Bensen on How Patent Law Can Alter State Contract Law Rules of Construction for Patent License Agreements

Bensen on How Patent Law Can Alter State Contract Law Rules of Construction for Patent License Agreements

 A patent license agreement is a contract and, naturally, the proper construction of a patent license agreement is generally a matter of state law. However, certain principles of federal law respecting patents create exceptions to the rules of construction that would normally obtain. Those exceptions create a trap for the unwary drafter.

Excerpt:

As practitioners are well aware, a patent license agreement lies at the intersection of state and federal law. A patent license agreement is a contract and, as such, will be construed for the most part under applicable state law principles. However, a patent license agreement concerns a federally created right and, thus, implicates to some extent federal policy. As a result, not all provisions in a patent license agreement will necessarily be construed and enforced the way they would if rights in some other form of property were at stake.


Below are eight questions, each concerning a common patent licensing agreement provision or presumption. The answer to each requires a departure from the rules that one would expect to apply were the construction and enforcement of the provision strictly a matter of state law.

Note: "State Law," as used below, refers to state law as it would or would likely exist in the absence of federal patent law addressing the same subject matter.

DISCUSSION

1. Is a nonexclusive patent license assignable? It is not uncommon for a point in time to come that a patent licensee desires to assign its rights under a nonexclusive license agreement to another party.

State Law. A contract other than a personal services contract is generally presumed to be assignable. 9 Corbin on Contracts §§ 47.3, 47.6 (Matthew Bender). Thus, a party that does not want its counterparty to assign their contract must expressly prohibit or limit the counterparty's right to assign.

Federal Law. It cannot be assumed that a patentee would be willing to let a competitor obtain a license to its patent by assignment of a license agreement and, thus, a nonexclusive patent license is not presumed to be assignable. Troy Iron & Nail Factory v. Corning, 55 U.S. 193, 216 (1853) [an enhanced version of this opinion is available to lexis.com subscribers].

In Troy Iron & Nail Factory, the Court set forth the basic rule that a nonexclusive license silent as to assignability is personal and nonassignable. Modern courts have carried forward the rule. Seee.g.Everex Sys., Inc. v. Cadtrak Corp. (In re CFLC, Inc.), 89 F.3d 673, 679 (9th Cir. 1996) [enhanced version]; Unarco Industries, Inc. v. Kelley Co., 465 F.2d 1303, 1306 (7th Cir. 1972) [enhanced version]; see also Cincom Sys. v. Novelis Corp., 581 F.3d 431, 436 (6th Cir. 2009) [enhanced version]. In a second case, the Court applied Troy Iron & Nail Factory to hold that a party that acquired the assets of a dissolved corporation did not receive the dissolved corporation's implied nonexclusive patent license because in those circumstances, the license could not pass to the acquiring party. Hapgood v. Hewitt, 119 U.S. 226, 234 (1886) [enhanced version]. Today, contrary to the general rule that the surviving company in a merger is the assignee for the merged company's contracts, the surviving company will not receive the merged company's nonexclusive patent licenses unless the license agreements are expressly assignable. E.g.Bd. of Regents v. BASF Corp., 2007 U.S. Dist. LEXIS 82497, **48-49 (D. Neb. Nov. 6, 2007) [enhanced version].

For a discussion of the nature of a nonexclusive licensee, see 2 Roger M. Milgrim & Eric E. Bensen, Milgrim on Licensing § 15.34 (Matthew Bender) [lexis.com subscribers can access this publication online].

An alternative approach would be to put the burden on the patentee to expressly prohibit assignment, which would allow the patentee to protect itself if it chose to while bringing the rule for patent license agreements into line with general principles of contract law. Courts have not adopted that approach, it appears, because a nonexclusive license agreement may arise by implication. See Hapgood, 119 U.S. at 234, For example, an employer may have a "shop right," a form of nonexclusive patent license, in an employee's patented invention simply by virtue of the employee's using the employer's resources to create the invention. In those cases, there would be no opportunity for the patentee to negotiate an assignment clause. Thus, were the usual default rule respecting assignment to apply to nonexclusive patent license agreements, either implied licenses would be assignable, which would run counter to the policy concerns addressed above, or there would be two default rules for nonexclusive patent licenses: one for written licenses and one for implied licenses. The latter option would not be entirely unworkable, but it would not achieve uniformity either.

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