Dreadful Drafting: The Do's and Don'ts of Grant Clauses - Gowlings

Grant ClausesDreadful Drafting: The Do’s And Don’tsOf Grant ClausesBy John T. Ramsay, Q.C.1. Introduction1.1 DevCo, an Alberta corporation based in Calgary,has developed and now manufactures anddistributes novel detector heads that are used in theimage capture device in digital x-ray systems. Theseunits have unique designs for the image captureprocess and use proprietary software (the “ImageSoftware”) to overcome the weaknesses in the imagequality that is inherent in the digital x-ray process.By adapting the detector head, one version can beuse by veterinarian for animals and a second versionby x-ray technicians/radiologists for humans. DevCohas developed software and proprietary techniques(the Manufacturing Software and ManufacturingTechniques) for the manufacture of the detectorheads. DevCo has Canadian and U.S. patents andpatent applications covering some of the hardwareand Image Software.1.2 DevCo wishes to grant to InterCo, a largeCalifornia based x-ray manufacturer and distributor,the worldwide rights to manufacture and sell thedetector for veterinarian purposes and to use theManufacturing Software and Manufacturing Techniquesfor its manufacturing purposes.1.3 Dreadful Drafter, in-house counsel for DevCo,has been asked to draft the “grant” clauses for thistransaction. Dreadful Drafter writes:DevCo grants to InterCo:(a) A 25-year non-transferable license to manufactureand sell in California the Licensed Productswith the image software embedded therein; and(b) A perpetual non-transferable license to usein California the Manufacturing Software andManufacturing Techniques in connection with themanufacture of the Licensed Products.2. Issues—What Is It?2.1 This dreadful clause brings out a number ofissues:(a) Is this a license or an assignment?(b) What rights has DevCo got that gives it theright to grant a license?(c) Is this a “technology-focused” license (InterCogets everything DevCo has that relates to the software)or an “intellectual property focused” license(InterCo gets what DevCo chooses to give it andnothing more)?(d) Who are the beneficiaries of the license?(e) What is the scope of use of the licensed technology?2.2 We will leave the issues of exclusivity, termand termination for another time.3. Basics of a License—Definition of an IPLicense3.1 First, let’s review what an intellectual propertylicense is. A license gives the licensee the right todo something that otherwise would be prohibitedby some sort of exclusionary right such as an intellectualproperty right. A patent or copyright prohibitscertain activities (or “excludes” others from engagingin those activities)—e.g. make, use or sell a productor copy a computer program. A license or other formof acquisition of these rights is necessary to avoidinfringement. Thus InterCo needs a license fromDevCo to engage in the activities covered by DevCo’sintellectual property rights.4. IP Rights—Exclusionary Rights4.1 Examples of statutory exclusionary rights thatcan be licensed are:(a) Patents,(b) Copyright,(c) Industrial design (in the U.S. referred to as“design patents”),(d) Trademarks,(e) Plant breeders Rights, and(f ) Mask works/chips/integrated circuit topographies.4.2 Although we often see “licenses” of tradesecrets, trade secrets are not protected by statutoryexclusionary rights even with U.S. statutesmodeled on the U.S. Uniform Trade Secrets Act.(For our purposes here, no distinction will be drawnbetween trade secrets and confidential information.)Trade Secrecy law provides substantially differentprotections to trade secrets than it does to thetraditional exclusionary rights such as patent andcopyright. Indeed, a “license” of trade secrets is abit of a misnomer; there is really nothing to licensein the true sense of that word. Thus an agreementfor the “license” of trade secrets requires special628les Nouvelles

Grant Clauseslanguage to cover the right to gain access to anduse the “licensed” secret in exchange for the dutyof restricted use (and no other use or “misuse” or“misappropriation”) and continued secrecy of thatsecret (i.e. a prohibition against disclosure exceptunder clearly specified circumstances).4.3 Thus the IP rights that DevCo has available tolicense are:(a) The issued patents;(b) The right to license the patents that will resultfrom the patent applications;(c) The copyright in the image software, theManufacturing Software and any codification (e.g.manuals) of the Manufacturing Techniques;(d) Trade secrets in the Image Software, ManufacturingSoftware and the Manufacturing Techniques.5. Assignment of License—Less Than All5.1 A license is the grant of permission to do anactivity that otherwise would be prohibited by someexclusionary IP right possessed by the licensor. Alicense is a transfer of part of those rights whereasan assignment is a transfer of all of the IP rights.A license is not an assignment of the underlyingexclusionary intellectual property right; it is a grantof something less than all those rights.5.2 An exclusive license may look like an assignment;the difference may be hard to determinein some cases since the economic effects are sosimilar.5.3 Each of an exclusive license and an assignmentmay get capital gains treatment in the U.S.;Canada’s treatment is more complex, depending onthe taxpayer’s practice of granting licenses—theylook to see if there is some sort of business of grantinglicenses.5.4 An assignor may be an unsecured creditor andrank behind secured creditors. Thus the assignormay run the risk that secured creditors gain thebenefit of the value of the intellectual property rightstransferred by the assignor. A licensor, on the otherhand, may be able to terminate the license and thusget the intellectual property rights back.5.5 Some phrases that indicate a license ratherthan an assignment are:(a) “Subject to the terms of this Agreement”(b) “No rights are granted to the Licensee otherthan those expressly granted by this Agreement”(c) “Such licensed rights continuing as long as”(d) “Such licensed rights terminable upon”5.6 More confusing phrases are:(a)“Irrevocable.” If you use this word it is recommendedthat you make it clear in the same or ajuxtaposed sentence that the license is subject totermination as specified in the termination clause.Better yet, use the word “irrevocable” only for assignments.Some judge may want to find an assignmentand use that word as an excuse to justify anotherwise weak legal conclusion (using the “smelltest” model for jurisprudence: decide first and thenfind the law to support the conclusion later).(b) “Perpetual.” Insoftware licenses, thishas the street connotationof a “fully Gowling Lafleur Henderson■ John T. Ramsay, Q.C. ofpaid up” license. Itsuse may be risky in aLLP Barristers & Solicitors,legal document since Calgary, Canada.it could be interpreted E-mail: john.ramsay@as an assignment—thepremise might be thatgowlings.comif nothing is left afterperpetuity it has to be an assignment.6. Exclusionary Patent Rights—ControlledActivities6.1 Let us first look at the rights granted by patents,perhaps the most critical, complex and valuabletype of intellectual property:(a) Section 42 Canadian Patent Act states that apatent gives the holder the “exclusive right, privilegeand liberty of(i) making, constructing and using the invention;and(ii) selling it to others to be used.”(b) Similarly the U.S. Patent Act, in s.271 providesthat anyone who does the following infringes therights of the patent holder (a “patentee”):(i) Makes, uses, offers to sell, or sells any patentedinvention, within the United States orimports into the United States any patentedinvention.(ii) Imports into the United States or offers tosell, sells, or uses within the United States aproduct which is made by a process patented inthe United States.6.2 As a result of these exclusionary statutorypatent rights, generally the activities licensed underpatents could include the right to:(a) “Make, use, offer to sell, sell and import LicensedProducts;”(b) “Make, use, offer to sell, sell and import Li-December 2007629

Grant Clausescensed Products that are covered by the LicensedPatents;”(c) “Make, use, offer to sell, sell and import into[Canada/United States] Licensed Products that arecovered by the Licensed Patents and that are withinthe Field of Use;”(d) “Make, use, offer to sell, sell and import into[Canada/United States] Licensed Compositions.”Like Licensed Products, the Licensed Compositionscould be all compositions that are covered by theLicensed Patents or be more restricted and be onlythose that are both covered by the Licensed Patentsand are within the Field of Use;(e) “Practise the Licensed Processes.” Again, theLicensed Processes could be all processes thatare covered by the Licensed Patents or only thoseprocesses that are both covered by the LicensedPatents and are within the Field of Use;(f) “Make use, offer to sell, sell and import [Canada/United States] products produced by the practiceof the Licensed Processes;”(g) “Make, use, offer to sell, sell and import machinesthat will enable the Licensed Process;”(h) “Make only.” It might be prudent but cautiouspractice to specify that “make” does not includethe right to sell. Consider whether:(i) the Licensee can “use” for its own internalpurposes;(ii) the Licensee can make only for the Licensorand no one else;(i) “Have made.” Many drafters want to make surethe “have made” only benefits the Licensee andthus use the phrase “have made only for the Licensor.”When drafting a “have made” clause, DreadfulDrafter could consider combined licenses of tradesecrets and patents. How does Licensor control andenforce secrecy and restricted use against the contractor?The Licensor has no privity of contract withthe contractor and thus may need a non-disclosureagreement directly with the contractor.(j) “Import into [Canada/the United States];(k) “Export.” The right to export may be excluded ifyour grant clause was restricted to activities in theU.S. or Canada. Often such a territorial restrictionis inserted into the grant clause due to concernsover anti-trust rules that prohibit licenses that purportto grant rights that do not exist; for examplegranting worldwide rights where there is only aU.S. patent, or otherwise granting overreachinglicenses. If those ant-trust rules do not apply, considerwhether the right to export is appropriate.DevCo has no Licensed Compositions and thereforethat does not apply here. Even though DevCo has notapplied for patent protection for its ManufacturingSoftware or Manufacturing Techniques, there maystill be trade secrets involved. Thus, there could bea license of these “processes.” Dreadful Drafter has,rather sloppily perhaps, picked these up in the licenseto use the Manufacturing Software and ManufacturingTechniques in connection with the manufactureof the Licensed Products.6.3 For an activity to be truly “licensed,” it mustbe covered by a claim in one or more of the LicensedPatents. For example under patents, a patent license“overreaches” if the definition of “Licensed Products”is not limited to those covered by the LicensedPatents. To avoid overreaching, consider defining“Licensed Products” to mean:Any product or process that uses or embodies anyinvention claimed in one or more of the claims of theLicensed Patents.7. The Grant: Technology Specific Grantsvs Intellectual Property Specific Grants7.1 Fundamentally there are two types of grant:(a) one type focuses on the technology or the applicationsof the intellectual property, and(b) the other type focuses on the intellectual propertyitself.Dreadful Drafter’s wrote for his grant clause DevCohereby grants to InterCo and its affiliates a perpetualnon-transferable sole and exclusive 25 year license touse in California the software described in Schedule A.He refers to the “Software,” obviously a technologyfocusrather than a focus on the precise intellectualproperty rights. Thus, we can expect that he wantedto cover all intellectual property that related to theSoftware: the Licensee was to get a license of anyand all intellectual property that was needed to useand otherwise gain the benefits of the Software.Dreadful Drafter did not care what specific patentsor other intellectual property rights were embodiedin the Software—he wanted them all.7.2 Software licenses are somewhat unique; theyoften do not refer to the intellectual property rightsthat give rise to the right to license. The premise isthat all intellectual property rights that are under thecontrol of the Licensor are to be licensed. Despitethis common practice, it would be better practice tospecify any existing and pending patent rights, anyother registered rights and then refer generally to allunregistered rights such as unregistered copyright aswell as other rights that could cover the Software.630les Nouvelles

Grant Clauses8. Comprehensive Subject Matter: AllIntellectual Property Rights8.1 Perhaps Dreadful Drafter wants to cover allpatents and patent applications that apply to a particularactivity rather than focused on one patent orfamily of patents. Consider:(a) Under all patents owned/controlled by the Licensor,and subject to the terms and conditions ofthis Agreement, the Licensor hereby grants to theLicensee a license to engage in any activity that,absent a license, would infringe or misappropriatea patent owned/controlled by the Licensor.(b) “Licensable Activities” means any activity absenta license would infringe or misappropriate a patentor Intellectual Property Right owned/controlled bythe Licensor.9. Specific Patents Only9.1 For grants that are focused on specific patentsrather than all the patents and other intellectualproperty that might apply, consider:(a) “Licensed Patent” means one of the followingpatents [insert list or other details];(b) “Licensed Product” means any apparatus orcomposition encompassed within the scope of aclaim in a Licensed Patent and shall also includea product that was manufactured, at least in part,by a process encompassed within the scope of aclaim in a Licensed Patent.10. Patent Applications10.1 Patent Applications cannot be truly licenseduntil they result in issued patents. However, thelicensee will want to have the license immediatelyupon issue without more and will want to have protectionagainst the issuance having retroactive effectfrom the date of issue back to the date of publication.Consider what happens if(a) The patent application does not issue;(b) The patent application does not issue within astated time period;(c) The patent application issues but not with theclaims that were critical to the licensee;(d) The patent application issues in one country(say, Canada) but not in another important country(say, the United States); and(e) The claims that issue are different from onecountry to another.10.2 If Patent Applications are involved, DreadfulDrafter will want to cover all the derivatives of apatent application. Consider:Patent Applications means any of the followingpatent applications, all divisions and continuationsof such patent applications and all patents issuingfrom such applications, all divisions, continuations,continuations-in-part, and all reissues, renewals,reexamination certificates and extension of suchpatents.10.3 If there is concern that a derivative of apatent application could have claims not includedin the application that is the subject of the license,consider:“Licensed Patent Rights” shall mean:a) U.S. patent applications and patents listed inAppendix A, all divisions and continuations ofthese applications, all patents issuing from suchapplications, divisions, and continuations, and anyreissues, reexaminations, and extensions of all suchpatents;b) to the extent that the following contain one ormore claims directed to the invention or Inventionsclaimed in a) above:i) continuations-in-part of a) above;ii) all divisions and continuations of these continuations-in-part;iii) all patents issuing from such continuations-inpart,divisions, and continuations; andiv) any reissues, reexaminations, and extensionsof all such patents;c) to the extent that the following contain one ormore claims directed to the invention or inventionsclaimed in a) above: all counterpart foreign applicationsand patents to a) and b) above, including thoselisted in Appendix A.Licensed Patent Rights shall not include b) or c)above to the extent that they contain one or moreclaims directed to new matter which is not thesubject matter of a claim in a) above.11. Just Valid Claims11.1 Instead of referring to specific patents andthus all the claims in those patents, Dreadful Draftercould refer to “Valid Claims.” This narrow grantclause could be chosen to:(a) Avoid paying royalties for activities covered byinvalid claims (in Canada the patent abuse rulesthat prohibit the requirement to pay royalties wheninvalidity has been determined are not as clear asthey are in the U.S.—it is better to address theissue in the contract);(b) To reduce the risk of violating patent abuse oranti-trust/anti-competitive rules;(c) To keep the scope of a license granted as a resultDecember 2007631

Grant Clausesof a settlement of litigation to a minimum.11.2 Delphion defines a valid patent as “A validpatent is an issued patent that is not invalid for oneof several reasons, the most common of which is thatone or more of its claims read on prior art that was notconsidered by the patent office during patent prosecution.While only a court can hold a patent is invalid,many patents are informally referred to as being invalidto indicate that a court would likely rule them so.”11.3 Delphion also defines a valid claim as “onewhich reads on the invention described in thespecification but does not read on any prior art.”Consider:(a) “Valid Claim” means a patent claim in a LicensedPatent that:(i) Has not expired, where the claim has notbeen disclaimed or cancelled from the LicensedPatent.(ii) Has not been held invalid by the final decisionof a court of competent jurisdiction from whichno appeal is or can be taken;(iii) Has not been held by the final decision of acourt of competent jurisdiction from which noappeal is or can be taken to prohibit the LicensedActivities.(iv) If a claim has been held to be invalid by thefinal decision of a court of competent jurisdictionfrom which no appeal is or can be taken, then,for the purposes of this definition and this Agreement,effective as of the date of such final decision,such claim will be deemed to be deleted from thescope of this definition of “Valid Claim” and thusthis License and such claim will be deemed to belimited in scope to delete from this definition of“Valid Claim” the portion that was held to be notinfringed.12. All Necessary Patents or Claims12.1 When the Licensor and Licensee are competitors,they may want to narrow the subject matterof the license to the absolute minimum.12.2 “Necessary Claims” or “Essential Claims”are phrases used in patent pools or for licenses ofindustry standard technology. For example, the 3GStandard License Agreement defines an “EssentialPatent” as “any patent claiming an apparatus, combination,method or process necessary for compliancewith the 3G Standard under the laws of the countrywhich issued or published the patent.” Consider also:“Essential patents are those patents, including patentapplications, whose infringement is unavoidable ina compliant implementation of either mandatory oroptional portions of a standard and where there isno other reasonable technical implementation available.”12.3 Rather than referring to patents, a cautiousdrafter may want to restrict the scope to claims. Forexample, Microsoft grants licenses to encourageadoption and use of its XML Paper Specifications:Microsoft hereby grants you a royalty-free licenseunder Microsoft’s Necessary Claims to make, use,sell, offer to sell, import, and otherwise distributeLicensed Implementations solely for the purposeof reading or writing XPS Documents, or renderingXPS Documents as allowed by the XML PaperSpecification.12.4 The key phrase here is the definition of“Necessary Claims”:The term “Necessary Claims” means claims of a patentor patent application (including continuations,continuations-in-part, or reissues) that are ownedor controlled by Microsoft and that are necessarilyinfringed by the Licensed Implementation. A claimis necessarily infringed only when it is not possibleto avoid infringing when reading or writing XPSDocuments, or rendering XPS Documents as allowedby the XML Paper Specification.12.5 To ensure that the license for the purpose ofthe standard does not require the licensor (or thecontributor of the patent to the patent pool) to paya royalty to a third party for patents that the licensorcontrols but does not own, Microsoft removed themfrom the definition of Necessary Claims by addingNotwithstanding the foregoing, “Necessary Claims”do not include any claims: (i) that would require apayment of royalties by Microsoft to unaffiliated thirdparties….13. Core Patents/Claims13.1 The Licensee will want to make sure that ithas the right to terminate the license if the claimsthat are essential or core to its needs are held tobe invalid or if the patent expires. In the U.S., theLicensor cannot demand royalties if the licensedpatent is held to be invalid or otherwise expires, butthat is not the law in Canada. Even in the U.S., theLicensee will have to continue to pay if the patentitself is still valid but the claim that is core to theLicensee’s needs is held to be invalid.14. Times Specific Grants14.1 When Dreadful Drafter granted the right to“use” the Software, was he granting a right to exercise632les Nouvelles

Grant Clausesonly those Intellectual Property Rights that DevCo hadat the time of the grant or was he granting a licenseof rights that arise thereafter—such as patents thatsubsequently issue or copyrighted code subsequentlycreated? He needs to specifically address whetherthe grant include rights created, issued, or otherwiseobtained after the Effective Date.14.2 There are times that the Licensee wants toget a license of all patent claims that arise out ofpatents issued by a certain date as well as patentsthat arise out of applications filed by that same date.Any filed after that date will not be included in thelicense. Consider:Licensor grants Licensee a license under the PatentRights and under all patent claims owned oracquired by Licensee, and having an effective filingdate before September 15, 2010, to make, use,sell, and import Licensed Products and to practiseLicensed Processes in the Field of Use, subject tothe terms and conditions of this Agreement.15. Multiple Patents in Package—Anti-Trust15.1 “Packaging” multiple intellectual propertyrights whether they are multiple patents or acombination of various intellectual property rights,can raise a concern about U.S. anti-trust/restraintof competition rules. The basic U.S. rule is that aLicensee should not be forced to take more thanthe minimum it needs for its purposes and thus,any combination of intellectual property in a license(multiple patents, combinations of different kinds ofintellectual property) will be viewed with suspicion.The Canadian law is not as clear as the Americanlaw, but for practical and economic reasons, thenegotiators and the license drafters should keep therules in mind even when there is not an Americanparty involved. Dreadful Drafter will want to set thestage in the license if there is a need for a complexlicense. Some U.S. authors indicate that it may bepermissible to mutually agree on a broad grant ofpatents that are related to the Licensee’s needs, butthe Patentee cannot require the Licensee to take alicense of an unrelated group of patents as a conditionto a license of a patent or group of patents thatare related to its needs. The Licensor cannot tiethem together in technology packages to discouragecompetition. Milgrim at para 6.03 recommendsthat the recitals be drafted to record that the wholepackage is needed and that there was no use of adominant position by the Licensor, or that therewere alternatives offered to the Licensee and itdeclined them.16. Multiple Patents in a Package16.1 There are more issues than anti-trust withcomplex licenses of multiple patents. For example,there is the business issue that the patents will expireat different times. Since the patents will likelyhave different values, Dreadful Drafter may want todesign the royalty structure to reflect the differingvalues. Thus, a foundation patent could be allocatedthe most value, a minor improvement patent wouldget a smaller value allocation.17. Owned and Controlled17.1 Often grant clauses only pick up all thepatents and patent applications OWNED by thelicensor. But the licensor could have other patentsthat are under its control. If Dreadful Drafter wantsto include them, he will want to be careful to avoidincluding ones that, although controlled by the licensee,would require the licensee to pay a royaltyto its licensor. A variation of the Network ProcessingForum precedent is:“Necessary Claims” means those claims of allpatents and patent applications to which Licensorhas the right at any time during the term ofthis Agreement to grant a license of the scopegranted herein without such grant or the exerciseof the rights thereunder resulting in the paymentof royalties or other consideration to third partiesand which are necessarily infringed by the making,using, selling and importing of a version of theLicensed Product.18. Foreign Equivalents18.1 We often see references to “foreign equivalents.”An American patent will have a Canadian“equivalent.” Dreadful Drafter must keep in mindthat they are not actually “equivalent” so the useof this word is technically incorrect. They are moreoften referred to as “foreign counterparts.” Theybecome “counterparts” as a result of relying on acommon priority filing date established by a patenttreaty or convention. Thus for increased precisionand comprehension, consider:“Foreign Counterpart Patent” means all patentsthat issue from a patent application in a jurisdiction[other than Canada] that benefited from the filingdate of that patent application in [Canada] underany international treaty or convention.19. Copyright Activities19.1 Activities controlled by copyright in a copyrightlicense that can be expected to appear in agrant clause include “Produce,” “Reproduce,” “Per-December 2007 633

Grant Clausesform,” “Publish a translation,” “Record,” “Transmitby telecommunication,” “Rent computer programs,”and “Authorize any of these activities.”20. Derivative Works and Distribution20.1 The U.S. Copyright Act expressly coverssome activities that are not expressly covered bythe Canadian Act but that have to be implied bythe Canadian Act: For example, “Create derivativeworks” and “Distribute” are covered by the U.S.Act but not by the Canadian Act. Thus if you wantto cover derivative works you will have to provideyour own definition; you can use the U.S. statutorydefinition as a precedent.21. Software and Copyright21.1 Some activities included in the basic copyrightactivities have somewhat stretched relevancefor software. We saw Dreadful Drafter grant the rightto “Use the Software.” “Use” is not an activity controlledby copyright; it should not be confused withthe “use” activity controlled by patent. In practicehowever, “use” of a computer program on your owncomputer (in contrast to using it on a time sharingor application service of some sort) involves makinga copy, even if only temporarily. Thus since “use”of software technically requires making a copy, theword “use” often appears in software licenses; thebusiness meaning of the word “use” does not conflictwith its legal meaning.21.2 Licensees want to make back up copies fortheir archival or security reasons. This involves “copying”and without more would violate rights given underthe Copyright Act. However the fair use/dealingrules in both the Canadian and U.S. permits backupcopies. Canada’s Act is somewhat miserly; ratherthan a reasonable number of copies that can be madeunder the U.S. Act, the Canada Act permits only onecopy, which is entirely out of line with prudent IP/ITpractice. The license should expressly grant the rightto make a reasonable number of copies for archivalor security purposes to overcome the deficiency inthe Canadian rule.21.3 Other words that you can expect to see in asoftware license that do not have direct co-relationto the activities controlled by intellectual propertyare:(a) Run/execute—Involves making a copy merelyso that the copy can be “run.”(b) Access hosted software (ASP model)—If thesoftware is downloaded even temporarily for useon the end user’s computer, then a copy will bemade. Often, however, The ASP model does notinvolve downloading and thus there is no copymade. Then, the activity can be controlled only bycontract. Access is given in exchange for restrictedusage and compensation.(c) Embed—The act of embedding, such as on achip or other firmware, involves copying or “reproduction.”22. Reverse Engineering, Software andCopyright22.1 Reverse engineering is the scientific methodof taking something apart in order to figure out howit works. Reverse engineering has been used by innovatorsto determine a product’s structure in orderto develop competing or interoperable products.Reverse engineering is also an invaluable teachingtool used by researchers, academics and students inmany disciplines, who reverse engineer technologyto discover, and learn from, its structure and design.(http://www.chillingeffects.org/reverse/)22.2 The process of reverse engineering by itstechnical nature, usually involves copying. Withoutmore, it would be an infringement. However, anotherwise infringing activity may be permitted bythe underlying copyright legislation if that activityis considered to be a “fair use” or a “fair dealing”and is not prohibited or covered by other legislationsuch as the U.S. Digital Millennium Copyright Act,for which there is no Canadian equivalent. A prohibitionagainst reverse engineering or other methods ofdiscovering the source code is common in softwarelicenses of executable code.23. Moral Rights23.1 “Moral rights” are not truly an intellectualproperty right. They cannot be transferred nor licensed.The Berne convention provides this definitionof moral rights:Independently of the author’s economic rights, andeven after the transfer of the said rights, the authorshall have the right to claim authorship of the workand to object to any distortion, mutilation, or othermodification of, or other derogatory action in relationto, the said work, which would be prejudicial to hishonour or reputation.23.2 Moral rights have little to do with moralityin the broader sense. They have more relevance toworks of art then to utilitarian software. The essenceof moral rights is the rights of:(a) integrity,(b) association, and(c) paternity.Moral rights apply in Canada through the CanadianCopyright Act. These rights apply only to individuals634les Nouvelles

Grant Clausesand not corporations. However, Dreadful Draftermust keep in mind when dealing with a corporationthat is reasonably to expect that individuals preparedthe work that gave rise to the moral rights. He doesnot need a waiver of moral rights by the corporation.He needs to see the corporation that got a waiverfrom each of the individuals involved with the creationof the work. An assignment of copyright doesnot address moral rights; moral rights continue eventhough copyright has been assigned.24. Trade Secrets24.1 There is not a clear consistent differencebetween trade secrets, confidential information,know-how and professional expertise that DreadfulDrafter can use either in Canada or the UnitedStates. In Canada, the courts sometimes use tradesecrets and information deserving confidentialityinterchangeably. Some States in the United Stateshave passed some form of the U.S. Uniform TradeSecrets Act; these Acts give a particular meaningto the phrase “trade secrets” that may be beyondnormal expectations.25. What’s In/What’s Out25.1 There is a significant difference in the structureof a definition of a trade secret than the structureof a definition of confidential information.25.2 For definitions of trade secrets in the purestsense, the structure is to cover only the informationthat satisfies the conditions precedents—theinformation must have certain qualities or it will notbe covered by the agreement. For example, Article1711: (Trade Secrets) of NAFTA provides threeconditions precedent:(a) the information is secret in the sense that it isnot, as a body or in the precise configuration and assemblyof its components, generally known amongor readily accessible to persons that normally dealwith the kind of information in question;(b) the information has actual or potential commercialvalue because it is secret; and(c) the person lawfully in control of the informationhas taken reasonable steps under the circumstancesto keep it secret.The U.S. Uniform Trade Secrets Act requires somewhatsimilar pre-requisites to be met. To qualify theinformation must:(i) derive independent economic value, actual orpotential, from not being generally known to, andnot being readily ascertainable by proper means by,other persons who can obtain economic value fromits disclosure or use, and(ii) be the subject of efforts that are reasonableunder the circumstances to maintain its secrecy.25.3 For definitions of confidential information inthe purest sense, all information is included unless itis excluded as a result of having certain qualities.25.4 This is not just a drafting style. In practice,the definition of confidential information does notusually require that the information have value frombeing secret, nor that the information be subject toreasonable (or any) security measures. In their purestforms, the definition of confidential information ismuch broader than the definition of trade secrets andwill require less proof that the information qualifiesfor protection.25.5 In definitions of confidential information, thedrafter may want to clarify the universe of informationthat is being included and provide specificsor examples of what information is to be includedunless it has the qualities of the exceptions. Eventhe drafters of the U.S. Uniform Trade Secrets Actdecided to include examples:“Trade secret” means information, including aformula, pattern, compilation, program device,method, technique, or process, that: (i) derivesindependent economic value, actual or potential,from no being generally known to, and not beingreadily ascertainable by proper means by, otherpersons who can obtain economic value from itsdisclosure or use, and (ii) is the subject of effortsthat are reasonable under the circumstances tomaintain its secrecy.25.6 Some drafters make it difficult to understandtheir distinction between trade secrets and confidentialinformation when they include “trades secrets”as an example of what is being included. Ratherthan an example of the nature of the content of theinformation, they are using an example of the legalqualities of the information.(i) No matter the style that Dreadful Drafteradopts, the definition should be clear—what arethe requisite qualities that the information musthave, or must not have—to be covered.25.7 Know-how is a phrase that can be used inrelation to an organization or to an individual.(a) When it is used in relation to an organization,it often refers to collective skill sets used in theorganization to make it more productive. This informationmay be known to competitors and thuswould not qualify as trade secrets or even confidentialinformation, but it still provides value to theorganization and often is needed by a Licensee soDecember 2007635

Grant Clausesit can fully enjoy the benefits of other technologythat was licensed to it.(b) When it is used in relation to an individual,it often refers to his/her professional expertise.Dreadful Drafter must make sure that he doesnot include in a license professional expertise incontrast to an organization’s know-how.25.8 Thus it is preferable to carefully define knowhowto make sure that it covers what was intendedand no more. It should not be assumed that there isan established meaning given to the phrase.25.9 Other matters that Dreadful Drafter could considerfor “licenses” of confidential information are:(a) How are disclosures made—only orally (e.g.spoken word or sounds) or visually (through planttours etc.)?(b) What is the permitted use of the information?(c) How is permitted to use/access the information?(d) What are the requirements of secrecy (for example:absolute secrecy) and what steps must betaken to maintain that level of secrecy?(e) What steps must be taken if there is a breachof secrecy/restricted use?(f) What is the duration of the secrecy/restricteduse obligations?(g) How “feedback” from the recipient is treated—is the feedback useable by the recipient who “fedback” or owners of the property who fed back?(h) Is there a requirement to return the information,and, if so, when; is there a provision forpermitting the keeping of our archival copies sothe recipient can later establish what was disclosedto it and later returned?26. Hybrid Licenses26.1 So far, we have only discussed licenses of onlyone type of intellectual property at a time. Often,however we have a combination of two or moretypes of intellectual property. These are often called“hybrid” licenses. As there often is with software,there could be a license of patents, copyrightedworks and trade secrets. Under the U.S. law, if thelicense does not set out different royalty rates forthe differing types of intellectual property licensed,then all royalties cease upon all the patents expiringor being held invalid. This may not be the caseunder Canadian law where it seems that a continuingobligation to pay is enforceable.26.2 In light of these conflicting rules it seems tomake good business sense to consider what is theappropriate compensation to be paid to the Licensorif core patent contributions to the expected valuego missing. Mel Jager (at www.ryutu.inpit.go.jp/pldb/seminar_a/2005/pdf/24/B2/jager.pdf) sets outa list of drafting suggestions for hybrid licenses thatare designed to satisfy the U.S. law and for otherjurisdictions can be used as guidance for appropriatebusiness principles. Consider these drafting tipsoffered by Jager:(a) “Create a differentiation between the treatmentof patents and trade secrets;(b) Create a different royalty rate if the patentsdo not issue, if they expire or if they are invalidated;(c) Allocate the royalty payment between the twoseparate rights;(d) Provide for a change in exclusivity if the patentsdo not issue, expire, or are invalidated;(e) Be sure that the time of the running royaltiesfor the patents does not exceed the life of thelicensed patents;(f) If the royalty payments are to continue forthe use of the trade secrets after the end of thelicensed patents, clearly state the relevant conditionsin the license;(g) If the right to use the trade secrets endswhen the patents expire or when the contractis terminated for any reason, say so explicitly inthe license;(h) Consider lump sum payments up front for theunpatented technology;(i) Consider if U.S. patents are crucial to thetransaction and, if not, consider a royalty freenon-exclusive license under the U.S. patents toavoid the effect of patent termination.”26.3 For the grant clause for a hybrid licensewhere separate licenses are not practical, break itdown to have a separate grant for each type of intellectualproperty. Consider:(a) Subject to the terms and conditions of thisLicense, the Licensor hereby grants to the Licensee:(i) a license under the Licensed Patents to make,use and sell the Licensed Products in Canada, topractice the Licensed Process and to import theLicensed Products into Canada;(ii) a license under the Licensed Copyrightsto copy and make Derivative Works from theLicensed Software; and(iii) the right to use the Licensed Trade Secretsfor Licensee’s Internal Purposes only.636les Nouvelles

Grant Clauses27. Fields of Use—Use/Permitted Purposes27.1 The license grant will often restrict the applicationsto which the licensed intellectual propertycan be applied (often referred to as “Licensed Activities”).Some patent licenses use the phrase “Fieldsof Use” but “Licensed Activities” or for trade secrets“Permitted Purposes” is more self-explanatory. Forexample, a novel digital X-ray could have separateapplications for chiropractors than for veterinarians,and again different for traditional medical x-raydepartments.28. Implied Licenses28.1 The courts tend to interpret licenses so thatLicensee gets all it reasonably should get out of theintended transaction and thus will look for “impliedlicenses” when the language in the license grantseems to be deficient. For example, a court may implythat the right to “make” includes the right to sell ifthere was no other reason why the License wouldmake the product? Courts do not like narrow interpretationsthat would interfere with the reasonableenjoyment of the product by the Buyer/Licensee andwill overcome this obvious deficiency by implying alicense.28.2 However Dreadful Drafter may be concernedthat the courts will rewrite the intended deal andbe far more generous than the Licensor was in thenegotiations. He may consider it best to set outexplicitly all the rights that are granted and then todisclaim all implied rights. Consider these alternateclauses:(a) No right or license is granted or implied tothe Licensee or any person claiming through theLicensee under any patent or patent applicationother than those specifically identified as LicensedPatents.(b) The Licensor reserves to itself all IntellectualProperty Rights that are not expressly granted bythis Agreement.(c) No express or implied licenses or other rightsare provided to the Licensee under any patents, patentapplications, trade secrets or other proprietaryrights of the Licensor, including any altered formsof the Licensed Material made by the Licensor.(d) Notwithstanding all other provisions of thisAgreement and the negotiations that led to thisAgreement, the parties agree that no right orlicense, in addition to the license granted underthe Licensed Patents, is to be implied or imputed.The Licensor is free to assert infringement claimsbased on other patents, including presently existingand future patents, against the Licensee withrespect to the Licensee’s practice of the LicensedPatents—Brunsvold p. 249.29. Beneficiaries—Who Benefits From theLicense29.1 Frequently, the licensee wants to extend thebenefit of its license to its affiliates. But who are theseaffiliates? There are many definitions, many of whichare deficient. So, dreadful drafter decides to choosea definition used by the securities people—surelythat one will be well done. So he writes:“Affiliate” has the meaning given to it by the AlbertaSecurities Corporations Act.29.2 Dreadful Drafter will be surprised to learnthat this Act does not define “Affiliate” in the definitionsection. The reference simply does not work;there is no definition to use.29.3 Instead the Act provides a statement of factin the section following the definitions as follows:An issuer is affiliated with another issuer if one ofthem is the subsidiary of the other or if each of themis controlled by the same person or company.29.4 The Act goes on to provide when “control”exists:“An issuer is controlled by a person or company if(a) voting securities of the issuer carrying more than50 percent of the votes that may be cast to elect directorsare held, other than for the purpose of givingcollateral for a bona fide debt, by or for the benefit ofthe person or company, and (b) the votes carried bythe securities referred to in clause (a) are sufficient,if exercised, to elect a majority of the board of directorsof the issuer.”29.5 The Alberta Business Corporations Act is astandard of lack of lucidity on this topic—it usesthe words “Associates” and “Affiliate.” Well, let’snot belabor the point with more definitions andhave you fall asleep or slam this article down indisgust. The point is that this is a complex area andthe securities lawyers have spent many hours tryingto figure out every possible way companies can be“related” to one another—they are only matched intheir tireless imagination by the tax lawyers. So whatkind of relationships and business entities shouldDreadful Drafter be mindful of when thinking of“Affiliates”?30. Types of Entities for Affiliation30.1 Some types of entities that can be affiliatedare:(a) Individuals, for example, the relationship couldDecember 2007637

Grant Clausesbe to other entities controlled by named individuals;(b) Corporations—this is the most common affiliatedentity but many definitions focus only oncorporations to the exclusion of other entities;(c) Not-for-profit corporations/societies;(d) Trusts—e.g. income trusts;(e) Partnerships—the normal rules for definitionsthat apply to corporations fail here—e.g. referencesto “affiliates” and voting control do not applyto partnerships;(f) Limited partnerships and joint ventures; and(g) Governments and governmental agencies– whatare their “affiliates”? All departments? All corporationsowned by the Government?30.2 As mentioned in the list, the standardwords of affiliation only refer to corporations.Dreadful Drafter must make sure he chooses wordsbroad enough to cover all kinds of entities. Hemay want to speak of governing bodies as well asboards of directors.31. Control31.1 Definitions of “affiliates” often refer to “control—forexample the “Affiliate” is under the controlof the Licensee. There are two types of control tobe considered.(a) The traditional legal control is de jure control.In that case the Licensee has to own 50 percentof the votes that can be cast. But the shares thatare outstanding at the relevant time may not bethe only ones to be considered; Dreadful Draftermay have to take into account warrants and otheroptions that can be exercised to produce votingshares. In the end de jure control is sufficientshares that would allow the holder to vote toappoint a majority of the board. But, what is dejure control over a partnership, or a trust or otherform of entity?(b) De Facto control results from some fact (e.g.a contract or effective voting control block). Anexample of contractual control is an agreementthat provides effective control over the conduct ofthe business. However when contractual control isconsidered, Dreadful Drafter may want to ignorethe provision in a standard and a bona fide LoanAgreement.31.2 For an example of a de jure control consider(where #(iii) addresses a partnership):(a) “Affiliate” means any corporation, firm, limitedliability company, partnership or other entity thatdirectly or indirectly controls or is controlled byor is under common control with a party to thisAgreement. As used in this Section, “control”means ownership, directly or through one or moreintermediaries:(i) of 50 percent or more of the shares of stockentitled to vote for the election of directors, inthe case of a corporation,(ii) or 50 percent or more of the equity interestsin the case of any other type of legal entity,(iii) status as a general partner in any partnership,(iv) or any other arrangement whereby a partycontrols or has the right to control the Boardof Directors or equivalent governing body of acorporation or other entity.31.3 For example a de facto control, consider:“Affiliate” means, with respect to a Party to thisAgreement, any Person directly or indirectly controlling,controlled by, or under common control with,that Party. For purposes hereof, the term “controlled”(including the terms “controlled by” and “undercommon control with”), as used with respect to anyPerson, shall mean the direct or indirect ability orpower to direct or cause the direction of managementpolicies of such Person or otherwise direct the affairsof such Person, whether through ownership of equityparticipation, voting securities, beneficial interest, bycontract or otherwise.32. Deemed Control32.1 For examples of deemed control consider:(a) Notwithstanding the actual control exercisedby the Licensee, XYC CO is to be considered anAffiliate of the Licensee.(b) If a business entity does not have voting sharesor other securities, the Licensor directly or indirectlyhas at least the right, whether by ownershipor otherwise, to(i) make decisions for such entity;(ii) appoint a majority of individuals to thegoverning body that makes decisions for suchentity; or(iii) has an interest sufficient to receive at least30 percent of the profits of such entity.33. Foreign Countries That Do Not AllowForeign Control33.1 Some countries do not allow for de jurecontrol by foreign entities. Consider:“Affiliate” means any corporate entity that, directlyor indirectly, through one or more intermediaries,Controls or is Controlled by, or is under common638les Nouvelles

Grant ClausesControl with another corporate entity provided that inany country where the law does not permit Control,then with respect to corporations organized undersuch country’s laws “Control” shall mean the maximumcontrol permitted by those laws.34. Qualifying Date34.1 Dreadful Drafter needs to consider when therelated entity qualifies as an Affiliate. Is it the EffectiveDate of the agreement? What is the effect of anentity ceasing to qualify after the Effective Date?(a) Does the entity lose its license;(b) Continue to have license as it exists on thedate that it ceased to qualify but does not get anysupport or continued improvements?(c) Does it continue to get support or improvementsfor a specified period of time?Consider:If an Affiliate Company of the Licensee ceases tobe an Affiliate Company, any license granted to suchAffiliate Company in or pursuant to this Agreementshall terminate on the date such entity ceases to bean Affiliate Company.34.2 What is the effect of not qualifying on theEffective Date but subsequently qualifying?(a) Does the entity automatically become a beneficiaryof the license?(b) Does the entity become a beneficiary only ifnotice is given and the Licensor approves?35. Sublicenses35.1 Dreadful Drafter will have to consider whetherInterCo can sublicense its rights to others. InterComay want to for the purposes of manufacturing ordistributing. HDco may want to exercise control overwhat entities are exploiting its intellectual propertyto permit it to audit and enforce requirements in thelicense agreement including payment of royalties,permitted fields of use and geographic territories aswell as quality control.35.2 Dreadful Drafter may want to consider:(a) How will HDco enforce contractual obligationsin the head license against sub-licensees?;(b) Is Sytemsco responsible and liable for compliancewith the head licnese by the sub-licensees?;(c) Does the royalty adjust for royalty revenuereceived by the Licensee from the sublicenseesinstead of sale revenues received by the Licenseeitself (the royalty revenue will be far less than thesales revenue)?; and(d) What happens to the sublicense if the headlicense terminates?36. Responsibility of Licensee for its Affiliates36.1 Dreadful Drafter may want the licensee tobe responsible for those of its affiliates to whom itpermits as beneficiaries of the license. Consider:Upon Licensor’s request, Licensee shall provideLicensor with a list identifying its sublicensed AffiliateCompany. Each sublicensed Affiliate Company shallbe bound by the terms and conditions of this Agreementas if it were named herein in the place of theLicensee provided, however, that the Licensee shallpay and account to the Licensor for royalties hereunderpayable as a result of the activities of any and allsublicensed Affiliate Companies, and the sublicensedAffiliate Company may not grant further sublicensesto either its Affiliate Companies or any third party. Inaddition, the Licensee shall be responsible for havingits sublicensed Affiliate Companies comply with theterms and conditions of this Agreement and shallbe jointly liable for any remedies arising from anybreach of an obligation under this Agreement by itssublicensed Affiliate Companies.37. Assignment—Restrictions on Assignment37.1 The general law of contracts (and thus thelaw that applies to licenses) has developed rulesabout the assignability of agreements without theconsent of the other party. Although these rules willvary from jurisdiction to jurisdiction (e.g. province orstate), the general rule is that a license agreement isnot assignability by the licensee without the consentof the licensor if any provision can be considered tobe personal to the licensee. Examples of indicationsof personal covenants are:(a) An agreement for the licensee to commercializethe technology;(b) An agreement by the licensee to further developthe technology;(c) An agreement by the licensee to prosecutepatent protection or maintain patents; and(d) An agreement to pay royalties (where financialcredit worthiness can be considered to bepersonal).None of these indicators are inclusive. Therefore itis better practice to agree when an assignment will bepermitted by either the licensor or the licensee.37.2 Frequently an assignment as a result of acorporate reorganization is permitted. In those casesconsider:(a) Will the assignor remain liable for the performanceof the assignor’s obligations?(b) Can there be a corporate reorganization as aDecember 2007639

Grant Clausesresult of insolvency under the laws of the applicablejurisdiction?(c) What are the consequences of an amalgamationor merger?37.3 Often assignments without consent are permittedif there is a sale of all or substantially all ofthe assignor’s assets, or a sale of the business divisionthat has responsibility for the license agreement—itmay be unrealistic to expect to the assignor to haveto get consent if the license is not a material part ofthe assets being assigned.37.4 It is also appropriate to specify what theremedy is if there is an assignment without consent.If there is not a provision for termination onan un-permitted assignment, then the only remedymay be damages; that remedy perhaps will not besufficiently effective.38. Effective Assignment—Change of Control38.1 Since no assignment actually takes place ona change of control, any attempt to treat this as anassignment is forced and often unworkable. Considerplacing this issue in the termination clause ratherthan in the assignment clause.38.2 “Change of Control” with respect to anentity means the occurrence of one or more of thefollowing:(a) The acquisition by any Person or related groupof Persons, whether by take over bid or other tenderor exchange offer made directly to the shareholders,open market purchases or any other transaction orseries of transactions, of 50 percent or more of thecapital stock entitled to elect the members of theBoard of Directors or other analogous governingbody of such entity.(b) An amalgamation, merger or consolidation inwhich such entity is not the surviving entity, exceptfor a transaction in which the securities of entity immediatelyprior to the consummation of such mergeror consolidation are converted by means of suchamalgamation, merger or consolidation into securitiesrepresenting more than 50 percent of the totalcombined voting power of the combined entity.38.3 Consider the effect of corporate reorganizations.■640les Nouvelles