IP As Property / IP Rights Licensing / International Licensing

5. Mundane Provisions of an International License Agreement

Before looking at what has over the years been one of the more difficult aspects of international intellectual property licensing, namely the interface between proper exploitation of intellectual property rights and antitrust or completion law, it is worthwhile looking at some of the more mundane issues that need to be considered in an international license agreement which may be less significant in a domestic agreement. These can be organized into the following groups: financial issues; jurisdictional and dispute resolution issues; technical service issues and other issues. How these issues are resolved in any particular situation will, of course, depend upon the objectives of the parties and the countries concerned. Certain considerations are, however, of general application.

For example in international agreements, in addition to issues that arise in domestic licenses it may be necessary to deal with financial issues, jurisdictional issues, technical assistance issues, and a number of other issues.

5.1 Financial Issues

%bull; How one is to be paid and in what currency;

%bull; What date is to be used for carrying out a currency conversion,

%bull; How is the issue of any withholding tax imposed by the country from which funds are to be remitted going to be dealt with (can a licensee in fact pay net of tax or is it sufficient that the licensee is obliged to provide documents to obtain a tax credit in the United States for the tax paid abroad, assuming that a double taxation treaty exists).

So far as currency for payment is concerned, there is a natural tendency to want to be paid in dollars. When the agreement is for an ongoing royalty as a percentage of sales, this makes sense as long as the way to convert sales figures in local currency into dollars is clearly set out. Let the licensee worry about the conversion issues. In other situations, however, where payments may fall due in the future as certain objectives are reached, for example the typical milestone payments that exist in licenses for many pharmaceutical inventions where large payments may be due when, for example phase III trials start or when a marketing application is filed or granted (similar to NDA's in this country) one may wish to at least consider whether payment in the licensee's currency might make more sense.

So far as the date on which currency conversion is to be effected in the present situation of volatile exchange markets, careful consideration should be given as to whether the date used for calculating the conversion of the sum due in dollars from local currency is the end of the accounting period in question, the date on which the transfer is to be made (which may well be some time after the end of the accounting period), or some other date. It is also desirable to specify exactly what conversion rate is to be used that set out in the New York edition of the Wall Street Journal for that date, that is in some other newspaper or the actual rate at which the sender of the funds can buy dollars on a given date? It is normally desirable to specify the most transparent means - such as the WSJ.

Another financial factor to be borne in mind is that if one wishes to base a royalty payment on a fixed sum per unit rather than on a percentage of sales, one should consider carefully what inflation index to use. For example it may be preferable to use a local index, if one is readily available, than to use the CPI or some other index issued by the U. S. Department of Labor.

On the withholding tax issue, if one could not persuade the licensee to make payments net of tax (which is always difficult), it used to be fairly common to specify that the licensee would take all steps appropriate to minimize the tax payable. This seems to be becoming more difficult to have accepted by licensees who in several countries are now increasingly concerned about compliance with local tax requirements. It is, therefore, important when entering into an international license agreement to check on the withholding tax rates in the countries in question and to ensure that language is included in the agreement to enable the licensor to take full benefit of any double tax treaty that exists between the country of the licensee and the United States.

In dealing with questions of payment, it should always be borne in mind that the country from which one wishes to remit funds may impose exchange controls at any time even if they are not in force with the time when the agreement is made. It is therefore normally desirable that the agreement sets out contingency provisions to come into effect if exchange controls inhibit the ability of the licensee to remit royalties or other fees due to the licensor back to the United States.

5.2 Jurisdictional Issues

%bull; What law will govern the agreement?

%bull; Whether one wishes to have arbitration of disputes that arise and, if so, where by whom and in what language, and if not what court will have jurisdiction over the proceedings

%bull; If the other party's language is not English, whether the agreement is to be drawn up in two languages and if so which is to be determinative in the case of a discrepancy?

On the first of these issues, that of the governing law of the contract, the most important factor is that the law chosen should if possible be one that is well developed and, if arbitration or jurisdiction is to be outside the United States, readily accessible. New York law fits this definition well. Of course, the other party may wish for its own country's law or the law of a neutral country. If there is a need to agree to either of these, it is prudent to have the agreement checked by a lawyer in the country whose law is chosen to make sure that there are no hidden traps. Whatever law is chosen, one should also be aware that the laws in some jurisdictions, including New York, may contain conflict of laws provisions that will in fact apply the law of somewhere else. The way to avoid this is to define the law governing the contract as being the law of the place chosen, absent its conflict of laws rules.

If it is decided to have an arbitration clause (as is common in many international agreements) some thought should be given to where the arbitration should take place. A "neutral" country is often chosen. However, it should be borne in mind that if one is relying on the New York Convention to ensure enforceability of the award, not only must the country of the other party be a member of the Convention but it may also be necessary for the arbitration itself to take place in a convention country. Consideration should also be given to the rules are to be used to govern the arbitration. Traditionally, those of the International Chamber of Commerce or the London Court of Arbitration have commonly been used. In the last few years, the use of UNCITRAL rules has become more common. These have the advantage (or disadvantage) that the rules governing the procedure of the arbitration do not derive from the body appointing the arbitrator (the UNCITRAL rules leave it to the parties to devise a mechanism for appointing the arbitrator), and that the fees may therefore be lower than if one relies on the International Chamber of Commerce to run the arbitration. The Stockholm Chamber of Commerce also has a good reputation for dealing with international disputes. Finally it should be noted that the World Intellectual Property Organization has established an arbitration center for arbitration of disputes relating to intellectual property matters although so far no real body of experience has been accumulated. In any case, it is desirable that an arbitration clause lays down the substantive law to be applied and that one is fully advised as to what the provisions of that law may be is so far as they apply to the agreement in question.

An alternative to arbitration is for the agreement to specify that the parties will submit themselves to the jurisdiction of a particular court. Sometimes it is agreed that such a court will be the "home" court of the party who would be the defendant in the action. If this is not done and some "neutral" court is chosen, one should check that such a court will in fact accept jurisdiction over a dispute in which the only nexus with the court is that it is recited in an agreement as the place for dispute settlement. As a further alternative some form of alternative dispute resolution may be specified in the agreement, although this is still not common in international license agreements.

On the question of language, it is desirable that the "official" language of the agreement is one that is native to the forum in which disputes are to be settled. Thus, if one wishes the English language version to be determinative (as is highly to be desired) it may be desirable to provide that if there is to be arbitration of any disputes such arbitration occurs in an English language country. Although having an agreement be equally authoritative in two languages may be comforting to the party with whom the agreement is being negotiated, it is a recipe for disaster since one can be sure that there will be a translation problem on what turns out to be the only issue in contention in some future debate. It is probably better to agree to the entire agreement being in, say, Urdu than to try to function with two equally authoritative texts in different languages.

A final point to note in this section is that if the party with which one is doing business is in some way related to a foreign government, it may be prudent to include a specific waiver of that party's right to claim sovereign immunity in the agreement.

5.3 Technical Assistance Issues

%bull; If technical assistance is to be given, who will be responsible for interpretation and translation of any documentation if the recipients do not speak English?

%bull; Should one insist that any persons sent for training in the United States have at least some proficiency in spoken English to avoid wasting one's own staffs time in training them?

%bull; If technical personnel from either party are to visit the other, who is responsible for the expenses associated with that travel and the accommodation of such staff away from home?

5.4 Other Issues

5.4.1 Durational Issues

When considering the question of duration, one must distinguish between the duration of the agreement, which can be for any period one chooses and the duration of various obligations contained in the agreement. Many countries have rules similar to that set out by the United States Supreme Court in Brulotte v. Thys[1] that preclude or inhibit a requirement to make royalty payments for a license under a patent after the patent has expired. Often one attempts to deal with this by including a provision for payment for use of know how. This is fine if there is a continuing supply of know-how from the licensor to the licensee. In other cases, however, one needs to be careful. There is an implication that the licensee is paying for something that is not available freely to others. If it is, there may be a question of failure of consideration (i.e. a failure to provide anything of value to the other party). On the other hand it is impossible to predict when information that is secret at the time the agreement is made may fall into the public domain. It is reasonable to try to impart predictability into the cost of an agreement and to share the risk of the secret becoming known publicly by agreeing to make payments for the use of the know-how for a defined number of years. Ten years from the date of transfer of the know-how seems to be a reasonable rule of thumb in many cases.

5.4.2 Quality Control

If the agreement includes a license to use a trademark, one should be careful to ensure that the agreement contains adequate quality control provisions to enable the licensor to check that goods on which the license trademark are being used are of an appropriate quality. Failure to include a provision of such a type can lead to the invalidity of the trademark registration in the country in question. Indeed failure properly to address the issue of use and control of a trademark could result in the trademark rights in fact being acquired by the licensee even though the mark was originally devised by the licensor.

5.4.3 Sublicensing

Another issue which needs careful consideration in connection with international agreements is the question of sublicensing. Whether or not a licensee has the power to grant a sublicense should be spelt out carefully in the agreement and the issue of whether sublicensing should be permitted should be considered carefully by the licensor. Particularly if one is granting a license for a number of different countries, there is a risk that by granting the licensor the right to grant sublicenses the sublicensee may finish up by just being too remote from the licensor for any effective control to be maintained. One must also in such situations consider the situation which exists if one needs to terminate the agreement with the principal licensee but there is a sublicensee operating satisfactorily in some other country. It may also be desirable for the licensor to retain the rights to be able to insist on termination of any sublicensee in defined circumstances and not simply leave all dealings with sublicensees to the main licensee. In addition to this there is the question as to the extent as to which the licensor may wish to become involved in negotiating the terms of any sublicense.

5.4.4 Product Liability Issues

Most foreigners today have heard of what they think of as fabulous sums awarded in damages by American courts in cases where someone was damaged by a defective product, whether the defect was in design or production. In the trademark area at least, it has been held that the owner of a trademark that is used by a licensee on a product that is defective and causes such damage may itself be liable to the victim as well as the licensee that actually made or sold the defective product. This combination of facts leads to the possibility that the victim of a defective product sold abroad by one's licensee may bring suit in the United States against the trademark owner, or possibly also against the owner of some other licensed intellectual property right. Since the defect in question may well be the sole fault of the licensee, it is prudent to include in the license agreement a provision whereby the licensee will indemnify the licensor against any such action and take out appropriate insurance to ensure that it can meet its obligations under such a provision.

5.4.5. Definitional Issues

We have already noted the need for definition in connection with the termination provisions of an agreement. However, the question of providing definitions in an agreement comes up in other ways as well. The same words can have different meanings to people in different countries. It may therefore be worthwhile spending the time to insert specific definitions of what one means in an agreement, even if these would not be required in a domestic agreement. For example, under Anglo-American law that the grant of an "exclusive license" in the intellectual property field means that even the owner of the intellectual property right himself cannot operate within the defined territory using the rights which have been licensed. This is not so, for example, under French law where the term "exclusive" has traditionally been understood to mean simply that the patentee, trademark owner, etc. will not license anyone else to operate within France. It is, therefore, desirable to ensure that an international agreement contains a specific statement by what is meant by "exclusive". We will come back to the question of exclusivity and its potentially anti-competitive aspects later.

1. 379 US 29 (S. Ct. 1965).