LICENSING INTELLECTUAL PROPERTY

TECHNOLOGY TRANSFER

FINAL EXAMINATION - December 11, 1995

Professor Jorda

Instructions: This is a three-hour, open-book exam (four and one-half hours for certain foreign students). You may consult the course materials as well as any other materials. Yet, your examination must be your own work. Do not discuss it with other students. Write your answers in the blue books supplied, but please use only one side of the page and observe the margins. Please write or print as legibly as possible. Grading will be anonymous; please do not put your name on anything you turn in. BE SURE YOUR EXAM NUMBER IS ON EACH BLUE BOOK YOU TURN IN.

PROBLEM I

A. Facts:

For many years, eyeglass lenses made of glass (not those made of plastic) had been required by the U.S. government to be of a specified hardness (strength) so that they would not be likely to break (in normal usage) and injure the wearer. Until 1990, a special heat treatment (annealing) of the lenses was adequate to meet government specifications. In 1990 new specifications were promulgated and the old heat treatment techniques were no longer adequate.

Edward Bell invented a new process for chemically treating the lenses so they could meet the government specifications. Bell obtained a patent on his process, which was adopted immediately by the entire eyeglass lens industry.

This industry is composed of three large competitors and a large number of smaller companies. The market share of these companies is as follows:
 
 

American Opticon (AO) 30%
Bash and Lam Co. (B&L) 25%
Universal Optical Corp. 20%
All others (largest having 4% of the market) 25%

Bell, through his licensing expert, Elias Colt, has succeeded in licensing his process to a number of small companies, totaling about 20% of the market, but has not succeeded in licensing the three major companies, partly because of some questions about the validity of Bell's patent.

Thomasina Edison, Universal Optical Corporation's director of licensing, has been approached by Colt to take a license. Edison has asked Universal's patent counsel, Perry Bailey, to check out the patent.

Bailey told Edison that it is clear that Universal, as well as the rest of the industry, got its technology from Bell's work and is infringing the patent. However, because of some prior publications and prior patents, Bell's patent may not be valid.

When pressed, however, Bailey states that, all things considered, he thinks there is a 60% chance the patent would be held to be valid by a court. Colt tells Edison that Bell is going to file a patent infringement suit against one of the big three companies, and Colt thinks Bell might decide to file suit against Universal, the smallest of the big three, because he might have a better chance of winning, or settling, a suit against the smaller company.

Edison has negotiated the royalty rate down about as far as she thinks she can and Universal does not object in principle to taking a license at these rates. However, Universal does not want to have to pay royalties to Bell unless its two bigger competitors are paying the same royalties.

Edison believes that Bell may sue Universal first. Edison also believes, from talking to AO's and B&L's patent and licensing people, that neither AO or B&L will take a license until Bell wins a patent infringement suit against either AO or B&L. Also, Edison is afraid that if Universal is sued, and loses, Bell could obtain an injunction which would, in effect, require Universal to pay much higher royalties to Bell (before Bell would have the injunction removed) than Edison has negotiated.

Edison's objectives are, therefore:

1. Not get sued by Bell because of the years which would be spent in the litigation, the cost of the litigation, estimated as at least $1,000,000, and the disruption the litigation would cause to Universal's management, its lawyers and its technical and marketing employees.

2. Not pay any royalties until AO and B&L pay.

3. Not pay any higher than AO and B&L will ultimately pay.


Bell's objectives are:

1. License all the eyeglass lens industry.

2. If the only way #1. can be accomplished is by suing for patent infringement, then Bell will sue.


B. Questions: What kind of business arrangement should be proposed that would meet the objectives of both Universal (Edison) and Bell? Please prepare an outline of the features of your proposed business arrangement, one that would pass the fairness test and would be a win/win resolution. Do not draft an agreement or clauses for an agreement. [25 points]

PROBLEM II

A. Facts:

Mestle Company (Mestle) opposed the trademark application of Mash-Finch Company (Mash) to register DELI QUIK for various delicatessen products. Mestle had prior use and a registration of the marks MESTLE QUIK and QUIK for powdered, sweetened cocoa, and related products.

Mash was a wholesale food distributor to supermarkets and grocery stores, servicing some 390 affiliated stores and, additionally, owning and operating some 90 supermarkets, grocery stores, or warehouse-type markets. Many of these affiliated and company owned stores included delicatessen departments, from which Mash' s DELI QUIK delicatessen products were sold.

Mestle asserted abandonment by Mash of its trademark as a result of Mash' s failure to sufficiently control the nature and quality of the goods sold under the DELI QUIK mark, alleging, among other things, the following:

1. Recipe books were incompletely distributed to affiliated stores and use of the recipes was not mandatory.

2. Affiliated stores were encouraged to develop their own recipes and to sell products without prior approval from Mash under the DELI QUIK mark.

3. Participation in Mash' s delicatessen training program was not mandatory.

4. There was no requirement that ingredients for the goods had to be purchased from Mash, nor was there an approved list of ingredient suppliers.

5. Inspections by Mash of affiliated stores using the DELI QUIK mark were incomplete and insufficient to insure control over the quality of the products sold.


Mestle contended that this resulted in a naked license situation. However, there was evidence which established that:

1. Mash did provide deli training manuals and training programs for deli managers and assistant managers (which were mandatory only for company store personnel).

2. Mash also distributed recipe books for its DELI QUIK products and a sandwich program manual providing specifications in connection with a variety of the sandwiches.

3. Regular merchandising bulletins were sent to the stores.

4. Mash encouraged (although it did not require) affiliated stores to purchase all material from Mash, and over 8% of the raw materials used in DELI QUIK products were, in fact, purchased from Mash.

5. Mash' s district managers did regularly inspect company and affiliated stores to observe operations and to handle problems.

6. Mash also employed a deli merchandiser (an inspector) who visited the delicatessen departments of the stores on a regular basis and oversaw operation of those departments.


B. Questions:

1. What is the rationale behind the quality control requirement in trademark licensing? [5 points]

2. Were Mash' s quality control activities, as a whole, adequate to insure the quality of the goods sold or were the alleged defects in Mash's licensing arrangement sufficient to justify a holding of trademark abandonment? [5 points]


Problem III

A. Facts

Wonderful Computers, Inc. ('WC') is in the business of making and selling computers upon which is loaded, in addition to WC' s copyrighted computer operating system software, a suite of computer applications specifically focused on office management. The office management suite of applications software programs includes software for accounting, word processing, finance, E-Mail, networking, and other functions. The Accounting software, 'ACT-UP' is a critical part of the success in the market of WC' s office management software suite. 'ACT-UP' was independently developed by Struggling Old Software, Inc. ('SOS'), and subsequently licensed exclusively to WC by SOS.

The license agreement WC and SOS requires that WC pay to SOS $100.00 for the use of the intellectual property rights (patents, trade secrets and copyrights) of SOS embodied in 'ACT-UP' in each computer system that it sells incorporating the office management software suite including the 'ACT-UP' accounting software. (A separate license agreement governs WC' s rights to use SOS' s trademark 'Act-UP', and is unrelated to this question.) These royalties are due to SOS quarterly, to be paid within thirty (30) days of the end of each quarter, i.e., December 31, March 31, June 30, and September 30. The license agreement with SOS requires SOS to upgrade the 'ACT-UP' software once per year, with the next upgrade due to WC in July of 1996.

SOS has now filed for bankruptcy and a referee/trustee in bankruptcy of the estate of the business of SOS has been appointed.

B. Questions

1. Unless and until the referee/trustee rejects the licensing contract what impact does the fact that SOS had entered bankruptcy proceedings have on the patent, trade secret and copyright license between SOS and WC? Why? [5 points]

2. After the referee/trustee rejects the license agreement between SOS and WC, if the referee does reject the contract, what right does WC have to continue the license to the patents, trade secrets and copyrights embodied in 'ACT-UP'? Can WC maintain the exclusivity of the license? [5 points]

3. After the referee/trustee rejects the license agreement between SOS and WC, if the referee does reject the contract, can WC enforce the obligation of SOS to provide the upgrade to the 'ACT-UP' accounting software, which is due next July? Why? [5 points]


Problem IV

A. Facts:

Several years ago, ABC Industries (Licensor) and XYZ Corporation (Licensee), both American companies, concluded a license agreement with the following GRANT clause:
 

Licensor hereby grants and agrees to grant to Licensee a sole license under Licensed United States Patent Rights to make, have made, use, and sell Licensed Products throughout the United States during the term of this Agreement.
A parallel license was also granted to an independent British company under corresponding foreign patent rights outside the U.S.

Recently a serious controversy arose between the parties when XYZ Corporation started to export Licensed Products, made in the U.S. by them, for sale and use in foreign countries where ABC Industries had not obtained corresponding foreign patent rights. XYZ Corporation claimed that they had the right to export to those countries where ABC Industries did not have blocking patents. ABC Industries strenuously disagrees.

Pursuant to an ARBITRATION clause the matter is now in the hands of an ARBITRATOR for decision under Rules of the American Arbitration Association.

B. Question:

In whose favor should the Arbitrator settle this controversy? Why? [10 points]


PROBLEM V
 

1. What is the 'Blackbox Dilemma' and how can it be neutralized? [2 points]
2. Can intellectual property misuse be 'purged' or rectified? If so, how? What is the effect of any such purging and as of when is it effective? [2 points]
3. Is the 'Licensee Estoppel Doctrine' viable in a) patent law and practice and b) trademark law and practice? [2 points]
4. What is an easy, simple test for determining the legality (from an antitrust/intellectual property misuse perspective) of intellectual property license restrictions? [2 points]
5. Please comment on the adequacy of the following best-efforts clause: 'RST Inc. shall exercise its best efforts to
exploit the Licensed Products.' Should you find this clause deficient, indicate how it should read and what other
additional or alternative provisions should have been included. [2 points]

 
* * * END OF EXAMINATION * * *
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