Patent prologue

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Vivek Ranjan at Singh & Singh Lall & Sethi outlines the perks and problems associated with patent licensing

One of the many things that we know about patent rights is that these rights incentivize the innovator. However, incentives are only half the purpose such rights serve in a modern economy. The economic purpose of intellectual property law today is not just to reward innovators, but also to allocate advantages of the commercial success of the licensed subject matter.

An innovator reaps the benefits of their patent either by working the patent itself or in other cases, through patent licensing. In my opinion, the former is a bit risky, particularly due to strong working requirements in jurisdictions such as India. The failure of a patentee to sufficiently work an invention could throw up compulsory licensing-like provisions, which are not only a contentious issue but also an involuntary process of licensing.

Voluntary patent licensing, on the other hand, is a smoother approach as it not only eliminates the hurdles of infrastructural requirements needed to sufficiently work an invention, but also generates cash flow for innovators without any substantial investment in the market. But beware of patent licensing, for while it may raise cash, it is also a risk which may lead to costly litigation.

Patent licence basics

A patent licence is essentially a contract. It combines individual and collective gains by rewarding an innovator while also benefiting society. It is therefore important for businesses and industries to understand the intricacies of licensing that may affect royalty, usage and therefore, the future business of the parties under the licence.

Vivek Ranjan
Vivek Ranjan

In general, royalties are the crux of a patent licence. Royalty determination involves choosing the best business arrangements based on which the royalty rate can be calculated. These arrangements can adopt well established economic theories or even cross arrangements among the parties as royalty. In addition, the rate charged may also vary with the element of invention involved in the licensing. For example, parties may choose to have one rate for the first set of claims and a different rate for the second set of claims. The minimum play of law during the course of bargaining not only gives the fair play to the market to allocate resources in an efficient manner but also lets the “invisible hand” decode the best position of the patent in a market.

Needless to say, the law does not interfere during the negotiation of a business arrangement, however, this cannot be an excuse for enforcement of a bad patent licence. Thus, it is important to ensure that the licence terms do not leave any ambiguous situations before the courts.

Benefits and barriers

Patent licences do not enjoy the same privileges as those of private contracts. However, there are some fundamental similarities between the two, the most important of which is the emphasis on the intention of parties at the time of execution of the patent licence agreement in a dispute. However, in absence of a clear intention emerging from the patent licence, the court may delve into other sources for interpretation such as previous contracts, negotiations and policies. It is pertinent to note that these are generally considered weak sources of interpretation for a private contract unlike in patent licences where such sources may strongly favour certain parties. Patent licences can also be affected by a “most favoured licensee” clause, which could substantially affect the interpretation of a patent licence based on a third party licence. The court may appoint experts to judge the feasibility of a proposition in a licence to determine the real intention of parties.

Patent licences are also limited by the principles of common law. An example in this regard is a clause mandating modification or escalation of royalty in a patent licence. In general, these clauses are viewed with suspicion in common law practice. However, it is not rare for the courts to excuse such clauses based on good faith, modification due to unforeseeable circumstances, and reasonable or equitable explanations. Some jurisdictions hold such clauses invalid in the absence of an independent adequate consideration.

There are other similar issues pertaining to patent licences which must be looked after before concretizing a deal. It is always advisable to work on patent licences, not just for the sake of business advantages, but also for enforcement purposes. Some perspective from lawyers handling patent litigation on such issues could end your future litigation costs today with only an advisory fee.

Vivek Ranjan is a senior associate and a member of the litigation team at Singh & Singh Lall & Sethi. He focuses on pharmaceutical patents, drug regulations and competition law issues. He can be reached at [email protected]

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Email: [email protected]