Licensing of IP rights.

There is a set of issues which have to be covered in a license contract:

1. Grant.

2. Term.

3. Consideration.

4. Licensee performance.

5. Advertising.

6. Quality Control Provisions.

7. Accounting and Record Keeping.

8. Licensee’s Indemnification of Licensor.

9. Product Liability Insurance.

10. Trademark, Copyright and Design Patent Protection.

11. Licensor’s Warranties, Indemnifications and Assistance.

12. Arbitration.

13. Termination.

 

In this article we will address the questions concerning termination of the license agreement and post expiration royalties according to the Russian law in comparison with the analogous provisions in the UK and the US.

 

1. Termination.

Usually a license agreement provides that the licensor is entitled to terminate the agreement upon:

  • licensee’s default in performance of any obligation provided for in the agreement, not timely cured after written notice;

  • licensee’s failure to make payment on due date, not timely cured after written notice;

  • licensee’s failure to provide access to licensee’s facilities or records, not timely cured after written notice;

  • licensee’s insolvency or bankruptcy.

 

One of the controversial provisions is the right of the licensor to terminate the agreement upon licensee’s insolvency or bankruptcy. For example the contracts which are governed by English law and contain such provision shall be drafted carefully with the due consideration of the Insolvency Deprivation Principle.

 

Insolvency Deprivation Principle is a common law principle that is the equivalent of s.107 of the Insolvency Act 1986 and r.4.181 of the Insolvency Rules 1986. Both sections ensure that the assets of an insolvent company are dispersed in line with the shareholders’ and creditor’s share of their interests in the company. By "anti-deprivation principle" there cannot be a valid contract that a man’s property shall remain his until his bankruptcy but that, on the happening of that event, the property goes over to someone else, and be taken away from his creditors.

 

Therefore, the termination cannot be linked to any mechanism that enables the licensor to benefit as a creditor/shareholder from the fall in value in the licensee as a result of the termination of the license. However, the existence of the anti-deprivation principle does not exclude the possibility to link the termination of the license since this rule can in any event be avoided by careful drafting.(see more Butters and others v BBC Worldwide Ltd and others [2009] EWHC 1954 (Ch), 20 August 2009).

 

2. Post expiration royalties.

 

According to art. 1235 (3)(4) of the Civil Code termination of the exclusive right has as a consequence termination of the license agreement - there cannot be a license agreement without the object the exclusive right protected by law). This provision concerns the agreement as a whole. Therefore the parties are not free to determine the term of the agreement beyond the term of the existence of the licensed exclusive right. With the termination of the exclusive right licensee is not obliged to pay royalties.

 

In many EU jurisdictions the termination of the exclusive right (expiration of a patent) does not lead to automatic termination of the license agreement. A provision requiring payment of royalties after expiry of a licensed patent was held to infringe art. 82, on the basis that it had the effect of burdening manufacturing costs without any economic justification and thereby weakening the competitive position of the licensee. In another case such provision was held not to fall under art. 82 if the licensee was free to terminate the license on reasonable notice and was not restricted after termination. This qualification was included in the Patent Block Exemption, but such a provision is now stated by art. 2 (1)(7) of the TTBE to be generally not restrictive of competition.

 

In the US in Brulotte case the Supreme Court found that the royalty agreements “were unenforceable to the extent that they extended `beyond the expiration date of the patent[s]”. This rule has not been changed, but the court is more pro-patent in our days.



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