Thursday, 25 June 2009

So Is It Joint Ownership or a Licence?

This week's contract construction issue involves joint ownership. Joint ownership of IP rights is one of those relationships to which parties often gravitate, even if legal counsel takes a dim view. In that context, consider the following two provisions, which in various related forms, I have encountered from time to time.

First, the parties state that they "agree they shall jointly own all of the intellectual property rights resulting from their mutual performance of the Project."

Second, the parties further agree that "Party A grants to Party B an [exclusive] licence with respect to the use of the Intellectual Property rights created during their mutual performance of the Project [for defined purposes of use]."

The obvious question is why are there two clauses apparently covering the same subject matter, one establishing joint ownership, while the other purports to grant a licence from one party to the other? If the IP is jointly owned then, subject to any particular local laws, each party is permitted to do what it likes with respect to these rights. If so, what purpose is served by the grant of licence? Permit me to offer several suggestions (readers are urged to offer their own comments):

1. Declaration of jont ownership may not be legally sufficient to create co-ownership. Perhaps the licence provision is a back-up in the event that joint ownership is not recognized. Even if A and B are not joint owners, A does grant to B the same rights that B would have enjoyed a co-owner.

2. Alternatively, the licence is an unartful attempt to create a limitation on the unfettered right of each joint owner to use the mark with restriction from the other joint owner, in this case a limitation on the right of use by B.

3. To the contrary, the grant of an exclusive licence could have the affect of limiting the right of use by A, in accordance with the meaning of an exclusive licence under various national laws.

4. The licence is provided in accordance with the requirements of local law. We were informally advised, e.g., that there is such a provision under German law. If this is correct, the provision serves to bring the parties into compliance with the applicable local law.
I probably have missed other possible ways to understand the two clauses. Dear readers: the floor is open.


Mark Anderson said...

It is interesting that Neil has reacted this way. I have come across other lawyers who have done the same. To my mind there is no problem with the situation that Neil has described, and saying it in an artful way would be legalistic and non-intuitive.

I am assuming that, despite joint ownership, the parties intend that only one of them will have the right to exercise rights with respect to the joint IP.

If we don't call it an exclusive licence, what do we call it? Perhaps as a series of promises:

1. Party A undertakes not to exercise any ownership rights. We may need to state that this includes A agreeing not to use the invention himself, which could otherwise be done without the consent of the other co-owner.
2. Party A consents to Party B exercising ownership rights (NB under most countries laws, a co-owner cannot license or assign without the consent of the other co-owner).
3. (Perhaps) Party A agrees that Party B will not have to account to Party A with respect to any financial gain that B makes from commercialisation (which may be implicit under joint ownership). Instead, the agreement may provide that B makes contractual payments to A.

The above may articulate the detailed implications of an "exclusive licence" by a co-owner. But don't you think this is a rather convoluted way of expressing it? Isn't it more straightforward just to say "exclusive licence"?

I look forward to reading others' views!

Luca Escoffier and Kris Lee said...

Dear Neil,

Our modest opinion is the following:

1) a declaration of joint ownership serves the purpose of making clear that the right to the potential IP to be generated are evenly split, even though most of the jurisdictions, especially in civil law countries, provide that this happens by default.

2) the licence is necessary if a party wants to exploit the IP that is co-owned. In fact, the general principle governing co-ownership is that every party can use the co-owned property according to her quota and cannot go beyond that. So, if a party wants to economically exploit the IP that is co-owned, she needs a licence to do it freely.

Ron Laurie said...

Here's a view from one US practitioner. Joint ownership gives each joint owner the right to license the IP to anyone for any purpose without consent of the other owner(s). (There is a duty to account to the other owner(s)for copyright license revenue but not for patents).

Any restriction on the licensing rights must be by agreement, and the reciprocal exclusive field of use licenses create the contractual restriction as to which fields each owner can exploit via sub-licensing, product sales etc.

Also, note that an agreement to jointly own future IP may not be effective to vest title jointly when the IP comes into existence without words of present assignment, e.g., "...and each party does hereby assign to the other an undivided ownership interest in and to [the relevant future IP]."

Michael F. Martin said...

I'm leaning toward 1, although not competent to pass on 4.

The first clause alone is insufficent by itself to work the grant of a license. Although, presumably, each co-owner could grant to herself a license by separate agreement, it seems more neighborly to make the grant reciprocal and save paper.

Perhaps more practically, if it is, in fact, intended that not all of the co-owners should practice the invention, then co-owners might want to memorialize that intent by breaking the reciprocal grant of license. The clause might be kept even in boilerplate as a reminder to lawyers and clients to consider whether or not all co-owners have a need to practice the invention. The allocation of profits that come in from ownership might be divided up differently as a result.

I would guess that there might be some case in which a reciprocal grant of license was not made and co-ownership terminated (because of breach?) and the former co-owner in breach was found to be an infringer. And this is your answer 1.

Renzo Marchini said...

And a view from an English lawyer. It is not the case, under English law, that a co-owner has the right to use the IP - a popular misconception. A co-owner has no right to exploit without permission of the other owner(s).

They can each (without consent of the other) use the negative right of stopping third parties, but they have no right to exploit.

The licence therefore is essential for the owner to be able to exploit; and what I have often seen (or used) is reciprocal licenses (necessarily non-exclusive if in the same field or exclusive in different fields).

(Clearly, there might always be arguments - if the document is silent on the issue - that a term allowing exploitation was implied into the contract under the very strict English law "business efficacy" test.)

Mark Anderson said...

Renzo, I don't understand your comment. Under section 36(2) of the UK Patents Act 1977:

"Where two or more persons are proprietors of a patent ... each of them shall be entitled do ...for his own benefit and without the consent of ...the other or others, any act which would ...amount to an infringement ..."

Subsection (3) prohibits licensing, assignment or mortgaging without the consent of the other party.

Therefore a co-owner can use the patent, but cannot license it.

(There is a separate, general point, as you have said, that ownership of a patent does not give the right to exploit the inventions claimed in the patent, just to prevent others from doing so - commonly called a negative right.)

The overall effect of the above is that if co-owner A grants the other co-owner B an exclusive right to develop, make, use and sell, with the exclusive right to sub-license, then depending on the wording, A may be agreeing not to use the invention himself. In principle I see no reason why A shouldn't agree to this.

Renzo Marchini said...

You are of course right in relation to patents, and I was being simplistic in dealing with all rights under one umbrella. I had in mind primarily copyright where the rule is different and as I had it.

Ron Laurie said...

I believe that Japanese law is the same as the English rule, i.e., that a co-owner cannot exploit the jointly owned IP without permission of the other owner(s), whereas the US rule is often expressed as, "each co-owner can act as if they were the sole owner." This difference sometimes comes as a nasty surprise if not reflected in cross-border agreements.

Lawrence B. Ebert said...

Of --"Party A grants to Party B an [exclusive] licence with respect to the use of the Intellectual Property --, in the background presumption in the US, the co-owner would have a right to license [see Lucent v. Microsoft] but not a right as an exclusive licensor. Some agreements speak of party A granting to party B an OPTION for an exclusive license. Some universities take the position that they can ONLY offer an option for an exclusive license, although that is not dictated by Bayh-Dole.

Mark Anderson said...

Would this address Neil's concerns:

1.1 A hereby grants to B the exclusive right [nb not licence] to exploit the Joint Patent, whether through assignment, licensing, use of any inventions claimed in the Joint Patent, development, sale or other commercialisation of any products that make use of any such inventions, or otherwise howsoever (together "Exploitation", and "Exploit" and "Exploiting" shall be construed accordingly).

1.2 For greater clarity, the grant in clause 1.1 includes without limitation the following provisions:

1.2.1 A hereby consents to B Exploiting the Joint Patent;

1.2.2 A undertakes not to Exploit the Joint Patent;

1.2.3 B shall not be required to account to A for any revenue generated from the Exploitation of the Joint Patent, subject to clause X [royalty clause]; and

1.2.4 A shall execute such documents and take such actions as B shall consider necessary or desirable to give effect to the provisions of clause 1.1.

Ron Laurie said...

Bear in mind that cross-licensing between and among the co-owners (whether exclusive, exclusive field-of-use, or non-exclusive) is only part of the total allocation of rights and duties that need to be addressed. Some of the other issues are:

(1) prosecution decisions and cost sharing (e.g., whether and in which countries to file follow-on apps, whether the resulting allowed claims are broad enough, etc.);

(2) enforcement (litigation) decisions, cost sharing and division of proceeds (e.g., veto right on any co-owner suing one or more named companies (who may be customers of the other co-owner), agreement to join the co-owner's suit if necessary to support standing, etc.);

(c) right of first refusal if the co-owner decides to sell its interest;

etc, etc.

In my experience, these various allocation and sharing provisions typically occupy five to ten pages of the agreement.