Patent Licensing in the Display Industry: A Primer

Especially in the fast-changing environment of display technology, companies should know the facts when it comes to intellectual property. What is IP, whose is it, and how can it be protected? Although the legal language can be daunting, this is vital information for anyone doing business in the display arena. Information Display will be offering articles throughout the next several months from several intellectual property experts. This is the first article in a series of four from law firm McKenna Long & Aldrige, written to provide an overview of patent licensing for the perspective of information-display managers.

by Song Jung and Adrian Mollo

THE DISPLAY INDUSTRY is a good model for a discussion of patent license agreements. First, the industry has multiple categories of companies, each with different, and often divergent, business interests. As discussed below, those interests may vary for a number of reasons, including both business concerns (e.g., the natural disinclination to enforce patents against potential customers) and legal issues (e.g., the fact that the new patent exhaustion doctrine limits the ability of a patent owner to implement a multi-tiered licensing program).

Further, the electronics and display industries are very competitive. Consider a 2005 survey published by the Licensing Executive Society (USA & Canada), which reported that the "digital information communications and electronics" industry group, more so than any of the other industry groups surveyed, responded that improving their patent bargaining position and managing litigation risk are key motivations for developing IP assets.¹ The LES survey also confirmed that the communications and electronics industries have an above-average number of in-bound and out-bound license agreements, id. at p. 150 (Exhibit 4), confirming the prevalence of licensing activity in the electronics industry.

Later articles in this series will address issues arising in the negotiation and drafting of patent licenses (e.g., types of license grants and covenants not to sue), recent legal developments of note to the licensing executive (in areas including antitrust law, patent exhaustion, and patent enforcement), and a checklist of issues to consider when preparing to negotiate and draft patent licenses and related agreements. This first article, however, is intended to provide an introduction to the forms of intellectual property, an understand-ing of why businesses license, and a discussion of licensing considerations in the display industry.

Forms of Intellectual Property

The most common forms of intellectual property are listed in Chart 1.

The intellectual property laws, generally speaking, provide the owner the right to prevent unauthorized use of the intellectual property. Unauthorized use of a patent, copyright, or trademark is generally referred to as infringe-ment of the intellectual property. Obtaining or using a trade secret without permission is referred to as misappropriation of the trade secret.

It is common for a license to address two ormore forms of intellectual property. For example, a license agreement might license the right to practice a particular group of patents, license a trademark under which the goods will be distributed, and license the copyright to a software program needed to operate the product. Although this series of articles focuses on patent license agreements, it is important to remember that patent rights may sometimes present the best value when coupled with other forms of intellectual property or assets.

Furthermore, although this article focuses on U.S. law, licensing in the display industry is, by its nature, an international effort. As such, the practice requires careful consideration of the law of the U.S. states (whose law governs the interpretation and enforcement of contracts), one or more nations (depending on the domicile of the parties and the place for performance of the agreement), and international treaties.

Why Do Companies License?

More important than "what" is being licensed, of course, is the question of "why." As noted above, the unauthorized use of a patented invention constitutes infringement of the patent, which triggers a number of potential remedies under the Patent Act, ranging from a reasonable royalty (the minimum recovery afforded a patent owner, see 35 U.S.C. § 284) to a permanent injunction and an award of lost profits and attorneys' fees.

A license, in turn, is the right to do something that, but for that grant, would constitute infringement. In other words, the patent owner may elect to barter away the exclusive right as against a certain party in return for some negotiated compensation. That com-pensation can take various forms, including a monetary payment (lump sum or a running royalty), a return grant of rights under the licensee's patents (a cross-license agree-ment), or some other type of non-monetary consideration (e.g., shareholdings in a joint venture).

The strategy underlying how to value a license is complex. Considerations include the relevance of the patented invention to the licensee's business activity, the availability of non-infringing alternatives, the relationship between the licensor and licensee, the length of the proposed license, and the breadth of the licensed rights, whether the license may benefit the licensee's affiliates, the scope of any grant-back rights, the licensee's profitability and ability to pay, the relevance of the licensee's own intellectual property, and whether the licensor may provide additional rights (e.g., know-how pertaining to use of the patented invention).

A patent license, therefore, is much more than a negative right. It is a tool for accomplishing larger business objectives, whether securing relationships with suppliers, extracting a fee from competitors, or creating new alliances and ventures.

Licensing in the Display Industry

Some businesses develop technologies, others use them to make products, and yet more assemble and sell finished goods to end-users. The concerns and objectives of a party vary, depending on the party's place in the system. For perspective, consider Chart 2, which attempts to categorize members of the display industry and characterize each category's likelihood to grant or take patent licenses (also referred to as either in-licensing or out-licensing patents).

The foregoing chart may be divided into three general categories of licenses: (a) upstream and downstream licenses, (b) licenses by and between competitors, and (c) licenses by non-practicing entities.

(a) Upstream and Downstream Licenses

The first category includes licenses within the value chain for a product, either upstream (e.g., a display manufacturer to a component manufacturer), or downstream (e.g., a component manufacturer to a display manufacturer). The nature of such licenses is significantly influenced by the business relationship between the licensor and licensee and related constraints.

Downstream licenses are uncommon for at least two reasons. First, a component manufacturer will naturally wish to avoid adversity with its potential customers. Second, sales of patented components to downstream customers likely "exhaust" the manufacturer's patent rights in the component, obviating the need by any downstream user for a license to use those components.

Upstream licenses are also uncommon, although they are seen more frequently than downstream licenses. On one hand, the upstream license presents a revenue generation opportunity without the direct threat of alienating existing or potential customers.

On the other hand, if the asserted patent claims apply equally to both upstream commercial activity (perhaps by a component manufacturer, a chemical company, or an equipment manufacturer) and activity by the patent owner's competitor, the patent owner may opt for horizontal enforcement of the patent, rather than an upstream license.

Why? First, any upstream patent licenses pose the threat of inadvertently exhausting patent rights against downstream use by competitors, particularly following the U.S. Supreme Court's 2008 decision in Quanta Computer Corp. vs. LG Electronics, Inc. (as discussed more fully in a later article). Second, a horizontal license may result in additional non-monetary benefits, such as a cross-license to a competitor's own patent portfolio. Third, if the patent owner is entitled to calculate royalties due based on the value of the downstream combination rather than the value of the upstream component or chemical, the horizontal license may be far more lucrative than an upstream license.²

(b) Licenses to Competitors

The second category of licenses involves those between competitors.

Why, some may ask, would the patent owner forfeit the right to exclude others from practicing the invention, particularly competitors? In some instances, admittedly, it doesn't make sense. Consider Coca-Cola, which zealously protects the trade secret rights to its formula. Likewise, pharmaceutical companies understandably investigate all available means to extend the duration of their patent monopolies over valuable medications and drugs. The right to exclude others and protect a valuable formula or design is a powerful tool.

On the other hand, the potential benefits of out-licensing patent rights often outweigh the value of excluding others from competition. For example, licensing new display technologies, on fair and reasonable terms, might not only disincentivize competitors from designing around your invention, but could help establish an industry standard.

Likewise, patent licenses can be used to manage and resolve threats from others, reduce the cost to acquire or design around new technologies, and acquire rights for both the licensing party and its affiliates and subsidiaries, thereby creating efficiencies for a family of companies. Further, presuming the owner and its licensee have roughly equivalent materials, manufacturing, and labor costs, the license fee adds an incremental cost to the competitor's operations.

(c) Licenses by Non-Practicing Entities

The third category of licenses encompasses those made by non-practicing entities (NPEs).

An NPE is a company that does not itself commercially use the claimed invention. Examples may include technology development companies, universities, and "patent trolls." "Patent trolls," in particular, have received the ire of industry and have been described as " . . . patent licensing firms that often end up taking legal action . . . [and] seldom ever create any inventions worthy of patents themselves."³ Licensing programs by NPEs are noteworthy because they are not subject to the business constraints imposed on conventional licenses, whether upstream, downstream, or among competitors (e.g., concerns regarding alienating a customer base, licensing a component manufacturer that may supply a competitor, etc.).

Conclusion

For a variety of reasons, most licensing activity in the display industry appears to be agreements or conflicts between competitors or out-bound licenses by non-practicing entities, such as technology companies and universities. This pattern is influenced by the underlying business relationships between the entities (such as the nature of a company's business and its customers) but also by strategic legal considerations. The remaining articles in this series will touch on those legal considerations, such as the differences between types of license grants, the interplay of standard-setting organizations and the antitrust laws, and the patent exhaustion doctrine. The series will conclude with a checklist of issues to consider when preparing to negotiate and draft patent licenses and related agreements.

References

¹R. Razgaitis, "U.S. Canadian Licensing in 2004: Survey Results," les Nouvelles, December 2005, p.152 (Exhibit 7).

²The U.S. Patent Act can be found at Title 35 of the U.S. Code, the Copyright Act at Title 17 of the U.S. Code, and the Lanham Act (the U.S. trademark statute) at Title 15 of the U.S. Code. Trade secret law, in turn, is governed by state law. Approximately 46 of the U.S. states have adopted a form of the Uniform Trade Secrets Act ("UTSA"), thereby providing a measure of uniformity in trade secret law. There are also numerous international treaties that touch on each area of patent, copyright, trademark, and trade secret law.

³The UTSA defines a "trade secret" as including any formula, pattern, compilation, program, device, method, technique, or process, that (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

⁴Whether the patent owner will be able to recover patent damages based on the value of the downstream combination (for example, a laptop computer), rather than the value of the patented component (for example, a microprocessor), will turn on application of the "entire market value rule." Typically, a patent owner is limited to a recovery based on the value of the patented component. If, however, the patentee shows that the patented component is the source of demand for the downstream combination, the patent owner may seek damages based on the entire value of the downstream combination, including the value of any accompanying unpatented components. See, e.g., Rite-Hite Corp. v. Kelley Co., Inc., 56 F.3d 1538 (Fed. Cir. 1995).

⁵Investors Business Daily (May 29, 2008). •