Non-Exclusive License

Non-exclusive License

• The licensee receives the right to make, use, sell (or the specific rights granted)
• The licensor retains the right to grant the same or similar licenses to any other party
• The licensor may also practice the patent itself

Exclusive License

• The licensee receives the right to practice the patent
• The licensor agrees NOT to grant the same rights to any third party
• The licensee has market exclusivity (within the licensed field/territory)

Sole License

• A hybrid between exclusive and non-exclusive
• The licensor agrees not to grant additional licenses to third parties but retains the right to practice the patent itself

Practical Implications

• Non-exclusive: licensor maximizes royalty revenue by licensing multiple competitors
• Licensee has no exclusivity advantage but pays lower royalty rates
• Exclusive: licensee gains competitive advantage
• Typically pays higher royalty rate or lump sum
• Often tied to performance obligations

What Determines the Structure

• Technology maturity: non-exclusive for widely adopted technology
• Exclusive for early-stage or highly differentiated technology
• Competitive dynamics: if the licensee is one of many in a market, non-exclusive is common
• If the licensee needs exclusivity for its business model (pharma: FDA approval), exclusive is necessary
• Patent owner goals: maximize revenue (non-exclusive to many) vs. maximize value of one deal (exclusive to one)
• OWNERSHIP vs.

License

• An exclusive licensee with all substantial rights may have standing to sue for infringement independently (Speedplay v. Bebop, Fed. Cir. 2000)
• A non-exclusive licensee typically does NOT have standing to sue for infringement without joining the patent owner.

Value of Exclusivity Premium

• An exclusive licensee pays a premium for the competitive advantage of exclusivity
• The exclusivity premium reflects: the incremental value of being the only party with access to the technology
• The competitive harm from having a competitor with the same license
• The licensor's opportunity cost of foregoing multiple licensees

Non-exclusive Royalty Rate

• Typically lower than equivalent exclusive rate
• Rational: the non-exclusive licensee does not capture the full economic value of the patent (competitors have the same access)
• Typical discount: non-exclusive rates are 25-50% lower than exclusive rates for comparable technology

Factors That Reduce the Discount

• If all competitors will seek licenses anyway (FRAND-committed patents; widely adopted standards), non-exclusive is the de facto exclusive because competitors are equally constrained
• If the licensee has a first-mover advantage even without formal exclusivity
• If the technology is difficult to license (few willing licensees), each licensee has quasi-exclusivity by default

Factors That Increase the Discount

• If multiple direct competitors will obtain the same license
• If design-around alternatives are available
• If the licensor's licensing program will result in full market saturation of non-exclusive licensees

Most-favored-licensee (MFL) Protection

• Non-exclusive licensees often seek MFL clauses: if the licensor grants a better rate to any subsequent licensee, the MFL clause entitles the first licensee to the same rate
• MFL clauses reduce the risk that a non-exclusive licensee is undercut by later, better-priced deals.

Default Rule

• A bare patent license (no specific sublicense grant) does NOT include the right to sublicense
• A licensee cannot grant to others what it does not hold
• Sublicense rights must be EXPRESSLY GRANTED in the license agreement

Typical Sublicense Structures

• (a) NO SUBLICENSE RIGHT: common in standard patent licenses
• Licensee may only practice for itself
• If the licensee sells a product containing the patented technology, the purchaser's right is governed by exhaustion, not sublicense
• (b) LIMITED SUBLICENSE RIGHT: licensee may grant sublicenses only to affiliates (subsidiaries and parent companies)
• Or only within a specific field of use
• Or only to customers who use the product (not competitors)
• (c) BROAD SUBLICENSE RIGHT: licensee may grant sublicenses to any third party
• Sublicensees are bound by the terms of the original license
• Licensor receives a percentage of sublicensee royalties
• PATENT EXHAUSTION vs.

Sublicense

• Important distinction: when a licensee sells a product embodying a patented invention, the purchaser acquires exhaustion-based rights — the right to use and sell the specific item purchased
• This is NOT the same as a sublicense
• Exhaustion arises from the authorized sale
• Sublicense is a grant of independent patent rights

Sublicensee Obligations

• Sublicensees are typically bound by: royalty obligations (flowing through to licensor)
• Field of use and territory restrictions
• Audit rights
• Most sublicense agreements include a flow-down of all material obligations

Licensor Approval

• Some non-exclusive licenses require licensor consent before any sublicense can be granted
• Or provide licensor with right of first refusal to license sublicensee directly.

What Triggers Exhaustion

• An authorized sale (or other disposition) by the patent owner or a licensee authorized to sell
• The item must substantially embody the patent (Quanta: even a component that substantially embodies the patented combination can exhaust)

What Exhaustion Prevents

• The patent owner (or licensor) cannot use the patent to restrict the downstream purchaser's use or resale of the specific purchased item
• This is why a purchaser of a licensed product does not need a patent license to use or resell it
• EXHAUSTION vs.

Sublicense

• A customer buying a product from a non-exclusive licensee gains EXHAUSTION rights (to use and resell that specific item)
• The customer does NOT get a patent license to make additional copies of the patented product

Non-exclusive License and Exhaustion Interaction

• A product manufactured and sold under a valid non-exclusive license exhausts the patent owner's claims against downstream purchasers
• The license must authorize the specific sale that triggers exhaustion
• A license limited to manufacturing (no right to sell) does NOT exhaust claims against distributors

US

• Post-Impression Products v. Lexmark (S.Ct. 2017): even international sales by the patent owner exhaust US patent rights
• Earlier Mallinckrodt restricted exhaustion for sales with explicit restrictions — overruled

Conditional Sales

• After Lexmark: patent owners cannot impose post-sale restrictions via the patent (licensing-style restrictions after authorized sale are not enforceable via patent law)
• Other legal theories (contract, trade secret) may still apply.

What Mfl Covers (Typically)

• Royalty rate
• Royalty base definition
• Upfront fees
• Field of use (if applicable)

What Mfl Typically Excludes

• Settlement licenses: licenses granted to resolve or avoid litigation often include below-market rates reflecting litigation risk
• Without a settlement carve-out, the settlement license could trigger MFL rights
• Government licenses (compulsory licenses)
• Charity/academic licenses at reduced rates
• Licenses in different fields of use or territories

Time Limits

• Some MFL clauses expire after a period (e.g., 5 years) or after a certain number of licensees have been signed
• MFL clauses with no time limit create a permanent ratchet downward on royalty rates

Licensor Risk from Mfl

• The licensor must carefully track all licenses
• A better rate granted to a subsequent licensee automatically applies to all MFL-protected licenses
• Under-priced subsequent deals become the benchmark

FRAND Connection

• For standard-essential patents, the FRAND non-discrimination obligation is effectively an MFL requirement for all similarly situated licensees
• MFL clauses in SEP licenses operationalize this non-discrimination requirement

Dispute Over Comparability

• What is a 'more favorable' rate? If the rate is lower but the field of use is broader, is it more favorable?
• Parties often negotiate definitions of what constitutes a comparable license for MFL trigger purposes