License Types

The most fundamental distinction in patent licensing is between exclusive and non-exclusive rights: NON-EXCLUSIVE LICENSE: the patent owner (licensor) grants a right to practice the patent, but retains the right to: practice the patent themselves; grant licenses to additional licensees; LEGAL CONSEQUENCE: a non-exclusive licensee generally cannot sue for patent infringement in its own name; only the patent owner has standing; Propat International Corp. v. Rpost, Inc. (Fed. Cir. 2007): bare licensee has no standing; COMMERCIAL CONSEQUENCE: the licensee faces competition from: the patent owner; every other licensee; parties who independently design around; VALUE CONTEXT: appropriate for: broad licensing programs (where the goal is to collect royalties from many parties); standards-essential patents (must be licensed to all comers on FRAND terms); technology with wide applicability across many markets; from a licensor's perspective: maximizes revenue by collecting royalties from multiple parties; lower per-unit royalty than exclusive; EXCLUSIVE LICENSE: the licensor grants a right to practice the patent AND agrees not to grant the same rights to others; the licensor may or may not retain the right to practice the patent itself (see 'sole license' below); EXCLUSIVE LICENSEE STANDING: an exclusive licensee with all substantial rights in the patent has standing to sue infringers (Speedplay v. Bebop); typically must join the patent owner as co-plaintiff; to have standing without the patent owner, the exclusive licensee must receive: right to sue infringers; right to exclude others; right to grant sublicenses; the right to collect damages; SOLE LICENSE: exclusive as to third parties, but the licensor RETAINS the right to practice the patent; a subset of exclusive licensing.

Field-of-use licenses allow patent owners to grant exclusive rights in different markets to different parties: DEFINITION: a field-of-use license restricts the license to a specific application, market, technology area, or use; outside the licensed field, the licensor (or another licensee) may practice the patent freely; EXAMPLES: pharmaceutical: license field = 'cardiovascular disease only' (separate licensee for diabetes); license field = 'oral formulations' (separate licensee for injectable formulations); semiconductor: license field = 'consumer electronics' (separate licensee for industrial applications); software: license field = 'financial services' (separate licensee for healthcare); LEGAL VALIDITY: General Talking Pictures Corp. v. Western Electric Co. (S.Ct. 1938): field-of-use restrictions are valid and enforceable; a licensee who uses the patent outside the licensed field infringes the patent; COMMERCIAL ADVANTAGES: patent owner extracts maximum value from single patent; exclusive licensee A gets exclusivity in its field; exclusive licensee B gets exclusivity in a different field; each pays a higher royalty because of exclusivity; patent owner collects multiple exclusive royalty streams from a single patent; TAX CONSIDERATION: Mead Corp. v. Commissioner: royalty income may be treated differently depending on whether the license is exclusive (could affect capital gains vs. ordinary income analysis in some structures); FIELD OF USE DEFINITION DISPUTES: poorly defined fields lead to disputes; what is 'cardiovascular disease'? does it include hypertension? metabolic syndrome?; best practice: define fields with reference to ICD codes, technical standards, or market definitions that are objective and stable; FIELD RESTRICTIONS IN ANTITRUST LAW: field-of-use restrictions in patent licenses are generally permissible as they are within the scope of the patent grant; broader field restrictions that go beyond the patent term or scope raise antitrust issues.

Sublicenses are grants of rights by a licensee to a third party: DEFINITION: a sublicense occurs when a licensee grants some or all of its licensed rights to another party (the sublicensee); REQUIRING EXPRESS AUTHORIZATION: the right to sublicense must be expressly granted in the head license; absent express authorization, a licensee CANNOT grant a sublicense; this protects the licensor from having its technology spread to parties it did not approve; SUBLICENSING IN EXCLUSIVE LICENSES: exclusive licensees often receive the right to sublicense; this allows the exclusive licensee to build a licensing business on top of the patent; common in pharma and technology transfer; SUBLICENSING IN PATENT POOLS: a pool administrator may sublicense pool patents to industry participants; ECONOMIC MECHANICS: head licensor receives: upfront sublicense fee from licensee + percentage of sublicensing revenues (typically 25-50%); the head license typically defines what share of sublicense income goes to the licensor; SUBLICENSEE'S RIGHTS: a sublicensee's rights cannot exceed the licensee's rights; if the head license is non-exclusive, the sublicense is also non-exclusive; TERMINATION CASCADE: if the head license terminates, what happens to sublicenses?; two approaches: (1) sublicenses automatically terminate with the head license (most common in practice — protects licensor); (2) sublicenses survive if the sublicensee was not at fault for the termination (more protective of sublicensees — negotiated in sophisticated deals); LICENSES vs. ASSIGNMENTS: a license grants a right to practice the patent; an assignment transfers ownership of the patent itself; an exclusive license that transfers ALL rights may be treated as an assignment for standing purposes; if so, the exclusive licensee becomes the owner and can sue without joining the original patent owner.

Standing to sue for patent infringement is one of the most important distinctions between exclusive and non-exclusive licenses: CONSTITUTIONAL STANDING REQUIREMENTS: to sue, a plaintiff must have Article III standing: (1) injury in fact; (2) causation; (3) redressability; a licensee who suffers economic harm from infringement of the licensed patent generally has injury in fact; PRUDENTIAL STANDING FOR PATENT SUITS: Waterman v. Mackenzie (S.Ct. 1891): only the patent owner or assignee can sue for infringement; a licensee lacks standing unless it holds 'all substantial rights'; 'ALL SUBSTANTIAL RIGHTS' TEST: courts look at whether the exclusive licensee received: (a) the right to sue for infringement; (b) the right to exclude others from the licensed field; (c) the right to sub-license; (d) the right to practice the patent in all commercial applications; if the patent owner retains material rights (reversion on bankruptcy; right to veto sublicenses; retained right to practice in the same field), the licensee does NOT hold all substantial rights; PRACTICAL APPROACHES: (1) join the patent owner as co-plaintiff: even if the licensee doesn't hold all substantial rights, if the patent owner joins the lawsuit, standing is satisfied; (2) contractual obligation: require the patent owner to join any suit or authorizing the licensee to sue in the patent owner's name; (3) full assignment to licensee: if you want unfettered standing, receive a full assignment (not a license); CONSEQUENCES OF LACK OF STANDING: the lawsuit is dismissed without prejudice for lack of standing; the parties must restructure the licensing agreement or add the patent owner as co-plaintiff; this is a common pitfall in patent licensing — license agreements should expressly address standing.

Implied licenses and patent exhaustion can limit a patent owner's ability to control downstream use: IMPLIED PATENT LICENSE: an implied patent license arises from the circumstances, not from an express agreement; SOURCES OF IMPLIED LICENSE: (a) EQUITABLE ESTOPPEL: the patent owner acted in a way that led the defendant to reasonably believe it could practice the patent without objection, and the defendant relied on this to its detriment; (b) LEGAL ESTOPPEL: where the patent owner has expressly granted a right inconsistent with the subsequent assertion of infringement; (c) CONDUCT + RELIANCE: a course of dealing between the parties; acceptance of payment for products the patent owner knew were being used to practice the patent; PATENT EXHAUSTION (FIRST SALE DOCTRINE): Impression Products v. Lexmark International (S.Ct. 2017): once a patented item is sold by or with the authorization of the patent owner, all patent rights in that specific item are EXHAUSTED; the purchaser (and all subsequent purchasers) can use and resell the item without infringing the patent; NO GEOGRAPHIC LIMIT: Lexmark overruled the Federal Circuit's rule that foreign sales don't exhaust US patent rights; ANY authorized sale anywhere in the world exhausts US patent rights in the sold item; CONDITIONAL SALES: the patent owner CANNOT use the patent to impose conditions on what the purchaser does with the purchased item after sale; restricting single-use medical devices; restricting resale of cartridges; these post-sale restrictions violate the exhaustion doctrine; the ONLY remedy for violation of the post-sale restrictions is a breach of CONTRACT claim (not patent infringement); COMPONENTS: exhaustion of a component that is sold separately does not exhaust a patent on a combination product that includes the component + other elements (Quanta Computer v. LG Electronics, S.Ct. 2008).