IBT – Problem 9.4 Patent and Know-how Licensing Victor H. Bouganim WCL, American University

IBT – Problem 9.4IBT – Problem 9.4Patent and Know-how LicensingPatent and Know-how Licensing

Victor H. Bouganim

WCL, American University

Victor H. Bouganim, WCL, American University, Spring 2001

Patent and Know-how Licensing Patent and Know-how Licensing Problem 9.4, Textbook p. 865Problem 9.4, Textbook p. 865

Drill-Bit Manufacturing Company, Inc.– Delaware Corporation. Formed in 1949– Manufactures drilling cutting bits for oil rigs for the

U.S. market– Success is largely dependent on patented several

style of drilling bits– Has a larger share of the high end quality market

Event I - Licensing production in Germany Event II - Establishing subsidiary in Mexico


Licensing Production in GermanyLicensing Production in Germany NordMetall in Hamburg, a German company, is the

potential licensee Drill-Bit will move cautiously into Germany

seeking a transfer of technology via a licensing agreement rather than a wholly owned subsidiary

Drill-Bit proposes a draft of the licensing agreement to NordMetall

EU has adopted regulations on transfer of technology agreements


Draft License AgreementDraft License Agreement Grant

– Sub licensing– No Competition

Supply of Know-How– Technical Assistance– Engineering

Development Production and

Marketing– Manufacturing and sales

responsibility– Quality control– Marketing

Requirements

Licensing– Trademarks– Patents– Know-how

Confidential relations

– Royalty Initial Payment Records

Term– Termination– Continuing rights and

obligations– Surrender of rights

Governmental Approval


EU Competition RulesEU Competition Rules In its 1982 Maize Seed judgment, the European Court of

Justice addressed patent license restrictions under the Community’s competition rules.

Article 81(3) of The Treaty of Rome establishing the European Common Market [formerly Article 85(3)] addresses:– Actions affecting trade among member states– Actions restraining competition within the Common Market

Regulation 17– Sets up the investigatory and law enforcement

institutes for European competition law


Licensing and Competition Licensing and Competition Maize Seed Case, ECJ, 1982Maize Seed Case, ECJ, 1982

Open License Agreement

Do not involve third parties– including restrictions on

parties for non-competition – Necessary for the

dissemination of new technology

Valid

Closed License Agreement

Involve third parties– e.g. preventing third-

parties from export/import– impact on free competition

Violates European competition law


EU Commission Approval EU Commission Approval Regulation 17Regulation 17

Individual Exemptions– Businesses may prevent

enforcement action by the Commission by notifying the Commission in advance

– Notification suspends the possibility of fines

– Granted by the Commission for a limited period of time

Negative Clearances– Agreements which are

not violating competition rules

– Granted on the basis of the factual and legal background

– Indicates that the Commission sees no grounds at present to intervene


Group Exemptions Group Exemptions Regulation 17Regulation 17

Inapplicability of competition rules may be done for “Group Exemptions”: I.e. for certain types of agreements

Also known as policy notices Eliminate the need for individual exemptions and

negative clearance Rely upon business self regulation Example: Commission Regulations 240/96

on certain types of technology transfer


EU Technology Transfer RegulationsEU Technology Transfer RegulationsCommission Regulation 240/96Commission Regulation 240/96

Effective”: 31 January 1996 Regulates technology transfer agreements and

practices to avoid violations of competition rules Covers technology transfer agreements

– Pure patent agreements Acquisition and use of industrial property rights including patents,

designs and trademarks.

– Pure know-how agreements “Rights arising out of contracts for assignment of, or the right to

use a method of manufacture of knowledge relating to use or application of industrial processes”

– mixed agreements


EU Technology Transfer RegulationsEU Technology Transfer RegulationsRegulation 240/96 - The ListsRegulation 240/96 - The Lists

White List– Clauses in technology

agreements that will not be challenged for anticompetitive reasons

Permissible List– Clauses in technology

transfer agreements that are “generally not restrictive of competition”

Black List– Clauses in technology

agreements that require review because they usually violate competition rules

Gray List– All clauses restrictive of

competition within the scope of the ‘white’ or ‘permissible’ lists and not listed in the ‘black’ list.

– Subject to special procedure


EU Technology Transfer RegulationsEU Technology Transfer RegulationsWhite List ExamplesWhite List Examples

Exclusive licensing agreements– “an obligation on the licensor not to license other

undertakings to exploit the licensed technology”

Competition clauses– “an obligation on the licensor not to exploit the

licensed technology in licensed territory himself”

– “an obligation on the licensee not to put the licensed product on the market in the territories licensed to other licensees within the common market in response to unsolicited order”


EU Technology Transfer RegulationsEU Technology Transfer RegulationsPermissible List ExamplesPermissible List Examples

Confidentiality agreement– “an obligation on the licensee not to divulge the

know-how communicated by the licensor…” Assignment clauses

– “an obligation on the licensee not to grant sublicenses or assign the license”

Trademark and source indicator agreements– “an obligation on the licensee to mark the

licensed product with an indication of the licensor’s name”


EU Technology Transfer RegulationsEU Technology Transfer Regulations Black List examplesBlack List examples

Price dictation by licensor– “one party is restricted in the determination of prices…”

Manufacturing limitation clauses– “the quantity of the licensed products one party may

manufacture or sell or the number of operations exploiting the licensed technology he may carry out are subject to limitations…”

New development assignment clauses - “Grant-back”– “the licensee is obliged to assign in whole or in part to the

licensor rights to improvements to or new applications of the licensed technology”


EU Technology Transfer RegulationsEU Technology Transfer RegulationsGray List ProcedureGray List Procedure

Parties may notify the Commission on any ‘gray’ clause in their licensing agreements for exemption.

The Commission may exempt such clauses or opposed them.

The Commission has four months to oppose such exemptions. The four month period begins upon notification.

Opposition by the Commission may be withdrawn if the undertakings concerned have shown that the conditions of the competition rules are satisfied.


EU Regulations - AnalysisEU Regulations - Analysis Are there any provisions in the proposed draft licensing

agreement which might be objectionable to the EU Commission under the Regulations?– Refer to the “Black” and “Gray” Lists.

Can you assume that practices listed as the “White” and “Permissible” Lists can be safely incorporated in the agreement? – Must they be incorporated in a licensing agreement?

Is Regulation 240/9 consistent with EU obligations under TRIPS?


Control of Anti-Competitive PracticesControl of Anti-Competitive Practices

TRIPS, Article 40TRIPS, Article 40 Acknowledgement that some licensing practices

pertaining to IPR which restrain competition may have adverse effects on trade and may impede technology transfer.

WTO Members may adopt measures to regulate such practices, which may include -– exclusive grant-back of IPR by licensee– preventing challenge to the validity of IPR – coercive package licensing


Patent and Know-how Licensing Patent and Know-how Licensing Problem 9.4, Textbook p. 865Problem 9.4, Textbook p. 865

Drill-Bit Manufacturing Company, Inc.– Delaware Corporation. Formed in 1949– Manufactures drilling cutting bits for oil rigs for the

U.S. market– Success is largely dependent on patented several

style of drilling bits– Has a larger share of the high end quality market

Event I - Licensing production in Germany Event II - Establishing subsidiary in Mexico


Technology Transfer Laws in MexicoTechnology Transfer Laws in Mexico

Transfer of Technology Act, 1972– Restrictive to IPR owners– Full-scope regulation and supervision of technology

transfer agreements– Repealed in 1991 by the following new IP regime

Industrial Property Law, 1991– In line with the views of IPR in developing nations– Deregulation of technology transfer: Requires registration

of licenses, but not approval of their conditions– Comply with TRIPS and NAFTA


Technology Transfer Technology Transfer Registration in MexicoRegistration in Mexico

Requires the recordation of patent and trademark licenses and transfers

Does not extend to other types of technology transfer agreements

Concern over public disclosure of terms of the licensing agreement during the registration process

License must be recorded in order to receive legal protection


Mexico’s Industrial Property LawMexico’s Industrial Property Law

Signals a significant step forward in Mexico’s efforts to join the global economy

Increases the industrial protection afforded most industrialized nations

Has improved the business climate in Mexico and removed a barrier to direct foreign investment and technology transfer

Compulsory licensing provisions for patents – If the patent has not been

worked in Mexico within 4 years from the patent application or 3 years from the patent grant

– Subject to public interest reasons

Where production, supply or distribution of basic commodities would otherwise be impeded


Intellectual Property Controversy Intellectual Property Controversy

Industrialized Nations

Technology exporters Patent, trademark,

copyright and trade secrets protection is an essential part of their modern technology driven economies

Developing Nations

Technology importers

Intellectual property rights are seen as expensive barriers to economic improvement


NAFTANAFTANorth America Free Trade AgreementNorth America Free Trade Agreement

Current parties include– Canada– United States– Mexico

Accession: Article 2204– The agreement is not limited to the current parties– Other countries are able to join NAFTA

Implemented on 1 January 1994


NAFTA IP RegimeNAFTA IP RegimeChapter 17Chapter 17

Minimum standards for IP rights – Art. 1702 allows parties to enact higher standards in their

national laws. IPR covered by the IP Chapter of the NAFTA

Agreement – Copyright– Patents– Trade secrets– Trademarks

Geographical indications Industrial designs

– Layout designs of semiconductor integrated circuits


NAFTA IP - OverviewNAFTA IP - Overview

Enforcement– Articles 1714 through 1719

Dispute settlement– Chapter 20

Dispute resolution procedures

– Article 1714(5) parties are not required to “establish a judicial system for the

enforcement of IP rights distinct from” their existing systems.

Substantially similar to TRIPS


NAFTA IP PrinciplesNAFTA IP Principles

National Treatment Article 1703– “each party shall accord to

nationals of another Party no less favorable than that it accords to its own nationals with regard to the protection and enforcement of all IP rights”

Compare: TRIPS Art. 3

Article 1704 Control of Abusive or Anticompetitive Practices or Conditions– Parties may enact anti-

trust laws as long as they are consistent with NAFTA’s provisions

Compare: TRIPS, Art. 40


NAFTA and TRIPSNAFTA and TRIPSSubstantially similar

– Both attempt a harmonization through minimum standards of IP protection

– Both give effect to IP Conventions as a starting point and National Treatment principle

– Both applies principles for dispute resolutionMinor differences in some details of the

provisions


Problem 9.4 AnalysisProblem 9.4 Analysis Drill-Bit Mexican SubsidiaryDrill-Bit Mexican Subsidiary

Do you see any reason why Drill-Bit should not go forth with licensing technology to Mexico?

What steps should Drill-Bit take to secure its interest in transferring technology to Mexico?

Documents

IBT – Problem 9.4 Patent and Know-how Licensing Victor H. Bouganim WCL, American University