Licensing in the Real World - A Primer on SEP License Agreements

In my early days of licensing, I believed my company had a competitive advantage because of the provisions we had in our standard patent licensing agreement.  We believed very few companies were using similar provisions in their licenses, and that our provisions were better than theirs.  Perhaps that belief was hubris or perhaps it was correct at the time.[1]  But, to the extent that used to be true, it isn’t anymore.  Over the years, license agreements (including SEP licenses) have become more and more similar to each other in their most important terms.  They typically contain the same types of provisions and even use similar language for at least the key definitions and the license grant.[2]

That is not to say that each license is exactly the same - even for SEP licenses, parties still negotiate the terms, and some SEP licenses have needlessly complex and picayune limitations and restrictions.[3] Nonetheless, these days the scope of the license, and even the phraseology, tends to be similar across different entities and different agreements.  In other words, most everyone who has negotiated a SEP license knows (a) which provisions will require negotiation (and thus will be at least somewhat different in each agreement), (b) which will be routine (and thus very similar in every agreement), and (c) what the basic license grant will be. 

For those who do not typically conduct such negotiations, this post is going to be a primer on the contents of a typical SEP license agreement with a focus on the key license terms.  The provisions cited in this post are from actual license agreements, but some of the language has been paraphrased or altered from the original. 

This post will not discuss other definitions (such as “Net Revenue”) and provisions (such as the mechanics of payment) that are in many license agreements.  Nor will it discuss the standard “miscellaneous” provisions such as rights in bankruptcy, severability, headings, counterparts, notice, interpretation, integration, waiver and the like, which are included in just about every agreement.  These excluded provisions (i) are rarely a topic of much negotiation and (ii) do not form a part of the material terms of the license itself.  This post also will not address confidentiality provisions in SEP license agreements – I will be doing a separate post on that issue.

So, let’s start with some of the routine provisions that appear in nearly every SEP license with some typical language used for those provisions.  Anything in brackets are things which tend to appear in some, but not all agreements or which tend to appear differently in different agreements.

1.       Definitions.  We saw from the Intel/VLSI decision (see Oh the Tangled Web Patent Investment Companies Weave) that definitions matter, sometimes quite a lot.  We also saw a pretty standard definition of Affiliate from that case which I am reproducing below. 

“Affiliate” means “[I]n relation to a specified Person (i) any Person that, now or hereafter, directly or indirectly through one or more entities, controls or is controlled by, or is under common control with, such specified Person, or (ii) any other Person, now or hereafter, that is deemed to be an affiliate of such specified Person under interpretations of the Exchange Act. As used in this Section 1.2, “controls”, “control” and “controlled” means the possession, direct or indirect, of the power to direct the management and policies of a Person, whether through the ownership of any percentage of voting interests of such Person, through contract or otherwise.”[4]

“Covered Third Party” means any person or entity that is implicitly or explicitly authorized by Licensee or its Affiliates as of or after the Effective Date, to exercise any legal rights or to perform any activities with respect to a Licensed Product, including without limitation suppliers, manufacturers, original equipment or device manufacturers, assemblers, replicators, integrators, distributors, resellers, value added resellers, customers and users, but only for the time period during which such authorization exists.

“Licensed Patent” means all patents and patent applications that [Licensor] or its Affiliates owns, or has a right to license [but excluding those for which a payment would be owed by Licensor to a third party for such license], as of the Effective Date [and for a period of X years thereafter] that is technically essential to the [name of standard] and all other patents, patent applications and patent rights claiming benefit, in whole or in part, of any of their filing dates including but not limited to any additional patents issued or granted via any divisionals, continuations, continuations-in-part, reissues and reexaminations, and any foreign counterparts of any of the foregoing.[5] 

“Licensed Product” means any and all past, present or future products, services, processes, technology, software, designs or other items owned, made, used or sold by or on behalf of, directly or indirectly, Licensee or any of its Affiliates, including any portion or component thereof, alone or in combination with other products, services, processes, technology, software, designs or other items, that conforms to or practices all or any part of the [name of standard].[5]

“Licensed Product Combination” means (a) a combination of one or more Licensed Products and/or (b) a combination of one or more Licensed Products with one or more third party products, services, processes, technology, software, designs or other items, provided that (i) the functionality, structure or other characteristics of the Licensed Products satisfies or is alleged or relied upon to satisfy, in whole or in part, an element or step of a claim in a Licensed Patent or (ii) the sale or use of such combination would, absent a license to the Licensed Patents, constitute infringement (whether direct, contributory or by inducement) of a claim in a Licensed Patent (assuming the existence of the knowledge or intent necessary to establish such infringement).

“Sale,” and cognate forms thereof, means sell, license, lease, distribute, dispose of, transfer and any other form or type of conveyance or supply.

2.       License Grant.  Here is a standard license grant including a provision giving Covered Third Parties (“CTPs”) a license as well.  Note that if a separate Covered Third Party license grant is not included in the agreement, the main license grant usually will contain at least some grant of rights to CTPs and/or there will be a covenant not to sue CTPs (or at least customers and distributors) for their use and distribution of Licensed Products.

License.  Provided that the payments under Section [xx] have been made, and subject to the terms and conditions of this Agreement, Licensor and its Affiliates grants Licensee and its Affiliates a fully paid-up, nontransferable, non-assignable (subject to Section Y [the general assignment provision in the Agreement]), non-exclusive, worldwide, irrevocable (except if the Agreement is terminated for non-payment), [royalty-bearing OR fully paid up], [perpetual or during the Term] license, with no right to grant sublicenses except as expressly allowed herein, under the Licensed Patents to:

(a)     Research, develop, make (including the right to use any apparatus and practice any method in making), use, import, export, offer to Sell, Sell, lease or otherwise dispose of Licensed Products, including the right to procure components therefore; and/or

(b)    Have Licensed Products made or otherwise provided for the use, import, export, offer to Sell, Sale, lease or other disposal (directly or indirectly) by Licensee or its Affiliates.

License to Covered Third Parties.  Covered Third Parties shall be granted a sublicense under the Licensed Patents, solely with respect to Licensed Products Sold by, for, or for the benefit of, Licensee or its Affiliates, to use, import, export, Sell, re-Sell, distribute, offer for Sale, or otherwise make available Licensed Products and Combination Products, including to practice or use a method or process claimed in a Licensed Patent that includes steps implemented by a Licensed Product and including to supply component parts for use in a Licensed Product.

3.       Covenant Not to Sue.  A bit of bootstrapping, but a covenant not to sue often is included: 

Subject to the terms and conditions of this Agreement, Licensor, on behalf of itself and its Affiliates, covenants not to sue or threaten to sue (or cooperate with, instruct, encourage, aid, or consent to a third party suing or threatening to sue) Licensee, its Affiliates or Covered Third Parties for infringement of a Licensed Patent by Licensed Products or Combination Products.  For clarity, this covenant not to sue does not apply to any third party product or service to the extent it infringes any Licensed Patent separately from any Licensed Product or Combination Product.

4.       Limitation on Assertions.  This type of provision is not always included but I have found it to be quite useful.  When present, this provision requires, for example, a Licensor to clarify to a  Licensee’s customers that the customers are licensed when they use the Licensee’s products.

In any communication or litigation filing by Licensor or its Affiliates alleging infringement of a Licensed Patent, the assertion of infringement shall not, in any way, rely upon or refer to any Licensed Product. For clarity, the limitation set forth in this Section applies to Licensed Products accused of infringement and does not apply if the allegation of infringement does not refer to or rely upon a Licensed Product or any functionality contained in a Licensed Product.  Upon written request from Licensee, Licensor shall promptly inform Covered Third Parties of their sublicense under the Licensed Patents for Licensed Products and Combination Products.

5.       Release.  The license is for the Licensee’s going forward activities.  The release is for past actions by the Licensee and sometimes by the CTPs.  It usually has equal or broader scope than the license.  Here’s a typical broad release: 

Provided the payments under Section [A] have been made, Licensor and its Affiliates shall automatically be deemed to, and Licensor, on behalf of itself and its Affiliates, successors and assigns, hereby waives, acquits, releases and forever discharges (a) Licensee, its Affiliates and their respective current and former predecessors, successors, officers, employees, agents, directors, shareholders and owners from any and all Claims that exist or may have existed prior to the Effective Date, known or unknown, that Licensor or its Affiliates may have against Licensee or any of its Affiliates and (b) any Covered Third Party granted a sublicense to the Licensed Patents in accordance with Section [B] from any and all Claims that exist or may have existed prior to the Effective Date, known or unknown, that Licensor or its Affiliates may have against such Covered Third Party for any infringement related to or arising from Licensed Products or Combination Products.  For purposes of this Section, “Claims” means any and all claims, counterclaims, third-party claims, contribution claims, indemnity claims, demands, actions, liabilities, damages, losses, attorney’s fees, court costs, causes of action, and all other claims of every kind and nature in law or equity, whether arising under state, federal, international or other law, which arise from or relate, in any way, to the Licensed Patents.

There is often also a separate release of unknown Claims.  This is frequently done under “California Civil Code Section 1542 (or any other similar law in any jurisdiction)” even when the agreement is not governed by California law. 

6.       Restrictions on Assignment of Licensed Patents.  There is typically a restriction to make sure the license travels with any change of ownership of a Licensed Patent:

Any assignment or transfer of this Agreement or ownership or title to any Licensed Patent or the grant of an exclusive license or other right to enforce any of the Licensed Patents shall be made expressly subject to the assignee’s prior acceptance of all of the terms and conditions of this Agreement.  Any assignment failing to comply with this Section [X] shall be null and void.

There are certain provisions that are more heavily negotiated than the ones detailed above.  The most significant of these, and the most heavily negotiated provision, is generally price and whether the amount paid will be a single payment, a continuing royalty or a bit of both.  But of course, this is exactly the provision that in FRAND committed SEP negotiations should not be substantially different across (at least similarly situated) licensees.  It seems to me that much of the confidentiality surrounding SEP licenses is designed to hide the total amounts (and the variation in amounts) companies are paying to license the same SEPs.  I will discuss this further in my next post in this series which will be about SEP licensing and secrecy.

Other, more heavily negotiated provisions that are important to the scope of the license grant include:

1. Term.   The Term of the License and of the Agreement, e.g. whether the license will be for the life of the Licensed Patents or something less than that.  Also, subject to negotiation for term limited licenses are when, and under what circumstances, may the license be extended beyond the term.

2. Double Dipping.  There often is a negotiation over whether the agreement allows for an attempt at double, triple or quadruple (or more) dipping (although no one calls it that).  There are a few ways that some licensors have attempted to do this.  Here are two of the most common ways:

a.       Exclusions of Some or All CTPs.  Some licensors try to limit the scope of the license so that it does not include some or all of the Licensee’s customers, component suppliers, OEMs and other Covered Third Parties.  Such exclusions generally stem from the desire of the licensor to try to collect double or even triple license fees for essentially the same product and same patents.[6]

b.       Other License Limitations. Another type of double (or more) dipping that sometimes comes into negotiations is the demand by some licensors to limit the license to a product’s implementation of a particular standard or a particular version of the standard.  In other words, if the same patent is essential to different standards (e.g. Wi-Fi and cellular) or to different versions of the same standard (802.11ac and 802.11ax for example) and the product implements both, then does a single license cover both implementations for a single royalty amount or are two separate licenses demanded.  I understand that this issue is particularly prevalent in the audio and video CODEC standards space where some licensors are attempting to license the same patents to the same licensee for the same products multiple times by limiting each license to a particular version of a particular standard.  Indeed, I understand that some licensors go so far as to license particular functionality separately (e.g. licensing encoding and decoding separately) even if done within the same product. 

3. Termination.  If the license does not have an ongoing royalty, usually the only grounds for termination is failure to pay the upfront payment.  If the license involves an ongoing royalty, there usually are other termination provisions including for non-payment of royalties, bankruptcy of the Licensee or for other material breaches.  There is not usually a big issue around termination but there sometimes are negotiations over whether and when the Licensee can terminate. For example, if the portfolio is small, there may negotiations and a provision allowing termination by the Licensee upon a finding of invalidity.

4. Arbitration.  Often licensors seek to have any disputes under the Agreement arbitrated.  This tends to keep the existence of the dispute, and all of the evidence from the dispute, secret.  When license disputes are litigated in court, there is typically open access to much of the proceedings and some of the evidence.  Arbitration also severely restricts a party’s ability to appeal a bad decision.  I expect after the quite high, recent decision in the Interdigital vs. Samsung arbitration, there will be a lot more licensors seeking arbitration provisions in their agreements.

5. Choice of Law/Venue.  The choice of law is not typically too much of an issue but certain forums are frowned upon by one side or the other.  The parties then usually chose a “neutral” forum.  Here’s a typical U.S. focused provision:

This Agreement and matters connected with the performance thereof shall be construed, interpreted, applied and governed in all respects in accordance with the laws of the United States of America and the State of [usually California, Delaware or New York, occasionally other U.S. states], without reference to choice or conflict of laws principles which would result in application of laws of any other state.

If there is not a provision requiring arbitration (or sometimes even if there is), there will be a venue provision setting venue for any actions under the Agreement in a particular court, usually a court in the venue of the choice of law but not always. There may be an exception to the venue provision for injunctions and similar actions in equity which are typically allowed in any court of competent jurisdiction. 

6. After Acquired Affiliates.  Sometimes there is a negotiation about whether, and to what extent, entities acquired after the effective date of the Agreement will be covered by the license.  Sometimes the licensor wants to exclude a specified list (typically entities with which that licensor is currently in litigation) or larger companies from being licensed under the agreement if that entity is later acquired by the licensee.  Here’s a simple After Acquired Affiliate provision:

In the event an Entity becomes a Licensee Affiliate after the effective date of the Agreement (“After Acquired Affiliate”), for purposes of all licenses, releases, covenants and other rights granted in this Agreement, such After Acquired Affiliate shall be treated as if it had been a Licensee Affiliate as of the effective date of the Agreement and such After Acquired Affiliate’s products and services shall be treated as if they had been Licensed Products as of that date. 

Here's a more complicated one that excludes both larger companies and companies subject to active Licensor infringement allegations at the time of acquisition:

If, after the Effective Date, Licensee or any of its Affiliate acquires a new Affiliate (“Acquired Entity”) and (i) the revenue of the Acquired Entity is below [insert amount] per year and (ii) Licensor has not provided the Acquired Entity with written notice regarding the Acquired Entity’s need for a license to the Licensed Patents at any time during the twelve months preceding the public announcement or public knowledge of the acquisition, then the licenses, releases, and covenants and other rights and obligations of this Agreement shall apply to the Acquired Entity, but only for the time after such acquisition by Licensee or its Affiliates, without any retroactive effect.

6. Divestment of Affiliates.  Not every Licensee cares about divested businesses – either because they do not foresee making any divestments or they are not willing to expend negotiating capital on what happens after divestment.  But some companies do care and, in that case, there usually is a negotiation over whether and to what extent the license will apply to the continuing business of a divested business or product line.  Here’s a typical mid-range divestment provision:

In the event that Licensee or its Affiliates transfers, divests or sells a product or product line, business unit, Affiliate or other assets to a third party (“Acquiring Third Party”), the licenses, covenants and other rights granted in this Agreement will extend to such Acquiring Third Party but only with respect to the transferred, divested or sold product or product line, business unit, Affiliate or other former assets and to any new versions, extensions and natural evolutions thereof.  For clarity, the rights granted hereunder shall not extend to any other products, product lines, business units, affiliates or other assets of the Acquiring Entity.

Conclusion

There are many places to find licenses (and license terms) on the Internet.  In footnote 2, I cite to some of them.  I will again note that SEP licenses can be quite, and in my view often needlessly, complex (and some of the ones I cite in footnote 2 are among the worst offenders).  However, at heart they tend to be very similar to each other.  In other words, for those of us who work in this field, there are no great mysteries about what the grant of rights or other provisions likely will be in a given SEP license agreement other than the license amount that is being demanded, and the license amounts received from anyone other than our own clients for those deals in which we were involved. 

[1]          Just to be clear, in this post I am discussing one-way (although sometimes they might have a grant back to the licensee’s SEPs for that same standard) SEP patent licenses, e.g. not true cross-licenses, not collaborative development agreements that also contain licenses, not patent licenses that also include transfer of technology or know-how, not agreements for the purchase of patents, or similar.  Those types of agreements tend to be more complicated with more bespoke provisions than in a standard one-way SEP license.

[2]          I attribute this convergence to a few factors.  First, there were the many years in the U.S. that multiple companies were sued in a single lawsuit.  During this period of time, different companies sued in the same lawsuit were often represented by the same law firm.  So when those companies settled by taking a license, the first drafters of each of those license agreement often were the same people.  They of course usually used the same or similar terminology in each of those drafts.  And, even when the agreements were not drafted by the same lawyer, production of license agreements in those lawsuits meant that lawyers across different firms saw a broad range of license agreements from different companies.  In addition, RPX Corporation, Allied Security Trust and similar entities that license patents on behalf of their members have standard license agreement terms that they use for their agreements.  Some of those are publicly available, e.g. Sublicensable-Rights-Agreement-includes-standard-PLA-and-direct-to-affiliate-PLA-updated-3.15.23.pdf.  Others are available only to members but that still means a lot of licensees, and a lot of licensors, have seen them.  Many of the entities that have entered into RPX, AST or similar agreements now seem to use similar language all of their license agreements.  In addition, there have been a rise in companies and websites that provide license agreement templates, sample agreements or excerpts of license agreement provisions.  Finally, the Internet is rife with examples of patent license agreements and templates whether disclosed in litigation (e.g. the Intel VLSI case) or because the U.S. Securities and Exchange Commission rules require companies trading on U.S. stock exchanges to publish (sometimes with a few redactions) their “material” license agreements or just because. In addition to the AST template, here are a few other examples: Patent License Agreement (Nokia/Interdigital); MCP_License_Agreement_Template.pdf (Sisvel’s “Mobile Communication Master Agreement); sec.gov/Archives/edgar/data/1649009/000121390020023370/ea125930ex10-8_siyatamobile.htm (Siyata Mobile/Via Licensing for LTE); License Agreement (Interdigital/LG); Standard Patent License Agreement (Gemalto); EXHIBIT 10.1 ------------ PATENT LICENSE AGREEMENT THIS AGREEMENT made... | Law Insider (Network-1/Microsemi).

[3]          If you take a look at some of the examples I cited in footnote 2, some license agreements are overly long and (in my view) needlessly complicated.  They often use ten words where two will do.  For example, in drafting this post I reviewed an exemplary license put out by a licensing pool.  It’s over 30 pages long and has more than 5 “Whereas” clauses, more than 30 defined terms just in the definitions section and more elsewhere in the agreement, complex provisions regarding what happens if a participant withdraws from the pool and dense provisions governing revenue, payment, taxes, reporting, and even the keeping of books and records.  Nonetheless, in general, the most important definitions and the license grant are very similar to what I have described in this post.

[4]          This definition comes straight from the decision in the VLSI/Intel case by the Delaware Court of Chancery discussing the agreement which can be found here: Download.aspx.

[5]          These two definitions are from SEP licenses.  Non-SEP “pure” patent licenses typically contain very similar definitions, and very similar provisions, but obviously without the limitations to standard essential patents or products that implement the standard.

[6]          The doctrine of patent exhaustion may limit some of these mechanisms for double-dipping in those jurisdictions that recognize the doctrine.