Cross-License

How it Works

• Party A owns patents that Party B needs to practice its technology
• Party B owns patents that Party A needs
• Instead of each suing the other for infringement, they negotiate a cross-license
• The license grants each party the right to make, use, sell, and import products covered by the other's patents
• Financial balancing payments (royalties or lump sums) flow in one direction if the portfolios have unequal value

Industry-wide Use

• Nearly every major technology company participates in cross-license programs
• IBM has cross-licenses with hundreds of companies covering most of its foundational technology portfolio
• Qualcomm, Ericsson, Nokia, InterDigital, and others have extensive cross-licensing programs with device manufacturers

Scope

• Cross-licenses are typically defined by: (a) PATENT PORTFOLIO SCOPE — which patents are licensed (all patents, a specific field, patents filed before a date)
• (b) FIELD OF USE — what the recipient can do with the licensed patents
• (c) TERRITORY — geographic coverage
• (d) TERM — how long the license runs
• (e) SUBLICENSING — whether the licensee can sublicense to affiliates or third parties.

(1) Counting Approach

• Count patents in each portfolio and compare
• Crude but common in initial negotiations

(2) Claims Approach

• Count the claims most likely to be infringed by the other party's products
• Broader, more targeted claims are worth more than narrow or weak patents

(3) Royalty Rate Approach

• Calculate what each party would charge the other for a unilateral license at arm's length
• The net difference (after offsetting the parties' cross-royalties) is the balancing payment

(4) Comparable Transaction

• Look at comparable licenses in the same technology space
• FRAND rates, industry standard rates, or prior arm's-length licenses

(5) Litigation Risk-weighted Value

• Consider the probability each patent would survive validity challenge and be found infringed
• Discount portfolio value by invalidity risk

Financial Balancing

• If Party A's portfolio is worth $50M/year in license fees and Party B's is worth $20M/year, the cross-license might require Party B to pay a 'balancing royalty' of $30M/year (the difference)
• Alternatively, the parties negotiate a lump-sum settlement for a defined period

Most Favored Licensee (MFL) Clauses

• A party may insist on an MFL clause — if either party later grants a more favorable license to a third party, the cross-licensee gets the same terms
• This prevents a party from signing a low-value cross-license and then offering a more valuable license to a third party
• MFL clauses complicate future licensing negotiations.

(1) Grant Clause

• Defines what each party is receiving — make, use, sell, import rights
• Within a specific field of use
• Within specific territories
• Under specific patents or patent families

(2) Portfolio Definition

• Which patents are included (all patents as of the effective date; patents filed before a certain date; patents in a specific technology field)
• Whether future patents are included
• How acquired patents are treated

(3) Term

• Typically co-extensive with the life of the licensed patents
• Renewable
• Subject to termination provisions

(4) Financial Terms

• Balancing royalties (running or lump sum)
• Payment currency
• Audit rights
• Interest on late payments

(5) Grantback Clauses

• Whether each party must license future improvements under the same cross-license
• Grantback provisions may be MANDATORY (automatic license to future improvements) or OPTIONAL
• Mandatory grantbacks are scrutinized under antitrust law (may be coercive if the stronger party imposes on a weaker licensee)

(6) Sublicensing Rights

• Whether the licensed rights extend to subsidiaries and affiliates (usually yes)
• Whether third-party sublicensing is permitted (usually no without consent)

(8) Assignment

• Typically not assignable without consent except with the entire business
• Bankruptcy issues — § 365(n) elections by licensees if licensor goes bankrupt

(10) Dispute Resolution

• Arbitration or litigation
• Governing law and venue.

Legitimate Vs. Anticompetitive

• Most cross-licenses are procompetitive — they allow both parties to use each other's technology, produce better products, and compete
• Courts and regulators generally view cross-licenses favorably

(2) Price-fixing

• If cross-licensees agree on licensing rates for third parties (coordinating their licensing terms), this can be price-fixing
• Patent pools with cartel-like pricing structures raise similar concerns

Regulatory Scrutiny

• DOJ Antitrust Division and FTC have guidelines on patent cross-licenses and pools
• EU competition law (Article 101 TFEU) and Technology Transfer Block Exemption Regulation (TTBER 316/2014) apply to cross-licenses in EU

SAFE Harbor

• Cross-licenses between non-competitors generally receive lighter scrutiny
• Cross-licenses between competitors in the same field receive more scrutiny, particularly for market allocation and grantback provisions.

Initiation

• Typically begins with a 'patent assertion' or 'patent notice letter' from one party to another
• The recipient responds by asserting its own portfolio — establishing the basis for negotiation
• Sometimes begins with litigation — cross-licenses often resolve patent suits between large technology companies

(4) Business Judgment

• Senior business leaders decide whether to pay a balancing royalty or fight (litigation)
• The value of avoiding litigation, maintaining product launches, and preserving business relationships drives this decision