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PATENTS / USA / LICENCE TRANSFER THROUGH MERGER

Considerations for the Patent Holder: the Transfer of Patent Licences in the Context of a Merger

Sung Yang

IDEA, The Journal of Law Technology, Vol 42 no 4, 2002

This article starts on the premise that patentees generally want to maintain control of their patents. However, there are circumstances in which a licence may be assigned to a third party without the patentee's approval; and, although this is not necessarily to the patentee's disadvantage, it could at worst mean that the licence falls into the hands of a commercial competitor. The circumstances can arise when a company acquires, or merges with, the company to which the patent has been licensed. Part I of the article states the problem; Part II discusses the general purposes of patent protection in the context of commercial mergers; and Part III analyses the legal considerations and the options available to the patentee. As a general rule, patentees select their licensees with care, bearing in mind the best way in which the patent may be exploited; and patent licences are personal to the licensee and are not assignable without language in the licence permitting assignments. However, the general rule may be circumvented, intentionally or otherwise, when the company to which the licence has been granted merges with another company; in which case, by operation of law, the merged company owns all the assets of both companies. The question therefore arises whether the transfer of assets to the merged company includes a transfer of patent licences. The author examines the case law, governing both patent licences and real property leases, and observes that courts are reluctant to enforce anti-assignment clauses when a transfer takes place by operation of law, because of the public policy against restraints of alienation. He does, however, draw a distinction between patent law, as guaranteed by the Constitution, and other fields of law governed by contract. He also draws a distinction between federal and state law. He nevertheless concentrates on the "authoritative cases" (Unarco Industries and PPG Industries, in particular), the effects of which were to articulate the default rule, that transfers of a patent licence occurring by operation of law in a merger will violate an anti-assignment clause in the licence, even where the licence does not define assignment to include transfers by operation of law. On the face of it, this settles the matter; but, in practice, some courts have tended to interpret the facts of individual cases in such a way as to weaken the patentee's rights. The author therefore advises patentees who wish to protect their rights to include in the licence not only an anti-assignment clause but also a provision to the effect that a transfer occurring by operation of law shall be deemed to be an assignment. He warns, however, that, while the courts have upheld corresponding provisions in other contexts, such as real estate leases, the enforceability of the provision in the context of patent licences has not yet been tested. He concludes with a reminder that "rules promoting the free alienation of licences would only undermine the rights granted to an inventor under the Patent Act". [20095]