Picture the scenario – your company creates a new affiliate in Ireland to sell and distribute a product. The parent company holds the legal title to the patents associated with the product. Parent grants the Irish affiliate a license to the patents and the Affiliate begins to sell the product.
Now, two years later, a third party is infringing the patents. Affiliate is losing sales and the company is seeing a drop in revenue.
Can Parent and Affiliate recoup their losses by seeking lost profits damages from the infringer?
The answer depends on the structure of the license and the country in which the patent rights are held.
In the US, a non-exclusive licensee cannot sue for patent infringement damages. It cannot even join in the litigation with the patent owner. Thus, in the US, if Affiliate is a non-exclusive licensee, it could not be part of the litigation or seek lost profits. Parent also faces the risk that it may be unable to recoup the lost sales that Affiliate suffered as a result of patent infringement.
Other countries adopt a similar approach to non-exclusive licensees. The UK, Australia and Japan do not permit a non-exclusive licensee to join suit or to collect damages. However a number of countries may permit a non-exclusive licensee Affiliate to participate in the litigation and collect damages. These countries include Canada, Italy, France, Germany, Spain, the Netherlands and China. Some require the patent owner to specifically authorize the non-exclusive licensee to join, for example, by providing the authorization in the license agreement. The chart below summarizes the different treatment of non-exclusive licensees in key jurisdictions.
Click here to view table.
What if Parent grants Affiliate an exclusive license – could Affiliate bring patent litigation on its own, or must Parent also join the suit? This too is a country-specific determination.
Additionally, what qualifies as an exclusive license can also differ between jurisdictions. For example, Chinese law differentiates between an exclusive license in which the patent owner retains no rights to use the patent, and a sole license, in which both the patent owner and exclusive licensee may have rights under the patent. Also, under Japanese law, there are actually two types of exclusive licenses, aSenyo license and an exclusive Tsujo license, and as explained below, each treat an exclusive licensee’s right to sue and collect damages differently.
The general rule in the US is that Parent, as the patent owner, must join unless the exclusive licensee Affiliate holds “all substantial rights.” Similarly, the UK, Australia and Canada do not permit exclusive licensees to sue on their own. In contrast, in France, Spain, Germany, the Netherlands and China, an exclusive licensee can bring litigation against the infringer as the sole plaintiff, with certain caveats. In Japan, a Senyo licensee may sue on its own, and an exclusive Tsujo licensee may act on its own unless an injunction is sought.
Click here to view table.
So what is a company to do?
Considering a few issues at the outset when rights are distributed between Parent and Affiliate (or between multiple affiliates) may avoid difficulties in the future when a company wants to enforce patent rights.
Consider the who, what and where.
- Which affiliate(s) will manufacture the product or manage manufacturing by third parties? Will this manufacturing be directed to products distributed worldwide or only in specific countries?
- Where will the product be sold now and in the future?
- Which affiliate(s) will sell the product and in which countries will each affiliate sell?
- In which countries does the company hold patents that cover its product, including its composition, methods of manufacture, and methods of use?
- Will the company continue to develop and improve the product and if so, where will this activity take place?
- Has the company out-licensed any rights to make, use or sell the product to a third party, and, if so, in which countries?
These considerations will help shape the type and scope of the license between Parent and its Affiliates.
Consider the remedies desired if patent infringement occurs.
Countries offer different monetary remedies for patent infringement. In the US, reasonable royalties and lost profits are potential remedies. China offers four types of remedies: the patentee’s losses, the infringer’s gains, a reasonable royalty and statutory damages. France, Germany and Italy provide damages calculated on one of three bases – actual damages (including lost profits), profits made by the infringer and an analogous licensing fee.
The following considerations can help guide the licensing options that are capable of achieving the desired remedies.
- In which countries will the company enforce its patent?
- Will lost profits be an appropriate remedy and for which company entities?
- Will other remedies be sought, such as an injunction or reasonable royalty?
- For an injunction against the infringer, in which countries will it be sought and against which activities (making, using, selling, offering to sell and/or importing)?
Create written agreements and authorizations to distribute patent rights.
In the US, an assignment must be in writing, whereas a license may be oral or implied by conduct. Nevertheless, a confirmatory writing outlining the rights granted and retained by Parent and those granted to Affiliate provides clearer evidence of the arrangement when litigation arises. Thus, while it may be tempting to leave intercompany arrangements unwritten for future flexibility, this informality can come with a price tag. Written agreements may save a company time and money that it might have to spend to defend Affiliates’ right to participate in the litigation and collect damages.
In countries that permit a non-exclusive licensee to join in patent litigation, those jurisdictions often require that the patent owner has authorized the non-exclusive licensee to enjoy such rights. Other requirements may also exist. For example, the Netherlands requires the license to be recorded in the patent register for a non-exclusive licensee to have rights to litigate. A written agreement that incorporates a grant of litigation rights can provide the foundation for the non-exclusive licensee to enforce the patent and collect its damages. A written authorization can also establish the right of an exclusive licensee to bring suit on its own.
Find the balance.
The optimal distribution of patent rights is not a “one size fits all” for all the of the countries in which patents are held. The distribution is generally a balance based on the company’s business objectives and the roles of the Parent, Affiliates and third parties involved in manufacturing, marketing, sales and distribution in each country.