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This Wisdom of the Crowd, compiled from responses posted on the Intellectual Property and Small Law Department eGroups,*addresses issues arising from contract clauses granting Buyer a license to use products he/she bought. The issues discussed include:

I. The Purpose of a Clause Granting Buyer a License to Use the Product he/she Bought
II. The Pros and Cons for Seller when Agreeing to Grant Buyer a License to Use the Product

*(Permission was received from the ACC members quoted below prior to publishing their eGroup comments in this Wisdom of the Crowd resource.)

THE PURPOSE OF A CLAUSE GRANTING BUYER A LICENSE TO USE THE PRODUCT HE/SHE BOUGHT

Question:

Why would Buyer need a license to use a product he/she bought?

What is the purpose of the following language for a Buyer in a Purchase Order where it buys a piece of equipment and associated software?

To the extent that any pre-existing inventions, technology, designs, works of authorship, mark works, technical information, computer software, and other information or materials are used, included, or contained in the Work or deliverable items and not owned by BUYER, SELLER grants to BUYER an irrevocable, world-wide, royalty-free license to use, execute, display, and perform such pre-existing inventions, technology, designs, works of authorship, mark works, technical information, computer software, and other information or materials.

Wisdom of the Crowd

    Response #1

    [Y]ou probably need to distinguish between equipment and associated software.

    Equipment

    For the equipment, you are absolutely right, this wording makes no sense (but it doesn't do any harm either). Upon the purchase of the equipment, the first sale (or exhaustion) theory will apply and the patentee must be considered to have parted with his exclusive rights - provided the sale was not accompanied with any restrictive conditions. However, this goes for straightforward scenarios - if besides the product patent, the patentee also has method patents or application patents that may extend to the equipment, you may need an additional authorization to use these patents when using the product.

    Software

    For the software, the reasoning may be a little different since depending on how the software is associated with the equipment, you may not have bought the latter but simply licensed it. However, apart from this distinction I would argue that the same reasoning applies, to the extent that if the use of the software (that you licensed) infringes a pre-existing patented technology incorporated into that same piece of software (that was not explicitly licensed), you at least can claim to have acquired an implied license.1

    Response #2

    This is fairly standard language for an agreement where you provide the Seller with something (probably a specification), and the Seller then develops and sells the product to you. Copyright law is complicated, but the bottom line is that this language is intended to make it clear that you are licensing the software from the Seller, and that you are not purchasing ownership of the copyright in the software. So the Seller is trying to ensure that you do not reverse engineer the product and make it yourself or have someone else make it. If you want to do that, then you need a different agreement.

    Scope of Copyrights.

    Copyrights cover the following (and a lot more, but these are the basics)

    (1) [L]iterary works;

    (2) [M]usical works, including any accompanying words;

    (3) [D]ramatic works, including any accompanying music;

    (4) [P]antomimes and choreographic works;

    (5) [P]ictorial, graphic, and sculptural works;

    (6) [M]otion pictures and other audiovisual works;

    (7) [S]ound recordings; and

    (8) [A]rchitectural works.

    Software is in category (1).

    Rights of a Copyright Owner.

    Here is a list of the rights that a copyright owner holds (again, subject to many exceptions):

    (1) [T]o reproduce the copyrighted work in copies or phonorecords;

    (2) [T]o prepare derivative works based upon the copyrighted work;

    (3) [T]o distribute copies or phonorecords of the copyrighted work to the public by sale or other transfer of ownership, or by rental, lease, or lending;

    (4) [I]n the case of literary, musical, dramatic, and choreographic works, pantomimes, and motion pictures and other audiovisual works, to perform the copyrighted work publicly;

    (5) [I]n the case of literary, musical, dramatic, and choreographic works, pantomimes, and pictorial, graphic, or sculptural works, including the individual images of a motion picture or other audiovisual work, to display the copyrighted work publicly; and

    (6) [I]n the case of sound recordings, to perform the copyrighted work publicly by means of a digital audio transmission.

    Some of the language in the [contract] comes straight from the statute - especially the parts about "works of authorship."2

    Response #3

    Note that the provision covers third party IP and software.[...] So, if a Seller manufactures a product and by way of example the product infringes a third party patent (i.e., a third party invention that is protected by a patent is used, either intentionally or unintentionally, in the product), then the Seller arguably would be obligated under the provision to obtain a license for the Buyer from the third party ow[n]er of the patent or be in breach of the provision. Or, in the case of software if the assoc[i]ated software was provided to Seller under a license, this provision would obligate the Seller to get for the Buyer an irrevocable, world-wide, royalty-free license from the third party owner of the software.3

    Response #4

    [...]The license for use has to be expressly stated because if it is a license to own, then it is a license to own the intellectual property that is inherently within the product. A license to own as opposed to a license to use[, which] means that you have given ownership of your IP to the buyer, and then you have essentially lost it. A license to use, by contrast, grants the buyer merely a use license but not one of ownership, which means the ownership of the IP has been effectively reserved back to the seller. Whenever I write licenses, I usually make them a little more robust and include language which expressly forbids a number of activities with respect the product, whether it be hardware or software.4 [...]

    Response #5

    [...]I've seen similar wording from buyers many times. I think they are primarily (and legitimately) trying to ensure that the seller has obtained all necessary rights to license any IP the buyer would need to use the product, including any included software the seller might be licensing from third parties. Your terms or your contract probably disclaim UCC implied warranties, so the buyer wouldn't have the benefit of the implied warranty against infringement in UCC section 2-312.5

THE PROS AND CONS FOR SELLER WHEN AGREEING TO GRANT BUYER A LICENSE TO USE THE PRODUCT

Question:

From the Seller's side, what are the pros and cons to agreeing to this language? It hardly seems necessary in that when you sell a product, clearly you intend for the Buyer to use it. In this case, the product being sold was developed and owned by Seller.

Wisdom of the Crowd

    Response #1

    [...]Frankly, I do not think there [are] any [pros and cons]. [I]t's pretty neutral and whether you have such a clause or not in your contract, it shouldn't really matter.6

    Response #2

    Note that specifically missing in your [contract] language is (1) the right to reproduce and (2) the right to prepare derivative works. If you were paying for development completely, as opposed to as part of a purchase agreement, then you would want to insist on having those two rights assigned to you.

    The rest of the stuff about "technology" and "information" being owned by the Seller is [...not relevant]. If it's not covered by a patent, trade secret or copyright, technology is more or less free game. (Note that patents can be filed for up to a year after disclosure in the US, and it takes another 18 months for the application to publish[.] [S]o [you should] get a freedom-to-operate opinion before copying any tech designs.)7

    Response #3

    However, I see a couple of issues with this particular wording. One is that the license is so broad it would cover even IP that is owned by unrelated third parties. You can't really grant a license to something you don't own or have a license for. I typically see these kinds of licenses limited to the IP owned by the seller and third-party software included with the product. Second, the wording doesn't limit the scope of the license to use in connection with the legitimate use of the product. So if you have patents or copyrights that cover some aspects of your product, this wording seems to give the buyer very broad rights to use your IP for purposes completely unrelated to the use of your product.8

    Response #4

    It does exhibit some suggestion that either the drafter (and/or some prior customer of that drafter who now makes the drafter skittish) doesn't understand the basic notions of patent exhaustion and implicit copyright licensing. (And, to the degree that this license is actually more limited than the rights that a buyer would get under exhaustion principles, [I] query if the license itself is mooted by the fact that it purport[ed] to license a right the seller, [which,] in this instance, doesn't have to right to withhold any longer once the sale's been consummated, and is in fact misleading by suggesting that the seller has a patent right to license in the first place.)

    I say that without having combed all of the annals of contracts -- No doubt somebody might toss out "But what about Stinkley versus Kahootz from the Idaho Supreme Court in 2003? That clearly went bad by not recognizing the patent exhaustion principle, and we need this clause to avoid the Stinkley result [...]!" I stand on principle that it's a bad idea to lard up our contracts because of some ill-thought case from long ago, if for no other reason than it suggests a standard of care for lawyers that we'll never actually meet (know about every [...] court case over the history of the common law and make sure you insert language in your contract to address it or you'll be committing malpractice). [...]

    My suspicion is that this derives from a tendency among many drafters of forms like this to try and cover all contingencies while doing no harm (and a tendency among some buyers to think they need to ask for a license when in fact it's already exhausted (patent) or implicit (copyright) under the circumstances). I [q]uery now whether the ["]fix["] actually does create harm to one or the other party by trying to fix a problem that doesn't exist, since now there's language for some litigator down the road to do mischief with that probably has nothing to do with either party's intent today.9

1 Response from: Erik Verbraeken, Senior Group Counsel, Johnson Controls, Inc., France (Oct. 11, 2013).

2 Response from: Dewayne Hughes, Sr. IP Counsel, Draeger Medical Systems, Inc., Pennsylvania, United States (Oct. 11, 2013).

3 Response from: G. Harvey Dunn, Director, Intellectual Property, Woodward, Inc., Colorado, United States (Oct. 11, 2013).

4 Response from: Anessa Allen Santos, General Counsel, Buffalo Pacific LLC, Florida, United States (Oct. 11, 2013).

5 Response from: David Munn, General Counsel, Pramata Corporation, Minnesota, United States (Oct. 11, 2013).

6 Response from: Erik Verbraeken, Senior Group Counsel, Johnson Controls, Inc., France (Oct. 11, 2013).

7 Response from: Dewayne Hughes, Sr. IP Counsel, Draeger Medical Systems, Inc., Pennsylvania, United States (Oct. 11, 2013).

8 Response from: David Munn, General Counsel, Pramata Corporation, Minnesota, United States (Oct. 11, 2013).

9 Response from: Michael Fleming, Senior Legal Counsel, Cray Inc., Minnesota, United States (Oct. 11, 2013).

Region: United States
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