Ethics And Professionalism In License Negotiations Advanced Licensing Institute January 8, 2009 by...

Ethics And Professionalism In Ethics And Professionalism In License NegotiationsLicense Negotiations

Advanced Licensing InstituteAdvanced Licensing Institute

January 8, 2009January 8, 2009

byby

D. Patrick O’ReilleyD. Patrick O’Reilley

Finnegan, Henderson,Finnegan, Henderson,Farabow, Garrett & DunnerFarabow, Garrett & Dunner

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Scope of PresentationScope of Presentation

• Ethics and ProfessionalismEthics and Professionalism

• Standards and RulesStandards and Rules

• Application to Licensing NegotiationsApplication to Licensing Negotiations

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EthicsEthics

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

ProfessionalismProfessionalism

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

Webster’s Dictionary

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What and Why Professionalism?What and Why Professionalism?Honesty and candor instead of gamesmanship and Honesty and candor instead of gamesmanship and overreaching.overreaching.

Negotiation is not a win or lose gameNegotiation is not a win or lose game

Obtaining enforceable yet workable business Obtaining enforceable yet workable business arrangement.arrangement.

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

Protecting and enhancing a professional reputationProtecting and enhancing a professional reputation ..

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Professional NegotiationsProfessional Negotiations • EthicalEthical• CourteousCourteous• ConfidentConfident

– Knows business issues involvedKnows business issues involved

– Knows legal issues involvedKnows legal issues involved

– Knows client’s positionKnows client’s position

– Knows scope of authorityKnows scope of authority

– Understands and accepts concept of negotiationsUnderstands and accepts concept of negotiations

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Relevant StandardsRelevant Standards

• LES ProfessionalismLES Professionalism– Full disclosureFull disclosure

– Fair representationFair representation

– No conflictsNo conflicts

– No undisclosed No undisclosed personal interestpersonal interest

– ConfidentialityConfidentiality

• Other ethics rulesOther ethics rules– No lyingNo lying

– No humiliationNo humiliation

– Competent Competent representationrepresentation

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LES StandardsLES Standards

• LES Rules of ConductLES Rules of Conduct– Guidelines for conduct of members Guidelines for conduct of members

to promote professionalism in to promote professionalism in licensinglicensing

– Supplemental to rules imposed on Supplemental to rules imposed on members by employer and other members by employer and other affiliationsaffiliations

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LES Standards – Full DisclosureLES Standards – Full Disclosure

• ““Each member owes to his/her Each member owes to his/her client/employer full and candid disclosure client/employer full and candid disclosure of his/her judgment and opinion as to of his/her judgment and opinion as to potentially licensable properties and any potentially licensable properties and any markets therefore, including therein markets therefore, including therein full full disclosure ofdisclosure of the nature and extent of any the nature and extent of any market, engineering or other studies and market, engineering or other studies and degree of reliability of degree of reliability of any studies any studies underlying such judgment and opinionunderlying such judgment and opinion.”.”

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LES Standards – Fair RepresentationLES Standards – Fair Representation “ “It is the duty of every member of this It is the duty of every member of this

society to make a fair representation as to society to make a fair representation as to the nature, quality and extent of the the nature, quality and extent of the subject matter being licensed. subject matter being licensed. Representations as to performance, Representations as to performance, reliability, or value should be supported reliability, or value should be supported by fact, and by fact, and any statementany statement which is which is not not supported by factsupported by fact should be should be identified as identified as opinionopinion. . Members shall not withholdMembers shall not withhold, , prior to or during licensing negotiations, prior to or during licensing negotiations, basic information of a negative naturebasic information of a negative nature, , whether whether requested or notrequested or not.”.”

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LES Standards - ConflictsLES Standards - Conflicts

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

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LES Standards – Personal InterestsLES Standards – Personal Interests

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

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LES Standards - ConfidentialityLES Standards - Confidentiality

• ““It is the duty of a member of this society to It is the duty of a member of this society to respect and hold inviolate the confidences of a respect and hold inviolate the confidences of a client. In the absence of other agreement with the client. In the absence of other agreement with the client, termination of the employment with the client, termination of the employment with the client will not terminate this obligation, but the client will not terminate this obligation, but the duty is relieved by the fact that the information duty is relieved by the fact that the information given in confidence is generally known. In the given in confidence is generally known. In the event that event that confidencesconfidences of a previous client preventof a previous client prevent him/her from fully him/her from fully discharging duties to the discharging duties to the subsequent clientsubsequent client, the member , the member shall immediately shall immediately notifynotify the subsequent client of such disability.” the subsequent client of such disability.”

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ABA Model Rules of ABA Model Rules of Professional ConductProfessional Conduct

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

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

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

ABAABA Model Rule 4.1Model Rule 4.1

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• Rule 4.1(a) forbidsRule 4.1(a) forbids– Lying about a material factLying about a material fact

• What is material depends on the situationWhat is material depends on the situation• Distinguish posturing or pufferyDistinguish posturing or puffery

– Failing to disclose a material factFailing to disclose a material fact• Where failure to disclose amounts to a Where failure to disclose amounts to a

misrepresentationmisrepresentation

– Making a misstatement of lawMaking a misstatement of law• Cannot assume opponent knows the lawCannot assume opponent knows the law

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• Rule 4.1(b) forbidsRule 4.1(b) forbids– Silence or inaction with knowledge of client’s Silence or inaction with knowledge of client’s

misleading statements or actionsmisleading statements or actions– Silence with knowledge that opponent Silence with knowledge that opponent

misunderstands an issue of fact or lawmisunderstands an issue of fact or law• Party with greater knowledge may have to assist Party with greater knowledge may have to assist

other partyother party

• Opposing counsel’s lack of experience may increase Opposing counsel’s lack of experience may increase obligation to discloseobligation to disclose

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Material Misrepresentations??Material Misrepresentations??

• Offering license under pending but rejected patent Offering license under pending but rejected patent application.application.– No representation of issued patent.No representation of issued patent.– File history available to both partiesFile history available to both parties

• Offering license for technical information that Offering license for technical information that may be in public domain.may be in public domain.– Absent actual knowledge that all is public, okay.Absent actual knowledge that all is public, okay.– Only relative secrecy is needed.Only relative secrecy is needed.

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• Offering license under patent known to be invalid.Offering license under patent known to be invalid.– No representation of validity.No representation of validity.– What is known?What is known?

• Asserting need for license with knowledge of no Asserting need for license with knowledge of no infringement due to file history.infringement due to file history.– Equal access to file history.Equal access to file history.

• Asserting no need for license with knowledge that Asserting no need for license with knowledge that patent owner is unaware of different model of patent owner is unaware of different model of accused product.accused product.– Any duty to advise patent owner?Any duty to advise patent owner?

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• Offering covenant not to sue with Offering covenant not to sue with knowledge that title to licensed right is in knowledge that title to licensed right is in doubt.doubt.– No warranty of title.No warranty of title.

• Failing to note all changes made in draftFailing to note all changes made in draft– Modern compare software induces reliance but Modern compare software induces reliance but

also provides means for checkingalso provides means for checking

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

Comment to ABA Model Rule 4.1Comment to ABA Model Rule 4.1

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ABA Formal Opinion 06-439*ABA Formal Opinion 06-439*Under Model Rule 4.1, in the context of Under Model Rule 4.1, in the context of negotiation, . . . a lawyer representing a party negotiation, . . . a lawyer representing a party may not make a false statement of material fact may not make a false statement of material fact to a third person. However, statements regarding to a third person. However, statements regarding a party’s negotiating goals or its willingness to a party’s negotiating goals or its willingness to compromise, as well as statements that can fairly compromise, as well as statements that can fairly be characterized as negotiation “puffing,” are be characterized as negotiation “puffing,” are ordinarily not considered “false statements of ordinarily not considered “false statements of material fact” within the meaning of the Model material fact” within the meaning of the Model Rules.Rules.

* April 12, 2006* April 12, 2006

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Lying vs. PuffingLying vs. Puffing

• Lying.Lying.– Misstatement of historical, objectively verifiable fact.Misstatement of historical, objectively verifiable fact.

• ““Can’t accept royalty of 5%; our profit margin is only 5%.”Can’t accept royalty of 5%; our profit margin is only 5%.”

• Puffing.Puffing.– Statement of inference, interpretation or intention.Statement of inference, interpretation or intention.

• ““Can’t accept royalty of 5%; we won’t make a profit.”Can’t accept royalty of 5%; we won’t make a profit.”

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• ““Client will not accept less than 4% Client will not accept less than 4% royalty.”royalty.”– Even with knowledge that client will accept Even with knowledge that client will accept

less, generally considered puffing, not lying.less, generally considered puffing, not lying.

• ““Because of MFL clause, client cannot Because of MFL clause, client cannot accept less than 4% royalty.”accept less than 4% royalty.”– If there is no MFL clause, lying.If there is no MFL clause, lying.

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• ““The licensed patent has issued”The licensed patent has issued” – – Lying, if known not to beLying, if known not to be

• ““The licensed patent is valid”The licensed patent is valid”– Puffing, despite knowledge of arguable Puffing, despite knowledge of arguable

weaknessesweaknesses• prior artprior art• even statutory bar - claim scope importanteven statutory bar - claim scope important

– Suppose knows of arbitration decision of Suppose knows of arbitration decision of invalidity – is it lying?invalidity – is it lying?

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Application of Standards Application of Standards Scenario 1Scenario 1

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

How do you proceed?How do you proceed?

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

How do you proceed?How do you proceed?

What are the pitfalls?What are the pitfalls?

Can they be addressed proactively?Can they be addressed proactively?

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

What are the pitfalls?What are the pitfalls?

How should they be addressed?How should they be addressed?

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Application of StandardsApplication of StandardsScenario 4Scenario 4

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

What does lawyer do?What does lawyer do?

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

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


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

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Application of Standards Application of Standards Scenario 5aScenario 5a

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

Is lawyer’s obligation different?Is lawyer’s obligation different?

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


-- Say nothing -- Inform potential licensee

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


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

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

What should lawyer do?What should lawyer do?

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

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

What should the licensor’s lawyer do?What should the licensor’s lawyer do?

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

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Application of Standards Application of Standards Scenario 9aScenario 9a

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

What should the licensor’s counsel do?What should the licensor’s counsel do?

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

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

What should lawyer do?What should lawyer do?

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

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ConclusionConclusion

• Be KnowledgeableBe Knowledgeable

• Be EthicalBe Ethical

• Be ProfessionalBe Professional

• No client or employer is worth sacrificing No client or employer is worth sacrificing your profession.your profession.

Ethics And Professionalism In License Negotiations Advanced Licensing Institute January 8, 2009 by...

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