Wednesday, 9 November 2016

Headache in need of relief? 'Ugly' clauses in IP licences

Late last month an appeal was made, via the IPKat weblog, to crowd-source examples of what that blog described as "ugly" clauses in intellectual property agreements -- these being clauses that employ vague, ambiguous or otherwise objectionable obligations on either party.  Specimens of such clauses, appropriately anonymised, are requested for use in teaching by Amsterdam-based IP attorney and academic Alexander Tsoutsanis, whom some readers may also know as the author of a major treatise on the making of trade mark applications in bad faith. 

Examples of such "ugly" clauses -- which may require litigation before their meaning can be deciphered -- are given: clauses that impose 'per product' penalty clauses on licensees but fail to specify whether the penalty is incurred in respect of each item manufactured in breach of licence terms or for each type of product, as well as 'reserved sector' provisions in patent licences that do not specify the parameters of the reservation. It is not hard to think of other types of "ugly" clause.  The once-ubiquitous obligation on a licensee to use unspecified 'best endeavours' springs to mind, as well as the duty of the licensee to license improvements on a licensed technology. Then there is the perennial problem of the royalty payments being expressed as a percentage, with no clear indication as to what the payments are a percentage of. 

'Ugly' clauses can be found in pretty much every sort of IP contract, whether that contract arises from normal non-contentious trade or from the settlement of a dispute.  The strategic deployment of such a clause can be most effective, whether as a way of using the prospect of expensive litigation as a deterrent to challenging the meaning demanded by the party that imposed it or, quite simply, as a way of cementing a deal by papering over the cracks in consensus between the negotiating parties by drafting terms that are intentionally vague.

When reviewing a business's IP portfolio or seeking to place a value on it, the existence of an IP licence is easily identified by the due diligence process, but the effect of such a licence -- particularly when it is just sitting there quietly with no-one raising issues regarding its potential scope -- is much more difficult to estimate.  The easy cases are where a clause is so precise as to raise no issue of ambiguity or so vague as to be entirely unenforceable; but it's the clauses in between that cause the biggest headaches -- headaches from which there may be no relief.

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