Are there any restrictions on the establishment of a business entity by a foreign licensor or a joint venture involving a foreign licensor and are there any restrictions against a foreign licensor entering into a licence agreement without establishing a subsidiary or branch office? Whether or not any such restrictions exist, is there any filing or regulatory review process required before a foreign licensor can establish a business entity or joint venture in your jurisdiction?
Foreign entities are generally not restricted from establishing US entities and are not prohibited from entering into licences, even if there is no US entity. However, the Bureau of Export Administration; Departments of Commerce, State, Energy and Agriculture; the Nuclear Regulatory Commission, the Drug Enforcement Administration, the Food and Drug Administration, inter alia, regulate the exportation and importation of certain articles and licences involving foreign entities must comply with these agencies’ requirements as well as US tax provisions and international treaties.
Also, the Committee on Foreign Investment in the US reviews transactions involving foreign investment to determine the effect of such transactions on national security.
Kinds of licences
Forms of licence arrangement
Identify the different forms of licence arrangements that exist in your jurisdiction.
The types of licensing arrangements that exist in the US include technology transfer, know-how and trade secret, patent, trademark, trade dress, industrial design, copyright, software and right of publicity, to control commercial use of one’s name, image, likeness or other use of identity.
Licensing arrangements may be exclusive or non-exclusive; relate to the entire intellectual property right or can be limited to a specific field of use or for a limited duration; and provide various forms of compensation, such as lump-sum payments, royalties, cross-licensing or equity interest.
Law affecting international licensing
Creation of international licensing relationship
Does legislation directly govern the creation, or otherwise regulate the terms, of an international licensing relationship? Describe any such requirements.
The terms of an international licensing relationship are not governed by legislation. However, where the intellectual property (IP) has a limited life, licences that require fees after patent expiration are generally unenforceable. Agreements that tie a staple good to a patent, or that effectively extend the term of a patent, thereby requiring royalty payments after the expiration of the patent, are patent misuse per se, while agreements that are anticompetitive in nature may be found to violate antitrust law. For inventions made in the performance of work under a government contract or funding, the US government has certain rights therein and may require the manufacture of any commercial good in the US. While there are no general requirements that products be purchased locally, it is common practice that state-funded public universities license their IP to local businesses within the state to stimulate the local economy.
What pre-contractual disclosure must a licensor make to prospective licensees?
There are no pre-contractual disclosure requirements imposed on a licensor regarding a potential licensee, but a licensor is obligated to act in good faith, not misrepresent any material facts, and disclose when a patent is part of a ‘standard’ that is subject to fair, reasonable, and non-discriminatory (FRAND/RAND) practices. A standard essential patentee is typically required to offer FRAND/RAND licensing terms.
Are there any requirements to register a grant of international licensing rights with authorities in your jurisdiction?
While there is no requirement to register a grant of international licensing rights in the US, certain agreements may require registration. Parties may submit a notice or short-form declaration – which is mandatory in certain circumstances – notifying the Committee on Foreign Investment in the United States of a covered investment to receive a potential ‘safe-harbour’ letter.
Intellectual property issues
Is your jurisdiction party to the Paris Convention for the Protection of Industrial Property? The Patent Cooperation Treaty (PCT)? The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs)?
Yes, the US is a party to all three.
Can the licensee be contractually prohibited from contesting the validity of a foreign licensor’s intellectual property rights or registrations in your jurisdiction?
No. Under US law, a licensee may not be prohibited from contesting the licensor’s (whether US or foreign) intellectual property rights (MedImmune v Genentech, 549 US 118 (2007)). Licensors may attempt to limit this contractually by including provisions providing for increased upfront compensation or royalty rates as well as a right to (1) terminate the patent licence; (2) convert an exclusive licence to non-exclusive; or (3) require the licensee to bear litigation costs. However, general ‘no challenge clauses’, prohibiting a licensee from challenging validity, have not been universally enforced by the courts or the United States Patent and Trademark Office (USPTO).
Invalidity or expiry
What is the effect of the invalidity or expiry of registration of an intellectual property right on a related licence agreement in your jurisdiction? If the licence remains in effect, can royalties continue to be levied? If the licence does not remain in effect, can the licensee freely compete?
Because subject matter disclosed in a patent is dedicated to the public upon expiration, any exclusive right, licence or privilege expires. Agreements requiring royalties after expiration of a licensed patent are unlawful per se (Brulotte v Thys, 379 US 29 (1964); Kimble v Marvel Entertainment, 576 US 446 (2015)). Brulotte, however, is limited and ‘poses no bar to business arrangements other than royalties – all kinds of joint ventures, for example – that enable parties to share the risks and rewards of commercializing an invention’ (Kimble, 576 US at 435-55).
There is no such prohibition on the term of a licence under know-how, technology or trade secrets with no set duration, and the US Supreme Court has ruled that if an agreement provides for royalty payments if a patent never issues, it is enforceable (Aronson v Quick Point Pencil, 440 US 257, 99 S Ct 1096 (1979))
Because trademark rights derive from use in US commerce, the rights may be licensed insofar as the mark is used in connection with the relevant goods or services, whether or not registered; it is highly advisable to register and maintain trademark registrations because they provide notice to third parties and a presumption of validity.
Regarding copyrights, there are specified terms following creation or publication to perfect ownership in a registered US copyright, after which the work will fall into the public domain and cannot thereafter be levied.
Requirements specific to foreigners
Is an original registration or evidence of use in the jurisdiction of origin, or any other requirements unique to foreigners, necessary prior to the registration of intellectual property in your jurisdiction?
A US trademark application (including intent-to-use under 15 USC 1051(b)) may be based upon use in US commerce, or a corresponding non-US registration, provided the applicant’s country of origin is a party to a treaty such as the Paris Convention for the Protection of Industrial Property of 1883 or other specific treaties.
For US applications based upon non-US registrations, a true copy of the foreign registration from the applicant’s ‘country of origin’, along with a verified English translation, must be submitted to the USPTO. While it is not necessary to demonstrate use in the US prior to applications based upon non-US registrations, the owner will be required to prove use of the mark in US commerce by submitting a Declaration of Use and specimen of use between years five and six following the US registration date and every 10 years thereafter from the registration date to maintain the US registration.
Regarding copyrights, the US is a member of the Berne Convention for the Protection of Literary and Artistic Works of 1886. Consequently, registration is not required for protection for non-US works; but statutory damages and attorneys’ fees are only available for infringement of registered US works (see, for example, Fourth Estate Public Benefit v Wall-Street.com, 139 SCt 881 (2019)).
Can unregistered trademarks, or other intellectual property rights that are not registered, be licensed in your jurisdiction?
Yes. US trademark rights derive from use in commerce and are valid while the mark (whether or not registered) is used in US commerce in connection with the relevant goods or services. However, rights in an unregistered mark are limited to the geographical area within which it has been used or may be reasonably expected to expand. It is best practice to register and maintain trademark registrations since this provides the broadest protection, including nationwide notice to third parties as well as a presumption of validity.
Are there particular requirements in your jurisdiction to take a security interest in intellectual property?
A security interest in a US patent, trademark or copyright must be recorded or ‘perfected’ with the proper federal or state authorities to be enforceable. To protect an ownership or security interest in IP against subsequent purchasers for value, an assignment should be recorded with either the USPTO or Copyright Office (35 USC 261). This alone, however, does not ‘perfect’ the security interest, which for a patent or trademark requires a filing in the appropriate state jurisdiction; often the Uniform Commercial Code. To perfect a security interest in a registered copyright, it should be recorded in the Copyright Office (In re Peregrine Entertainment, 116 Bankr 194 (CD Cal 1990)).
Proceedings against third parties
Can a foreign owner or licensor of intellectual property institute proceedings against a third party for infringement in your jurisdiction without joining the licensee from your jurisdiction as a party to the proceedings? Can an intellectual property licensee in your jurisdiction institute proceedings against an infringer of the licensed intellectual property without the consent of the owner or licensor? Can the licensee be contractually prohibited from doing so?
Whether foreign or domestic, an intellectual property right holder must have ‘standing’ to enforce such rights, which is determined on a case-by-case basis. While owners will almost always have ‘standing’ (but joint owners may have to join), exclusive licensees may have ‘standing’ if the licence coveys sufficient rights.
Further, ‘any person [including a licensee] who believes that he or she is or is likely to be damaged’ by the false or misleading use of a trademark may bring an action without the consent of the owner (15 USC 1125(a)).
Can a trademark or service mark licensee in your jurisdiction sub-license use of the mark to a third party? If so, does the right to sub-license exist statutorily or must it be granted contractually? If it exists statutorily, can the licensee validly waive its right to sub-license?
Yes, provided that the licensor supervises and controls the licensee’s use of the mark to protect the public’s expectation as to the origin and quality of products or services provided thereunder. Absent such controls, the mark may be deemed abandoned owing to the ‘naked licensing’. The right to sub-license typically must be granted contractually (see In re Trump Entm’t Resorts, 526 BR 116, 127 (Bankr D Del 2015)).
Jointly owned intellectual property
If intellectual property in your jurisdiction is jointly owned, is each co-owner free to deal with that intellectual property as it wishes without the consent of the other co-owners? Are co-owners of intellectual property rights able to change this position in a contract?
Co-owners are generally free to deal with that intellectual property without the consent of the other co-owners.
Unless contractually prohibited, a trademark co-owner is free to assign the trademark rights provided that (1) the assignee is subject to the obligations of such co-owner; (2) all goodwill is transferred; and (3) such transfer would not result in consumer confusion as to the origin. In examining such transfers, courts have employed a test balancing the parties’ contractual expectations with consumer expectations of origin and quality. See Ligotti v Garofalo, 562 FSupp2d 204, 222-23 (DNH 2008).
With copyrights, the authors of a joint work are co-owners of the copyright in the work (17 USC 201(a); Davis v Blige, 505 F3d 90, 98 (2d Cir 2007); Thomson v Larson, 147 F3d 195, 199 (2d Cir 1998). As such, co-owners may allocate the rights and duties of the work of authorship among themselves, and may contractually regulate, modify or otherwise limit the exploitation of the work.
Regarding patents, each co-owner may make, use, offer to sell, sell or import the patented invention into the US without the consent of and without accounting to the other owners absent any contractual prohibition (35 USC 262; Schering v Roussel-UCLAF SA, 104 F3d 341 (Fed Cir 1997)).
Is your jurisdiction a ‘first to file’ or ‘first to invent’ jurisdiction? Can a foreign licensor license the use of an invention subject to a patent application but in respect of which the patent has not been issued in your jurisdiction?
The US patent system is now a ‘first to file’ system for all patent applications filed in the US that have an earliest effective filing date on or after 16 March 2013. Patent applications may be licensed, and patent law does not preempt state contract law such that the term of a patent licence may continue if the patent application fails; typically where the licence includes know-how or other technical information (Aronson, 440 US 257 (1979)).
Scope of patent protection
Can the following be protected by patents in your jurisdiction: software; business processes or methods; living organisms?
The execution of a physical process is patentable, but mathematical formulae and abstract ideas, in and of themselves, are not (Bilski v Kappos, 561 US 593 (2010). However, the mere presence of software does not render an otherwise patentable process unpatentable (Diamond v Diehr, 450 US 175 (1981)).
With living organisms, the Supreme Court has held that ‘anything under the sun that is made by man’, including a living, human-made organism, is a patent-eligible subject matter, with the caveat that naturally occurring organisms, other products of nature, and laws of nature are not patent-eligible (Diamond v Chakrabarty, 447 US 303 (1980)).
Following the Supreme Court’s Alice and Mayo decisions, a patent claim is unpatentable under section 101 where:
Business methods are patentable.
Trade secrets and know-how
Is there specific legislation in your jurisdiction that governs trade secrets or know-how? If so, is there a legal definition of trade secrets or know-how? In either case, how are trade secrets and know-how treated by the courts?
Yes. The Uniform Trade Secrets Act (UTSA), which has been enacted, in one form or another, by most of the states, defines a trade secret as information, including a formula, pattern, compilation, program, device, method, technique or process, that derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use where reasonable efforts are made to maintain its secrecy. The states that do not follow the UTSA generally follow the First Restatement of Torts, which uses a similar definition of trade secret.
Misappropriation remedies include damages and injunctions, and enhanced (up to two times) damages and attorneys’ fees. The Defend Trade Secrets Act, additionally, creates a federal civil cause of action for misappropriation, and enables plaintiffs to also seek an ex parte seizure order from the court to seize misappropriated trade secrets without providing prior notice to the alleged wrongdoer.
Does the law allow a licensor to restrict disclosure or use of trade secrets and know-how by the licensee or third parties in your jurisdiction, both during and after the term of the licence agreement? Is there any distinction to be made with respect to improvements to which the licensee may have contributed?
Generally, a licensor can restrict disclosure or use of trade secrets and know-how by the licensee or third parties both during and after the term of the licence. Improvements and the underlying trade secret or know-how should be addressed separately in licences and typically should have the same protections.
What constitutes copyright in your jurisdiction and how can it be protected?
Copyright protection automatically applies to ‘original works of authorship fixed in any tangible medium of expression’ (17 USC 102), which include literary, musical, dramatic, pictorial and architectural works.
Copyright protection typically does not extend to any idea, procedure, process, system, method of operation, concept, principle or discovery, but computer source code is copyrightable as a literary work, and manifestations, such as the visual display, may be copyrightable as an audiovisual work. Registration also provides the opportunity to recover statutory damages and attorneys’ fees in court. Additionally, a work that is registered within five years of the date of first publication will constitute prima facie evidence in court that the copyright is valid.
Software licensing
Perpetual software licences
Does the law in your jurisdiction recognise the validity of ‘perpetual’ software licences? If not, or if it is not advisable for other reasons, are there other means of addressing concerns relating to ‘perpetual’ licences?
A perpetual software licence would be valid. The use of perpetual software licensing, however, appears to be declining and subscription-based licensing, which typically has lower initial costs and can be more flexible, is becoming more prevalent. Differences between a perpetual or subscription-based licence include ownership of the software; scalability in the number of users; costs (upfront payment or periodic); and access to newest releases, latest technology and updated security.
Are there any legal requirements to be complied with prior to granting software licences, including import or export restrictions?
Yes. US export control laws control the conditions under which certain information and technologies can be transmitted overseas to anyone. Export controls usually arise, where (1) the export has actual or potential military applications or there are economic protection issues; or (2) the government has concerns about the destination country, organisation or individual or the declared or suspected end use or user thereof.
Export control laws also apply to encryption software and technology as well as foreign-origin items that enter the US before being exported again, and foreign-origin items that contain more than a de minimis amount of controlled US content. Unless a ‘licence exception’ under the Export Administration Regulations is applicable, the export of computer software may require a licence.
Restrictions on users
Are there legal restrictions in your jurisdiction with respect to the restrictions a licensor can put on users of its software in a licence agreement?
Such restrictions are governed by the licence between the licensor, the licensee and the user and parties are generally free to agree to licence terms, provided that they are not illegal or contrary to public policy. Generally, features such as updates and upgrades are addressed in a shrink-wrap licence or click-wrap licence, and typically require prior consent by the user for implementation unless agreed otherwise. Further, certain licences permit the user to ‘opt in’ for automatic updates or ‘opt out’ and require manual installation of the same.
A software licence can further include the fields of use restrictions, geographic use restrictions, restrictions on the number of concurrent users, restrictions on the hardware used to run the software and restrictions on the transferability of the software licence. Software companies often include provisions that the licensee will not reverse engineer, decompile, decode, decrypt, disassemble or in any way derive source code from, the licensed software, although the court rulings are not unanimous. A backup copy is usually permitted.
Royalties and other payments, currency conversion and taxes
Is there any legislation that governs the nature, amount or manner or frequency of payments of royalties or other fees or costs (including interest on late payments) in an international licensing relationship, or require regulatory approval of the royalty rate or other fees or costs (including interest on late payments) payable by a licensee in your jurisdiction?
Other than limits (generally set by each state) against charging interest rates above a statutory limit called ‘usury limits’, the US has no legislation governing royalty rates, except for specific rules and regulations relating to the distribution of music copyright. The Federal Circuit has rejected the 25 per cent rule of thumb as fundamentally flawed for determining a baseline royalty rate in a hypothetical negotiation (Uniloc v Microsoft, 632 F3d 1292 (Fed Cir 2011)). However, asserting industry standards patents creates a contractual obligation to offer fair, reasonable, and non-discriminatory (FRAND/RAND) licensing terms, which should be based on the contribution of the patents to the standard-practising component and the contribution of that component to the entire accused product.
Courts have also held that damages based on the entire market value of the accused product are proper only where the patented feature creates the basis for customer demand or substantially creates the value of the component (Versata v SAP Am, 717 F3d 1255, 1268 (Fed Cir 2013)). In the absence of such a showing, principles of apportionment apply. The smallest saleable unit approach is intended to produce a royalty base much more closely tied to the claimed invention than the entire market value (Mentor Graphics v EVE-USA, 851 F3d 1275 (Fed Cir 2017); VirnetX v Cisco, 767 F3d 1308 (Fed Cir 2014)).
Are there any restrictions on transfer and remittance of currency in your jurisdiction? Are there any associated regulatory reporting requirements?
Subject to the tax withholding issue, the US has no restrictions on currency transfers, except that cash transfers in excess of US$10,000 must be reported to the US Internal Revenue Service under anti-money laundering statutes (26 USC 6050I, 31 USC 5331).
Taxation of foreign licensor
In what circumstances may a foreign licensor be taxed on its income in your jurisdiction?
Generally, foreign companies are only subject to taxation on income from US business operations, which generally includes income from the sale of US real property, connected with participation in an entity (eg, partnership) that engages in US business or received as a beneficiary of an estate or trust. Under various international tax treaties, a foreign company is taxed only on income attributable to a ‘permanent establishment’ in the US and withholding tax rates are reduced to prevent double taxation on the same income. All foreign companies are also taxed on a gross withholding basis on US-source intellectual property portfolio income; for example, dividends, interest, rents and royalties.
Competition law issues
Restrictions on trade
Are practices that potentially restrict trade prohibited or otherwise regulated in your jurisdiction?
Practices that restrict trade are prohibited by both US antitrust and patent laws. Generally, the antitrust laws (eg, the Sherman Act, 15 USC 1, 2) prohibit agreements between parties that unreasonably restrict trade, as well as preventing a business with a monopoly over certain products or services from abusing its dominant position or market power. Examples of the types of prohibited practices include bid rigging, predatory pricing, price fixing, product tying and vendor lock-ins.
Regarding patent licences, there is the concept of ‘patent misuse’, which could render a patent unenforceable with the exception of certain activities. While patent misuse is similar to antitrust, it addresses broader activities. That is, the key inquiry will be whether the patentee has impermissibly broadened the scope of the patent grant with ‘anticompetitive effect’ by imposing conditions that derive their force from the patent.
Are there any legal restrictions in respect of the following provisions in licence agreements: duration, exclusivity, internet sales prohibitions, non-competition restrictions and grant-back provisions?
Not all restrictions on competition are prohibited to the extent that they do not violate the US antitrust laws or constitute patent misuse. US patent laws also specifically exclude certain activities from the ambit of patent misuse unless the patent owner has market power in the relevant market relating to the patent (35 USC 271(d)). These activities include, for example, refusing to license a patent (35 USC 271(a)(4)) and conditioning license of one patent to the acquisition of rights in another patent (35 USC 271 (d)(5)). US courts do not appear to have addressed the issue of intellectual property and ‘internet sales prohibitions’.
IP-related court rulings
Have courts in your jurisdiction held that certain uses (or abuses) of intellectual property rights have been anticompetitive?
In the US, reverse-payments or ‘pay-for-delay’ arrangements whereby the patentee pays (or provides other value to) the accused infringer to delay market entry, which for the most part arise only in the pharmaceutical field, may be considered anticompetitive and prohibited. Pay-for-delay arrangements can arise in the pharmaceutical field due to the Hatch-Waxman Act’s statutory framework wherein submitting an Abbreviated New Drug Application seeking Food and Drug Administration (FDA) market approval is deemed infringement, while development activities are protected under the ‘safe harbour’ of the Bolar Amendments. The generic manufacturer, however, is not allowed to launch until receiving final market approval, which the FDA will not issue, if there is an infringement action, until the earlier of resolution thereof or expiration of the 30-month stay (King Drug v SmithKline, 791 F3d 388 (3d Cir 2015)).
The Supreme Court has rejected the argument that ‘reverse payment settlement agreements are presumptively unlawful’ holding that courts ‘reviewing such agreements should proceed by applying the 'rule of reason', rather than under a 'quick look' approach’ (FTC v Actavis, 570 US 136 (2013)). Thus, courts must find anticompetitive activities beyond mere compensation to hold a pay-for-delay arrangement in violation of the competition laws. While the various US appeal courts have addressed the issue to varying degrees, the Supreme Court refused to hear GlaxoSmithKline v King Drug, 791 F3d 388 (Fed Cir 2015), cert denied, 137 SCt 446 (2016), which held not to be anticompetitive a settlement where Teva sought to make a generic version of Lamictal and Glaxo filed an infringement action, which the parties settled without a cash payment. Instead, Glaxo agreed to permit Teva to sell generic Lamictal tablets, but not the ‘authorised generic’ before patent expiration. Thus, whether a pay-for-delay arrangement is anticompetitive is still open and will be addressed upon a case-by-case basis, analysing the entirety of the situation.
While Congress has sought to introduce legislation deeming pay-for-delay arrangements per se anticompetitive, there has been no substantial progress. Civil liability can additionally attach to pay-for-delay arrangements. In a series of settlements finally approved in July 2018, Medicis agreed to pay slightly more than US$76 million to consumers, sellers and insurers to settle a class-action lawsuit based upon Medicis’ Hatch-Waxman settlements under which Impax, Sandoz and Lupin were paid and agreed not to introduce generic equivalents (In re Solodyn (Minocycline Hydrochloride Antitrust Litigation, US District Court, District of Massachusetts, No. 14-md-02503 (2018)).
Indemnification, disclaimers of liability, damages and limitation of damages
Are indemnification provisions commonly used in your jurisdiction and, if so, are they generally enforceable? Is insurance coverage for the protection of a foreign licensor available in support of an indemnification provision?
Indemnification provisions are commonly used and are enforceable in the US. Insurance coverage is also available for the protection of a foreign licensor against the invocation of an indemnification provision. Agreements can include a clause requiring a party to carry insurance and to agree to indemnify one party or another in the event of a lawsuit.
Waivers and limitations
Can the parties contractually agree to waive or limit certain types of damages? Are disclaimers and limitations of liability generally enforceable? What are the exceptions, if any?
Parties may contractually agree to waive or limit certain types of damages, and disclaimers or limitations of liability are generally enforceable. Sales of goods under article 2 of the Uniform Commercial Code are subject to a non-infringement warranty, unless explicitly disclaimed by contract. It is common to disclaim indirect damages as well as incidental and consequential damages. Disclaimers and limitations on liability are usually enforceable unless unclear or unconscionable. Some disclaimers of liability are not enforceable, such as disclaimers for fraud or unlawful conduct.
Termination
Right to terminate
Does the law impose conditions on, or otherwise limit, the right to terminate or not to renew an international licensing relationship; or require the payment of an indemnity or other form of compensation upon termination or non-renewal? More specifically, have courts in your jurisdiction extended to licensing relationships the application of commercial agency laws that contain such rights or remedies or provide such indemnities?
Generally, US and state laws do not impose conditions on, or otherwise limit, the right to terminate or not to renew an international licensing relationship, or require the payment of an indemnity or other form of compensation upon termination or non-renewal. Typically, licences include termination provisions negotiated by the parties.
Impact of termination
What is the impact of the termination or expiration of a licence agreement on any sub-licence granted by the licensee, in the absence of any contractual provision addressing this issue? Would a contractual provision addressing this issue be enforceable, in either case?
In the absence of a contractual provision addressing the termination or expiration of the sub-licence, the sub-licence will no longer be in force when the licence expires or is terminated. A contractual provision addressing this issue would be enforceable in either case. In some instances, a sub-licensee may be permitted to ‘step into the shoes’ of the licensee if the original agreement with the licensee terminates.
Bankruptcy
Impact of licensee bankruptcy
What is the impact of the bankruptcy of the licensee on the legal relationship with its licensor; and any sub-licence that the licensee may have granted? Can the licensor structure its international licence agreement to terminate it prior to the bankruptcy and remove the licensee’s rights?
In the US, a bankrupt licensee may seek to assign the licence without the licensor’s consent (11 USC 365(a)), but typically a licence will either terminate automatically or is terminable upon such bankruptcy, and any such termination also terminates any sub-licences. On the other hand, a bankruptcy of licensors in patent licences is governed by the Intellectual Property Bankruptcy Protection Act of 1988, and 11 USC 101(35A), 101(39), 365(n) and 1502, under which, the debtor can either assume or reject the licence if it is executory, (ie, performance is still required. Nevertheless, if there is a ‘foreign main bankruptcy proceeding’ (ie, a foreign proceeding pending in the country where the debtor has the centre of its main interests), the US courts may apply the foreign law in the US bankruptcy proceeding (11 USC 1502(i)).
If the debtor assumes the licence, the license remains in place as if there had been no bankruptcy. But, if the debtor rejects the licence, it will be terminated, and the licensee may make seek money damages, or choose to retain the licence rights that existed on the date of the bankruptcy filing. Specifically, section 365(n) permits licensees to treat the contract as terminated and become an unsecured creditor for any monetary damages caused by the licence termination under sections 365(g) and 502(g) or retain its rights under the licence, such that the licence essentially continues as if never terminated such that the licensee must continue performance, including paying royalties.
Section 365(n) also provides the licensee with the additional right to enforce any exclusivity portion of the licence, such as, in the case of an exclusive licensee, preventing another party from infringing the licensed rights.
Despite the US’ commitment to international cooperation with foreign insolvency proceedings, the Fourth Circuit Court of Appeals has rejected the application of foreign (German) law, where the foreign main bankruptcy proceeding was in Germany, to protect the rights of cross-licensees because the German law conflicted with section 365(n) (Jaffe v Samsung, 797 F3d 14 (4th Cir 2013), cert denied, 135 SCt 66 (2014)), (ie, the cross-licences were not enforceable under German law). The Court further noted this decision was within the sole discretion of the US Bankruptcy Court, such that this may not always be the result.
Unlike patents and copyrights, trademarks are not expressly identified as intellectual property where US law permits a licensee the option to continue under a licence, but the Supreme Court has held that a trademark licensee’s continued rights depend upon whether the license would survive a breach under applicable non-bankruptcy law (Mission v Tempnology, 139 SCt 1652 (2019)).
Impact of licensor bankruptcy
What is the impact of the bankruptcy of the licensor on the legal relationship with its licensee; and any sub-licence the licensee has granted? Are there any steps a licensee can take to protect its interest if the licensor becomes bankrupt?
The impact of and impact on a licensee-licensor relationship as well as protections for licensees in the event of the same is discussed above.
Governing law and dispute resolution
Restrictions on governing law
Are there any restrictions on an international licensing arrangement being governed by the laws of another jurisdiction chosen by the parties?
While there is are no prohibitions on applying a foreign law specified the choice of law, a US court may decline to do so as against public policy or having no connection to the parties (Riley v Kingsley, 969 F2d 953 (10th Cir 1992)).
Contractual agreement to arbitration
Can the parties contractually agree to arbitration of their disputes instead of resorting to the courts of your jurisdiction? If so, must the arbitration proceedings be conducted in your jurisdiction or can they be held in another?
Parties may contractually agree to arbitration that is held before a tribunal in any agreed-upon (US or foreign) jurisdiction, the provision of which US courts generally enforce. Regarding patents, ‘any such [arbitration] provision or agreement shall be valid, irrevocable, and enforceable, except for any grounds that exist at law or in equity for revocation of a contract’ (35 USC 294).
Would a court judgment or arbitral award from another jurisdiction be enforceable in your jurisdiction? Is your jurisdiction party to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards?
US courts located in a jurisdiction (state) that has adopted the Uniform Foreign-Money Judgments Recognition Act will enforce a foreign judgment.
The US is a party to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 and foreign arbitration awards are enforceable in the US.
Is injunctive relief available in your jurisdiction? May it be waived contractually? If so, what conditions must be met for a contractual waiver to be enforceable? May the parties waive their entitlement to claim specific categories of damages in an arbitration clause?
There are two types of injunctions available in the US: preliminary and permanent injunctions.
A preliminary injunction is an ‘extraordinary and drastic remedy, that should never be granted as of right’ (Munaf v Geren, 553 US 674, 676 (2008)), and awarded only upon a clear showing that the plaintiff is entitled to such relief (Winter v NRDC, 555 US 7, 22 (2008)). A patentee is typically required to post a bond to reimburse the alleged infringer’s costs or damages if the preliminary injunction is later found to have been improperly granted.
Upon a finding of infringement, a permanent injunction may be granted where the patentee shows irreparable harm and insufficiency of money damages coupled with the balance of hardships favouring the patentee and the injunction being in the public interest (Apple v Samsung, 809 F.3d 633 (Fed Cir 2015). While courts are not required to enforce such a provision, parties may contractually agree to an injunction under predefined circumstances or may waive the right to (1) seek an injunction; or (2) entitlement to specific categories of damages in an arbitration clause.
The Trademark Modernization Act of 2020 further provides that a trademark owner enjoys a rebuttable presumption of irreparable harm when either (1) a Lanham Act violation is found; or (2) a showing of likelihood of success of prevailing.
Updates & Trends
Key developments of the past year
Please identify any recent developments in laws or regulations, or any landmark cases, that have (or are expected to have) a notable impact on licensing agreements in your jurisdiction (including any significant proposals for new legislation or regulations, even if not yet adopted). Explain briefly how licensing agreements might be affected.
US appeal courts issued a number of decisions in 2021 that affect patent licensing.
In MLC Intellectual Prop v Micron Tech, 2021 US App LEXIS 25710 (Fed Cir 2021), the Federal Circuit denied consideration of an expert damages opinion because it failed to establish that prior licences were sufficiently similar to establish a basis for a reasonable royalty.
The Fifth Circuit, in HTC v Telefonaktiebolaget LM Ericsson, US App. LEXIS 26250 (5th Cir 2021), held that Ericsson’s licensing offers satisfied its FRAND obligations, and that contract law, not patent law, guides whether an offer was reasonable.
The Trademark Modernization Action (TMA) was passed by the United States Congress on 27 December 2020, and its main provisions are effective as of 18 December 2021. The TMA creates two new ex parte proceedings for cancellation of registered marks that were never used in US commerce or were not in use as of the filing date of the US application or the Amendment to Allege Use/Statement of Use. Owners of US trademark registrations based on a foreign registration or extension of protection under the Madrid Protocol should be aware that under the new ex parte cancellation proceedings, a registered trademark that is not used in US commerce within the first three years will be subject to cancellation. The TMA also provides that irreparable harm should be presumed upon a finding of trademark infringement for the purposes of imposing permanent and preliminary injunctions. This resolves a split among circuits that formed after the Supreme Court decision in eBay v MercExchange, 547 US 388 (2006).
In 2021, the Music Modernization Act (MMA) took effect, providing an easier way for copyright holders to obtain royalties for their work. Specifically, the MMA changes the way songwriters and music publishers can be paid royalties when their work is streamed or downloaded on interactive streaming services. The MMA also established a nonprofit entity called the Mechanical Licensing Collective to collect and distribute royalty payments to copyright owners of musical works matched to sound recordings in its database.
These answers were prepared in November 2021 and thus do not include any later legislative or administrative changes that may later be enacted (eg, owing to Covid or as part of presently proposed legislation).
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Give the date on which the information above is accurate.
