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Navigate carefully around duty-to-enforce clauses in license agreements

This article appeared in the February 2016 issue of Technology Transfer Tactics. Click here for a free sample issue or click here to subscribe.

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Duty-to-enforce clauses in IP licenses are often tricky, since TTOs and their licensees are typically at polar opposites. Licensees want the university to commit to enforcement, and universities want no part of it. Something’s gotta give.

Experts caution TTOs not to tie your hands in a technology license by committing in writing to any specific duty to enforce the patent. However, they say, recognize that the holder of an exclusive license may well expect some protection — or at least some help from you if the licensee decides to aggressively pursue an alleged infringer. Your best bet: Include language granting a right to enforce to the licensee, under certain circumstances, but reserve specifics for face-to-face conversations on a case-by-case basis.

“Our position is not to accept a duty to enforce, but to allow for a right to enforce with our consent,” comments Jim Baker, PhD, executive director of innovation and industry engagement at Houghton’s Michigan Technological University. “We qualify that our consent shall not be unreasonably withheld to give the licensee at least an arguable lever against us unreasonably denying its right to litigate.”

Some would call that the proverbial “argument waiting to happen,” he concedes, and notes that “most licensees object to this premise, some more strenuously than others.” So, he explains, “our approach is to negotiate whatever conditions we need to create mutual comfort short of an outright and unqualified duty to or right to enforce based on all of the circumstances around the license.”

The matter comes up, he adds, because “licensees always ask for either a duty to or right to enforce clause under the argument that the license isn’t very valuable without it.” He cites this analogy as typical of a licensee’s stance: “We are selling a ticket to a VIP box, but we don’t provide for a means to escort anyone out of the box who doesn’t have a ticket.”

The technology transfer office, though, can counter that “ill-advised enforcement has multiple negative consequences to all parties involved, including time and effort lost, financial expense, ill will and challenges to patent validity.” MTU’s position is “we need to provide a process for a constructive discussion about the right to or duty to enforce, but that needs to be a true conversation about the merits of the enforcement as well as the realistically probable upsides and downsides.”

Downside of duty to enforce

Those upsides and downsides can be quite up and down. One tech transfer expert recounts a case where a licensee used an open-ended right to enforce against one of its competitors for what appeared to be the sole purpose of creating trouble for that competitor. The case was settled before going to trial, so the merits were never fully determined. But the enforcement action resulted in substantial — and unnecessary — ill will between the licensor and the licensee’s competitor, as well as unnecessary costs for all involved.

Duty to enforce can cut both ways, and in some cases it’s the licensee who bears responsibility, notes Michael Shore, a partner at Dallas’ Shore Chan DePumpo LLP. “The one who bears it generally has a duty to monitor the market and seek either an injunction or damages,” he says. In some cases, an exclusive licensor can put the licensee on notice of infringement and make a demand that the target be approached for licensing or sued. “If the licensee refuses, the licensor then sometimes can have the option of directly suing the target itself and the original licensee loses its exclusivity,” Shore notes. “So there is either an option to sue in order to maintain exclusivity, or a requirement to sue to maintain exclusivity. It varies a lot.”

Here’s how it works in practice at one major state institution: “At the University of California, the authority to enter into patent litigation is reserved by the vice president of legal affairs in the UC Office of the President,” says David Gibbons, PE, MBA, assistant director of physical sciences licensing in the UC San Diego TTO. “As this authority is not delegated to the individual UC campus licensing offices, nor even the individual campus’s general counsel, we cannot agree to any form of a duty to enforce clause when licensing. Likewise, we cannot commit the UC to join in any licensee-initiated litigation without the head office’s consent, on a case-by-case basis.”

It doesn’t come up that often, he adds. “In my experience, I have not had a company request this type of clause,” he says. “More typically, we give exclusive licensees the first right to enforce the patent, following a consultation with the university on the merits of the case.” If standing becomes an issue for the licensee, he points out, the university reviews that on a case-by-case basis as well. “But,” he stresses, “we have a very good track record of supporting our licensees when required.”

Wesley D. Blakeslee, JD, CLP, principal at Blakeslee LLC and formerly a TTO executive, takes a similarly measured approach to enforcement clauses. He notes, as a bottom line, that “no one wants to assume an undefined obligation, such as being obligated to take action against a future unknown infringer.” So typically “you only see even a request for a duty to enforce where there is at the time of the license a known infringer,” he says. “Then as licensor you might want to negotiate the obligation of the licensee to go after the infringer. As the licensee, you may be willing to agree, but will want to retain the right to settle or pass the expense of continuing to the licensor.”

He adds: “Universities generally would not want to be obligated to go to court. Typically the licensee requests the right, but not the duty, to enforce.”

When the license is exclusive, the licensee is likely more likely to want enforcement protection. “Most or all exclusive licensees are likely to request or demand a duty to or right to enforce clause,” Baker comments. “The means and willingness to litigate for the prospective infringer should certainly be a consideration in any decision to litigate. Other business relationships with the prospective infringer should also be a consideration; however, in our view, it is not fair for us to argue against litigation when requested by a licensee solely based on an unrelated business relationship with the prospective infringer.” He adds that non-exclusive licensees may also bring up enforcement clauses, arguing “unfair treatment for a requirement to pay when others don’t have to.”

But exclusive licensees represent the biggest challenge when it comes to enforcement clauses. Shore details the three most common contexts:

  • “The most [typical] is where the licensee pays a lower royalty but in exchange bargains to enforce the patent against third parties and split the proceeds of licensing with the licensor,” he explains. That relieves the financial pressure on the assignee to go out and investigate infringers, pay for licensing efforts and, if necessary, pay for the litigation.
  • The second scenario is the licensee that pools patents in a particular area with the idea that the patents as a pool have greater value than their individual parts. “The entire purpose of the licensing entity is to pool and enforce,” Shore notes, “taking the decision making away from the licensor.”
  • The third context is the start-ups whose only assets are the technology they have developed. “Many of them are spinoffs from universities or larger companies,” Shore says. “Their enforcement clauses are often tied to the overall commercial success of the company penetrating the market.” Here’s an example: A start-up may be required to pay X amount in minimum royalties during the first five years, with an escalation clause. Many times, a start-up will put in an enforcement clause that states even if its products are not successful, it can meet its royalty minimums by suing others for using the technology and forwarding proceeds to the licensor.

Seeking balance

Ed Walsh, co-chair of the Post-Grant Proceedings Group at Boston’s Wolf Greenfield & Sacks PC, emphasizes alternatives to outright enforcement duties. Absent a specific duty to enforce, he explains, “you’re more likely to have clauses that balance the economic playing field, like reducing the royalties the licensee has to pay. A lot depends on the circumstances and expectations of the parties — and the price the licensee is paying for the license.”

Those circumstances, he adds, include situations where somebody’s infringing, but it’s a very minor infringement, so the enforcing party could spend more enforcing than it could possibly hope to collect. Another is a deep-pocketed infringer who has “way more money than you have to spend” on infringement litigation. The infringer might also be a major contributor to your institution. Shore adds: “I have seen situations where companies have provided university licensors with manufacturing equipment, laboratory equipment and other tangible assets in lieu of cash, so an enforcement clause is just another thing in the mix of compensation to be adjusted to suit the needs and capabilities of the parties.”

The best argument against enforcement clauses is they “create an environment likely to raise future conflicts,” Shore says. “The exclusive licensor and licensee often will disagree on whether a third party should be sued. Do the parts infringe? Is the value of the expected royalties high enough to justify the cost of litigation? Does the licensee have other business ties to the target that could be adversely affected?” Such disagreements can lead to disputes and challenges to whether the enforcement clause is being properly followed.

When you do opt for an enforcement clause, there are ways to make it work to your advantage. “We don’t have a litigation budget, so our approach is to have the licensee do all of the legwork and to reimburse us for our out-of-pocket costs for participating in any litigation,” Baker explains. The licensee is allowed to recover those costs off the top of any proceeds from the litigation.

“If we strongly support the litigation and if we need to participate in the costs, we are open to negotiating that,” he adds, “but we require the ability to make an investment decision based on the likelihood of positive outcomes as well as affordability.”

Here are Shore’s additional tips:

  • Make the terms of when enforcement is required very clear and objectively measurable.
  • Make the consequences of not enforcing when required very clear and automatic, but reserve some time for renegotiation and adjustment. The power to maintain or take away exclusivity should sit with the licensor, as it was the licensor who originally gave up the right to sue on its own, so it should get that right back if the circumstances do not allow it to force the licensee to enforce the patent.
  • Always have an objective measure of when the enforcement is required, say, 90 days after notice of an identified infringer or tied to royalty income from the licensee. Never have an enforcement clause without a sufficient period to determine if enforcement is warranted in case there is a disagreement.

The bottom line is this, Baker says: “If we are going to have a patent and license the patent, we need to be prepared for the prospect of litigation, since there is no sense owning a gate if you never plan to lock it. But we try to pursue all possible paths available prior to proceeding with formal enforcement.”

His office won’t accept an outright and unqualified duty or right to enforce, he stresses. “We provide mechanisms to get to a reasonable and mutual decision on enforcement,” he says, “including robust dispute resolution processes and language if necessary to mitigate disagreement. This can be a sticking point that takes a lot of work to get through, but we have not found it to be a dealbreaker yet.”

Contact Baker at 906-487-2228 or jrbaker@mtu.edu; Shore at 214-593-9140 or shore@shorechan.com; Gibbons at 858-534-0175 or dgibbons@ucsd.edu; Blakeslee at wes@wesblakeslee.com; and Walsh via Julie Parker at 617-646-8378 or jparker@WolfGreenfield.com.


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