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without
the express written consent of the American Bar Association.
 Message from the Chairs
Licensing is one of the foremost means
by which our clients exploit and realize
value from their intellectual property. As
we all know, patents, trademarks, and
copyrights come with a bundle of rights
that their owners may license to others, in
whole or in part, in a myriad of ways. Of
course, with that bundle of rights comes a
bundle of issues that often arise when IP
is licensed, including issues related to the
scope of the license, the interpretation of
the parties’ license agreement, the admin-
istration and monitoring of the licensee’s
activities during the life of the license, and
the rights and obligations of the parties
at the end of the license’s life, especially
where it has ended in the context of a
dispute between the parties. Additional
complications can (and often do) arise
when a license results from litigation or
when licensing in foreign countries whose
intellectual property laws may not be as
developed or as robust as those in the
United States.
This issue explores some of the issues
that may arise when IP owners license
their rights. We will learn about strate-
gies for avoiding licensing disputes
by implementing effective monitoring
programs; how the courts have interpreted
certain language found in most licens-
ing agreements regarding limitations on
the licensor’s ability to withhold certain
consents; the possibly unintended effects
of covenant not to sue provisions and the
right of licensees to sublicense; the effect
of bankruptcy laws, particularly in the
United States and United Kingdom, on
IP licensing; the current law governing
so-called compulsory licenses in patent
infringement cases; the effect of the Fed-
eral Circuit’s recent decision in ResQNet.
com, Inc. v. Lansa, Inc., which appears to
open the door to the discovery of settle-
ment negotiations in certain cases involv-
ing patent licensing; and the issues that
may arise when licensing in China, widely
recognized as one of the most promis-
ing licensing markets. In this issue, then,
we tackle the world of IP licensing from
multiple fronts so that you can be better
prepared to assist your clients in avoiding
its pitfalls.
Our tradition of being one of the largest
and most active committees in the Section
continues, and we are instituting even more
ambitious initiatives this year—including
adding a new Hot Topics Subcommittee
and exploring providing regional round-
tables—to provide more and better benefits
to you, our members. As always, we are
looking for Committee members who are
interested in becoming more involved in
our work, whether it’s through contributing
to the newsletter, webpage, or programs,
or through membership outreach. For more
information about opportunities to become
involved, please visit the Committee’s
webpage at www.abanet.org/litigation/
committees/intellectual.
We also want to give very special
thanks to Coke Morgan Stewart, who
served as a chair of the Committee this
past year. Stewart has been appointed chair
of the 2012 Section Annual Conference
this year. Her colleague, Joseph Drayton,
has stepped in as our third Committee
chair, and we all look forward to work-
ing with him over the next year. As a
testament to Stewart’s dedication to our
Committee, she’ll continue to be involved,
particularly with our regional roundtable
project.
You can email any of us, the Commit-
tee chairs, with questions. Thank you for
your continuing support!
Erick Howard
John P. Hutchins
Joseph Drayton

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may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
Licensing Your Brand in China: Guidelines for
Brand Owners
C
hina is widely recognized as one
of the most promising licensing
markets for prospective brand
owners due to rapid growth in its econo-
my. According to China’s National Bureau
of Statistics, total retail sales of consumer
goods in 2008 were approximately $1.6
trillion (CNY 10.8 trillion). China has seen
a 4.8 percent increase in retail sales of
licensed merchandise from 2008 to 2009,
despite a 13.9 percent drop in worldwide
retail sales of licensed products.1 This
does not come as a surprise, consider-
ing that sales from licensed products in
China have grown from $600 million in
2001 to more than $8 billion in 2008.2 The
growth in consumer spending has more
than doubled since 2004 and shows no
signs of slowing.3 China’s urban popula-
tion growth will also continue to help fuel
domestic consumption; it is anticipated to
grow from 572 million people in 2005 to
more than 1 billion by 2030, of which half
are estimated to be in the middle class.4
The rapid growth in consumer spending
and the trend toward urbanization make
China ripe for brand-driven marketing. To
take advantage of China’s dynamic and
relatively untapped market, brand owners
should consider protecting their brands in
China and devising brand licensing strate-
gies to target the unique Chinese market.
The potential for brand expansion in
China has outpaced China’s development,
implementation, and execution of a system
to protect intellectual property (IP) rights.
As a member to the Paris Convention5 and
the World Trade Organization (WTO),
China has strengthened its obligations to
the international IP community by signing
treaties such as the Agreement on Trade-
Related Aspects of Intellectual Property
(TRIPS Agreement).6 China’s recognition
of the need for IP rights and IP protection
has contributed to the significant growth
of China’s IP system. For example, in
2009, there were 830,000 new trademark
applications filed—a 20 percent increase
from 2008—and there were approximately
30,500 judgments rendered by Chinese
courts in IP cases, representing a 30 percent
Published in Intellectual Property Litigation, Volume 22, Number 1, Summer 2010. © 2009 American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof
may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
By Marc Lieberstein and Tywanda Harris Lord
increase from 2008.7
Despite the growth of its IP system,
China still endures harsh criticism for the
endemic and culturally accepted coun-
terfeiting activities that occur within its
borders, the high threshold requirements
for criminal prosecution for trademark and
copyright infringement,8 and restrictions
on market access for foreign companies.
The U.S. Trade Representative, which
placed China on its 2010 Priority Watch
list, expressed concern over China’s
continued inadequate IP infringement
penalties and oppressive market-access
barriers.9
Brand Owner Concerns in China
Market conditions in China pose unique
problems for companies seeking to enter
the country’s marketplace. Disputes
between brand owners and their Chinese
licensees can be especially challenging
due to cultural differences and the distance
between China and many regions around
the world. When launching and licensing
a brand in China, brand owners should
proactively identify any red flags before
entering a relationship with a Chinese
licensee. At minimum, foreign brand own-
ers should:
• research the state of IP rights in their
specific industry;
• research the history of any potential
licensee;
• be cognizant of cultural differences;
• register the trademark in China;
• conduct face-to-face contract nego-
tiations and utilize a translator;
• travel to China before problems
arise, and certainly after they arise;
• periodically return to China to en-
sure the terms of any license agree-
ment are being fulfilled; and
• establish a continuous presence in
China to show that they are invested
in the licensing outcome in China.
Protecting Brands in China
The China Patent and Trademark Of-
fice awards trademark registrations on a
first-to-file basis. Before embarking on
any brand extension in China, a com-
pany should find out if the brand name is
eligible for trademark protection there. A
non-Chinese registrant must abide by the
Chinese Trademark Licensing Contract
Recordal Procedures (TLCRP).10 Article
8 of the TLCRP requires trademarks to be
submitted in both English and Chinese.
In addition, Chinese characters should
be filed in both the traditional and sim-
plified form. Similar-sounding marks,
translations, and transliterations (using the
Chinese pinyin system) can also be filed
as a defensive measure.11 Always consult
with native Chinese trademark counsel at
the initial stages of securing mark protec-
tion to avoid disputes about the validity of
the mark’s registration and the subsequent
ability to license the mark in China. Other
steps brand owners may take to ensure
the proper registration and protection of a
mark in China include:
• monitoring the trademark registry in
China for similar mark filings;
• filing oppositions against similar
trademark applications;
• filing cancellation proceedings
against similar trademark applica-
tions that become registered; and
• monitoring the Internet for the po-
tential unauthorized use and sale of
infringing domain names and pirated
products in China.12
Key Licensing Provisions
Brand owners often encounter problems in
China that are associated with counterfeit-
ing, the improper use of child labor, and
the use of low-quality materials/shoddy
construction. In an effort to prevent these
problems, brand owners should focus on
thorough and effective license provisions
that address quality control, manufactur-
ing, and enforcement.
Quality Control
Brand owners generally contract with
Chinese manufacturers, retailers, and
distributors to launch their brands in China
because the cost of labor and materials
is low, and these local entities generally
know the Chinese marketplace better than
foreign brand owners do. However, brand
owners should routinely monitor and con-
trol the quality of all products sold under
their brand. In China, this is especially
important, because in recent years, there
have been several cases requiring the re-
call of Chinese manufactured products due
to health and safety hazards.13 In addition,
Chinese vendors sometimes substitute
cheaper materials, subcontract to third
parties without the licensor’s knowledge,
or sell unauthorized quantities “out the
back door.” Often, these subcontractors
are subsequently untraceable or not legally
liable for use of poor quality materials.14
As a result, brand owners should incorpo-
rate strict quality-control provisions when
licensing the manufacturing and sale of
branded goods in China. Below is a list
of suggested terms for a quality-control
license provision:
Brand owners should
routinely monitor and
control the quality of
all products sold under
their brand.
• Retain approval rights prior to, dur-
ing, and after manufacturing, sale
and use, as well as for channels of
distribution, quality-control checks,
and the advertising and marketing of
licensed products.
• Require approval of preproduc-
tion samples and postproduction
samples.
• Specify the grade and quality of
materials to be used.
• Specify when the licensee should
submit all samples, to whom they
should be submitted, and by when
approval will be given.
• Reserve the right to require the
licensee to recall any/all products if
they do not meet the requirements of
Published in Intellectual Property Litigation, Volume 22, Number 1, Summer 2010. © 2009 American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof
may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
the license agreement.
• Reserve the right to monitor the
licensee’s sales activity and distribu-
tion, including Internet activity.
Manufacturing
Because foreign companies have come
to expect low prices when manufacturing
goods in China, Chinese factory owners
are caught between maximizing revenue
and enduring the margin squeeze of higher
food and energy costs.15 As a result, Chi-
nese factories sometimes recruit under-
age laborers and fail to maintain proper
safety and working conditions in their
factories. To avoid these practices, brand
owners should clearly define the expected
“standards of manufacturing” and require
that the licensee abide by these standards.
Brand owners should emphasize the
brand owner’s commitment to producing
high-quality goods and the licensee and/
or third-party manufacturer’s responsibil-
ity to observe all international, national,
and local laws and regulations. Specifi-
cally, the license agreement should include
provisions that:
• reserve the right to disapprove of
any/all products not complying
with the “standards of manufactur-
ing,” even if they were previously
approved;
• reserve the right to review employee
complaints;
• require that products meet or exceed
the industry’s highest quality stan-
dards and specifications for products
similar to the licensed products that
are sold in the same distribution
channels;
• require the licensee to report
inventory and sales quantities on a
monthly, quarterly, and annual basis;
• require that all manufacturing be
done in accordance with any and all
applicable laws, rules, and regula-
tions, including, but not limited to,
product safety laws, human rights
laws, child labor laws, and health
and safety laws;
• reserve the right to inspect the fac-
tory at which the products are made
at any given point in the production
and distribution process; and
• require that remedial action be taken
for any breach of the foregoing
provisions, and specify that if none is
taken, the license may be terminated.
Enforcement
China’s inadequate enforcement of trade-
mark and other IP rights is a key concern
in deciding whether to expand in China
through a licensee. To manage these con-
cerns, brand owners must craft strong en-
forcement provisions that will facilitate the
resolution of disputes in a reasonable and
fair manner. The choice of law provisions
in the licensing agreement is important
to overcoming uncertainty when seeking
relief for the breach of a license. There
are limitations in Chinese law regarding
the brand owner’s ability to enforce the
choice of law provisions against violators
in China. For example, public policy laws,
such as the Chinese antimonopoly law,
often supersede choice of law provisions.16
Indeed, even if the parties agree to have
all disputes adjudicated under U.S. law
in U.S. courts, there is no guarantee that
the Chinese courts will enforce any orders
or judgments rendered by a U.S. court
against a Chinese national.
Accordingly, brand owners in China
should consider including arbitration
provisions in a license with a Chinese
entity doing business in China. The New
York Convention on the Recognition and
Enforcement of Foreign Arbitral Awards,17
which China recognizes and has signed,
has made enforcing arbitral awards more
likely in China than an order issued by
a U.S. court. The New York Convention
requires contracting countries to enforce
arbitration awards entered in other territo-
ries and mandates the recognition of writ-
ten arbitration agreements. The arbitration
provision in a license should specify:
• that the parties consent to applying
the brand owner’s local law or some
other neutral state or country law
to govern all disputes to avoid the
uncertainty of China law;
• that arbitration is the mandated form
of dispute resolution;
• the location for resolution, e.g., the
brand owner’s place of business, or
some other neutral location such as
New York, Los Angeles, Hong Kong
or Singapore;
• the specific arbitration body to be
used, e.g., American Arbitration As-
sociation (AAA) or the International
Chamber of Commerce (ICC);
• the rules chosen under the arbitra-
tion body, e.g., under the AAA,
the International Arbitration and
 Mediation Rules;
• a time limit for the completion of
arbitration proceedings, e.g., six
months; and
• the type of relief the arbitrators shall
have the power to award, e.g., dam-
ages, injunctive relief, preliminary
relief, temporary restraining orders,
reasonable attorney’s fees, etc.
Arbitration clauses in licensing agree-
ments are often a central issue in nego-
tiating licensing terms. Therefore, it is
important to choose a neutral arbitration
institution and be aware of Chinese law
addressing arbitration.18
Brand Enforcement in Chinese Law
In addition to incorporating an arbitration
provision in a license agreement, a brand
owner may also use the Chinese legal
system to address disputes with licensees.
Similar to U.S. laws, the Trademark Law of
the People’s Republic of China19 proscribes
unauthorized use of a trademark. Article 52
of the Trademark Law, supplemented by
Article 50 of the Trademark Law’s Imple-
menting Regulations, provides that the
following acts constitute infringement:
• using a trademark that is the same
as or similar to a registered trade-
mark on the same or similar goods
without the authorization of the
registered trademark holder;
• selling products that violate the
exclusive right to use a registered
trademark;
• counterfeiting or fabricating without
authorization a mark or a symbol
that is part of a registered trademark
of another party, or selling marks
or symbols that have been made or
fabricated without permission;
• modifying a registered mark without
the authorization of the registered
owner and distributing products
bearing the modified mark;
• causing harm in other respects to the
registered trademark holder’s right
to exclusive use; and
• providing transport, storage, mail-
ing, hiding or other conveniences to
facilitate others in the infringement
of the exclusive rights of a registered
trademark holder.
If a licensee commits any of these acts,
the brand owner can seek redress from
Published in Intellectual Property Litigation, Volume 22, Number 1, Summer 2010. © 2009 American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof
may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
the People’s Court of China20 or through
administrative adjudication by using the
Trademark Office. If the infringement is
serious, Article 53 of the Trademark Law
requires the Trademark Office to refer
the complaint to China’s Public Security
Bureau for criminal prosecution.
Administrative Adjudication
China’s State Administration for Industry
and Commerce (SAIC)21 is responsible
for handling trademark infringement
complaints. The Trademark Divisions of
the provincial and municipal AICs have
the authority to investigate trademark
infringement within their geographic
jurisdictions. Administrative adjudica-
tion of trademark infringement is an
attractive option for a brand owner if
the infringement is contained to a small
geographic area and the primary goal is
to stop the infringing activity quickly.
In fact, the AIC will determine within
seven days whether it will accept the
complaint, and a resolution of the dispute
is generally announced within 90 days.22
The remedies imposed by the AIC can
also quickly provide injunctive relief to a
trademark licensor, because the AIC has
the authority to:
• issue cease-and-desist orders;
• confiscate and obliterate trademark
logos from infringing goods;
• confiscate and destroy infringing
goods where the trademark cannot
be obliterated; and
• confiscate materials, tools, and
equipment used mainly for the
production of infringing goods and
trademark representations.23
However, the swift action of the AIC
comes at a price, especially for a foreign
company. Many foreign companies
complain that the AIC has refused to in-
vestigate complaints due to local protec-
tionism, corruption, or a lack of resources.
Even when infringement is found by
the AIC, a trademark owner’s remedy is
limited to injunctive relief. While the AIC
can impose fines upon an infringer, those
fines are not collected for the benefit of
the brand owner but are instead retained
by the collecting AIC. While the fines are
likely intended to punish the infringer,
they are often not substantial enough to
put the infringer out of business or deter
future infringement.
Civil Proceedings
Brand owners may also seek relief from
trademark infringement resulting from the
breach of a trademark license agreement in
the People’s Court through civil litigation.
The People’s Court can award not only the
permanent injunctive relief available from
an AIC, but it can also award preliminary
injunctions and compensatory damages.24
Because there is no
formal discovery, the
brand owner is required
to investigate and
collect all the evidence.
To obtain a preliminary injunction,
the brand owner must provide sufficient
evidence that the continued infringement
is likely to cause irreparable harm to its
reputation or will erode its market share.
Similar to the United States, China re-
quires brand owners granted a preliminary
injunction to provide a deposit for guar-
anty. According to the Interpretation by
the Supreme People’s Court of the Issues
Relating to Application of Law to Pre-
Trial Suspension of Acts of Infringement
of Exclusive Rights to use Trademarks and
to Evidence Preservation,25 the People’s
Court should rule on a prelitigation
preliminary injunction within 48 hours,
and, if entered, the injunction should be
executed without delay. In turn, the brand
owner is required to commence litiga-
tion within 15 days after the injunction is
ordered or the suit will be dismissed.
Litigating in the People’s Court is not
without its challenges. First, it is expen-
sive. Because there is no formal discovery
process in civil litigation, the brand owner
is required to investigate and collect all
the evidence of infringement and damage.
This can be a daunting task for foreign
companies. Second, like administrative
proceedings in China, local protectionism
is also an issue in civil litigation. More-
over, the level of training and experience
of judges in civil litigation varies widely,
especially for jurisdictions outside the
major cities in China. Nonetheless, the
tide of enforcement of IP rights in China
appears to be changing, with 30 percent
more IP actions adjudicated in its courts in
2009 than in 2008. Companies operating
in China have also reported more success
in enforcing IP rights than ever before,
and, consequently, are more willing to
utilize the court system in China.
Criminal Prosecution
Criminal prosecution for trademark in-
fringement is available in China, although
it is not a remedy trademark owners can
seek directly. Rather, the AICs must refer
cases involving “serious” infringement
for criminal prosecution. However, what
constitutes a “serious” infringement is not
defined in the Trademark Law, leading
many foreign brand owners to complain
that the Trademark Law is thus vague
and too subjective. Indeed, foreign brand
owners complain that the vague language
of the Trademark Law results in the AICs
rarely referring cases to criminal pros-
ecution. Interagency conflicts with local
government have also been cited as a rea-
son for the AICs’ failure to refer cases for
criminal prosecution. In addition, the AICs
are financially motivated to adjudicate
cases within their agency because they can
retain any fines paid by the infringer.
Nevertheless, criminal prosecution
for trademark infringement does occur
in China, and the punishment includes
imprisonment for up to seven years and
a fine.
Conclusion
There is no magic formula for launching
and licensing a brand in China. There
have been significant improvements in
China’s willingness and ability to pro-
tect IP rights, but the implementation
and execution of its laws are not without
flaws and pitfalls. With that in mind,
foreign brand owners looking to expand
in China must take the time to investigate
prospective business partners in China,
understand the Chinese culture, and draft
enforceable license agreements that ad-
dress potential problems with Chinese
licensees before they arise. l
Marc Lieberstein is a partner at
Kilpatrick Stockton, LLP, New York,
New York, and can be reached at
mlieberstein@kilpatrickstockton.com.
Published in Intellectual Property Litigation, Volume 22, Number 1, Summer 2010. © 2009 American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof
may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
Tywanda Harris Lord is a partner
at Kilpatrick Stockton, LLP, Atlanta,
Georgia, and can be reached at tlord@
kilpatrickstockton.com. They would like
to thank Tina Mepani, a summer associ-
ate from Benjamin N. Cardozo School of
Law, and Anne Knox Morton, a summer
associate from Harvard Law School, for
their assistance.
Endnotes
1. See Emerging territories grow in 2008,
but worldwide retail sales down, 33 Licensing
Letter 5, available at 2009 WLNR 7820501
(Mar. 2, 2009).
2. Allan Feldman, Top 10 Trends in Brand
Licensing, The Licensing Journal, May 2010,
at 22.
3. See National Bureau of Statistics of
China, http://www.stats.gov.cn/English
(Retail sales in 2004 were reported at
CNY 5.95 trillion, and retail sales in 2007 were
reported at CNY 8.92 trillion (approximately
$1.3 trillion)).
4. See William O. Hennessey, Sixth
Annual Baker Botts Lecture at the Intellectual
Property in International Perspective: Institute
for Intellectual Property & Information Law
Symposium: Protection of Intellectual Property
in China (30 Years and More): A Personal
Reflection (available in 46 Hous. L. Rev. 1257,
1292 (2009)).
5. Paris Convention for the Protection of
Intellectual Property, Mar. 20, 1883, 21 U.S.T.
1583, 828 U.N.T.S. 305, available at http://
www.wipo.int/treaties/en/ip/paris/. The treaty
has been amended several times, most recently
in 1979.
6. Agreement on Trade-Related Aspects
of Intellectual Property Rights, Marrakesh
Agreement Establishing the World Trade
Organization, Annex 1C, Legal Instruments—
Results of the Uruguay Round, Part II, Section
5, Apr. 15, 1994, 1869 U.N.T.S. 299, 33 I.L.M.
1125, 1197, available at http://www.wto.org/
english/docs_e/legal_e/27-trips.pdf.
7. Gary Zhang, Xiang An, Jinhua Lu and
Guangliang Zhang, China’s IP System Comes
of Age, Managing Intellectual Property,
(2010), available at http://www.managingip
.com/Article/2460070/Chinas-IP-system-comes-
of-age.html.
8. Hennessey, supra note 4 (citing David
Lague, U.S. Presses Chinese on Piracy, Int’l
Herald Trib., Nov. 15, 2006, at 15 (“The
estimated loss that a U.S. business faces as a
result of the rampant counterfeiting in China
was estimated at approximately $2.3 billion a
year in 2006.”).
9. United States Trade Organization
Special 301 Report (2010), available at http://
www.ustr.gov/webfm_send/1906 at 21.
10. Trademark Licensing Contract
Recordal Procedures, (Promulgated by the
Trademark Office of the State Administration
for Industry and Commerce on and effective as
of August 1, 1997) (1997) (P.R.C.) available
at http://www.shcontractlaw.com/English/
Regulations.Asp?Action=Content&ID=302.
11. See Elizabeth Chien-Hale, Doing
Business in China: Resolving the Challenges
in Today’s Environment, Corporate Law and
Practice Course Handbook Series, Inst. for
Intell. Prop. in Asia (2007).
Elizabeth Chien-Hale, Doing Business in
China: Resolving the Challenges in Today’s
Environment, 109 (Practicing Law Institute,
2007)
12. See Justin Pierce, Trademark
Enforcement in China, INTA Annual Meeting
(2010).
13. See Julia A. Phillips, “Does ‘Made
in China’ Translate to ‘Watch Out’ for
Consumers?” The U.S. Congressional Response
to Consumer Product Safety Concerns, Penn
St. Int’l L. Rev. (2008).
14. Harry Rubin, Outsourcing to China: Risk
Management and Strategies, The Licensing
Journal, Nov./Dec. 2009, at 8.
15. David Barboza, Child Labor Rings
Reach China’s Distant Villages, NY Times,
May 10, 2009, available at http://www.nytimes.
com/2008/05/10/world/asia/10CHINA.html.
16. Rubin, supra note 14 at 8.
17. Convention on the Recognition and
Enforcement of Foreign Arbitral Awards, Jun.
10, 1958, 330 UNTS 38, 21 UST 2517, 7
ILM 1046, available at http://www.uncitral
.org/uncitral/en/uncitral_texts/arbitration/
NYConvention.html.
18. See Jian Zhou, Judicial Intervention in
International Arbitration: A Comparative Study
of the Scope of the New York Convention in U.S.
and Chinese Courts, 17 Pac. Rim L. Pol’y J.
41, 46 (2006) (Article 260 of China’s 1991 Civil
Procedure Law provides criteria that, if present,
allow Chinese Courts to invalidate foreign
arbitration awards).
19. Trademark Law of the People’s Republic
of China (adopted by the 24th Session of the
Standing Comm. of the Fifth Nat’l People’s
Cong. Feb. 22, 1993, rev. according to the
Decision on the Amendment of the Trademark
Law of the People’s Republic of China adopted
at the 24th Session of the Standing Comm. of
the Ninth National People’s Cong. Oct. 27,
2001) Judicial Protection of IPR in China
(last visited Jun. 9, 2010) (P.R.C.).
 20. Chinese judicial courts of similar
jurisdictional status as a U.S. federal/state
district court or court of appeals. Local People’s
Courts are made up of three regionally divided
levels: the High People’s Court (provincial
level), Intermediate People’s Courts (prefecture
level), and Basic People’s Courts (county level).
A party can only bring one appeal to the next
highest court.
21. The SAIC regulates and allocates its
trademark enforcement measure to the local AIC
(e.g., Beijing AIC, Shanghai AIC, etc.). SAIC
also promulgated a set of rules that officially
grants the local AIC the power to confirm
and approve registration of Foreign-Invested
Partnerships.
22. http://www.saic.gov.cn/sjpdq/sjpd/nsjg/
fgs/gzdt/t20070914_23979.htm.
23. Trademark Law (P.R.C.), supra note 19
at Article 55.
24. Trademark Law (P.R.C.), supra note 19
at Articles 56–57.
25. Interpretation by the Supreme People’s
Court of the Issues Relating to Application
of Law to Pre-Trial Suspension of Acts of
Infringement of Exclusive Rights to use
Trademarks and to Evidence Preservation
(adopted at the 1203rd Meeting of the Judicial
Committee of the Supreme People’s Court on
December 25, 2001, and enters into force on
January 22, 2002) (2001) (P.R.C.), available at
http://www.wipo.int/clea/docs_new/pdf/en/cn/
cn058en.pdf.

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Published in Intellectual Property Litigation, Volume 22, Number 1, Summer 2010. © 2009 American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof
may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
How to Avoid Licensing Disputes
T
he reasons behind entering into an
intellectual property (IP) license are
numerous and include dissemination of
knowledge and technology for the greater good
as well as the expansion of market share for the
IP holder. Much time is spent by the parties on
the license in the negotiation stages, discuss-
ing minute details regarding fields of use
and indemnity clauses. Arguably, the license
would never be consummated if it was not for
the consideration paid for the license, but IP
holders often do not receive the full amount of
monies due under license agreements.
In fact, the latest statistics from Invotex
Group’s royalty audit practice show alarming
results. Invotex has found that in 86 percent
of the licenses it audits, there are instances of
misreporting. The most common causes of
misreporting are issues of license interpreta-
tion, followed by oversights relating to the
launch of new products or sales made in new
territories. According to Invotex, 47 percent of
the dollars associated with the total amount of
understated royalties it has uncovered during
its royalty audits are related to questionable
license interpretation.
One of the tactics IP holders can employ to
avoid disputes over consideration is the imple-
mentation of a robust and consistent monitor-
ing program designed to deter complications
such as questionable license interpretation.
Preventing Underpayment and
Avoiding Disputes
A license agreement that is monitored
consistently is generally less likely to result
in significant underpayment of royalties. A
compliance program should include desk
audits and full royalty audits.
A desk audit is a monitoring activity that
can be performed without visiting a licensee
location. Within the context of a desk audit,
licensors should analyze royalty payments for
accuracy. For example:
• If royalty payments suddenly decrease,
is there a valid explanation?
• If there are cost deductions from the
royalty base, are those cost deductions
appropriate?
• Are any of the calculations unsupported
or lacking in sufficient detail?
Published in Intellectual Property Litigation, Volume 22, Number 1, Summer 2010. © 2009 American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof
may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
By Michele M. Riley and Debora R. Stewart
• Do the calculations include sales by
sublicensees?
• Does the calculation include sales from
all relevant geographies?
• A desk audit should also compare
data from various sources to identify
anomalies. For example:
• If a product catalog or other marketing
materials of the licensee are accessible,
are all relevant product names/codes
included on the royalty report?
• Do public statements about sales
growth (e.g., press releases) agree with
the royalty report?
• How does the performance of licensed
products compare to the performance
of other products sold by the licensee?
• How do the royalty payments made
by one licensee compare to the royalty
payments made by other licensees?
A royalty audit is designed to determine
whether or not a licensor is receiving the
payments he or she is due under the license
agreement. A royalty audit typically involves
three phases: pre-site research, site investiga-
tion, and post-site analysis and reporting.
The first phase typically includes an
analysis of all of the relevant information
from public sources and the licensee avail-
able prior to the site visit. The second phase
involves investigative interviews—typically in Dealing with Suspected
the accounting, finance, technical, marketing, Underpayments
business development, and royalty reporting It is not uncommon for individuals who did
areas. A facility tour may also be deemed ap- not participate in the original negotiation of a
propriate. The focus for this phase is to gain a license agreement to be in charge of prepar-
thorough understanding of
the accounting and report- Dollar Impact of Royalty Reporting Errors
ing systems the licensee Description
uses for royalty reporting.
Questionable License Interpretation
The third phase involves
continued analysis and Royalties from Underreported Sales
development of the audit Royalties from Disallowed Deductions
report.
A license-monitoring Unreported Sublicenses
program will not suc- Math Errors
ceed without active and
meaningful communica- Royalty Rate Errors
tion between the licen- Transfer Prices
sor and the licensee. As
such, another preemptive Unreported Benchmarks or Milestones
strategy is for a licensor to
develop and foster a healthy and productive
relationship with its licensees. To that end,
licensors should:
• Contact licensees regularly. Know
who is submitting royalty and other
reports and when those reports should
be submitted. Make sure the individual
responsible for preparing the royalty
report has detailed knowledge of the li-
cense agreement. Request to be notified
of changes in royalty reporting staff.
• Follow up immediately in cases of
delayed, insufficient, or incorrect data.
• Call licensees to acknowledge the
receipt of reports, thank them for their
timeliness, and discuss any relevant
developments.
• Perform audits early in the licensing
relationship so that potential misun-
derstandings regarding the terms of the
license agreement can be taken care of
as soon as possible.
• Make audits routine rather than reac-
tive. Make it clear that all licenses that
meet a certain threshold or are of a
certain type will be audited. If a formal
monitoring program is implemented,
advise each licensee of the program so
that no licensee feels targeted.
Percent
47%
23%
11%
7%
6%
3%
2%
1%
—Invotex Group, April 2010
ing the royalty report. Therefore, misreporting
is almost de rigueur. Although all licenses
should be part of a comprehensive monitoring
program, certain red flags will indicate that
there is an increased potential for misreporting
royalties and that immediate follow-up will be
required. Red flags can be identified through
analyzing a royalty report or by scrutinizing
the licensee’s performance in the marketplace.
These red flags, some of which have been
touched on above, include the following:
• There are unsupported calculations, or
there is an insufficient level of detail
surrounding the calculations.
• The licensor is not able to respond to
questions about its royalty calculation.
• Royalty payments are late.
• Minimum payments are not in
complete compliance with the license
agreement.
• Royalty payments are not as high as
anticipated or are not in line with cur-
rent market expectations.
• The royalty report demonstrates
inconsistent sales in relation to market
performance.
• The royalty report shows poor perfor-
mance of a licensed product compared
to other licensee products.
• The royalty report indicates a poor
or failing financial condition for the
licensee.
• The royalty reports continuously con-
tain miscalculations of amounts owed.
• The licensee operates with poor inter-
nal controls.
• The royalty report contains evidence of
product combinations.
• The licensee uses complex distribution
channels for the licensed product.
• There is an inconsistent or nonexistent
contact person for the licensee who
possesses comprehensive knowledge of
the license agreement.
What happens when a licensor receives a
royalty report and suspects that royalties are
underpaid? What tactics can be used to remedy
the situation? The first step is to communicate
with the licensee in an effort to resolve any
questions or concerns that have arisen. It may
be the case that there is a straightforward and
acceptable answer that can assuage the licen-
sor’s suspicions of misreporting. Or it may be
the case that there is a difference in language
interpretation within the license agreement that
can be amicably and quickly resolved.
If communication efforts do not resolve
Published in Intellectual Property Litigation, Volume 22, Number 1, Summer 2010. © 2009 American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof
may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
suspicions of misreporting, the next step is
to confirm the underpayment via a royalty
audit. This should be done promptly, before
any additional loss is incurred, or the busi-
ness relationship is further compromised.
It will enable the licensor to negotiate from
a position of full information rather than
negotiate in the dark.
License agreements typically state that
a third-party auditor will perform the audit.
A licensee will likely feel more comfort-
able being audited by a third party due to
the unbiased and nonadversarial nature of
the relationship. The selected auditor must
have significant royalty audit experience and
expertise to communicate effectively with
licensee personnel, analyze complex contract
provisions, and uncover sales that can be
masked by product combinations or complex
distribution channels. A royalty audit is a dif-
ferent animal than a financial statement audit.
The required expertise is very distinct.
If a royalty audit uncovers an understate-
ment of royalties, the auditor can provide a
quantification of the unreported sales dollars
or units and a quantification of the amount of
royalties owed. The next step is for the auditor
and/or licensor to work alongside the licensee
to identify any flaws in the royalty-tracking
system and develop measures that can be
taken to prevent future misreporting.
A licensor who suspects an understate-
ment of royalties may be inclined to im-
mediately pursue legal action against the
licensee. Even if an alleged understatement is
confirmed via preliminary audit results from
an independent auditor, the licensor should
complete all of his due diligence before com-
mencing legal action. The licensor should
consider the following issues.
Is the Audit Final?
Whether or not the audit is final is critical.
Obtaining information through the audit
process is less costly than obtaining infor-
mation through discovery. It may achieve
the same result in terms of the collection of
relevant documents, but without the myriad
of legal requirements surrounding discovery.
In addition, the licensee will likely be more
forthcoming with information than he would
be through interrogatories and depositions. As
such, if the audit is not yet final, care should
be taken to ensure that all documents associ-
ated with the underpayment are collected.
How Much Money Is at Issue?
The key here is to consider whether the
anticipated cost of litigation outweighs the
potential for recovery. Perhaps a negoti-
ated settlement, even if reduced from the
amount of the underpayment, will still
outweigh any recovery via the legal system
once attorney costs and court fees are taken
into consideration.
How Valuable Is the Business Relationship?
A litigation proceeding can be an efficient
and effective way to terminate a business
relationship. If commencing litigation
against the licensee will serve as a lethal
dose of poison to the business relationship,
the licensee will need to think long and hard
about whether the recovery of any underpay-
ment via the legal process (after attorney,
court, and other possible fees) outweighs the
anticipated value stemming from a profitable
business relationship into the future.
But if the licensee refuses to acknowl-
edge the underpayment or takes an unaccept-
able position vis-à-vis the interpretation of
language within the agreement, the next step
may be legal action if such action is deemed
necessary in order to recoup losses. Taking
legal action may also be warranted if the IP
is licensed out to many parties and the licen-
sor, along with legal counsel, deems it neces-
sary (and value-added) to send a message to
all licensees that underpayments will not be
tolerated and will be dealt with through the
legal process.
Conclusion
Whether instances of misreporting relate to
intentional omissions of product sales, pure
human error, some ambiguity within the
license agreement, or something else, the
frequency of misreporting suggests that licen-
sors need to take more proactive measures to
prevent misreporting.
Implementing a robust and consistent
monitoring program will help prevent
instances of misreporting, as will develop-
ing and fostering a healthy and productive
relationship with licensees.
When misreporting is uncovered, a licen-
sor will need to determine the most effective
and appropriate method for the collection of
underpayments—whether that is a negotiated
settlement or taking legal action. l
Michele M. Riley, CPA, CFF, CFE,
and Debora R. Stewart, CPA, CFF, are
managing directors at Invotex Group,
Baltimore, Maryland. Riley can be
reached at mriley@invotex.com, and
Stewart can be reached at dstewart@
invotex.com.
Licensing Disputes and Insolvency in the
United States and United Kingdom
By Matthew E. Hoffman, Gregory J. Urbanchuk, Kenneth L. Dorsney, and James R. Tumbridge
T
he convergence of global markets
and the growth of intellectual prop-
erty over the last 30 years have cre-
ated unique challenges for inventors and
companies seeking to develop, monetize,
and enforce their IP rights, which are
becoming an increasingly more significant
part of their businesses. Recent statis-
tics published by the World Intellectual
Property Organization (WIPO) suggest
that patent applications increased from ap-
proximately 926,000 in 1985 to more than
1.8 million in 2007.1
While an increase in patent filings
is somewhat abstract when viewed in a
vacuum, a working paper published by
the Federal Reserve Bank of Philadelphia
provides two estimates that are useful in
assessing the magnitude of this growth and
the relative importance of intangibles to
companies: U.S. private gross investment
in intangibles was at least $1 trillion in
2000, and intangibles represented a third
or more of the market valuation of all
U.S. stocks at the end of the first quarter
of 2001.2 Given the relative importance
of intangibles to the market value of
companies, it’s not surprising that licens-
ing disputes involving IP often result in
high-stakes, “bet-the-company” litigation,
which increasingly involves jurisdictions
outside of the U.S. For example, the U.K.
case of Nokia v. InterDigital Corp. [2004]
EWHC 2920 (Pat) and [2005] EWCA
Civ 614 involved a dispute regarding the
royalties associated with the licensing of
certain mobile phone patents, resulting
in a payment of nearly $300 million to
InterDigital.
Bankruptcy Law and License
Agreements
U.S. Bankruptcy Code
Article 1, section 8, clause 4 of the U.S.
Constitution provides Congress with the
power to enact “uniform Laws on the sub-
ject of Bankruptcies throughout the United
States.” U.S. bankruptcy law is codified
in title 11 of the U.S. Code.3 Congress en-
acted the U.S. Bankruptcy Code in 1978 to
Published in Intellectual Property Litigation, Volume 22, Number 1, Summer 2010. © 2009 American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof
may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
replace the Bankruptcy Act of 1898.4 The
overarching goals of the U.S. Bankruptcy
Code are providing a uniform mechanism
for maximizing and preserving the assets
of a debtor and an efficient means of liqui-
dating claims against the debtor’s bank-
ruptcy estate equitably among creditors.
Section 101(35A) of the U.S. Bank-
ruptcy Code defines “intellectual prop-
erty” as including patents, copyrights, and
trade secrets. The treatment of IP license
agreements is often governed by Sec-
tion 365 of the U.S. Bankruptcy Code,
which addresses assumption, assignment,
and rejection of executory contracts and
unexpired leases.5 In addition, Section 363
of the U.S. Bankruptcy Code, which ad-
dresses the use, sale, or lease of property,
may come into play in respect to the sale
of the underlying IP that is the subject of
the license agreement.
U.K. Insolvency Law
U.K. insolvency law is derived primarily
from the amended Insolvency Act of 1986.
The overarching goal of U.K. insolvency
law is to free the debtor from overwhelm-
ing debts so that a fresh start can be made
(subject to some restrictions) and to ensure
that the debtor’s assets are shared out
fairly among the creditors. Under U.K.
law, there are three key persons in insol-
vency matters: an administrator who is
appointed to run the insolvent business, a
liquidator who is appointed to manage the
winding up and sale of the debtor’s assets,
and a licensed insolvency practitioner
who can act as an administrator, liquida-
tor, or advisor to parties in the insolvency
proceedings. Unlike in the United States,
there are no specific statutory protections
related to IP license agreements under
U.K. insolvency law.
Bankruptcy by a Licensor/Licensee
U.S. Perspective
The purpose of the U.S. Bankruptcy
Code—to maximize the size of a debtor’s
estate and distribute property of the estate
equitably among creditors—results in
provisions that sometimes function to the
detriment of particular creditors in the
name of fairness to all. For example, Sec-
tion 363(f) permits a trustee or debtor in
possession to sell property free and clear
of an interest in the property under certain
circumstances, namely, if applicable non-
bankruptcy law permits the sale of such
property free and clear of such interest, the
nondebtor interest holder consents, the in-
terest is a lien “and the price at which such
property is to be sold is greater than the
aggregate value of all liens on such prop-
erty,” the interest is in bona fide dispute,
or the nondebtor interest holder could be
compelled to accept a money satisfac-
tion of the interest. Thus, under certain
circumstances, if a debtor sells IP pursuant
to Section 363, nondebtor licensees of the
IP may find their licenses extinguished.
The most debtor-friendly creation of
the U.S. Bankruptcy Code is the automatic
stay, which, pursuant to Section 362, arises
upon the filing of a petition for bankruptcy
relief. This stays, among other things, the
commencement or continuation of all judi-
cial, administrative, or other actions against
a debtor that were or could have been com-
menced prior to the bankruptcy, as well as
any act to collect, assess, or recover a claim
against the debtor, with certain enumerated
exceptions. Bankruptcy judges typically
apply the automatic stay broadly, which
stays termination of an IP license agree-
ment and possibly even provides notice
of a default. In an effort to circumvent the
automatic stay and bankruptcy process in
general, parties to IP license agreements
often draft their agreements to include de-
fault provisions triggered by the insolvency
or commencement of a bankruptcy case by
either party, but such “ipso facto clauses”
generally are not enforceable in bankruptcy
pursuant to Section 365(e).
Bankruptcy judges often punish viola-
tions of the automatic stay severely, so
nondebtor counterparties to IP license
agreements must be careful not to violate
the stay. Accordingly, nondebtor counter-
parties embroiled in patent litigation, or
those contemplating the commencement
thereof, would be advised to move for re-
lief from the automatic stay to commence
or continue such litigation, regardless of
whether the nondebtor counterparty is li-
censor or licensee under the license agree-
ment. Nondebtor counterparties may and
often do seek relief from the automatic
stay pursuant to Section 362(d) for cause,
including lack of adequate protection of
an interest in property, or where the debtor
does not have equity in the property in
question and the property is not necessary
for an effective reorganization.
Because of the automatic stay, non-
debtor parties to executory contracts are
typically limited in what actions they can
take relative to such contracts—even if the
debtor is in breach of the contract—until
the trustee or DIP decides to assume or
reject such contracts. A trustee or DIP
has the option to assume (i.e., honor) or
reject an executory contract, such as an IP
license agreement, assuming the parties
have material obligations due and owing
to each other. After a petition for bank-
ruptcy relief is filed but before the trustee
or DIP assumes or rejects an executory
contract, the contract remains in existence,
enforceable by but not against a debtor, on
account of the automatic stay.
A nondebtor counterparty to an execu-
tory contract may move the court to compel
the debtor to assume or reject its contract,
although such motions are not typically
granted, particularly in the early stages of a
chapter 11 case. But if the debtor continues
to receive benefits under the contract before
it makes a decision to assume or reject the
contract, then the debtor is obligated to
pay the reasonable value of those ben-
efits, which may be determined to be the
amount specified in the contract. To assume
an executory contract, the trustee or DIP
must cure any default under the contract or
provide adequate assurance of cure (with
limited exceptions) and provide adequate
assurance of future performance under
the contract. If the trustee or DIP elects to
assume the contract, it generally has the op-
tion to assign the contract to a third party.
Despite the fact that Section 365 grants
a significant amount of leeway to debt-
ors with regard to executory contracts,
seemingly at the expense of nondebtor
counterparties, there are certain balances
built into this section of the U.S. Bank-
ruptcy Code. Section 365(c)(1) provides
that the trustee or DIP may not assume or
Published in Intellectual Property Litigation, Volume 22, Number 1, Summer 2010. © 2009 American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof
may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
assign an executory contract if applicable
nonbankruptcy law excuses the nondebtor
party from accepting performance from or
rendering performance to an entity other
than the debtor or debtor-in-possession
and the nondebtor party does not consent
to such assumption or assignment. This
provision is designed to protect licensors
from being forced to license their IP to
a party with which they did not contract
absent their consent.
There is a split of authority among the
courts of appeals as to whether Section
365(c)(1) prohibits a licensee from assum-
ing an executory contract, and much of the
litigation over this provision arises in the
context of IP license agreements. Closely
tracking the language of the statute, the
courts of appeals in the Third, Fourth, and
Ninth Circuits (and arguably the Eleventh
Circuit) abide by the “hypothetical” test,
prohibiting assumption of an executory
contract by a licensee even if the debtor
does not “actually” intend to assign it.6
The First Circuit permits a debtor licensee
to assume an executory contract if the
debtor does not “actually” intend to as-
sign it.7 The Fifth Circuit has construed
the language of Section 365(e)(2), which
is substantially similar to that of Section
365(c)(1), in accordance with the “actual
test,”8 and bankruptcy courts in the Eighth
and Tenth Circuits have applied the “actual
test” in construing Section 365(c)(1).9
Should the trustee or DIP ultimately
reject the contract, the contract is deemed
to have been breached as of immediately
before the date of filing the petition. This
typically gives rise to a general unsecured
claim with damages calculable under
applicable state law. A counterparty to a
rejected executory contract typically has
30 days after rejection to file a proof of
claim pursuant to Section 501; rejection
orders typically specify the deadline to file
such claims. If a contract is assumed and
later rejected, the breach is deemed to be
at the time of rejection (i.e., post-petition),
unless the case was converted to a chapter
7, in which case the breach is deemed
to be immediately before the date of the
conversion (i.e., post-petition, pre-
conversion), though if the assumption itself
takes place after conversion, the breach is
deemed to be at the time of rejection (i.e.,
post-petition, post-conversion).
To the further benefit of creditors,
claims are allowed unless a party in
interest objects. Depending on the size of
the bankruptcy, trustees or DIPs may file
omnibus objections to multiple claims
for a given set of reasons enumerated
in Rule 3007(d) of the Federal Rules of
Bankruptcy Procedure. Thereafter, trustees
or DIPs typically object to claims on a
case-by-case basis, and attorneys often
negotiate the terms upon which claims will
be allowed, including the dollar amount
and priority of such claims, though under
certain circumstances, they may litigate
these issues.
Nondebtor counterparties to execu-
tory contracts—specifically, IP license
agreements—are given further flexibility
Nondebtor
counterparties to
executory contracts are
given further flexibility
by Section 365(n).
by Section 365(n), which provides that
where the trustee or DIP rejects an IP
license agreement under which the debtor
is licensor, the nondebtor licensee may
elect to treat the agreement as terminated
if rejection amounts to a breach that would
entitle the licensee to treat the agreement
as terminated by its terms or under ap-
plicable nonbankruptcy law. Alternatively,
the nondebtor licensee may elect to retain
its rights under the agreement and any
supplementary agreement for the duration
of the contract and any extension right
available under applicable law. These
retained rights include the right to enforce
any exclusivity provision but exclude any
other right under applicable nonbankruptcy
law to specific performance.
If the licensee elects to retain its rights
under the license agreement, it must make
all royalty payments due under the agree-
ment for its duration. Further, the licensee is
deemed to have waived any right of setoff
it may have with respect to the agreement
under the U.S. Bankruptcy Code or appli-
cable nonbankruptcy law, and any prior-
ity administrative expense claim pursuant
to Section 503(b). In addition, when the
nondebtor licensee elects to retain its rights,
Section 365(n)(3) requires the trustee or
DIP, upon written request by the licensee, to
furnish to the licensee any IP (including any
embodiment of the IP) held by the trustee
or DIP and not interfere with the rights of
the licensee as provided in the IP license
agreement or any supplementary agreement,
including any right to obtain such IP.
In sum, while the U.S. Bankruptcy Code
provides trustees and DIPs with significant
flexibility vis-à-vis nondebtor counterpar-
ties to IP license agreements, it does con-
tain a number of protective balances.
U.K. Perspective
Consistent with the United States, many
license agreements in the United Kingdom
include default provisions triggered by the
insolvency of the licensee. However, the
U.S. treatment of these provisions is quite
different from that of the United King-
dom, where the termination of the license
agreement is unlikely to be prohibited by
the moratorium against creditor action that
applies in U.K. insolvency proceedings. In
addition, some license agreements include
provisions whereby, in the event that one of
the parties becomes insolvent, the IP trans-
fers to the solvent party.
This position has recently come under
scrutiny in Butters v. BBC Worldwide Ltd.
[2009] EWHC 1954 (Ch), where BBC
Worldwide (BBCW), the BBC’s commer-
cial arm, was successful in its dispute with
the administrators of Woolworths Group,
a retail chain that collapsed. The dispute
concerned the appropriate basis on which to
value Woolworths’ shares in its 2Entertain
joint venture on DVD and video distribu-
tion. BBCW had granted the joint venture
a perpetual master license of rights over
BBC content. Following the insolvency
of Woolworths, BBCW served notice to
buy out Woolworths’ shares in 2Entertain.
Under the relevant contractual provisions,
BBCW was obliged to pay “fair value” for
the shares, as determined by an independent
valuer, and could terminate the master li-
cense. However, the administrators objected
and cited the “deprivation principle” of
insolvency law that certain provisions in the
relevant agreements were void, obligating
BBCW to buy the shares on the basis that
the master license subsisted and had not
been terminated and raising the price for
the shares. Additionally, the administrators
contended that the valuer’s assessment of
Published in Intellectual Property Litigation, Volume 22, Number 1, Summer 2010. © 2009 American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof
may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
fair value should take into account the fact
that BBCW was obliged to buy Wool-
worths’ shares. However, the administra-
tor’s challenges were unsuccessful, and the
contractual position was honored.
Distinguishing the decision in Per-
petual Trustee Co. Ltd. v. BNY Corporate
Trustee Servs. [2009] EWHC 1912, the
court found that the deprivation principle
did apply, but it agreed with BBCW that
the effect of the principle in the present
case was only to avoid part of the relevant
clause. The result was that the master
license had terminated and the valuation
was to be determined on that basis. The
court also found that given the hypotheti-
cal basis of the assessment of “fair value”
established by longstanding jurisprudence,
it was not permissible to take into account
the fact that BBCW was obliged to buy
Woolworths’ shares. The key lesson from
this dispute is to ensure the agreement is
balanced and fair—had BBCW been seen
to take excessive advantage, the court may
not have found as it did.
If the IP is not critical to the debtor,
a liquidator may consider disclaiming a
license as onerous property. Section 178 of
the U.K. Insolvency Act 1986 confers on
liquidators the power to disclaim onerous
property, which is defined as “any unprofit-
able contract, and any other property of the
company which is unsalable or not readily
saleable or is such that it may give rise to a
liability to pay money or perform any other
onerous act.” An IP license, which may be
of limited value to creditors but requires the
insolvent company to pay a license fee is,
potentially, an onerous contract. However,
where a license agreement is disclaimed,
the counterparty, assuming it has suffered
a loss, would become a creditor of the
debtor to the extent of the loss. If a licensor
debtor disclaims a license agreement, the
licensee would retain the right to use any
licensed IP, as the disclaimer only operates
to release the insolvent company from its
obligations and does not affect the rights of
the licensee. Furthermore, where a liquida-
tor disclaims registered IP, an entity with
an “interest” in the IP (e.g., an exclusive
licensee) can appeal to the court to have the
IP vested in it. It should be noted that only
a liquidator may disclaim onerous property.
However, an administrator can cause a
debtor to breach the terms of a license and
allow the counterparty to file a suit to re-
cover damages, which, if successful, would
become an unsecured creditor’s claim.
A common issue arising in the United
Kingdom is the identification of unregis-
tered IP and its valuation. Typical scenarios
involving IP are either the desire of a
licensee to maintain its rights or the desire
of those with a security interest over the IP
to ensure the insolvency practitioner/ad-
ministrator or liquidator does not dispose of
the underlying IP without their being able
to claim their entitlement. As mentioned
earlier, IP may have been used for security,
and it is important to check whether the
charge/security interest has been registered
at Companies House, because any security
that is not registered is void against a liqui-
dator or an administrator per section 874 of
the U.K. Companies Act 2006. It is of equal
importance to check the national registry
for IP at the U.K. Intellectual Property
Office (IPO) to determine what interests,
if any, against the IP are registered. This
can be very important, as failure to register
with the U.K. IPO can have significant
impact on rights and the ability to bring
infringement actions or recover costs and
may affect title. Patent licenses in particular
should be registered at the U.K. IPO, as
failure to do so can have cost consequences.
For example, under Section 68 (Patents Act
1977) a proprietor or an exclusive licensee
may not be able to obtain damages or an
account of profits in an infringement action
where a registration does not occur. Ad-
ditionally, unlike in the United States, the
United Kingdom does not have established
protection for licensees who continue to
make payments under their license, and
whether the license under which they oper-
ate will be maintained is a primary concern.
Conclusion
The importance of intangibles to the market
value of companies will likely continue to
result in high-stakes, “bet-the-company”
litigation in the United States, United
Kingdom, and other foreign jurisdictions.
Accordingly, the threat of insolvency,
whether real or perceived, may be pur-
sued by a party in a licensing dispute as a
mechanism to resolve the proceedings. A
basic understanding of the laws governing
IP license agreements in insolvency can
provide a mechanism for assessing the risks
associated with the threat of insolvency
and the potential outcomes of the litigation.
Although some similarities exist, the laws
governing IP license agreements in insol-
vency are markedly different between the
United States and the United Kingdom. As
such, the complexity related to IP license
agreements in insolvency is further ampli-

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Matthew E. Hoffman is an associ-
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Pennsylvania. He can be reached at
mehoffman@duanemorris.com. Gregory
J. Urbanchuk is a principal at Asterion,
Inc., Philadelphia, Pennsylvania. He can be
reached at gurbanchuk@asterion-consulting
.com. Kenneth L. Dorsney is counsel and
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Elliott Greenleaf, Wilmington, Delaware. He
can be reached at kld@elliottgreenleaf.com.
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Endnotes
1. World Intellectual Property
Organization, WIPO Statistics Database,
June 2009, http://www.wipo.int/ipstats/en/
statistics/patents/ (last visited May 14, 2010).
2. Nakamura, L.I., What Is the U.S. Gross Find timely articles
Investment in Intangibles? (At Least) One

and news updates,

Trillion Dollars a Year! (Federal Reserve Bank
of Philadelphia, Working Paper No. 01-15).
3. See 11 U.S.C. § 101, et seq. Debtors
and creditors are also governed by other
nonbankruptcy laws and state common law,
which are not addressed in this article.
CLE program information,
4. Congress has amended the U.S.
Bankruptcy Code several times since 1998, with
the most recent significant amendments arising
and recent podcasts
under the Bankruptcy Abuse Prevention and
Consumer Protection Act of 2005.
5. It is generally agreed that an executory for litigators.
contract is one under which both parties have
material obligations due and owing to each
other, though the U.S. Bankruptcy Code does
not define “executory contract.”
6. See In re West Elecs., Inc., 852 F.2d 79 (3d
Cir. 1988); RCI Tech. Corp. v. Sunterra Corp. (In
re Sunterra Corp.), 361 F.3d 257 (4th Cir. 2004);
Perlman v. Catapult Entm’t (In re Catapult Entm’t),
165 F.3d 747 (9th Cir. 1999), cert. denied, Catapult
Entm’t, Inc. v. Perlman, 528 U.S. 924 (1999).
7. See Institut Pasteur v. Cambridge Biotech
Corp., 104 F.3d 489 (1st Cir. 1997), cert.
denied, 521 U.S. 1120 (1997).
8. See Bonneville Power Admin. v. Mirant
Corp. (In re Mirant Corp.), 440 F.3d 238 (5th
Cir. 2006).
9. See In re GP Express Airlines, Inc., 200
B.R. 222 (Bankr. D. Neb. 1996); In re Aerobox,
373 B.R. 135 (Bankr. D.N.M. 2007).

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may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
ResQNet: Rescuer or Wrecking Ball in
Patent-Licensing Negotiations?
F
or years—decades, even—it has been
an accepted truth that patent licenses
resulting from a settlement agreement
to end a patent infringement lawsuit cannot
serve as evidence of a reasonable royalty
rate. In this year’s decision in ResQNet.com,
Inc. v. Lansa, Inc., however, the Federal
Circuit suggested that litigation-induced
settlement agreements might nevertheless
have some evidentiary value to fact-finders
charged with deciding how to measure
infringement damages.
Whether you believe that the Federal
Circuit has laudably refused to throw out the
baby with the bathwater or you are skeptical
that there can be any evidentiary value to an
agreement signed at gunpoint, ResQNet has
inspired a flurry of activity in the Eastern
District of Texas, opening the doors of
discovery, and potentially the subsequent use
at trial, of evidence regarding past settlement
agreements and their underlying negotia-
tions. The implications, at least in this popu-
lar patent venue, are clear: Your settlement
communications may be discoverable and
may someday function as your opponent’s
trial exhibits (or your own). Awareness that
not only license agreements, but also the ne-
gotiation documents that underlie them, may
be discoverable will undoubtedly influence
patent-licensing behavior, both in and out of
litigation.
The Rules of Rude
In the 1889 decision of Rude v. Westcott,
the U.S. Supreme Court noted that “a pay-
ment of any sum in settlement of a claim
for an alleged infringement cannot be taken
as a standard to measure the value of the
improvements patented, in determining the
damages sustained by the owners of the
patent in other cases of infringement.”1 The
justification offered was simple: “Many
considerations other than the value of the
improvements patented may induce the pay-
ment in such cases. The avoidance of the risk
and expense of litigation will always be a
potential motive for a settlement.”2
Just as true in the era of Barack Obama
as in that of Benjamin Harrison, courts
Published in Intellectual Property Litigation, Volume 22, Number 1, Summer 2010. © 2009 American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof
may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
By David Swetnam-Burland and Stacy O. Stitham
today often exclude evidence of proposed
or accepted patent licenses offered to settle
litigation when offered for the purpose of
establishing a reasonable royalty. Although
often excluding from trial such litigation-
induced agreements, a number of courts
have allowed discovery of the same.
Reincarnation in ResQNet
In February 2010, the Federal Circuit
vacated the district court’s damages award
in ResQNet (based on a hypothetical royalty
of 12.5 percent) and remanded. Heavily
criticizing the plaintiff’s expert for relying
on certain bundled licenses as a touchstone
for the proposed royalty rate without ac-
counting for the technological and economic
differences between the patents covered by
those licenses and the patent at issue in the
litigation, the court observed that “the most
reliable license in this record arose out of
litigation,”3 since that license, at least, related
to the patent in suit. Though cautioning
that “the hypothetical reasonable royalty
calculation occurs before litigation and that
litigation itself can skew the results of the
hypothetical negotiation,”4 the court never-
theless invited the district court on remand to
recalculate a reasonable royalty with a closer
eye to such settlement-oriented licensing
agreements to the extent such license agree-
ments covered the technology at issue.
ResQNet Revolution: Tyco,
Datatreasury, and Abbott Labs
The Eastern District of Texas, with its
patent-heavy docket, responded quickly to
this decision. In an order granting a motion
to compel in Tyco Healthcare Group LP, et
al. v. E–Z–EM, Inc., et al., Judge Ward con-
cluded that the logical import of ResQNet
was that underlying settlement and licensing
negotiations relating to the same patent (or
comparable technology) may be relevant
to the calculation of a reasonable royalty
and, thus, should be discoverable under the
broad definition of relevance applicable
in discovery.5 Though he had previously
considered such materials privileged under
Goodyear Tire & Rubber Co. v. Chiles
Power Supply, Inc.,6 Judge Ward found that
the Goodyear doctrine had been undermined
by ResQNet and departed from his long-
standing practice of adopting a “bright-line
rule that settlement negotiations are privi-
leged while the resulting license agreement
is discoverable.”7 Accordingly, the floodgates
of discovery in Tyco opened to documents
and other evidence of negotiations leading
up to settlements covering the same patent
or comparable technology. Defense counsel
in infringement cases pending in the Eastern
District of Texas have duly taken note.
Proving that turnabout is fair play in
patent litigation, the decision handed down
by Judge Folsom a few days later in Data-
treasury Corp. v. Wells Fargo & Co., et al.8
applied ResQNet in a similar fashion, but
with a result skewed in favor of the plain-
tiffs. Denying a motion in limine to exclude
evidence pertaining to litigation-related li-
censes at trial, the court relied on ResQNet to
conclude that evidence of litigation-induced
settlements was admissible at trial not only
to prove or disprove a “reasonable royalty”
measure of damages, but also to prove that
the plaintiff’s patent was commercially suc-
cessful (and therefore nonobvious) or that
the plaintiff had complied with its marking
obligations. The court determined that the
licenses were relevant and admissible, and
that it was up to the defendants to dispute
their evidentiary weight during trial and in
proposed jury instructions.
In a different jurisdiction a few months
later, Judge Coar of the Northern District of
Illinois in Abbott Labs., et al. v. Sandoz, Inc.9
denied a motion in limine and introduced a
further wrinkle—plaintiffs opening the door
to a defendant’s introduction of litigation-
induced settlements at trial. Noting the gen-
eral practice of excluding license agreements
contained in litigation settlements from trial,
the court nonetheless left this door open to
the defendant because the plaintiffs’ expert
had relied on certain litigation-related license
agreements in coming up with his reason-
able royalty figure. Framing the choice as
one between allowing both parties to rely on
such evidence or permitting neither to do so,
the court opted for the former.
Then, on June 24, 2010, Magistrate
Judge Love of the Eastern District of Texas
ruled in Software Tree, LLC v. Red Hat, Inc.,
et al. that evidence of litigation-induced
license agreements was not discoverable and
endorsed the Goodyear rule, thereby effec-
tively generating a split within the district on
the discoverability of evidence of litigation-
induced license agreements.10
Retreat from ResQNet?: Fenner and
IP Innovation
While it appears to have altered the com-
plexion of discovery, it’s much less appar-
ent whether ResQNet will turn out to be
a mountain or molehill at trial. Departing
from Datatreasury, Magistrate Judge Love
granted in part a motion in limine in Fenner
Investments, Ltd. v. Hewlett-Packard Co., et
al. to preclude testimony or exhibits relat-
ing to settlement licenses entered into as a
result of prior litigation with third parties.
The court found that “the recent ResQNet
decision has not altered the admissibility
of agreements entered into under the threat
of litigation.”11 ResQNet was distinguished
on grounds that the question of the admis-
sibility of the licenses into evidence was not
before the appellate court. Such licenses had
been admitted during a bench trial, negating
any concern about jury confusion, and their
admissibility was not contested on appeal.
Moreover, the same day that Judge Ward
issued his order in Tyco Healthcare, Judge
Rader—a member of the panel that issued
the per curiam opinion in ResQNet—while
sitting by designation in the Eastern District
of Texas, suggested in IP Innovation, LLC v.
Red Hat, Inc. that the Federal Circuit had not
intended to use ResQNet to raze the land-
scape on the relevancy of settlement agree-
ments in the hypothetical negotiation used to
calculate a reasonable royalty. In IP Innova-
tion, Judge Rader struck the testimony of the
patentee’s damages expert as unreliable. One
of Judge Rader’s criticisms of the expert’s
analysis was the exclusion of certain prior
license agreements from consideration as
outdated because they had occurred 10
years before the date of the hypothetical
negotiation. Noting the relevance of these
earlier agreements, Judge Rader wrote “[a]t
least two of these agreements were entered
into outside of the context of litigation and
thus [were] appropriate as touchstones for
determining the appropriate royalty rate in
this case.”12 Judge Rader’s focus on reviving
decade-old licenses for evidentiary purposes
Published in Intellectual Property Litigation, Volume 22, Number 1, Summer 2010. © 2009 American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof
may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
because they were not formed in the context
of litigation and ignoring other, more recent
agreements that were litigation-induced may
indicate that the winds of change sweep-
ing through the patent world may blow out
soon—at least when it comes to the use of
litigation-induced licenses and settlement
negotiation documents at trial.
Magistrate Judge Everingham’s terse
order in Commil USA, LLC v. Cisco Systems,
Inc., et al. provides some confirmation of
this view. Without mentioning ResQNet,
Judge Everingham indicated that he would
allow the defense to introduce evidence of
the purchase price of the patent in suit, but
not “evidence of the negotiations undertaken
to arrive at that price” because such evidence
was “relevant, if at all, in only a remote
way,” and any such relevance “is substan-
tially outweighed by the danger of unfair
prejudice and confusion of the issues.”13
The Impact of ResQNet and Progeny
on Licensing Behavior
Given the prominence of the Eastern District
of Texas as a forum for patent litigation, the
rulings of this court interpreting ResQNet
will likely reverberate, whether or not they
are ultimately endorsed by other courts or
the Federal Circuit. First, there is a division
of opinion on the discoverability of evidence
of litigation-induced license agreements in
the Eastern District of Texas, Tyco stand-
ing for the proposition that evidence of
litigation-induced settlements and settlement
negotiation documents are discoverable in
order to allow litigants the opportunity to
determine whether settlements might be
relevant to any fact issue at trial, and Red
Hat standing for the opposite conclusion.
Second, in cases where discovery is al-
lowed, while there appears at present to be a
judicial willingness to consider whether such
evidence may be relevant at trial, east Texas
courts continue to be reluctant to allow such
evidence into the record at trial absent a
showing of specific relevance on damages,
nonobviousness, marking, or some other
issue. This reluctance may be even stronger
in jury cases.
With recent case law signaling a poten-
tial shift in the landscape, parties entering
into patent-licensing agreements would do
well to expect that such licenses—as well
as the underlying communications—may
be admissible. What will the effect of this
phenomenon be on licensing behavior?
As matters currently stand, parties should
anticipate that they will be asked for, and
may be required to produce, copies of
litigation-induced settlement agreements and
any documents underlying the settlement
negotiations. Given ResQNet and the broad
definition of relevance applicable to discov-
ery, licensors should enter litigation knowing
that their licensing efforts will be sought dur-
ing case preparation (and likewise, licensees
may expect to be the recipient of third-party
subpoenas). Even if the documents produced
never see a courtroom, the knowledge that
a litigation opponent will ask for, and likely
receive, them in discovery will have some ef-
fect on licensing and litigation conduct.
Licensors should know
that their licensing
efforts will be sought
during case preparation.
This knowledge may affect prelitigation
licensing talks. The routine practice of a
patent holder asking a potential licensee to
sign a nondisclosure agreement concern-
ing any settlement discussions may now
lead to second thoughts. If such settlement
communications may properly be sought in
discovery and possibly admitted at trial one
day, many prospective licensees will hesitate
before signing away their rights to use these
documents in subsequent litigation at the
outset of prelitigation talks with a licensor
who may one day become a plaintiff.
For their part, licensors may be reluctant
to commit details of their negotiations to
paper (or email) out of concern that such
details may come back to bite them later.
To that end, licensors may increasingly turn
to the use of standard form agreements, the
terms of which do not vary from license to
license (thus greatly reducing the ability
of a would-be licensee to negotiate more
favorable provisions or creative releases).
Such an outcome may lead to more lawsuit
filings and longer litigation before settle-
ment, as parties conclude it is more favor-
able to fight within the context of litigation
than agree to an ill-fitting, one-size-fits-all
form agreement.
Continued on page 17
Reasonably Withheld Consent in License
Agreements
I
t’s common to restrict or limit licensee
activity in a license agreement by includ-
ing such language as “Licensee may not
grant sublicenses without consent from licen-
sor, which consent shall not be unreasonably
withheld.” However, many license agree-
ments do not further state what the standards
of reasonableness are. Hence, there remains a
question of when it’s reasonable to withhold
consent and when it’s not. If the licensor only
provides consent under the condition that the
licensee accept certain arrangements of roy-
alty sharing, is it reasonable or unreasonable?
It’s Reasonable When . . .
One reasonable basis for a licensor to refuse
consent is when the licensor’s consideration
for entering into the license agreement is
being impaired. In the Federal Circuit case
of Speedplay v. Bebop,1 the licensors and the
licensee entered into an agreement wherein
the licensee could not assign its interest in the
license without the consent of the licensors.
Under the agreement, however, the licensors’
consent to an assignment by the licensee
could not “be withheld unreasonably.” The
court reasoned that the “[licensors’] only
reasonable basis for refusing consent would
be the impairment of their consideration for
entering the [license agreement].”2
Speedplay raises the question of what the
licensor’s considerations are for a license
agreement. A licensor may enter into a
license agreement for further development or
commercialization of an intellectual property
or invention. A licensor may also grant a
license for monetary reasons. For example,
a license may be granted for the purpose of
obtaining funding for continual development
of the invention. The court in Speedplay
recognized that an ongoing royalty stream is
an example of a licensor’s consideration for a
license agreement.3
A licensor may reasonably withhold con-
sent for a sublicense or an assignment when
one of the above considerations is being jeop-
ardized. If the licensee wants to grant a sub-
license to a competitor of the licensor, then
the licensor’s goal of further development of
Published in Intellectual Property Litigation, Volume 22, Number 1, Summer 2010. © 2009 American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof
may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
By Hon-Man Lee, Lauren Korshalla, and Albert Wai-Kit Chan
the intellectual property would be seriously
compromised, and the licensor, under this
situation, would certainly have reasonable
basis to withhold consent. Similarly, if the
licensee’s assignment or sublicense would
jeopardize the licensor’s ongoing royalty
stream, then the licensor may reasonably
withhold consent.
In trademark licensing, a licensor may
reasonably withhold consent when the
licensor is exercising quality control over the
mark. For example, a trademark holder has
the right to control the quality of the goods
manufactured and sold under its trademark,
wherein the protection of the mark may be
lost if the trademark licensor fails to control
the quality of the licensed goods.
Copyright licensors
may reasonably
withhold consent
when it is based on
quality control.
The First Circuit case of Rey v. Lafferty4
involved creator and licensor Margaret Rey’s
rejection of proposed merchandise bear-
ing the children’s book character Curious
George. In Rey, the licensing contract stated
that licensor’s approval “shall not be unrea-
sonably withheld.” Rey had rejected various
items for merchandising, such as pajamas,
plush toys, and software. In certain instances,
other manufacturers disengaged from propos-
als for the manufacture of Curious George
merchandise after hearing of Rey’s harshly
worded rejections of prototypes. The court
concluded that the rejection was reasonable
if the licensor could, at a minimum, articulate
a material reason (even if the reason was
subjective) for disapproving a product. The
licensor could not disapprove for reasons
immaterial to the mark, its proposed use or
commercial potential, or reasons unrelated to
the creator/licensor’s artistic and reputational
identification with the mark and ancillary
products. Disapproval needs to be commu-
nicated, consistent with contractual speci-
fications, within a reasonable time and in a
reasonable manner so as to let the licensee
rework the product to gain approval. Finally,
the reason for withholding product approval
could not be so preclusive as to frustrate
the fundamental contractual assumptions
upon which the license was formed. In
other words, the licensor could not impose
approval standards that would effectively
eliminate all potential for profitable use of the
trademark.
Similarly, copyright licensors may reason-
ably withhold consent when it is based on the
exercise of quality control over the intel-
lectual property. Although copyright holders
in the United States do not possess moral
rights, they may insist, contractually, on
approval provisions to assure quality control
and high standards in the exploitation of the
creative work.5 In Clifford Ross, a contractual
provision calling for the copyright holder’s
participation in selecting licensing agents
and enjoining the issuance of further licenses
absent the copyright holder’s approval was
upheld because the court concluded that
there would be irreparable harm to the future
profitability of the intellectual property and
the artistic reputation of the copyright holder
if the exploitation of the intellectual property
continued without regard to the licensor’s
high standards of quality control.6
It’s Unreasonable When . . .
On the other hand, it would be unreasonable
to withhold consent to coerce a licensee into
accepting certain concessions in an attempt to
renegotiate the license agreement. In Orange
County Choppers v. Olaes Enterprises, Inc.,7
the licensor granted the licensee an exclusive
license to use the licensor’s logos, trade-
marks, and controlled designs. Under the
license, the licensee could submit proposed
designs to the licensor, and the licensor was
required under the license agreement to use
reasonable efforts to notify the licensee of
its approval or disapproval of any materi-
als submitted. The licensee alleged that the
licensor intentionally delayed approval of the
licensee’s designs to force renegotiation of
the license agreement to obtain more money
and concessions from the licensee than that
to which the parties had previously agreed.
The licensee claimed that it was coerced into
signing three amendments to the license to
limit the scope of the license in exchange
for the licensor’s approval of its designs.8
The court ruled that the licensor failed to use
reasonable effort to notify the licensee of its
approval or disapproval when the licensor
withheld notice to force renegotiation of the
license agreement.9
Application
Applying the above standards of reasonable-
ness to the scenario posted at the beginning
of this article, i.e., when the licensor condi-
tions his consent on having the licensee ac-
cept certain arrangements of royalty sharing,
one can argue that the licensor has withheld
ResQNet
Continued from page 15
No doubt licensors will also consider
ways in which they can use such evidence
to their advantage down the line, as the
plaintiffs did in Datatreasury on the issues of
commercial success and marking. Likewise,
they will consider ways in which they do
not want to use such evidence, to avoid the
Abbott Labs scenario in which the plaintiffs’
reliance on litigation-induced license agree-
ments in calculating a reasonable royalty
ensured that the defendant could introduce
those agreements in evidence at trial. Finally,
if courts continue to be reluctant to admit ev-
idence of litigation-induced licenses at trial,
patent holders may have a further incen-
tive to sue first and then negotiate, thereby
potentially minimizing the chance that their
negotiation documents will be introduced in
evidence at trial.
Conclusion
Further repercussions of ResQNet bear
watching, both inside and outside the East-
ern District of Texas, as the implications
Published in Intellectual Property Litigation, Volume 22, Number 1, Summer 2010. © 2009 American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof
may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
consent unreasonably. Absent any deficiency
or fraud in the original license agreement,
and without any evidence that the sublicense
may jeopardize the licensor’s ongoing royalty
stream, the licensor cannot arguably maintain
a reasonable basis of withholding consent.
Instead, the conditions put forth by the licen-
sor upon receiving a consent request from the
licensee are most likely conditions that are
more favorable to the licensor than originally
agreed to in the license. Thus, conditioning
the granting of consent on the licensee’s ac-
ceptance of the new licensor-friendly condi-
tions would arguably amount to unreasonably
withholding consent to coerce renegotiation
of the license agreement.
Furthermore, it may be advisable, from
the licensee’s perspective, to include certain
standards of reasonableness when withhold-
ing consent in the license agreement. It may
benefit the licensee if the agreement includes
language that indicates the licensor cannot
claim to have reasonably withheld consent
unless the licensor’s considerations for
entering into the license agreement are being
impaired. For example, the license agreement
might read “Unless the licensor reasonably
believes that the sublicensee cannot fulfill
of the Federal Circuit’s holding play out
in ongoing litigation. The Federal Circuit
has signaled that past license agreements
must have some clear connection to the
patents or technology, and at least one
district court in east Texas has interpreted
that holding to entail that the scope of
discovery must allow the parties to de-
velop evidence proving (or disproving)
the existence of such a connection through
a review of documents underlying prior
license or settlement negotiations. Mean-
while, the jury is out on whether expanded
discovery will lead to increased admission
of licenses and license-related documents
at trial, and if so, for what purposes. It also
remains to be seen whether allowing par-
ties to inquire more deeply into litigation-
related settlement documents will assist
fact-finders in tethering a reasonable
royalty to the real value of the underlying
inventions. l
David Swetnam-Burland is a partner
and Stacy O. Stitham is an associate at
Brann & Isaacson, Lewiston, Maine. They
may be reached at dsb@brannlaw.com and
sstitham@brannlaw.com, respectively. Peter
what is agreed in the license agreement,
the licensor cannot reasonably withhold
consent.” l
Hon-Man Lee and Lauren Korshalla are
patent attorneys and Albert Wai-Kit Chan
is a partner at the Law Offices of Albert
Wai-Kit Chan, PLLC. They can be reached
at leehm@kitchanlaw.com, korshallal@
kitchanlaw.com, and akitchan@aol.com,
respectively.
Endnotes
1. Speedplay v. Bebop, 211 F.3d 1245 (Fed.
Cir. 2000).
2. Id. at 1251-52.
3. Id. at 1251.
4. Rey v. Lafferty, 990 F.2d 1379, 1393 (1st
Cir. 1993).
5. See Rey, 990 F.2d 1379, 1393 (1st Cir.
1993), citing Clifford Ross Co. v. Nelvana,
Ltd., 710 F. Supp. 517 (S.D.N.Y. 1989), aff’d
without opinion, 883 F.2d 1022 (2d Cir. 1989).
6. Clifford Ross, 710 F. Supp. at 520.
7. County Choppers v. Olaes Enterprises,
Inc., 497 F. Supp. 2d 541 (S.D.N.Y. 2007).
8. Id. at 548–49.
9. Id. at 559.
J. Brann, a partner at Brann & Isaacson,
also contributed to this article and can be
contacted at pbrann@brannlaw.com.
Endnotes
1. Rude v. Westcott, 130 U.S. 152, 164 (1889).
2. Id.
3. 594 F.3d 860, 872 (Fed. Cir. 2010).
4. Id.
5. 2010 WL 774878 (E.D. Tex. Mar 2, 2010).
6. 332 F.3d 976 (6th Cir. 2003).
7. 2010 WL 774878 at *2; see also Order,
Alexsam, Inc. v. Unitedhealth Group Inc., et
al., Case No. 2:07-cv-512-CE (E.D. Tex. May
26, 2010) (ordering production of settlement
negotiation documents in light of ResQNet).
8. 2010 WL 903259 (E.D. Tex. Mar. 4, 2010).
9. Order, Case No. 05 C 5373 (N.D. Ill. May
24, 2010) (slip op.).
10. Mem. Op. & Order, Software Tree, LLC v.
Red Hat, Inc., et al., Case No. 6:09–cv–97 (E.D.
Tex. June 24, 2010) (slip op.).
11. 2010 WL 1727916, *3 (E.D. Tex. Apr. 28,
2010).
12. 2010 WL 986620, *3 (E.D. Tex. Mar. 2,
2010) (emphasis added).
13. Order, Case No. 2:07-cv-341-CE (E.D.
Tex. May 10, 2010) (slip op.).
Compulsory Licenses
Continued from page 1
compensation—just because that grant is
limited to one defendant as opposed to the
entire universe of potential infringers does
not make it any less a license.
That being said, apart from the Federal
Circuit’s reasoning for using the term
“ongoing royalty” instead of “compulsory
license,” there is a rational basis for doing
so in light of recent district court opinions
attempting to apply this concept. Aside
from a few monitoring requirements, the
post-verdict relief granted in lieu of an
injunction in these cases thus far typically
covers little more than the amount of the
ongoing royalty and the royalty base to
which it is applied. Indeed, several district
courts (in addition to the Federal Circuit,
particularly Chief Judge Rader) have
strongly encouraged litigants to negoti-
ate their own licenses for post-verdict
infringement precisely to address the other
points that are generally covered in a pat-
ent license.
As the Federal Circuit noted in Paice
and has been further noted by commen-
tators, the imposition of post-verdict
royalties by courts in patent cases is not
new. There is precedent for such royalties
that predates the founding of the Federal
Circuit,2 and, as relied upon in Paice, the
Federal Circuit itself previously upheld
the imposition of an ongoing royalty for
continued patent infringement in lieu of
an injunction in Shatterproof Glass Corp.
v. Libbey-Owens Ford Co.,3 where the
royalty was styled as a compulsory license
by the court. What is new is the frequency
with which such a mechanism is being
used by district courts. This can be directly
correlated to the Supreme Court’s 2006
decision in eBay Inc. v. Mercexchange,
LLC,4 which reversed the previously
held “general rule that courts will issue
permanent injunctions against patent
infringement absent exceptional circum-
stances.” In eBay, the Supreme Court held
that injunctions in patent cases are not
to be presumed, and instead, a plaintiff
must demonstrate that it can satisfy the
traditional four-factor test before a court
may grant an injunction. Specifically, “[a]
plaintiff must demonstrate: (1) that it has
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may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
suffered an irreparable injury; (2) that
remedies available at law, such as mon-
etary damages, are inadequate to compen-
sate for that injury; (3) that considering the
balance of hardships between the plaintiff
and defendant, a remedy in equity is
warranted; and (4) that the public interest
would not be disserved by a permanent
injunction.”
In the wake of eBay, courts have
grappled with applying the four-factor test
in patent cases, and in many cases, they
have concluded that an injunction is not
appropriate in certain circumstances. In
most of the cases where an injunction is
not granted, the court then instead orders
an ongoing royalty. This body of law is
still evolving, however, and numerous
questions have been raised about both the
authority and the mechanism for impos-
ing an ongoing royalty for post-verdict
infringement, including:
• The source of the court’s authority
to grant such relief;
• Whether or not there is a Seventh
Amendment right to a jury trial
regarding such relief;
• The appropriate procedural mecha-
nism for determining the relief;
• The factors to be considered for as-
sessing such relief regardless of the
procedural mechanism;
• The complete scope of the relief
(e.g., the products to which the
royalty should be applied and/or the
scope of the terms of the license/
remedy); and
• Remedies available to address a
violation of an order of an ongoing
royalty or compulsory license.
Some, but not all, of these questions
have been answered, at least in part, by
one of three Federal Circuit decisions
since eBay, starting with Paice. In Paice,
the Federal Circuit held that an award of
ongoing royalties has its basis in a court’s
power to grant equitable relief in patent
cases, as delineated in Section 283 of the
Patent Act (35 U.S.C. § 283), which pro-
vides that “courts [that] have jurisdiction
of cases under this title may grant injunc-
tions in accordance with the principles of
equity to prevent the violation of any right
secured by patent, on such terms as the
court deems reasonable.” The court further
explained that although ongoing royalties
are monetary relief, they are equitable
relief and not “properly characterized
as ‘damages.’” Thus, the right to such
relief “does not, standing alone, warrant
a jury trial,” such that there is no Seventh
Amendment violation if a court rather
than a jury decides the issue. The Federal
Circuit’s position on both these points
has been the subject of some criticism by
commentators, but thus far there has been
no case law authority to the contrary, nor
has there been any attempt in the legis-
lature to change this result. Accordingly,
this holding stands, and district courts are
empowered to determine whether and how
to award an ongoing royalty in an appro-
priate case.
Interestingly, notwithstanding this
precedent, at least one judge—Judge Clark
of the Eastern District of Texas—has taken
the view that it is nonetheless preferable to
submit the question of an ongoing royalty
to the jury and has done so on a number of
occasions.5 In his view, an ongoing royalty
should be calculated in much the same
manner as a prejudgment royalty under
Georgia-Pacific, so a jury should be just
as capable of awarding a post-judgment
royalty as it is a prejudgment one. How-
ever, Judge Clark is mindful of the Federal
Circuit’s charge to the district court judge
to determine the ongoing royalty if the
parties cannot agree, and thus attempts to
harmonize his view with the holding of the
Federal Circuit in Paice, saying, “Because
the parties will have an opportunity to
confer on the issue of future damages
post-verdict and before final judgment
is entered, the court’s submission of this
question to the jury does not run afoul of
the Federal Court’s statement in Paice,”
and that the parties should have the op-
portunity to negotiate the royalty them-
selves post-judgment.6 Judge Clark further
explained that “a question submitted to
the jury on the issue of future damages
neither helps nor hurts Plaintiff’s case for
an injunction; it merely provides the court
with a guide, if the court determines that
monetary damages are appropriate either
in full or during a temporary stay.”
Judge Clark also distinguished the
holding in the Federal Circuit’s second
case on this topic, Innogenetics, N.V. v.
Abbott Laboratories.7 In Innogenetics,
the Federal Circuit held that the district
court could not grant an injunction where
the jury award in the case provided for an
ongoing royalty payment for post-verdict
infringement. As the Federal Circuit
explained, “[W]hen a patentee requests
and receives such compensation, it can-
not be heard to complain that it will be
irreparably harmed by future sales.” In
Cummins-Allison, Judge Clark explained
that in Innogenetics, “the jury’s award of
future damages negated any potential for
irreparable harm resulting from future
sales.” Further, he stated that “the Plaintiff
in Innogenetics automatically received
future damages based on the jury’s verdict,
and according to the Federal Circuit,
was already adequately compensated for
future infringement.” In contrast, under his
procedure, Judge Clark also explained that
an injunction may still be necessary even
if the jury provides for an amount of future
damages, and “merely because experts
can opine on, and a jury can arrive at, a
future royalty rate does not mean that such
compensation would automatically be ad-
equate. Some amount of money could be
calculated for any interference with prop-
erty rights; that does not necessarily make
the amount an adequate legal remedy.”
Thus, in Cummins-Allison, Judge Clark
described his procedure as “efficient” and
indicated that it recognized “the vital role
of jury as fact-finding partner” while meet-
ing all legal requirements. Indeed, in an
interview in 2008, Judge Clark explained
that “having juries address the future dam-
ages issue is a way to avoid having law-
yers prepare, and the court hear, damages
testimony twice, before and after a verdict,
saving ‘the time and the resources of the
court and the parties.’”8 Commentators
have opined that Judge Clark’s procedure
is also beneficial to the extent that there re-
main any lingering doubts about the right
to a jury trial on future damages, notwith-
standing the Federal Circuit’s precedents
in this area.
The Federal Circuit has also provided
guidance on several of the remaining is-
sues relating how to determine the award,
and these issues have been the focus of
district court decisions in this area. In
Paice, the Federal Circuit remanded the
case “for the limited purpose of having
the district court reevaluate the ongo-
ing royalty rate. Upon remand, the court
may take additional evidence if necessary
to account for any additional economic
factors arising out of the imposition of an
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may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
ongoing royalty.” The Federal Circuit also
indicated that “[t]his process will also,
presumably, allow the parties . . . the op-
portunity to negotiate their own rate prior
to the imposition of one by the court, as
the concurrence [by Chief Judge Rader]
suggests.” In its final case thus far in this
area, the Federal Circuit also remanded
for further consideration of the ongoing
royalty rate in Amado v. Microsoft Corp.
The focus in Amado was on the specific
amount of the ongoing royalty and the
extent to which, if any, it should be higher
than the prejudgment royalty rate. In this
regard, the Federal Circuit cited with ap-
proval the views of Chief Judge Rader that
he expressed in his concurrence in Paice
and held that “[t]here is a fundamental dif-
ference . . . between a reasonable royalty
for pre-verdict infringement and damages
for post-verdict infringement . . . because
different economic factors are involved.”
Accordingly, a different rate may be ap-
propriate.
There is currently no
single pattern in the
cases beyond following
the general guidance
from the Federal Circuit.
The Federal Circuit has not opined on
the proper procedures and test for de-
termining an ongoing royalty, however,
beyond the general guidance discussed
above. Accordingly, this area has been the
subject of much discussion in the district
court cases in this area and by commenta-
tors. While there is some detailed guidance
emerging in certain courts, there is cur-
rently no single pattern in the cases beyond
following, in some fashion, the general
guidance from the Federal Circuit on these
issues. For example, as discussed above, at
least one judge, Judge Clark, has decided
to send the question of ongoing royalties to
the jury in the first instance, although even
he affirms that the parties should have a
post-verdict opportunity to negotiate the
issue and that the final decision on this is
the court’s. Another outlier is those cases in
which courts have ordered that the plaintiff
file a new complaint to address the post-
judgment infringement. This procedure
was adopted by Judge Davis of the Eastern
District of Texas in z4 Technologies, Inc.
v. Microsoft Corp.9 in 2006, prior to the
Federal Circuit’s rulings in this area. This
procedure was more recently also adopted
by Judge Ward in 2008 in Saffran v. Boston
Scientific Corp.10 Similarly, in another
2006 decision, Voda v. Cordis Corp.,11
Judge Leonard of the Western District
of Oklahoma severed the post-judgment
damages issue from the main case so that
it could remain alive as a continuing action
and allow for monitoring of the ongoing
royalty payments.
In a number of cases since Paice and
Amado, the court has ordered the parties
to first negotiate the post-judgment royalty
rate and held an evidentiary hearing on the
matter if the parties failed to arrive at an
agreement on the rate.12 The most notable
recent case to use this process is Boston
Scientific Corp. v. Johnson & Johnson
from the Northern District of California.
In that case, the court provided the parties
with a 60-day period in which to negoti-
ate a license agreement and then set a
schedule for briefing the issue of whether
a permanent injunction should issue or,
alternatively, briefing and submitting evi-
dence as to what a reasonable royalty rate
would be.13 In 2009, after the parties were
unable to agree on a license agreement, the
court held an evidentiary hearing and is-
sued an order setting the royalty rate based
on the evidence and arguments adduced at
that hearing.14
Even once the procedural mechanism
for setting the post-judgment royalty rate
is determined, the question still remains as
to the appropriate method for setting the
rate. Imbedded in Judge Clark’s process
of having the rate determined by the jury
is the view that an ongoing royalty should
be set using the same Georgia-Pacific15
factors used in setting the prejudgment
royalty rate. In this regard, Judge Clark
noted in Cummins-Allison that the dam-
ages analysis already assumes validity
and infringement, but opined that “[i]t is
true that some factors such as the rela-
tive importance of the technology or the
availability of a design-around may have
changed since the date of first infringe-
ment. To the extent these were not consid-
ered in the ‘book of wisdom’ analysis and
will not be accounted for in total future
sales, these factors can be explained [to
the jurors] without a great deal of diffi-
culty.” This approach was also followed by
Judge Illston in the Boston Scientific case,
where she utilized “the Georgia-Pacific
factors but . . . consider[ed] whether cer-
tain factors should be weighed differently
in the context of post-verdict royalties.”
Finally, the Georgia-Pacific factors also
formed the basis for Judge Folsom’s
analysis on remand in Paice,16 although
the court noted that “[a] post-judgment,
ongoing royalty negotiation . . . is logically
different from the pre-trial hypothetical
negotiation discussed in Georgia-Pacific,”
and the “changed circumstances in this
case warrant a different ongoing royalty
rate,” than the pre-judgment royalty rate
awarded at trial.
Perhaps one of the most interesting
cases in this area is the decision of Mag-
istrate Judge Love of the Eastern District
of Texas in Creative Internet Advertising
Corp. v. Yahoo! Inc.17 In that case, which
followed the pattern of allowing the parties
to negotiate a royalty rate first and then
imposing one after considering the parties’
submissions and utilizing “a modified
Georgia-Pacific analysis,” like the courts
above, the court grappled with the issue
of what rate, if any, should be applied to
products sold post-verdict that were modi-
fied from those products that had been
adjudged infringing. In that case, Yahoo!
argued that it had modified its product
and thus ceased infringement, while the
plaintiff argued that the product in ques-
tion was, nonetheless, still infringing. The
court addressed the issue as to whether
it could determine whether the project in
question was infringing. In this regard, it
applied the analysis used for determin-
ing if an injunction would apply to the
product, i.e., the patentee must establish
“that the products for which the royalty is
based are at least a ‘colorable variation’
of the adjudicated product.” Determining
that the product did meet that standard, the
court then went on to set the appropriate
royalty rate.
In each of these cases, except for some
instructions as to when payments are due
and whether or not there are audit rights
or the like, the orders from the district
courts generally contain little more than
setting the rate to be paid. Indeed, for this
reason, at least one court, in Finisar Corp.
v. DirecTV Group, Inc.,18 has invited the
Published in Intellectual Property Litigation, Volume 22, Number 1, Summer 2010. © 2009 American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof
may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
parties to formulate their own licensing
agreement, incorporating the terms set by
the court. As the court explained, “[i]t is
anticipated that, as sophisticated entities
with experience in licensing agreements,
the parties may wish to agree to more
comprehensive or convenient terms.”
Finally, in terms of enforcing the ongoing
royalty provisions, courts have generally
retained jurisdiction to enforce that portion
of their judgment, such as in Finisar.
At least one court,
in Finisar Corp. v.
DirecTV Group, Inc.,
has invited the parties
to formulate their own
licensing agreement,
incorporating the terms
set by the court.
In the absence of additional guidance
from the Federal Circuit, while there is
some diversity in how courts are imple-
menting the current guidance of the Fed-
eral Circuit in ordering ongoing royalties
for post-judgment infringement in patent
cases, it is clear that a reasoned analysis of
some sort will be required to set the rate.
While the parties will generally be given
little guidance from the courts for manag-
ing their post-verdict relationship beyond
the royalty rate to be applied to particular
products, the courts should be open to the
parties agreeing to additional terms that
would allow for the more efficient and
effective management of the relationship.
Should problems arise, it is likely that the
parties would be able to return to the court
for resolution as an enforcement of the
order. l
Nicole D. Galli is a partner at
Feldman Gale, P.A. in Philadelphia,
Pennsylvania. She may be reached at
ngalli@feldmangale.com. Scott E. Scioli,
an associate with Feldman Gale, P.A. in
Philadelphia, Pennsylvania, contributed
to the research in this article.
Endnotes
1. 504 F.2d 1293, 1314 (Fed. Cir. 2007).
2. See, e.g., Foster v. American Machine &
Foundry Co., 492 F.2d 1317, 1324 (2nd Cir.
1974).
3. 758 F.2d 613, 628 (Fed. Cir. 1985).
4. 547 U.S. 388 (2006).
5. E.g., Cummins-Allison Corp. v. SBM
Co., 584 F. Supp. 2d 916 (E.D. Tex. 2008);
Ariba, Inc. v. Emptoris, Inc., 567 F. Supp. 914
(E.D. Tex. 2008).
6. Cummins-Allison, 584 F. Supp.2d at 920.
7. 512 F.3d 1363 (Fed. Cir. 2008).
8. Marek, Juries May Take up Future
Damages in Patent Cases, Nat’l L.J. (Aug. 4,
2008).
9. 434 F. Supp. 2d 437 (E.D. Tex. 2006).
10. Case No. 2:05-cv-00547-TJW (E.D.
Tex. Feb. 14, 2008).
11. No. Civ-03-1512-L, 2006 WL 2570614
(W.D. Okla. Sept. 5, 2006).
12. E.g., Ricoh Co. v. Quanta Computer,
Inc., No. 06-cv-462-bbc, 2010 WL
1607908 (W.D. Wis. Apr. 19, 2010); Hynix
Semiconductor Inc. v. Rambus Inc., 609 F.
Supp. 2d 951 (N.D. Cal. 2009); Telcordia
Tech., Inc. v. Cisco Sys., Inc., 592 F. Supp. 2d
727 (D. Del. 2009); but cf. Presido Components
Inc. v. American Tech. Ceramics Corp., No.
08-CV-335-IEG (NLS), 2010 WL 1462757
(S.D. Cal. Apr. 13, 2010) (ordering the parties
to brief the issue of “whether the court should
allow them to negotiate their own license
agreement, or whether the Court should impose
a specific amount of ‘ongoing royalty.’”).
Also, in two cases, the courts appear to have
simply held hearings on the appropriate rate
and do not indicate whether the parties were
given an opportunity to negotiate first. See
Bard Peripheral Vascular, Inc. v. W.L. Gore &
Assocs., Inc., No. CV-03-0597-PHX-MHM,
2009 WL 920300 (D. Ariz. Mar. 31, 2009);
Joyal Prods. Inc. v. Johnson Elec. Inc., Civ. A.
No. 05-5172 (JAP), 2009 WL 512156 (D.N.J.
Feb. 27, 2009).
13. 550 F. Supp. 2d 1102 (N.D. Cal. 2008).
14. No. C 02-00790 SI, 2009 WL 975424
(N.D. Cal. Apr. 9, 2009).
15. Georgia-Pacific Corp. v. U.S. Plywood
Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970).
16. 609 F. Supp. 2d 620 (E.D. Tex. 2009).
17. 674 F. Supp. 2d 847 (E.D. Tex. 2009).
18. Case No. 1:05-cv-00264-RC (E.D. Tex.
July 7, 2006).
Covenants Not to Sue
Continued from page 1
in Corebrace held that the right to have
a licensed product made by a third party
is implied in licenses unless expressly
excluded. Together, these decisions provide
the potential for patentees to inadvertently
open the door to unanticipated and unen-
cumbered competition.
TransCore
TransCore, LP and TC License, Ltd.
(collectively “TransCore”) owned certain
patents for automated vehicle identification
systems.3 TransCore sued its competitor,
Mark IV Industries, another manufacturer
of such systems, for patent infringement in
2000. The parties later settled the case for
$4.5 million. In the settlement agreement,
TransCore covenanted not to sue Mark IV
under certain patents: “TCI hereby agrees
and covenants not to bring any demand,
claim, lawsuit or action against MARK IV
for future infringement of any [listed patent
rights].”4
Several years later, TransCore sued
Electronic Transaction Consultants Corp.
(ETC) in the Northern District of Texas
for patent infringement. ETC installed
toll-collection systems for the Illinois
State Toll Highway Authority (ISTHA),
which ISTHA had purchased from Mark
IV. TransCore asserted four patents against
ETC, three of which were included in
the covenant not to sue and release found
in the TransCore-Mark IV settlement
agreement. ETC sought summary judg-
ment on the theory that the doctrines of
patent exhaustion, implied license, and
legal estoppel barred TransCore’s suit. The
district court granted ETC’s motion, not-
ing particularly that with respect to patent
exhaustion, the covenant would be “com-
mercially worthless” if TransCore could
sue Mark IV’s customers.5 On appeal, the
Federal Circuit affirmed.
It is well established that the first
unconditional sale of a patented product
that is authorized by the patent owner
exhausts the patentee’s rights over the
downstream use, offer for sale, importa-
tion, or resale of the patented product.6
TransCore did not dispute that the
covenant not to sue allowed Mark IV to
Published in Intellectual Property Litigation, Volume 22, Number 1, Summer 2010. © 2009 American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof
may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
produce and sell the infringing products.7
However, TransCore maintained that the
covenant applied only to Mark IV and
did not flow to or protect any of Mark
IV’s downstream customers and users.8
To address this point, the Federal Circuit
considered whether, under the patent
exhaustion doctrine, an unconditional
covenant not to sue is an “authorization”
of the sale made by the covenantee. The
court first looked at the nature of patent
rights, which are negative rights (i.e., the
right to exclude others from infringing
activity, not the affirmative right to make,
have made, use, import, offer for sale, or
sell), and concluded that patentees cannot
grant affirmative rights to practice inven-
tions because “one cannot convey what
one does not own.”9 Instead, a license
merely permits an entity to engage in an
activity that the patent holder has a right
to prevent.10 Similarly, a covenant not to
sue is merely a forbearance of the ability
to sue for infringement. The difference
between the two, the court held, “is only
one of form, not substance—both are
properly viewed as ‘authorizations.’”
Therefore, the primary issue was what
TransCore had authorized Mark IV to do.
The settlement language provided that
TransCore would not “bring any demand,
claim, lawsuit, or action against Mark
IV for future infringement.” Under the
patent statute, infringement occurs when
an unauthorized party makes, uses, sells,
offers for sale, or imports the subject mat-
ter claimed in the patent.11 Honing in on
the “future infringement” wording in the
covenant not to sue, the Federal Circuit
concluded that “[t]his term, without
apparent restriction or limitation, thus
authorizes all acts that would otherwise
be infringements: making, using, offering
for sale, selling, or importing.”12 Because
this language “authorized” Mark IV to,
for example, sell the patented products,
any such sale would fall within the patent
exhaustion doctrine. Thus, Mark IV’s
customers could use the patented systems,
free from any infringement liability.
The point of TransCore to bear in mind
when drafting a settlement or license
agreement containing a covenant not to sue
is whether any conditions should be placed
on the scope of the covenant that the pat-
entee conveys and, if so, the extent of those
conditions. Without express limitations
on the scope of the covenant, the licensee/
covenantee will receive an unconditioned,
nonexclusive license authorizing all acts,
including downstream sales and use of the
purchased article, both through the doc-
trine of patent exhaustion and also poten-
tially because such a covenant may divest a
trial court of subject matter jurisdiction in
declaratory judgment actions.13
Corebrace
“Have made” rights give a licensee the
right to have a third party manufacture the
licensed product on the licensee’s behalf,
an act that would, but for the license
agreement, constitute infringement. In
Corebrace, the Federal Circuit affirmed the
district court’s holding that “have made”
rights are implied in licenses that entitle
the licensee to “make, use, and sell” a
patented product.14
Corebrace had granted Star Seismic,
LLC a nonexclusive license to “make,
use, and sell” the licensed products, but
reserved “all rights not expressly granted
to [Star].” Although “have made” rights
were not included in the license grant
language,15 Star nevertheless used third-
party contractors to manufacture licensed
products for it. Corebrace sued Star for,
among other things, breaching the license
by using the third-party contractors to
make the licensed products.
In affirming the district court’s hold-
ing, the Federal Circuit primarily relied
on Carey v. United States,16 an early Court
of Claims case that held that “have made”
rights were included in a license despite
there being no express granting of such
rights. The court’s reliance on this case
was surprising because the license granted
in Carey was exclusive with the right to
grant sublicenses. Under this type of grant,
it would be more understandable that the
exclusive licensee also received “have
made” rights. However, the Corebrace
court felt that the exclusive rights in Carey
had “no relevance” to the question of
whether “have made” rights were included
in the license grant in Corebrace.17 First,
the court noted that “a right to have made
is not a sublicense.” While correct, the
court ignored the practical matter that if a
licensee has sublicensing rights, it could
sublicense its manufacturers and achieve
the same effect as provided with “have
made” rights.
 general reservation of rights clauses to
Practice Tips to Prevent the preserve for the licensor all rights not

Granting of Unintended Rights otherwise expressly granted.18 When

drafting conveyances, counsel should
Under TransCore, covenantees are “licensees” and will receive all rights provided now consider whether the “have made”
under the patent statute unless the patentee places express conditions on the cov- rights should be expressly excluded from
enant not to sue.i Under Corebrace, a license grant to “make” licensed products the license (or the covenant not to sue) or,
includes the right to “have made” unless expressly disclaimed. Finally, foundry if included, whether the patentee has been
rights may be implied if the definition of products and the granting of rights is adequately compensated for such rights.
not narrowly tailored. In view of these principles, consider the following drafting
approaches: Foundry Rights: Additional Drafting
Considerations
• Where possible, expressly limit a covenant not to sue to the actions of While “have made” rights grant the
the covenantee and expressly exclude the right to sell to prevent patent licensee the right to have its own prod-
exhaustion. ucts made by a third party under the
• Where possible, expressly exclude “have made” rights, for example, by licensed patents, foundry rights give
limiting the grant language (“The Licensor hereby grants to Licensee the the licensee the right to make or have
right to make (but not the right to have made), use and sell . . .”) or expressly made another entity’s products under the
stating in the reservation of rights clause that “[a]ny right, including without patents licensed to that other party. For
limitation, the right to have product made or methods practiced, that is not example, assume both Party A and Party
expressly stated in the grant of rights is not granted, is not be impliedly B are competitors of Party C. Party A
granted, and instead is expressly reserved solely to the licensor.”ii and C settle a dispute by entering into
• When granting the right to have products made by subcontractors, limit these an agreement whereby Party C grants
“have made” rights to only those products of the licensee, perhaps referencing Party A (either via an express license or
a product code or trademark or specifying that the products must be owned by a covenant not to sue) the right to make,
the licensee and sold by the licensee only to end-users.iii use, import, and sell products covered by
Party C’s patents. Party B, hearing that
i. TransCore, 563 F.3d at 1276. With respect to all rights being granted to covenantees Party A is now licensed, decides to do an
under covenants not to sue, the court clarified that this applied to unconditioned covenants end run around Party C and either makes
because “TransCore did not, as it could have, limit this authorization to, for example, products for Party A to sell under Party
‘making’ or ‘using.’” B’s branded name (because Party A has
ii. See Milgrim, supra note 31, at n.3(2010). the unrestricted right to “have made” and
iii. With respect to preventing “have made” rights, the court stated in Corebrace that “sell” any product covered by the licensed
although “have made” rights are inherent in licenses that grant the right to “make” a licensed patents) or gives Party A the design for
product, “[a] clear intent shown in a contract to exclude ‘have made’ rights can negate what Party B’s products and has Party A make
would otherwise be inherent.” Corebrace, 566 F.3d at 1074–75. those products, which Party B then buys
and resells to its customers (because Party
The Corebrace court also reasoned separate stick in a bundle of rights, a stick A has the unrestricted right to “make” and
that exclusivity does not affect whether that no longer separately exists as a result “sell” any product covered by the licensed
a licensee can have a product made for of the Federal Circuit’s holding: patents).
it. While it is true that both exclusive One does not typically see express
and nonexclusive licenses can grant such Because the right to “make, grants of foundry rights in license agree-
rights, in practice, it’s far more typical use, and sell” a product inherently ments, and such rights are more often
for exclusive licensees to have the right includes the right to have it made, granted unintentionally through unre-
to have products made on their behalf as “have made” rights are included in stricted license grants to make and sell
opposed to conveying such rights under the License and not excluded by the products covered by the licensed pat-
the personal nature of a nonexclusive reservation of rights clause. A grant ents.19 The danger of such broad rights is
license. This is the practice for a number of a right to “make, use, and sell” a that unless the remuneration was negoti-
of reasons, such as a licensor’s concerns product, without more, inherently ated to take this into account, unlicensed
about foundry rights, discussed below, includes a right to have a third party parties can “cash in” on the licensed
and the licensor’s reliance on the exclu- make the product. party’s rights, enjoying the immunity
sive licensee to provide the method for the licensor probably only priced for the
products to get to market. It would thus The notion that the “have made” licensee’s benefit.20 Such arrangements
be undesirable for the licensor to limit rights, unless expressly disclaimed, are circumvent the very nature of nonex-
the manner in which products enter the now part and parcel of licensees’ (in- clusive licenses, essentially transferring
stream of commerce by requiring that the cluding nonexclusive licensees’) right to the personal nature of the nonexclusive
exclusive licensee manufacture all of the make a licensed product disrupts long- license to a third party.21
products itself. Whatever the case, prior standing drafting practice that treated While one would think that such
to Corebrace, “have made” rights were a these rights as distinct and relied on activities by third parties would require
Published in Intellectual Property Litigation, Volume 22, Number 1, Summer 2010. © 2009 American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof
may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
an express sublicense, the Federal Circuit
has rejected such a requirement in certain
cases. For example, in Intel Corp. v.
ULSI Sys. Tech., Inc., Intel and Hewlett-
Packard (HP) granted nonexclusive
cross-licenses, without the right to sub-
license, to each other to make, use, and
sell any product covered by the respec-
tive licensed patents.22 HP subsequently
entered into an agreement with ULSI, a
competitor of Intel’s, whereby HP manu-
factured coprocessors for ULSI, using the
design specifications provided by ULSI,
and ULSI resold these as ULSI products.
Intel sued ULSI for making, selling, and
inducing others to make, use, and sell the
allegedly infringing ULSI coprocessor.
ULSI argued that HP was permitted to act
as a foundry under the license agreement
from Intel, and that HP’s sale of ULSI’s
coprocessors to ULSI constituted a “first
sale,” and therefore extinguished Intel’s
rights to those products.
On appeal, Intel argued that HP merely
provided “fabrication services” to ULSI
and did not sell any products. However,
the Federal Circuit held that the licensed
seller of a patented product need not own
the intellectual property rights to a product
in order for there to be a first sale. The
court further noted that Intel’s inability
to enforce its patent rights was of its own
making:
To the extent that Intel had a pat-
ent covering the chips, HP’s con-
ceded right to sell the chips deprives
Intel of any claim of infringement,
as long as HP sold the chips. If it
had not granted that license or if the
license had been limited in some
relevant way, that would be a differ-
ent case from the one before us. Intel
might thereby have retained its right
to proceed against those who entered
into foundry agreements such as the
present one.
The Federal Circuit also rejected
Intel’s argument that HP’s making mi-
croprocessors for ULSI constituted an un-
authorized sublicense. The Federal Circuit
found that HP did not grant a sublicense,
but rather sold a product designed by its
purchaser (ULSI) and that ULSI did not
need a sublicense to provide such a design
to HP. Therefore, ULSI was immune from
claims of patent infringement by Intel not
because it was a sublicensee, which it was
Published in Intellectual Property Litigation, Volume 22, Number 1, Summer 2010. © 2009 American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof
may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
not, but because it received its chips from
HP, a licensed supplier. The message from
Intel is loud and clear—drafters should
appreciate the details of the business models
embodied in the license agreements,
expressly state what the models mean by
clearly describing permitted activities,
and expressly exclude what the agree-
ments are not intended to permit. Doing
so would go a long way in avoiding com-
ments such as those delivered by the Intel
court: “While Intel may not in retrospect
be pleased with the deal that it made in
permitting HP to make unrestricted sales,
it nevertheless granted HP that right in
1983, presumably for consideration it
believed to be of value at that time. It can-
not now renege on that grant to avoid its
consequences.”23
Conclusion
Drafting settlement and license agree-
ments in the wake of the Federal Circuit’s
decisions regarding covenants not to sue,
“have made” rights, and foundry rights
require more express articulation in agree-
ment language than ever before. While past
agreement language may be tempting to
use in terms of efficiency and familiarity,
such language is unlikely to address these
new developments in case law. At a mini-
mum, the implications of each exclusion,
restriction, and reservation of patent rights
contained in any settlement or license
agreement must be viewed critically and
their application understood fully. l
Donald W. Rupert is a partner at
Marshall, Gerstein & Borun, LLP,
Chicago, IL. He may be reached at
drupert@marshallip.com. Gina M.
Bicknell is an associate at Marshall,
Gerstein & Borun, LLP, Chicago, IL.
She may be reached at gbicknell@
marshallip.com
Endnotes
1. 563 F.3d 1271 (Fed. Cir. 2009).
2. 566 F.3d 1069 (Fed. Cir. 2009).
3. TransCore, 563 F.3d at 1273.
4. Id. (emphasis added)
5. TransCore, LP v. Electronic Transaction
Consultants Corp., No. 3:05CV2316K, 2008
U.S. Dist. LEXIS 41812, at *16 (N.D. Tex. May
22, 2008).
6. Quanta Computer, Inc. v .LG Electronics,
Inc., 128 S. Ct. 2109, 2115 (2008).
7. TransCore, 2008 U.S. Dist. LEXIS 41812,
at *8.
8. Id. TransCore wished to introduce parol
evidence to show that the parties intended
to exclude customers and other downstream
users, but the district court would not consider
such evidence because the contract was
“unambiguous” and the covenant language was
unconditioned. Id. at *11–14.
9. TransCore, 563 F.3d at 1275.
10. Id. at 1276 (citing W. Elec. Co. v. Pacent
Reproducer Corp., 42 F.2d 116, 118 (2d Cir.
1930)).
11. 35 U.S.C. § 271(a).
12. TransCore, 563 F.3d at 1276.
13. A covenant not to sue eliminates any
case or controversy between the parties. The
question of how far that covenant not to sue
extends, however, is an interesting one. A recent
Federal Circuit decision, Dow Jones & Co.,
Inc. v. Ablaise Ltd., 2009-1524 (Fed. Cir. May
28, 2010) addressed this issue in terms of a
covenantee’s affiliate. In view of TransCore,
it is likely that this issue may also arise with
respect to customers of covenantees.
14. Corebrace, 566 F.3d at 1070.
15. Although the license did, somewhat
confusingly, include a statement that Star
would own improvements made by third-party
contractors, the grant language itself did not
permit such third-party contractors. Id.
16. 326 F.2d 975 (Ct. Cl. 1964).
17. Corebrace, 566 F.3d at 1074.
18. Roger M. Milgrim, 2–15 Milgrim on
Licensing § 15.13, n.3 (2010).
19. Brunsvold, Brian G. et al., Drafting
Patent License Agreements, § 3.06 (“A
foundry agreement is not a type of license
intentionally granted by a licensor; it is more
the result of inattention to the consequences of a
broad, unrestricted license.”).
20. Amber L. Hatfield, Patent Exhaustion,
Implied Licenses, and Have-Made Rights:
Gold Mines or Mine Fields?, Comp. L. Rev. &
Tech. J. 1, 9 (2000) (“The development of the
exhaustion doctrine has been most notable in its
application to foundry arrangements, because
there, the opportunity most neatly presents itself
for unlicensed third parties to gain the benefits
of the underlying license agreement”).
21. Regarding the personal nature of
nonexclusive licenses, see TransCore, 563 F.3d
at 1276 (collecting cases).
22. Intel Corp. v. ULSI Sys. Tech., Inc., 995
F.2d 1566, 1567 (Fed. Cir. 1993).
23. Id. See Hatfield, supra note 33, at 12
(discussing the “vigorous” dissent, where
Judge Plager, joined by Judge Rader and
Judge Newman, raised public policy concerns
regarding immunizing third-party products).
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In This Issue...
Current Law on Compulsory Licenses for Post-Verdict Patent
Infringement
By Nicole D. Galli.................................................................................................... 1

Covenants Not to Sue In Light of Federal Circuit Decisions

By Donald W. Rupert and Gina M. Bicknell............................................................ 1

Licensing Your Brand in China: Guidelines for Brand Owners

By Marc Lieberstein and Tywanda Harris Lord....................................................... 3

How to Avoid Licensing Disputes

By Michele M. Riley and Debora R. Stewart........................................................... 8

Licensing Disputes and Insolvency in the United States and the United
Kingdom
By Matthew E. Hoffman, Gregory J. Urbanchuk, Kenneth L. Dorsney,
and James R. Tumbridge..................................................................................... 10

ResQNet: Rescuer or Wrecking Ball in Patent-Licensing Negotiations?

By David Swetnam-Burland and Stacy O. Stitham............................................... 14

Reasonably Withheld Consent in License Agreements

By Hon-Man Lee, Lauren Korshalla, and Albert Wai-Kit Chan.............................. 16

Published in Intellectual Property Litigation, Volume 22, Number 1, Summer 2010. © 2009 American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof
may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.