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Advanced Licensing Institute January 8, 2009 by D. Patrick O’Reilley Finnegan, Henderson, Farabow, Garrett & Dunner. Ethics And Professionalism In License Negotiations. Scope of Presentation. Ethics and Professionalism Standards and Rules Application to Licensing Negotiations. Ethics.

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slide1
Advanced Licensing Institute

January 8, 2009

by

D. Patrick O’Reilley

Finnegan, Henderson,Farabow, Garrett & Dunner

Ethics And Professionalism In License Negotiations
scope of presentation
Scope of Presentation
  • Ethics and Professionalism
  • Standards and Rules
  • Application to Licensing Negotiations
slide3

Ethics

“The principles of conduct governing an individual or a groupon the basis of a set of rules established by the group (culture).”

Professionalism

“The conduct, aims or qualities that characterize . . . a profession or a professional person”

Webster’s Dictionary

slide4

What and Why Professionalism?

Honesty and candor instead of gamesmanship and overreaching.

Negotiation is not a win or lose game

Obtaining enforceable yet workable business arrangement.

What is legal and what is right under the circumstances are often different

Protecting and enhancing a professional reputation.

professional negotiations
Professional Negotiations
  • Ethical
  • Courteous
  • Confident
    • Knows business issues involved
    • Knows legal issues involved
    • Knows client’s position
    • Knows scope of authority
    • Understands and accepts concept of negotiations
relevant standards
Other ethics rules

No lying

No humiliation

Competent representation

Relevant Standards
  • LES Professionalism
    • Full disclosure
    • Fair representation
    • No conflicts
    • No undisclosed personal interest
    • Confidentiality
les standards
LES Standards
  • LES Rules of Conduct
    • Guidelines for conduct of members to promote professionalism in licensing
    • Supplemental to rules imposed on members by employer and other affiliations
les standards full disclosure
LES Standards – Full Disclosure
  • “Each member owes to his/her client/employer full and candid disclosure of his/her judgment and opinion as to potentially licensable properties and any markets therefore, including therein full disclosure of the nature and extent of any market, engineering or other studies and degree of reliability of any studies underlying such judgment and opinion.”
les standards fair representation
LES Standards – Fair Representation

“It is the duty of every member of this society to make a fair representation as to the nature, quality and extent of the subject matter being licensed. Representations as to performance, reliability, or value should be supported by fact, and any statement which is not supported by fact should be identified as opinion. Members shall not withhold, prior to or during licensing negotiations, basic information of a negative nature, whether requested or not.”

les standards conflicts
LES Standards - Conflicts

“It is unprofessional to represent both parties involved in the licensing or sale of intellectual property or to represent conflicting interests in the same transaction without the knowledge and express consent of both parties involved. Prior to accepting employment with a client, it is the duty of a member to disclose any interest which might be adverse to a client.”

les standards personal interests
LES Standards – Personal Interests

“It is the duty of the licensing professional to disclose the fact that he or she has an interest in the subject matter being licensed.”

les standards confidentiality
LES Standards - Confidentiality
  • “It is the duty of a member of this society to respect and hold inviolate the confidences of a client. In the absence of other agreement with the client, termination of the employment with the client will not terminate this obligation, but the duty is relieved by the fact that the information given in confidence is generally known. In the event that confidencesof a previous client prevent him/her from fully discharging duties to the subsequent client, the member shall immediately notify the subsequent client of such disability.”
aba model rules of professional conduct
ABA Model Rules of Professional Conduct

In the course of representing a client, a lawyer shall not knowingly:

Make a false statement of material fact or law to a third person; or

Fail to disclose a material fact to a third person when disclosure is necessary to avoid assisting a criminal or fraudulent act by a client, unless disclosure is prohibited by Rule 1.6.

ABAModel Rule 4.1

aba model rules of professional conduct14
ABA Model Rules of Professional Conduct
  • Rule 4.1(a) forbids
    • Lying about a material fact
      • What is material depends on the situation
      • Distinguish posturing or puffery
    • Failing to disclose a material fact
      • Where failure to disclose amounts to a misrepresentation
    • Making a misstatement of law
      • Cannot assume opponent knows the law
aba model rules of professional conduct15
ABA Model Rules of Professional Conduct
  • Rule 4.1(b) forbids
    • Silence or inaction with knowledge of client’s misleading statements or actions
    • Silence with knowledge that opponent misunderstands an issue of fact or law
      • Party with greater knowledge may have to assist other party
      • Opposing counsel’s lack of experience may increase obligation to disclose
material misrepresentations
Material Misrepresentations??
  • Offering license under pending but rejected patent application.
    • No representation of issued patent.
    • File history available to both parties
  • Offering license for technical information that may be in public domain.
    • Absent actual knowledge that all is public, okay.
    • Only relative secrecy is needed.
material misrepresentations17
Material Misrepresentations??
  • Offering license under patent known to be invalid.
    • No representation of validity.
    • What is known?
  • Asserting need for license with knowledge of no infringement due to file history.
    • Equal access to file history.
  • Asserting no need for license with knowledge that patent owner is unaware of different model of accused product.
    • Any duty to advise patent owner?
material misrepresentations18
Material Misrepresentations??
  • Offering covenant not to sue with knowledge that title to licensed right is in doubt.
    • No warranty of title.
  • Failing to note all changes made in draft
    • Modern compare software induces reliance but also provides means for checking
aba model rules of professional conduct19
ABA Model Rules of Professional Conduct

“Under generally accepted conventions in negotiation, certain types of statements ordinarily are not taken as statements of material fact. Estimates of price or value placed on the subject of a transaction and a party’s intentions as to an acceptable settlement of a claim are in this category.”

Comment to ABA Model Rule 4.1

aba formal opinion 06 439
ABA Formal Opinion 06-439*

Under Model Rule 4.1, in the context of negotiation, . . . a lawyer representing a party may not make a false statement of material fact to a third person. However, statements regarding a party’s negotiating goals or its willingness to compromise, as well as statements that can fairly be characterized as negotiation “puffing,” are ordinarily not considered “false statements of material fact” within the meaning of the Model Rules.

* April 12, 2006

lying vs puffing
Lying vs. Puffing
  • Lying.
    • Misstatement of historical, objectively verifiable fact.
      • “Can’t accept royalty of 5%; our profit margin is only 5%.”
  • Puffing.
    • Statement of inference, interpretation or intention.
      • “Can’t accept royalty of 5%; we won’t make a profit.”
lying vs puffing22
Lying vs. Puffing
  • “Client will not accept less than 4% royalty.”
    • Even with knowledge that client will accept less, generally considered puffing, not lying.
  • “Because of MFL clause, client cannot accept less than 4% royalty.”
    • If there is no MFL clause, lying.
lying vs puffing23
Lying vs. Puffing
  • “The licensed patent has issued”

– Lying, if known not to be

  • “The licensed patent is valid”
    • Puffing, despite knowledge of arguable weaknesses
      • prior art
      • even statutory bar - claim scope important
    • Suppose knows of arbitration decision of invalidity – is it lying?
application of standards scenario 1
Application of Standards Scenario 1

Acme has hired you to negotiate a non-exclusive license to Zulu under patents covering automated payments. Acme informs you that there is an earlier Japanese patent that likely invalidates their patents, but they want you to see how much you can get anyway.

How do you proceed?

application of standards scenario 2
Application of Standards Scenario 2

Acme cannot afford to pay your full rate, so Acme agrees to pay you 75% of your normal rate and to give you 33% of all royalties, milestones, and upfront payments received from Zulu.

How do you proceed?

What are the pitfalls?

Can they be addressed proactively?

application of standards scenario 3
Application of Standards Scenario 3

After extracting a huge royalty out of Zulu for automated payment software on behalf of Acme, then Zulu hires you to do all of their future licensing negotiations.

What are the pitfalls?

How should they be addressed?

application of standards scenario 4
Application of StandardsScenario 4

Before negotiating marketing agreement with retailer, client tells lawyer about new, better, cheaper competitive product to be introduced by competitor within 12 months. During negotiation, retailer’s lawyer asks if client knows of any new competitive products soon to be introduced.

What does lawyer do?

--- Changes the subject --- Says “I can’t answer that.” --- Tells the retailer what he knows

application of standards scenario 5
Application of Standards Scenario 5

Before commencing negotiation to grant exclusive, world-wide trademark license to manufacture a merchandising product, licensor counsel receives common law search results and notes prior use of same mark on similar product but only in metropolitan New York.

What does lawyer do?

--- Refrain from disclosing to licensee counsel and proceed with negotiations --- Voluntarily disclose to licensee counsel and offer to obtain rights in New York

application of standards scenario 5a
Application of Standards Scenario 5a

Shortly after negotiations begin, potential licensee comments on his marketing plans, noting that his strongest market position is in large cities.

Is lawyer’s obligation different?

application of standards scenario 6
Application of Standards Scenario 6

In negotiations to grant exclusive patent license, lawyer for patent owner knows that his client has granted two nonexclusive licenses under the same patents. Lawyer knows that preexisting nonexclusive licenses do not prevent granting an exclusive license.

What does lawyer do?

-- Say nothing -- Inform potential licensee

application of standards scenario 7
Application of Standards Scenario 7

During review of draft of exclusive license prepared by licensee’s counsel, lawyer notes proposed representation that patent owner has granted no other licenses.

What does lawyer do?

-- Leave it in the draft -- Delete it and wait for licensee’s counsel to ask why -- Call licensee’s counsel and disclose preexisting licenses

application of standards scenario 8
Application of Standards Scenario 8

In drafting exclusive license agreement, lawyer for licensee inserts provision that disclaims any obligation on licensee to make or sell any licensed product. Lawyer then sends draft agreement to licensor's counsel.

What should lawyer do?

-- Nothing more -- Bring provision to attention of opposing lawyer

application of standards scenario 9
Application of Standards Scenario 9

Both parties understood that the licensee wanted and would get the right to grant sublicenses. The licensee’s lawyer created first draft of the proposed agreement and did not include any express grant of such a right. In reviewing the draft, licensor’s lawyer noticed the omission.

What should the licensor’s lawyer do?

-- Add the provision to the draft -- Nothing -- Ask opposing counsel if he intended to omit it

application of standards scenario 9a
Application of Standards Scenario 9a

Licensor’s counsel calls licensee’s counsel about the omitted sublicense grant, but the latter says, “The provision is unnecessary since the right to grant sublicenses is inherent in the basic grant.” Despite a belief that this is wrong, licensor’s counsel agrees, and they leave the agreement as is.

What should the licensor’s counsel do?

-- Call licensee’s counsel back and explain the law -- Add the provision as “belt and suspenders” -- Avoid confrontation since it is the licensee who suffers

application of standards scenario 10
Application of Standards Scenario 10

During negotiations, client, in response to direct question for potential marketing licensee, says there has been no claim of infringement by any third party. Lawyer knows this to be false.

What should lawyer do?

-- Privately advise client of error and request correction -- Withdraw from negotiation and representation as to matter if client refuses to make correction -- Do nothing

conclusion
Conclusion
  • Be Knowledgeable
  • Be Ethical
  • Be Professional
  • No client or employer is worth sacrificing your profession.