Due diligence for licensees – and why it’s important

A licence of patented technology can be a substantial investment. The licensee will normally want to carry out due diligence to understand the scope and nature of the rights being granted. Determining whether the licence will be exclusive or not is also key. An exclusive licence of a patent can give a licensee valuable rights that are not otherwise available. Under UK law, for example, an exclusive licence not only permits the licensee to exercise any rights granted to the exclusion of all other parties – including the owner of the patent – but also gives a statutory right to bring proceedings against would-be infringers in the licensee’s own name.

The practical significance of ensuring that a licensee’s exclusivity remains protected and enforceable is illustrated by a recent court decision (Oxford Nanopore Technologies v Pacific Biotechnologies of California) where things became a little difficult.

Some background

In 2008 Harvard granted Oxford Nanopore a licence. This was amended and restated several times, most recently in 2015. It was expressed as an “exclusive licence”. But the grant was subject to an agreement between Harvard and a third party whose identity was not disclosed in the litigation. Under that agreement the third party had an option to require the grant of a non-exclusive licence from Harvard.

This point was seized on when Oxford Nanopore later brought patent infringement proceedings against Pacific Biotechnologies. Pacific Biotechnologies argued that although the third party had not yet requested the non-exclusive licence, because it could ask for one at any time Oxford Nanopore’s licence could not be exclusive.

The practical effect of this would have been that Oxford had no legal standing to bring infringement proceedings in the first place.

“Conditional exclusivity?”

The court recognised that an exclusive licence is not created simply because the licence agreement describes itself as “exclusive”. The rights granted must be “to the exclusion of all others” – including different companies from the same corporate group. The licence must be granted to a single individual or entity, which may then (depending on the licence terms) grant sub-licences to certain authorised parties.

Exclusive status may change over the licence’s lifetime, so a licence initially granted exclusively may become non-exclusive on the fulfilment of some condition.

In this case the relevant condition was the third party’s right to call for the grant of a licence. Importantly, at the time of the court hearing, the condition had not been exercised so the licence remained exclusive. Had the third party exercised its rights before the hearing, Oxford Nanopore would no longer have been an exclusive licensee.

Protecting your position as licensee

This case demonstrates the dangers posed by complex licensing networks. Oxford Nanopore could easily have lost its statutory rights connected to the status of exclusive licensee through the actions of an unconnected third party. It would then have been forced to rely on Harvard, as the patent owner, to bring infringement proceedings.

It also illustrates the importance of careful due diligence to find out if there are any prior claims over a patent portfolio, and including appropriate provisions in the licence agreement to protect a licensee’s position if a problem arises.

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