Should Exclusive Licenses Come With A Health Warning?
Licensing a patent is often seen as a way of amicably settling a dispute, or bringing a product (covered by the patent) to market, where the owner of the patent is unable to do so themselves.
Exclusive licenses are often seen as a treasured right, in that they grant to the licensee exclusivity to exploit an invention (even excluding the owner of the patent) and the right to initiate proceedings for infringement of the patent. However, there are certain requirements for a licence to be deemed exclusive which, if not met, can mean an exclusive licence by name may not be considered an exclusive license in the eyes of the law.
In this article, we take a look at recent case law surrounding exclusive licensing and how care should be taken both when negotiating and acquiring an exclusive license.
Meaning of exclusive license
The term ‘exclusive license’ is defined under UK Patent Law as “…a license from the proprietor of or applicant for a patent conferring on the licensee, or on him and persons authorised by him to the exclusion of all other persons (including the proprietor or applicant), any right in respect of the invention to which the patent or application relates…”.
The meaning of ‘exclusive license’ was specifically further examined in two cases during 2017. One case being Illumina v Premaitha  EWHC 2930 (hereinafter “Illumina”) and the second being Oxford Nanopore Technologies & Anor v Pacific Biosciences of California, Inc. & Anor  EWHC 3190 (Pat) (hereinafter “Oxford Nanopore”).
In this case, the Court held that a grant of a license to a company “and its affiliates” was not exclusive, even though the affiliates were under the company’s control. The Court did however hold that a license which is subject to reserved rights, which included the grant of a non-exclusive license to the Hong Kong Government, could still be exclusive.
In the case of Oxford Nanopore, a patent was owned by a first party (A) and licensed to a second party (B). The license was stated to be an exclusive worldwide license but subject to a provision that a third party (C) could request a non-exclusive license. The request was yet to be made at the time of the proceedings.
B tried to sue an infringer, citing its standing as exclusive licensee which, under UK Patent Law (section 67 (1) of the UK Patents Act), enables it to sue infringers. The infringer claimed that B was not an exclusive licensee, as the license contained the provision that C could request a non-exclusive license — even though a request had yet to be made.
The Court held that the license was exclusive, since at the time, the option available to C had not been exercised. Therefore, B could sue for infringement.
The overriding teaching of this case is that an exclusive license is not an exclusive license because it says so, but rather because a proper construction of all relevant clauses of the licence confirms it is exclusive. Merely stating a license is exclusive does not make it so. What’s more, it was held that an exclusive license may become non-exclusive.
This case also confirmed that a plurality of exclusive licenses may exist at once and all relate to the same intellectual property right, in that more than one exclusive license to exploit the same invention may exist.
It may be, for example, that a first exclusive license can give the respective licensee exclusive rights to exploit the patented technology in a first sector and a second exclusive license gives the respective licensee exclusive rights to exploit the patented technology in a second sector. That is to say, two exclusive licenses to the same patent would exist but for two different sectors.
The confluence between intellectual property and competition law centres on licensing. Indeed, the Technology Transfer Block Exemption Regulations essentially promote licensing of intellectual property rights as being pro-competitive by exempting patent licenses, in certain conditions, from the ambit of competition law and the severe fines that can be given out for breaches of the same.
When it comes to exclusive licenses, the justification often given for granting one is that it enables a new product to be brought to market. However, an exclusive patent license could well give the exclusive licensee a dominant position in the market for the products covered by the patent. As a result, such arrangements are closely scrutinised in the European Union.
Holding a dominant position in a market is not in itself unlawful. However, those with such a dominant position are considered to have a special responsibility to behave in a way that does not damage or hinder the development of competition. Abusing a dominant position can result in substantial fines and behavioural commitments.
That is to say, in acquiring an exclusive license to a patent, an exclusive licensee may need to examine its wider behaviour with respect to its competitors or they may find themselves subject to an ‘abuse of dominance’ investigation and liable for some heavy financial penalties.
Behaviour which is considered to be particularly abusive is predatory pricing, excessive pricing, fidelity rebates, refusal to supply, tying and discrimination between undertakings (particularly with respect to price). Some of these behaviours may, almost overnight, become subject to much higher levels of scrutiny than before.
Exclusive licenses are attractive as they enable licensees to engage in the exploitation of a patented invention to the complete exclusion of others. It also provides them with the right to sue infringers. However, for the reasons given above, caution is advised.
A license is not exclusive simply because of the word ‘exclusive’ is used. Additionally, multiple exclusive licenses may exist for the same patent.
A detailed consideration of each clause of the agreement and an investigation of the presence of other exclusive licenses should be part of the due diligence procedure during negotiation.
It’s not always possible to establish all the facts during due diligence, as some information will just not be accessible. Any points of doubt should find their way into warranties in the license if they are crucial to the licensee’s commercial activity.
That said, it may be possible to coexist nicely with other exclusive licensees in the picture if the respective field of use or the territory is different.
Finally, as the acquisition of an exclusive license may result in a dominant position in the market, the exclusive licensee should carry out a risk assessment to investigate whether its current relationship with its competitors could land it in hot water with the competition authorities after the license has been signed.
In answer to the question posed at the start of this article, exclusive licences can be valuable but should come with a health warning. The full impact of the exclusive licence should be assessed, and the correct and thorough due diligence undertaken.
And whilst this article isn't about SEP specifically, it could apply to SEP as it is about licenses and how they operate and are interpreted. See our Top Tips to License SEPs article for more information.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. To speak to a specialist Murgitroyd attorney, please get in touch with us, using our contact page.