BOEHMERT & BOEHMERT - 1 -

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1 - 1 - Kinds, Scope and Limits of Licensable Intellectual Property Rights ================================================== (Paper presented by Dr. Heinz Goddar, Boehmert & Boehmert/Forrester & Boehmert, German Patent Attorney, European Patent and Trademark Attorney, Munich, Germany, Past President of LES International (LESI), at an EPO Licensing Seminar at Ljubljana, Slovenia, on January 17/18, 2006) 1. Exploitation of Technology and Intellectual Property Rights (IPRs) When technology is to be used in cooperation with a third party, whether in the form of a license, as it is the main aspect of this paper, or by merger or by taking capital investment of a third party into the company owning the technology, it is of tremendous importance to determine the value of patents and other intangible assets, in the following designated as Intellectual Property Rights (IPR), belonging to the respective entity. In many instances, said IPRs, understood in a broader sense, do already exist by the mere creation of a technology etc., in other instances an appropriate protection by registered IPRs is necessary or at least advisable. The purpose of this paper is to give a well-founded preview relating to the subjects to be discussed during the lecture. The paper is more detailed than it will be possible to factually discuss the items involved during the lecture, which will be restricted to certain abstracts therefrom, but nevertheless may be considered as a basis for further studies and considerations by the participants Licensing and IPRs Licensing means "permitting", and quite in general nothing can be licensed which the potential licensee is enabled or permitted to do even without the permittance by the potential licensor. Usually, and at least in the understanding of this paper, by "licensing" it is understood that a third party is enabled to use patents and other industrial property titles, i.e. designated as IPRs,

2 - 2 - as already indicated, which otherwise that party, the licensee, could not use. Insofar, one has to distinguish between two completely different aspects of licensing, namely the enabling and the permitting aspect. As an example, in case of a pure know-how license, licensing means that the licensor enables the licensee to use the licensed know-how by disclosing same to the licensee, since otherwise, without the specific knowledge achieved by licensing, the acquiring party, the licensee, as a matter of course could not use such know-how. In other cases, like in a pure patent license, where the licensor would not undertake any obligation to teach the licensee anything more than one could already learn from a respective patent specification, there is only a licensing in the sense of permitting the licensee to use the otherwise exclusive right of the licensor as granted by the patent. 2. Kinds of IPRs In order to illustrate to the audience the types of intellectual property which can be licensed, reference will subsequently be made to the different types of IPRs in the widest possible sense. Any advisor participating in licensing should be guided by means of a type of check list to investigate the structure and possible scope of license arrangements Registered IPRs Typical IPRs are those in a narrower sense, namely registered IPRs. These rights are the easiest basis of someone wishing to license out or in, though the world of licensible IPRs certainly is not restricted to such rights Patents A preeminent role among IPRs is enjoyed by patents, which in the present context also cover patent applications. When valuing these it must be borne in mind that even a patent application already represents an economic basis for licensing, although it still fails to provide full exlusive rights.

3 - 3 - Naturally, in the case of a patent application there is a risk of it subsequently not leading to a patent during examination proceedings because its invention is not considered patentable, but the risk of a subsequent patent destruction also exists with already granted patents, which can be destroyed during opposition or invalidation proceedings. In the practice of licensing of technology which is subject to patent applications or patents rather seldom there is a significant risk factor deduction in case of patent applications compared with already granted patents. This is largely the opposite to what happens when according e.g. to German practice compensation for employees' inventions is calculated, where a 50 % risk deduction up to patent grant has been adopted. A transfer of this rule to licensing has not generally been observed, though certain reductions during the application period of an invention which is subject to a patent application might be justified Protection Certificates So-called protection certificates occupy a special position among registered IPRs. At present such protection certificates in most countries can only be obtained for medicines. As an example in the Federal Republic of Germany such protection certificates, which give a supplementary protection term following onto the life of the patent, can be obtained for those patent-protected medicines, whose initial acceptance as medicines took place after January 1, When valuing IPRs of medicine-manufacturing enterprises for the purpose of licensing, which have patent applications or patents for not yet or only just authorized medicines, it is necessary to carefully check whether it is possible by means of a protection certificate to obtain an extended exclusion effect and therefore by means of the protection certificate a corresponding prolongation of a possible license period can be obtained Utility Models For the purpose of the present paper utility models, wherever they exist because of local legislation, can be looked upon as "petty patents". Fundamentally they are exclusive rights substantiating claims to cease and desist and for damages. Since the right of the utility model

4 - 4 - owner insofar are no different from those of the patentee, they lead to the corresponding consequences for licensing Designs Unlike in the case of patents and utility models, designs do not protect technical inventions, but instead creations having an esthetic uniqueness. It is not a question of whether the particular article represents a work of art or is "attractive" in the esthetic sense, it is only the uniqueness differentiating a particular design from a generally known shape fund, no matter whether it is attractive or not. The protection of the design, unlike that of a patent or utility model, is not an "absolute" protection, but instead only covers the copying of the protected design, a requirement which does not exist with patents and utility models. Subcases of design protection are the protection of typographic characters and the topographies of microeletronic semiconductor products. If the enterprise to be acquired is of such a nature it will be necessary to check such rights. Rights of the aforementioned kind are valuable assets in case of licensing Variety Protective Rights In special cases variety protective rights, particularly concerning seeds etc., in accordance with the variety protection acts existing in many countries may be considered for licensing Registered Marks Apart from patents, trademarks constitute extremely valuable IPRs which can be used for licensing in the broadest sense. Marks, namely word and picture marks, but also sound or three-dimensional structures, can assume considerable values, as will be made apparent by the fact that e. g. in 1991 seven marks for alcoholic drinks with which it was possible in the past to obtain an annual turnover of about 235 million US $ were sold by the Canadian drinks firm

5 - 5 - Seagram for more than 370 million US $ to American Brands, giving an average mark value of more than 50 million US $. Other than in the case of patents, utility models and designs the protection term of trademarks is unlimited. Also for the economic use period it is difficult to give empirical values, because it can range between zero in the case of stock marks and extend to infinity. On e. g. considering Coca Cola, the value of a mark frequently exceeds many times the total value of the remaining assets of the enterprise. Obviously, trademarks are an ideal subject for license agreements, taking duly into consideration the aforementioned aspects Domains Recently, domain names, generally designated as Domains, play an increasingly important role, registration being obtainable, by various mechanisms not be discussed here, at a semiprivate organization located in U.S.A., called ICANN (Internet Corporation for Assigned Names and Numbers). Disputes between holders of identical and similar Domains and between holders of Domains and trademark registrants are settled by special dispute settlement systems under the surveillance of the WIPO Mediation and Arbitration Center, Geneva Unregistered Exclusive Rights Often when licensing is taken into consideration, not sufficient attention is given to the fact that there are also unregistered exclusive rights which give the potential licensor a competition advantage and therefore represent a value which economically can be used for licensing purposes Trade Secret Know-How ("Unprotected Invention")

6 - 6 - To continue to use "patent language", firstly reference is made to unprotected inventions in the form of trade secret know-how. The latter covers such information, particularly of a technical nature, which is not known to the public or is not easily accessible to the public. Typically any technical invention fulfilling the requirements for patentability, i. e. which is novel and inventive compared with the prior art, in the case that it is not made accessible to the public and in particular is not applied for as a patent, constitutes secret know-how, which gives its owner an economically usable competition advantage, in that the particular know-how cannot be used by competitors because they are unaware of it. Therefore the disposal of such know-how represents an asset, which can be used for licensing purposes Copyrights Copyrights, which are unregistered e. g. in Germany unlike in many other countries, can also constitute an important asset for licensing purposes, particularly if it is borne in mind that copyrights not only represent the duplication rights for books or musical works, but also software rights, which according to the law of many countries cannot be patented and are instead subject to copyright protection. Thus, not only when thinking of licensing in case of publishing houses and the like, such copyrights play an important and in fact decisive part, but also in technology-oriented enterprises, such as software companies and the like Get-Up Rights - Unregistered Trademarks Not only get-up features, such as word or picture marks, pakings, etc., which are protected by registered marks, represent a value that can be used in licensing transactions, but also those markings which are only protected, either by Trademark or Competition Law, in that they are known in business and are e. g. understood to represent a particularly high quality. Particulary in the franchising sector, i. e. restaurant chains and the like, an important part is played by such get-up rights, so that they are economically usable and correspondingly have to be considered in licensing business Name and Business Name Rights

7 - 7 - The goodwill associated with the name of the enterprise must not be underestimated. On assuming that a firm called Microsoft would have to be valued, then the name MICROSOFT would in this case constitute a business name right, would still have a considerable economic value even if no parallel trademark or mark protection existed. The aforementioned goodwill can be made subject of licensing, too. 3. Patent Strategies 3.1. Trade Secret or Patent - A Principle Choice Particularly in view of the considerable costs usually the patenting of technical inventions, to which in a broader sense also know-how, like computer software which is not protectable under the patent systems of most countries, belongs, it is difficult for a company to decide what kind of technical know-how created, here and in the following generally designated as "Invention", should be protected by the mere fact of keeping it secret, thereby preventing third parties to imitiate the Invention because of unawareness of it, and which Inventions should be protected by patents, here and in the following under this term including utility models. The question of whether to protect an Invention by keeping it secret or by protecting it by a patent is of a principle nature. The reason is that if one tries to protect an Invention by a patent, necessarily publication of the respective Invention takes place, based on the general rule that the grant of a patent is the reward the public gives to an inventor just for the fact that the inventor does not keep the respective Invention secret, but discloses it to the public. Accordingly, a wise choice has to be made between the alternatives of trade secret and patent protection. In the following, it shall be tried to give some guidelines for the aforementioned choice Inventions Derivable from Product Sold

8 - 8 - A first step in the decision process, related as to whether an Invention should be protected by keeping it secret or by filing a patent application, is whether the invention can be derived or learnt by an ordinary expert from the product to be sold and marketed, respectively. If the product itself, like in case of certain structural Inventions related to an engine or the like, shows the Invention, the only way to protect such an Invention is to file a patent application before marketing of the product, since otherwise the Invention becomes known to the public, and thereafter can no longer be protected by neither keeping it secret or nor patenting. Accordingly, in this first step of the decision process those Inventions which can be learnt form the product to be marketed are subject of a definite choice between - impossible - protection by trade secret and patenting already Inventions not Derivable from Product Sold If the decision process according to 1.1. has led to the result that the Invention cannot be learnt from a product sold, typically in case of methods of manufacturing, like physical processes to manufacture a certain chemical substance (temperature, pressure etc.), it principally is possible to protect the Invention by either keeping it secret or by patenting. The charm of protection by trade secret is that practically no cost, except those for secrecy agreements and documentation, as discussed under and documentation, as discused under , are created; the disadvantages and certain pitfalls are discussed under Secrecy Agreements If a decision is made to protect an Invention by trade secret only, i. e. without applying for a patent, a first condition to continuing protecting the Invention by keeping it secret is that appropriate steps are taken to avoid disclosure of the Invention to third parties. Amongst those measures, in case of cooperation with third parties, marketing negotiations etc. Secrecy Agreements are of vital importance. It is to be recommended that whenever trade secrets might be disclosed to third parties, or trade secrets might arise of the cooperation with a third party, in advance by appropriate Secrecy Agreements it is made sure that the respective knowhow and Inventions are definitely kept secret by the third party. It is also necessary to include

9 - 9 - provisions into employment agreements, both in the own company where the Invention is created and in the company of the cooperation partner, which make sure that the associates and workers of the parties keep the Invention secret Documentation Since this is a pre-condition for certain rights which the owner of a trade secret may still have even after the trade secret becomes publicly known, namely in case of patenting by a third party (2.2.) and also in relation to certain requirements to enjoy legal advantages in case of licensing (3.), the Invention should be carefully documented. This should be done in a written form, describing in detail, very similar to the drafting of a patent specification, the character and essence of the Invention, the name of the persons having contributed to the creation of the Invention, the date on which the development of the Invention began, and the date on which the Invention was finalized. Such documentation is of particular importance also in cases where rights in a first-to-invent country are concerned, like U.S.A., since the documentation may be of extreme use in later interference procedures, i. e. in cases where there is a fight, in relation to patent rights to be obtained in U.S.A., between independent inventors Trade Secrets and Pitfalls If protection of an Invention by trade secret would, under all circumstances, be as effective as by patent, and would it not present certain pitfalls, as a matter of course probably no patent laws would exist in this world. Protection by trade secret, however, is rather fragile, and the advantages of it - factually prevention of third parties to use the Invention, just because of third party does not know it! - should be carefully balanced against certain disadvantages unavoidably connected to protection by trade secret only Public Disclosure By definition, the protection of trade secret disappears, essentially fully, as soon as secrecy is no longer given. A company protecting its Inventions merely by keeping them secret is under

10 the permanent risk that a third party becomes aware of the Invention and thereafter, except in certain cases where the know-how in a legally not acceptable manner became available to the third party, is fully entitled to make unrestricted use of the Invention. A special risk insofar is the transfer of an employee, knowing of the Invention, to a different employer Patenting by a Third Party Sometimes inventors and companies, respectively, believe that the risk of trade secrets becoming publicly known or easily accessible to the public is the greatest risk to lose the full protection by trade secret. Another possibility, however, is even much more dangerous: If a third parties, independently of the party having made the Invention earlier and having kept it as a trade secret, creates the Invention and gets patent protection based thereon, at least in the Western European countries the earlier inventing company cannot prevent patenting of the Invention by the later new creator. The reason is, of course, that protecting an Invention by trade secret only means that the Invention, by definition, does not become part of the state of the art, and accordingly cannot create and be the basis, respectively, for attacking a later patent application because of lack of novelty and inventiveness, respectively. The only right the earlier inventor/company retains in such an instance is that in spite of the patent of the later party the use of the respective Invention may be continued. This is restricted, however, at least as far as Germany is concerned, similar rules applying to the other countries of Western Europe, first of all to essentially the same kind of use as already conducted before the Invention of the third party was applied for patent. In other words, if before the secondary Invention and its application date, respectively, in a certain country covered by the third party by later patent protection a product was only sold, it is not possible to switch to manufacturing. In Germany, at least, however, if a company (first inventor) has alredy manufactured before the priority date of the secondary application, also later switching to marketing (sale) and use is permitted. Additionally, the aforementioned right, the so called right of prior use, is restricted to using the Invention by the owner of the trade secret itself, no licensing being possible. Furthermore, the right of prior use is restricted to the country where the trade secret was used before the priority date of the later patent application, and no exports

11 into other "patented" countries (of the third party) are possible, even not under the doctrine of the permittance of parallel imports according to the rules of the European Union. In other words, approximately the worst thing that can happen for the owner of a trade secret is that the respective Invention is "repeated" by a third party and patented. In this case, the owner of the trade secret is restricted to a very limited right of continuation of use in the country where the trade secret was already used before, without the right of licensing, and without export rights. The right of prior use can only be sold, according to German law, at least, and the same applies to most Western European countries, together with the company itself owning the respective right of prior use, but not separately therefrom Remedies In view of the aforementioned pitfalls of protecting Inventions by trade secret only, very little can be done to protect against these disadvantages as far as the risk of public disclosure is concerned. Practically secrecy measurements, as discussed particularly under are the sole remedy. Something can be done, however, against the much bigger risk for the owner of the trade secret, namely that a third party independently of the first inventor makes the same Invention and obtains patent protection for it, as discussed under 2.2.: The solution in instances of this kind is that the trade secret is published, at the time when the decision not to file a patent application is made, at a rather remote place and in a rather remote publication, like a public gazette or the like, newspaper, magazine etc., such publication being to be made in a manner which satisfies the requirements of creating printed state of the art in the sense of general patent laws, on one side, but on the other side not creating a too big risk that the respective publication is really read by the "civilized" world, i. e. persons and companies interested in the respective technology. It has been heard of instances where, e. g., German companies have published articles relating to the manufacturing of certain chemicals in scientific papers of rather local importance e. g.

12 in New Zealand. When drafting such a "hidden" publication, besides of making sure that in general the requirements of patent law in relation to novelty destroying publications are met technically, one also must make sure that the respective newspaper article etc. describes the Invention in such a manner that the expert can learn and derive it therefrom, since otherwise even for this material reason no novelty destroying character of the publication would be created Trade Secrets vs. Patents - Consequences for License Agreements Competition Law Aspects The choice whether an Invention is protected by trade secret or by a patent under the existing Block Exemption Regulation of the European Union, one of them related to patent licensing, the other one related to know-how licensing, also means to make a choice between the applicable regulations. In view of the fact, however, that a general Technology Transfer Regulation will replace the existing regulations not so soon, making a choice between trade secret and patent protection does for a while also mean a choice of a certain Block Exemption Regulation, as it still is the case. It should be duly noted in this regard, that exclusivity provisions in exclusive license agreements can be kept in force for a much longer time if an invention is protected by a patent, compared with the case whether protection is only given by trade secret: The exclusivity of a manufacturing license, when signing a patent license agreement, can be guaranteed for the life time of longest lasting patent already applied for (or applied within one year after) at the time of signature of the licensing agreement, i. e. twenty years or even longer, whilst in case of a trade secret that respective exclusivity can only be given for a period of ten years after introduction of the respective product into the marketplace Post Term Use Bans

13 An important consequence of whether an Invention is protected by trade secret or patent also plays a role in case of post-term use bans. If by an exclusive license agreement following the respective Block Exemption Regulations of the EU the licensee after expiration/termination of the license agreement shall be prevented from using licensed know-how (trade secrets), such a post-term use ban is only possible if and as long as the respective know-how is still secret, notwithstanding the fact that in accordance with the new Technology Transfer Regulation in case of post-term use of licensee royalties may still be applicable even in cases where the know-how became publicly known. In case of patents, however, the licensee after termination/ expiration of the respective agreement may be totally prevented from using the respective Invention as long as the respective patent is in force. Continuance of use of the Invention by the Licensee would simply mean patent infringement, with all possibilities of the owner of the Invention to enforce its patent rights against such abuse after expiration of the agreement. After the principle choice to file a patent application on a certain invention has been made, a wise decision in relation to where to file first, when and in which manner to file in other countries etc. should be made. Details thereof can be seen from the transparencies accompanying this paper Strategy for Optimizing Costs The various possibilities to obtain IPRs in Europe create the chance that a potential licensor wishing to protect its technology etc. in Europe makes use of various systems in a particularly smart form. In the following it will be discussed in which way cost minimization, at the same time guaranteeing the full legal effect of IPR protection in Europe, can be achieved. Further aspects how to proceed in relation to patenting also will be explained in some detail as follows:

14 Homework For obvious reasons, the potential licensor (or entrepeneur seeking for capital investment etc.) wishing to protect IPRs in Europe, as an example, and looking for cost savings should do as much of the work necessary to protect its technology in its home country, i. e. China, by himself. The best way to do so, first of all, is to conduct a patent search in the home country and to determine, without using any foreign exchange etc., whether the technology is protectable by a patent or not. After that has been done, a priority basing home application should be made, based on which in accordance with the Paris Convention within a term of 12 months after the application date in the home country foreign applications can be made. It should be stressed that the application from the very beginning should be drafted in such a manner that it as closely as possible corresponds to the requirements of the European Patent Office, so that lateron, namely whenever filings covering Europe according to one of the methods available are conducted, only minimum modifications are still necessary. Besides of that, the inventor and applicant might wish to prepare an English language version of the application already so that, when filing in English speaking countries, including EPC, no translations costs will arise Use of PCT The main advantage of PCT has to be seen in two aspects: First of all, even until the end of the priority term, i. e. at the last day of the twelfth month according to the Paris Convention, by depositing an international application under PCT at the Chinese Patent Office, in the domestic language a valid application date can be secured, virtually, for all designated countries, including, of course, U.S.A. and the European countries, provided that lateron the national procedures are executed. Only twenty months after the priority term, instead of otherwise twelve months, the necessary translations etc. will have to be filed at the national patent offices of the designated countries, EPC as lateron CPC being applicable under PCT as one regional patent. If international examination is requested, the aforementioned term is even extended until thirty months after the priority basing term. This

15 "extension effect" of the PCT according to the author's experience is the greatest advantage of PCT and certainly will be used by many Chinese applicants. Particularly if at the end of the priority term it is not clear for an applicant whether the invention can be successfully evaluated in foreign countries, e. g. because of license negotiations still pending, it can be of great value to "buy" an extension possibility for world-wide protection of the invention by means of the rather cheap PCT application, which does not involve translation costs yet. A big advantage insofar is also that for designating more than ten countries under PCT no further designation fees have to be paid. So, the real cost-causing decision as to whether patent protection in the designated countries and regions, respectively, of a PCT application should be sought for can be postponed until the end of the above mentioned periods of twenty and thirty months, respectively, after priority date. There is a remedy, however, also for an applicant wishing to use PCT whose home country is not a member of PCT yet. In this case, the applicant should consider to transfer its priority right to a person or enterprise in a country belonging to PCT, under an appropriate agreement, which person or enterprise then will make use of PCT in a cost effective manner for the applicant. Quite a few patent law firms even in European PCT countries, like Germany, keep, exactly for the purpose of being the carrier of applications of the aforementioned kind, small enterprises which legally can be used, in a standardized form, for the aforementioned, highly cost saving purpose. As an example, the patent law firm the author of this contribution belongs to holds such a business in Germany under the name "Terramark GmbH", the main purpose of which is to make it possible for persons and entities from non-member countries of certain organizations - not only PCT, but also, as dicussed below, Madrid Union and The Hague Convention - to make use of the respective facilities National Patents or EPC? Under cost aspects, a potential licensor seeking for patent protection in Europe should duly note that, as long as patent protection is only wished in less than three countries belonging to EPC, it will usually be cheaper to file national patent applications. Starting from the third country, however, EPC should be preferred under cost aspects, three countries being the

16 breakeven point, as far as external costs are concerned. The internal cost savings will be added thereto, of course, since the applicant only has to deal with one examination procedure, with a lot of internal R+D work etc. to be saved because of not having to answer tricky questions of patent agents in various countries Conclusions The choice between protection of Invention by trade secret on one side and patent on the other side has to take into account many aspects. In the decision process, it first has to be considered that Inventions automatically becoming disclosed by sale of a product etc. can only be protected by patents, and not as trade secrets. If an Invention in principle can be protected by either tade secret or patent, the question of whether it is really possible to keep the Invention secret (because of cooperations, leave of employees etc.) carefully has to be checked. Against the risk of patenting by third, independent parties "hidden" publications etc. should be taken into consideration. If exploitation of the technology in question by licensing is considered, in most instances it is preferable at least to protect core issues of the respective technology by patents. For further explanations reference is made to the transparencies accompanying this paper. Enclosure: Transparencies 1-17 Kinds of IPRs