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Wednesday, 21 December 2011

Recording a Patent Licence: Is There a Reason for Doing So?


I recently had occasion to revisit one of those issues in patent law that has always left this Kat perplexed. That issue is the recordal of a patent licence on various national registries. Consider, for example, section 87 of the Israel Patent Law, which provides that a patent licence, whether exclusive or non-exclusive, "is effective only as between the parties, unless it was registered under this Law." The provision seems simple enough on its face, until one tries to parse the provision. When that happens, the rationale and underpinning for the recording of licences becomes increasingly murky. And so, one is left with the question: what exactly is going on here?

Let's start by first digressing to trade marks. There was a time when the Anglo-inspired registered user provisions were in widespread effect, that registration of a licence was viewed as material for ensuring the validity of the licensed mark. The idea was that, by virtue of the recordal, there was a modicum of certainty that the licence met the quality control requirements that served as the legal bedrock for permitting trade mark licensing within the source theory framework. The most notable jurisdiction that provided for recordal of a trade mark licence was the UK. Even in the UK, however, the courts were not prepared to hold that recordal was madatory but merely permissive. The moral -- even when recordal of a licence could be seen as material to the validity of the underlying intellectual property right, i.e., trade marks, the law was reluctant to construe the obligation as required.

By contrast, there is no such necessary connection between a patent licence and recordal on the Registry. The patent right is not tied to use and, even for those jurisdictions that provide for a compulsory licence, such licensed use is not tied to the validity of the patent. The justification, if any, for recordal must be found elswhere. I can think of two possible reasons: (i) anchor the exclusive licensee's right of suit; (ii) provide notice to third parties. As a matter of providing a justification, the former seems doubtful, the latter insufficient, especially in light of the potentially undesirable consequences of being required to disclose the existence of a licence to the public.

As for the need for a recordal to confer a right of suit on the exclusive licensee, this Kat is not aware of any such requirement in any jurisdiction. Taking the Israeli provision as an example, the relevant statutory section on right of suit provides that an exclusive licensee has the same right of suit as the patentee. It does not, however, require that the exclusive licensee be recorded. Nor can this Kat come up with a compelling rationale as to why this should be the case. If there is any jurisdiction that does require recordal for this purpose, this Kat would be delighted to be informed.


As for putting third parties on notice, there is certainly a certain logic in recording a licence for this purpose. Under such a scheme, a third party who might enter into a later, purported "exclusive" licence is estopped from claiming that he was deceived, because the recordal constitutes constructive notice of the existence of the licence. That said, this possibility seems so remote and, frankly, it is not a front-and-centre issue in the larger picture of patent law and practice, certainly not to the extent that a fully-fledged recordal system should be put into place.

This conclusion is strengthened when one considers that the parties to the licence might have sound commercial or strategic reasons to keep the existence of the licence a secret. Given this possibility, it seems to be statutory overreach for the statutory regulation of patents to force the licensor and licensee to choose between compliance with the recordal requirement and protection of legitimate commercial interests. Moreover, unlike the treatment of trade mark licences, at least under the ancien regime, there does not appear to be any reasonable sanction that could be put in place in the event of failure to record a licence.

The upshot of this Kat's ruminations leads him to the conclusion: recordal of a patent licence is unnecessary, although a totally permissive system that allows the parties to record the licence as a form of notice to third parties is not out of the question. Against this backdrop, this Kat would be delighted to hear from readers about the position of the recordal of a patent licence in the reader's jurisdiction.

17 comments:

Anonymous said...

Yes, it is unnecessary and very expensive. There are patent agents out there advising their clients to record licences and they are making a lot of money on the back of this advice. Self-serving.

Anonymous said...

In some jurisdictions (South Africa being one), an unregistered licensee under a patent is not entitled to participate in legal proceedings. The unregistered licensee is not entitled to damages. As a consequence, any harm suffered by the unregistered licensee is not relevant to injunction proceedings. This can have an effect on the balance of convenience in interim injunction proceedings - particularly if the patentee is not itself trading in the jurisdiction concerned.

Anonymous said...

As for patents, in the UK, there is an argument that the whole need to register an exclusive licence has perhaps been removed by virtue of the amendments to section 68. Let's say BIG CORP INC., based in Scranton Pennsylvania USA, was the patent holder, and its subsidiary BIG CORP (UK) Ltd. was the one that sold the products (falling under the scope of the patent) in the UK. It was always good advice to get the exclusive licence down to BIG CORP (UK) Ltd on the patent register, because there was a danger that, if the licence was never registered, then UK Ltd might have problems proving damage if the patent was subsequently infringed.

Not that one would necessarily take the risk of not registering it exclusive licence, even now.

If BIG CORP INC., say, wants an interim injunction to stop any infringement, I still reckon he's in a much better position (when giving evidence on irreperable harm etc.) if he gets that exclusive licence registered.

the dude said...

Dear Kat,

I believe you may have missed the point regarding French law: an unrecorded(on RNB) licensee (or assignee)cannot recover damages in case of a lawsuit(at least until recently -Cour d’appel de Paris, 5 octobre 2011-Waters c. Hewlett-Packard et Agilent Technologies-)

Ernesto said...

Spare a thought for the situation with a BFPWN bona fide purchaser without notice, i.e.: to protect the licensee where the patentee sells or proposes to sell ...

Petr said...

In the Czech Republic (s.14, Act no. 527/1990 Coll.) and the Slovak Republic (s.24, 435/2001 Coll.) an unregistered licence has no effect against third parties. This is despite the directive 2004/48/EC, which mandates for the owner and licensee to have identical rights. It would, at the moment, be a brave licensee to risk not recording a licence before enforcing.

The rationale behind the recordal requirement may be that the potential infringer (who need not necessarily be the villain we quite often picture him as) should have the right to take into account the identity of the possible enforcer of the patent. For example the licensee (unlike the patent owner) may have some additional rights, that the infringer should know about (which would otherwise be unknown). Such rights may make a borderline case clearly unfavourable to the infringer. The licence recordal system then makes it possible for a bona fide innovator to fully weigh his options. Thus while the patent owner and the licensee may have valid reasons to keep their arrangement secret, there may be valid public interest reasons for the relationship to be out in the open.

Anonymous said...

"not recording a licence before enforcing". Exactly. On the remote chance that you have an infringement issue with one of your patents then record before suing. But in the vast majority of cases, even in countries where registration is necessary for damages, it is a waste of money.

By 'waste of money', we are talking about commercial realities and not "covering-every-possible-risky-scenario" academic thinking.

If we are thinking about a client with a worldwide portfolio (covering the examples of UK, France, South Africa and Czech Republic given above) the costs of registration are very high and unnecessary until you get infringement.

If the licence covers projects in early development and not a market product (or a third party's marketed product) then infringement will also likely be a long way off.

The restrictions are generally over the recovery of damages and the main requirement for a patentee is an injunction. If you miss out on damages for previous sales then it is probably because they were too small for you to notice, and hence be concerned about. If you are missing out on spotting such infringement early then I sugeest more money is spent on being vigilant rather than on registration of everything.

"...a danger that, if the licence was never registered, then UK Ltd might have problems proving damage if the patent was subsequently infringed"
- That doesn't make any sense.


Re: the Directive not being implemented fully in the Czech Republic, the licensee has a simple case against the state, so the argument against registration is even stronger. At least the state will be good for the money when you win in court (unless it is one of those Eurozone members!).

There is an additional reason for not recording licences - commercial confidentiality. Why let your competitors know everything about your business, for no great benefit?

The comments in here demonstrate that private practice attorneys are advising clients to spend money based on a exam-style scenario and not based on commercial realities and best interests of their clients. Discuss?

Felix Rozanski said...

In Argentina, you must record all IP licenses for information and tax reasons, in particular when you pay royalties abroad.

Anonymous said...

Re " "...a danger that, if the licence was never registered, then UK Ltd might have problems proving damage if the patent was subsequently infringed"
- That doesn't make any sense. "

To clarify.

Imagine BIG CORP INC. (USA) does not register the exclusive license under the patent to the UK company. Say Infringer comes on the market, cuts price by 80%, and destroys the market. Infringer subsequently found by the court to have infringed. They move to a damages enquiry. In its claim for damages, and in the absence of the exlcusive license being registered, US company needs to prove what damage was caused to it (a US entity), in the UK. US company starts digging out a spreadsheet of lost sales in the UK....but wait, US company didn't make any sales in the UK. (If it did, say, then the US tax authorities are going to be coming after their slice of this). It was the UK limited company that actually lost out, so it's the UK company that has to prove its lost.

A well-advised client would make sure that the exclusive licensee had that license registered at the UKIPO.

No need for a full copy of the license to be registered. You can just complete the form getting the patentee and exlcusive licensee to sign.

Make sense now?

Anonymous said...

@ Anonymouse 12.33

I draw your attention to section 68 of the UK patents act and this bit of case law:

http://www.bristows.com/?pid=46&nid=1772&level=2

The key bit "Section 68 provides that where an assignee becomes the proprietor of a patent and the patent is subsequently infringed before the assignee has registered its ownership with the patent office, the assignee cannot recover its costs and expenses if the transfer has not been registered within six months of it taking effect, unless it was not practicable for the assignee to register the transfer within that six month period."

It's worth noting that court costs are significant and even if you're going for an injunction (and not trying to claim damages for past sales) it's well worthwhile being able to recover your costs and expenses.

So it's highly adviseable that you do record a change of rights for a patent in the UK on the patents register.

A U.K. patent agent has to adhear to a profesional code of conduct - if they are not acting in their client's best intersts they are running the risk of being struck off the register. So the vast majority will always advise you as best they can.

Hope this helps

Anonymous said...

Anon at 3:10. I understand the implications on identifying which party has made a loss. It is your comment that didn't make sense.

The claimant has to prove a loss. The companies are separate entities. The parent US company could be patentee and licensor taking a royalty from the UK sales of the UK company (licensee). The parent compnay (if they are claimant in the action) can prove they lost out on royalties. Tax authorities don't come into it, and unfortunately, the P2 examiners do not make deductions for such comments.


Anon at 3:23. "infringed before the assignee has registered its ownership"

Register then sue and you will get your costs.

The code of conduct is not something to hide behind when giving commercially useless advice. Yes, by all means advise your client of the implications for not registering their exclusive licence. What you can't do is simply advise that they should register the licence without further consideration and discussion. I know that agents go straight for "you should register" because they believe S.68 tells them to, but it doesn't.

Like I said above, all comments in here conclude "must register". Where is the consideration of all factors? Why would Microsoft UK need to register a patent that is merely an unimportant addition to a bundle of patents licensed to them by Microsoft US? Will it ever cover an MS product? Will it ever cover a 3rd party product? Will MS ever know if it covers a 3rd party product? If it is ever infringed will MS want an injunction or £1000 in damages? Can microsoft afford to register every single piece of IP, irrepsective of importance, in every country? If the answer to the last question is yes, then try answering it for every other 'normal' company that works to controlled budgets.

Register IP licences on a case-by-case, as-needed basis. P2 answers are for exams only. Businesses demand and need better commercial advice. Just read the Hargreaves Report and all the submissions. The UK private practice sector is like the Home Office: quote: "Not fit for purpose".

[For those overseas readers who do not know what P2 is, it is the UKs legal practice paper for patent attorney qualification]

Anonymous said...

@ Anon 5:34 eh nope - the assignee cannot recover its costs and expenses if the transfer has not been registered within six months of it taking effect.

See section 68 of the UK patent act.

Have a lovely christmas!

Anonymous said...

Fair comment. Other points still apply. Every case needs to be decided on its merits and commercially relevant advice given, which it isn't. I've seen agents register bundles of patents worldwide when it wasn't necessary. It would be interesting to see a few of these clients bring cases to the regulator and see whether agents are found to be acting in their clients' interests. Or is it the case that commercial relevance to advice is irrelevant for assessing the duty of patent practitioners?

Anonymous said...

Private practice have their role, but I see it mainly supporting experienced IP management, in-house attorneys and agency work. Godd also for oppositions, but then we are talking about selected individuals and not private practice per se. The profession was never cut out for today's business world, so we shouldn't be too harsh on them. The need for something different has been identified and may come about from Hargreaves, but we can't predict what that might be.

Some firms now sell themsleves as 'in-house' but I see that as more marketing and not much substance. From what I know of these firms, the attorneys are the same as before. Recruiting in-house attorneys into private practice is a good idea, but traditional firms shy away from this for reasons known only to themselves. I think those reasons demonstrate part of the problem. They are money-making machines and not service-providers who care to understand their clients affairs. TIme needs to be spent understanding a client, and as we know, time is money. If a client wishes to pay then so be it, but the real value is in the substantive actions of filing/national phase entry/prosecution/agency work. All work that can be done with minimal expertise (admin or lower-piad/high charge-out rate trainees) and all subject to hourly charges plus substantial service fees. The service charges are good money, pure profit.

Difficult to make big money discussing real business objectives with a client as you can't pass that off onto your trainees. And unless they have had relevant experience themselves, such as in an in-house position, they are also unqualified to do more than offer standard services.

I didn't mention drafting above, but the majority of work in the UK is agency work and so drafting experience is hard to come by for many, save for the odd local client. Even then, the drafting of commercially valuable specifications is a hit and miss affair. Drafting in complicated technologies, as in the fields most important to the UK economy, is best done by experts and not by general pracitioners. We have found that the 'big firms' tend not to recruit from an experienced pool, but appear to stick with the new graduates (only rarely PhDs), probably because they are cheap for a few years and their main function is the agency work mentioned above.

I wouldn't say private practice is broken, but something needs fixing.

(Anon above 5.34 possibly hasn't been referring to the latest version of the Act?)

Graham Feakins said...

In part, you are correct but please see Section 68 of the UK Patents Act 1977.

Prior to 2006, that Section also embraced being unable to claim damages by an exclusive licensee prior to registration of their licence. In that way, I was able to save my client more than £1m in damages for past infringements, which was good enough reason for me to remember to record the licences of others.

Graham Feakins
Chartered Patent Attorney

Anonymous said...

(An official of an international organization, writing in his private capacity, made the following comment)

Neil, one reason for requiring recordal of patent licenses may be to encourage transactional transparency in technology markets.In my several decades in the private sector, I would occasionally represent companies wishing to enter a market that was characterized by multiple patent holders not organized into any sort of pool or standards group. So getting into the market required separate negotiations with each holder.

These negotiations were made much more difficult by the tendency of each established player to maintain secrecy regarding the terms of licenses already granted. It was as if you were trying to negotiate a lease with a landlord who refused to tell you the amount of rent he was charging for his other identical apartments.

The only way forward for my individual clients was sometimes to file a declaratory judgment action (asserting noninfringement and/or invalidity), primarily to get access in discovery to the other deals that had been struck. This of course was massively inefficient at the level of the individual transaction. The macro consequence of this situation, naturally, is higher rents and a tendency to lock up markets and discourage competition.

Therefore, it has long been a subject of discussion among some lawyers, academics and competition authorities whether requiring recordal of the “essential terms” of patent licenses might be good policy.

After all, the patent is a special right conferred by the state that stands as an exception to the normal rule against monopolies. It may reasonably be argued that the state has a compelling interest in regulating the market effects of that grant by qualifying the right just a bit, in order to encourage more open competition. This notion has particular application to dynamic technology markets.

Jonathan Turner said...

As I recall, registration of licences was introduced in the UK to obtain evidence of how the patent system was being used (or abused). Unfortunately the provisions as drafted were defective to achieve this (since patentees and licensees could avoid disclosing any useful information). Now that evidence is so much in vogue with policy makers, perhaps bigger and better registration requirements will be brought back?

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