Intellectual Property Licensing and Technology Transfer   Why License? Understanding the significant differences between assignments and licenses can help you decide whether to assign or license technology. What is the difference between an assignment and a license? A license allows someone the right to use your technology/intellectual property while you retain ownership. An assignment is complete transfer of ownership. Is it better to license or assign rights? It depends upon the owners financial goals and the desire to control use of the technology, competition and the market. The owner of a copyright, trade secret or patent may assign or sell all rights in the technology. Alternatively, the owner of the mark may license specific, limited rights to one or more licensees. What are the key elements when considering whether to assign or license technology? Generally, licensing allows an owner to dictate the terms of the technology use (for access to distribution and support resources, and to maintain product synergies), its market penetration and use by competitors. Licensing usually involves future revenue streams in the form of royalty payments, as well as ongoing obligations of the owner to police the use and integrity of the technology. Conversely, assignments generally transfer complete ownership of the technology, including all rights and responsibilities, for a one-time payment to the owner. As a result, the owner loses the ability to control the assigned technology use, its brand recognition, as well as his or her contact with customers. Must an assignment or license be in writing? That depends on the nature of the rights at issue and whether the technology is subject to an assignment or a license. For example, a transfer of copyright ownership is generally not valid unless it is in writing and signed by the owner of the rights conveyed. Also, absent a written assignment-of-invention clause in an employment contract for technical employees, an employer has limited or no rights to the technology developed by its employees.   What Elements of Technology Are Licensable? A wide variety of technology rights can be licensed. What proprietary rights can be licensed? Any specific proprietary rights in technology are licensable, but first, those rights should be protected. Ideas, concepts and methodologies of the technology (e.g., its designs, operation and processes) may be protected via patents. Tangible expressions of technology (e.g., blueprints, computer programs, and accompanying instruction manuals and/or technical text) may be protected via copyright. Source and goodwill identifiers for underlying products and services of the technology may be protected by trademarks or service marks. Valuable information regarding the technology that provides the owner with a competitive advantage and is maintained in secrecy (e.g., ideas, formulas, methods, databases, customer lists and pricing, marketing development and research plans) may be protected via trade secret.   Do You Really Own It? Tools you should consider using to assure that you own your technology. What tools should be used to vest ownership in technology? Once the protectable elements of a particular technology are identified, the owner must ensure that his or her ownership is vested. Generally, the author, creator or inventor of a particular technology, working on his/her own time, will be the owner of the intellectual property rights to that technology. However, where employees and independent contractors are involved, the doctrines of Work For Hire and Commissioned Works may create presumptions that the employer, rather than the inventor, author or creator, is the owner of any resulting intellectual property rights. By using specific ownership clauses in employment, consulting and development agreements, an employer or consultant can clarify who will own any resulting intellectual property rights, regardless of the technology creator or inventor. Assignment, Work For Hire, invention and confidentiality and nondisclosure agreements, when used properly, can help ensure ownership of the technology that is sought to be licensed or sold. What is a confidentiality/nondisclosure agreement and how should it be used? Confidential disclosure (or nondisclosure) agreements require limited disclosure of proprietary information between parties, and serve to preserve and protect commercially sensitive information (such as financial information, know-how, inventions, customer or vendor information, formulas, and computer source code) and other rights that may constitute trade secrets or may be the subject of patent protection. In most states, the information need not qualify as a trade secret in order to render the confidential disclosure agreement enforceable. A confidentiality agreement contractually binds a party from using or disclosing information or materials and should be considered whenever a party has access to proprietary or valuable information. What is an independent contractor and how does this status affect ownership rights? An independent contractor is a person who contracts to do work according to the contractor methods and is subject to engaging party control only as to the final result of the work. Many of the same factors used by the Internal Revenue Service to determine whether, for income tax withholding purposes, a person is an employee or an independent contractor are used by the courts to determine whether or not the creator of intellectual property rights is an independent contractor. Generally, rights in technology developed by an independent contractor are owned by the independent contractor, unless the contractor has signed an agreement to the contrary. How does an engaging party obtain ownership of a work developed by an employee or independent contractor? Typically, an engaging party can secure ownership in the underlying intellectual property rights of a particular technology via written agreement, signed by both parties, in which the employee or independent contractor conveys to the engaging party the rights to all works created under the agreement. These agreements typically take the form of invention or assignment agreements, or related clauses in employment, consulting, or development agreements. However, if funding for the technology development is derived from federal or state grants, often a condition associated with the grant is that the ownership of any resulting intellectual property vests with the government or private body extending the grant.   Types of Licenses and Assignments What types of agreements document technology transfers and licenses? There are a variety of agreements used to paper technology transfers. These agreements deal with such areas as: trademark licensing, patent licensing, copyright licensing, trade secret and know-how licensing, co-branding, shrink-wrap and clickwrap software licensing, linking, framing, software escrow, site licensing, internet content assignment, multimedia licensing, software consulting, software development and licensing, network licensing and maintenance, beta test licensing, web site development and hosting, distribution and marketing, merchandising, packaging, agent and broker, publishing, application service provider licensing, internet service provider licensing, invention and assignment licensing, rights of publicity licensing and endorsement, database licensing, model and property release, and third-party use. IPH2 can assist in choosing the appropriate document to “paper” the transfer or license of your technology. What are shrink-wrap and clickwrap licenses and are they enforceable? Shrink-wrap licenses are agreements contained within the packaging or interior materials of off-the-shelf software whereby the consumer accepts the terms and conditions of the license upon opening the software. The purpose of shrink-wrap licenses is to (i) avoid the first sale doctrine, (ii) prohibit reverse engineering and (iii) license only specified rights in the software and thereby control the consumer use of the product. The enforceability of shrink-wrap licenses depends upon whether the terms of the license were available to the potential consumer prior to purchase of the product. Where the shrink-wrap license provides the purchaser an opportunity to review the contract terms prior to purchase (e.g., the terms are readily viewable on product packaging), or the item may be returned within a certain period of time if the purchaser rejects the terms of the license, several courts have found them enforceable. Clickwrap licenses are agreements contained within online works or web sites whereby the consumer is required to read and agree to the terms of the license prior to accessing, purchasing or downloading the work in question. By giving the purchaser an opportunity to know the contract terms before paying for the online product, clickwrap licenses avoid the enforceability issues associated with shrink-wrap agreements. As such, clickwrap licenses are valuable tools in licensing online technology accessible via the World Wide Web.   Using Escrow Agreements Escrow agreements can be useful in securing the owner of the creditor to the intellectual property of a debtor or assignor, in the event of breach or default. What is an escrow agreement and how is it used in licensing technology? The purpose of an escrow agreement is to protect the user of the particular licensed technology in the event the owner ceases to do business or otherwise defaults in its obligations under the license arrangement. If a breach of the underlying license agreement occurs, an escrow agent is authorized to release the tangible manifestations of the technology (typically, copyrighted source code) to the user, provided certain conditions are met. Owners and licensees of technology must carefully consider the trigger provisions of an escrow agreement and we can assist in choosing appropriate conditions to satisfy the release from escrow.   Valuation of Technology Accurately accessing the value of your technology and intellectual property assets is essential to maximizing your returns from these property interests. How do I value my technology? There are several ways to value technology in connection with its commercialization. First, an owner must determine position of the technology in the overall product portfolio. Whether the technology is embodied in a primary or supplemental/support-orientated product or service will drive its value. Also, whether or not competitors have brought or will attempt to bring similar or competing technology to market will also determine the value of a particular technology. Accountants can provide estimated revenue projections for a product and bring those estimates down to present day value. Finally, there are several published materials and sources that establish royalty guidelines for certain industries and products. What types of compensation alternatives are available for commercializing technology? Typically, compensation packages for the transfer or license of technology takes the form of one or more of the following schemes: (i) lump-sum payment, (ii) future royalties, or (iii) equity grants. Royalties can be based on numerous factors, including annual sales, a percentage of net revenue, and sliding-scale payments based upon minimum or milestone sales volume. Are there guidelines for technology royalty rates? Yes. There are several published guidelines and sources that establish benchmark royalty rates for certain industries and products (e.g., Licensing Royalty Rates by Battersby and Grimes). How do I update the value of my technology? By limiting the initial scope of use and/or term of a license arrangement, parties to a license can be sure to provide for set periods of renegotiation in the event the value of a particular technology changes. What are the important considerations in marketing and distributing my technology? Often an owner or developer of a particular technology is limited in the ability to aggressively market and distribute the products derived from the technology, usually due to a lack of experience and resources. Commonly distributors or sales representatives are used to assist with product distribution and sales. In drafting marketing and distribution agreements, technology owners should be cognizant of several issues, including: exclusivity or nonexclusively of the rights to distribute and market, authorized channels of trade, licensed markets and territories, domestic and international compliance issues, rights to exploit derivative products, right to appoint sub distributors/representatives, rights to distribute competitive and related products and services, minimum orders and sales volume, limitations on internal use, combination sales with other products, price list changes, liability for damage or loss and freight/insurance, antitrust limitations on suggested retail pricing, minimum guaranteed purchases, rights to audit and inspect, warranties and disclaimers, agency status and authority to bind, distributor best efforts to sell versus quotas, marketing commitment, conflict of interest, duplication rights, end user license agreements, reporting requirements, maintenance and service obligations, compliance with product marking, legal notices and registration in foreign territories, passage of title and intellectual property rights, confidentiality, termination rights, sales and use tax obligations, reversion of ownership and use rights, sell-off periods, return of marketing materials, assignment of discoveries, modifications and improvements, duty to notify and cooperate in instances of infringement, noncompete obligations, and trademark ownership issues, among others.   International Licensing Issues Before agreeing to the licensing or assignment of technology rights with foreign companies or individuals, technology owners should determine whether any export regulations are implicated. Complex rules governing what can be exported, with whom a company can do business and how business is conducted apply to every aspect of international technology transfers and licenses. Our lawyers are at the forefront of these challenges, international trade regulation and the application of the technology transfer and licensing to international commerce. From Treasury Department sanctions to Commerce, State and Energy Department export controls, our attorneys have assisted U.S. and multinational corporations in developing compliance safeguards to avoid problems and effective defense strategies to deal with issues that develop notwithstanding compliance efforts. In general terms, there are some basic considerations when engaging in international commerce. What export control regulations are applicable when commercializing technology internationally? Before providing any service (including banking, brokerage, etc.), exporting commodities, or transferring technical data or know-how, a U.S. company needs to determine if trade with the party is permitted. The Departments of Treasury, Commerce and State maintain lists of parties who are prohibited from receiving certain U.S.-origin goods, technology, know-how or services. The Department of Treasury, Office of Foreign Assets Control, enforces embargoes and prohibits business transactions of any type with parties on the Specially Designated Nationals and Blocked Oarties List found on the department’s web site, U.S. Department of Treasury. Trading with a denied party can result in expensive civil and criminal penalties, and expose the company to shareholder actions and other litigation. The Department of Commerce, Bureau of Industry and Security, publishes two lists of parties who are denied access to any U.S.-origin technology or participation in any export-related transaction: Denied Persons List Entities List A third list, called the Unverified List, contains the names of entities which require additional scrutiny prior to engaging in export activity. These lists can be found at the Department of Commerce web site, U.S. Bureau of Industry and Security. Significant civil and criminal sanctions can apply to violations of these prohibitions. As with any violation of law, attendant shareholder actions are always a risk. The State Department maintains the Debarred Parties list. A "debarred party" is a person or company that is not allowed to participate (receive or send) in the export of defense articles or to provide defense-related services. At a minimum, a U.S. company should check new customers against these lists, compare additions to the lists against current customer files, and check again prior to exporting. When making these checks, it is advised to search with several independent variables of information, e.g., name, telephone, fax and address. This will minimize the chance that trade will occur with a prohibited party who merely changes a name or address. In addition to the Departments of Commerce and State, there are several other federal government departments and agencies whose regulations impact international trade. A few examples include: Nuclear Regulatory Commission, Office of International Programs: Controls the export of technologies that relate to certain aspects of nuclear power generation. Department of Energy, Office of Arms Controls and Nonproliferation, Export Control Division: Licenses nuclear technology and technical data for nuclear power and special nuclear materials. Department of the Interior, Division of Management Authority: Controls the export of endangered fish and wildlife. Drug Enforcement Administration, International Drug Unit: Controls the export of controlled substances. Patent and Trademark Office, Licensing and Review: Controls the export of unclassified technical data in the form of patent applications or modifications sent abroad. A complete list of departments and agencies that exercise control over exports can be found at U.S. Bureau of Industry and Security. Can you sell what you want? A good rule of thumb is that everything leaving the country is controlled for export purposes. While some exports require specific licensing, most exports leave under a general license or the designation NLR (no license required). Exports of know-how, such as the exchange between an engineer and a customer, may require specific licenses. Exports can occur in unexpected ways, so it is important to be mindful of export regulations. For example, exports occur even within the United States. A non-U.S. national touring a plant may receive an export of know-how that requires a license. The hiring of a foreign worker and exposing that employee or consultant to your know-how may trigger a license requirement. Likewise, some web site content that transmits technology (i.e. know-how, technical data, training or software) can implicate export regulations and require a license. Department of Commerce, Bureau of Industry and Security: The Export Administration Act and the Export Administration Regulations control the export of technology (which includes any item, commodity, know-how, technical data or software). Most exports fall within the jurisdiction of the Bureau of Industry and Security. Department of State, Office of Defense Trade Controls: The Arms Export Control Act and the International Traffic in Arms Regulations control the export and import of defense services and defense articles. Defense articles can include software, commodities or services that are specially designed or modified for military use. This means that civilian-use technology can fall within State Department jurisdiction depending on modifications. Exporters in the high-tech field are often unaware of this possibility and can inadvertently violate these controls. Publicly available information and the Internet: Publicly available data in the form of software, printed books, records, pamphlets, newspapers, maps, sheet music, etc.; other publicly available data, such as data that are the product of fundamental research; data that are educational; and data included in certain patent applications generally fall outside the scope of export controls. However, transmitting technology (i.e. know-how, technical data or software) that is not otherwise publicly available on the Internet or providing defense services through the Internet can constitute an export for which a license may be required. Can you do business the way you want? The Anti-Boycott Regulations: The Department of Commerce regulations prohibit U.S. persons from trading with or supplying information to particular countries. The regulations also prevent an exporter from refusing to conduct business, or from supplying information, in support of a boycott aimed at a country with which the U.S. has friendly relations, such as Israel. If an exporter receives an invitation to participate in the boycott or a request for information supporting the boycott, the exporter has an affirmative duty to report to the Anti-Boycott Office of the Department of Commerce. Foreign Corrupt Practices Act: The Foreign Corrupt Practices Act prohibits bribery of foreign government officials or parties by U.S. companies and citizens. Under the Act, criminal and civil liability may be imposed against persons who make promises or payments of money to foreign officials in order to influence a business decision. What is involved in developing and implementing export control compliance procedures? It is a good idea to develop and implement an export control compliance program so that all compliance and reporting measures are documented and filtered through a single point of contact. Vascoe Valdes LLP can assist you in drafting and implementing such a program in a pragmatic way to reduce export compliance headaches and inefficiencies.   Cost-Saving Tips Here are some cost saving tips when considering licensing or transferring your technology. Consult guidelines for technology royalty rates before negotiating with potential buyers/licensees. There are several published materials and sources that establish royalty guidelines for certain industries and products (e.g., Licensing Royalty Rates by Battersby and Grimes). Consider requiring periods of renegotiation under license arrangements to account for increases in the value of your technology. By limiting the initial scope of use and/or term of a license arrangement, an owner may be able to provide for set periods of renegotiation in the event the value of a particular technology changes. Consult federal, state and local agency web sites for regulations regarding sale and distribution of your technology and restrictions on commercializing your technology overseas. EU competition and U.S. antitrust rules: The owner should draft exclusivity and price terms very carefully to avoid any limitations on competition within the international market. In European Union countries, manufacturers will want to insure that their agreements fall within certain bloc exemptions for exclusive distributors