Crucial clauses in global IP transactions and the importance of local law advice
When it comes to cross-border commercial transactions involving intangible assets, local legal advice can be critical to ensuring the enforceability of key contractual terms. In the following Q&A, Paul Armitage in Canada, Vivian Desmonts in China and Mathilda Davidson in the United Kingdom discuss the local law enforceability issues of some key clauses when commercialising intellectual property.
Paul Armitage (PA): Let’s start by considering the commonly used clause of the IP grant-back. If you are an IP licensor, you may wish to access improvements made by your licensee, either during the term of the agreement or at its end. This would typically be achieved by way of a grant-back, through either an assignment or licence of the licensee's improvements back to the licensor. From a licensor's perspective, a grant-back can be a very desirable clause that serves different purposes. These include enabling the licensor to benefit from further developments to its valuable intellectual property, which can then be embedded into its product, or by preventing its licensees from patenting licensee improvements and blocking the licensor. However, when writing grant-backs into agreements, local law requirements can vary.
Vivian Desmonts (VD): It is particularly important in China to obtain access to improvements as many factories develop their own technologies and may even become competitors of their clients. Let’s take the example of a Canadian purchaser of goods to be manufactured by a supplier in China under an original equipment manufacturer arrangement, and this purchaser/licensor brings its own technology to the supplier. If, during the manufacturing process, the supplier develops a technology improvement that is patentable, it would be considered the inventor of the improvement and will normally own IP rights in it, although it has developed this improvement thanks to its client's technology in the first place.
Chinese law has changed only recently: parties may now specifically agree in their written contract that any technology improvements made by the licensee should be owned by the licensor, provided that “reasonable compensation” is paid to the licensee, in addition to the normal purchase price paid by the licensor for the goods.
Mathilda Davidson (MD): This also requires consideration if you are contracting in the United Kingdom. Under English law, the position on ownership of improvements is similar to that in China. So, if the agreement is silent, ownership will typically follow inventorship and the creator of the improvement will own it. Also bear in mind that if you are considering provisions such as an automatic assignment or exclusive licence-back of improvements from the licensee to the licensor, then you should also have an eye to local competition law requirements.
PA: Let’s move on to the right of first refusal (ROFR) and its close cousin, the right of first negotiation (ROFN). The basic theory behind these clauses is that, if you find a company that has something useful for you once, there's a good chance that it will have something useful for you again. Thus, these clauses give the holder of the right first choice over new offerings by its licensor, which could include a new product, territory, application, field of use and so on. The essential difference between a ROFR and a ROFN is that a ROFR provides you with the right to match a specific deal offered to the other party, whereas a ROFN permits you to negotiate a deal with the other party. While these clauses are beneficial to the holder, one question to ask is what rights exactly are you acquiring under a ROFR or ROFN, based on local law enforceability issues?
MD: From an English law perspective, there may be questions about just how enforceable these types of clauses are. When I see provisions of this nature in contracts, they typically don't amount to much more than an “agreement to agree”, which is not enforceable under English law. So, I would say that, from a commercial perspective, they can be a useful item in your IP contracting toolkit, but in reality, the most you can achieve is a right to participate in any future partnering or sale discussions.
PA: The treatment of joint intellectual property is another area in which local law advice can be crucial. If your agreement says only that intellectual property will be “jointly owned”, what rights do your co-owners have under the applicable law, and if these are different to what the parties intend, what clauses should you include in your agreement to ensure that the parties’ intentions are reflected? Under Canadian law, for example, each co-owner can assign their entire right in a patent to another party, but cannot license their rights without the consent of the other co-owners. The policy behind this is that assigning one’s entire interest does not dilute the other co-owners’ interests, and therefore is permitted by Canadian law, but granting licences to others could dilute, and therefore requires the co-owners’ consent.
VD; Chinese patent law authorises co-owners to independently use the patent or license the patent to a third party by way of a non-exclusive licence. In that event, any profits from a licence to a third party must be shared with the other co-owner. For joint ownership of trademarks, Chinese law isn't so clear. Our recommendation is to conclude a detailed written contract on the rights and obligations of each co-owner, making sure that this is duly registered with the relevant administrative authority for trademarks in China.
MD: In the United Kingdom, each joint proprietor of a patent may use the patented technology itself, but cannot license, assign or mortgage it without the consent of the co-owner. This is even more restrictive than the situation Paul outlines in Canada.
PA: The takeaway, therefore, if you are dealing with joint intellectual property in an agreement is that it is important to obtain legal advice on what that means under the existing law of the agreement, and if you subsequently wish for different treatment, make sure that it’s written into the agreement.
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