(Second Edition)

Kenneth L. Port,  Jay Dratler, Jr.,  Faye M. Hammersley, Esq.,  Terence P. McElwee,
Charles R. McManis, and Barbara A. Wrigley

On-Line Problem Supplement
Copyright © 2005   Carolina Academic Press.   For permission, see CMI.

Chapter 10

Problem 11:  Enforcement Issues and Terms

Recently, Contair's CEO instituted a new licensing program that has as its objective licensing Contair's patented technologies with commercial applications outside the auto industry.  This licensing program is led by the Vice President of Research and Development, whose department will receive 75% of any licensing revenues. The Vice President has approached you for advice (actually your blessing), on a proposed license to a new startup company, Janson Ceramix, formed by ex-Contair engineer, Charles Janson.

While at Contair, Janson worked for many years inventing and developing ceramic materials for brake linings and engine and transmission parts.  Contair holds more than 40 U.S. and foreign patents on the ceramic material and various methods of manufacturing it.  While at Contair, Janson had discovered that the ceramic in some forms could be an extremely inexpensive and potent fire retardant.  With sufficient capital investment, Janson claims that his company could develop and sell numerous fire retardant products, from building materials to children's clothing.

The Vice President shows you the following term sheet that summarizes all the agreed terms to date:
    a.  Contair grants an exclusive, worldwide royalty-bearing license of the entire patent portfolio to Janson Ceramix in all fields of use related to fire retardancy.
    b.  Janson Ceramix will pay Contair running royalties of 5% on all net sales of licensed products.
    c.  Ownership of patentable improvements will be decided by mutual agreement of the parties at the time a new invention is disclosed.
    d.  Contair will receive shares of common stock totaling 10% of the equity of Janson Ceramix.
    e.   Contair grants a non-exclusive, worldwide license to Janson Ceramix to all its know-how, trade secrets, and technical information relating to the licensed patents.  Janson Ceramix will hold all in confidence.  Contair will disclose more such know-how and trade secrets to Janson Ceramix in the future as may be agreed between the parties.
    f.   Janson Ceramix will have the right to sublicense and the right to assign the license.
You also learn that Janson Ceramix is a Delaware corporation but is currently considering a move to either India or Israel to be near technical universities with strengths in ceramics manufacturing.

The Vice President would like to close a license deal with Janson Ceramix quickly. He would like to do a short and simple agreement, two or three pages at the most, based upon the term sheet.  He sees this as a handshake deal between two long-time colleagues who contemplate a continued close working relationship.  Janson Ceramix is in a hurry because Janson is currently trying to attract venture capital and needs the license to show potential investors.

Write a memo to the Vice President that (1) lists any key terms missing from the term sheet, (2) identifies terms that should be modified or deleted, and (3) describes the potential risks of the deal to Contair.  Where possible, support your opinions with examples from case law that demonstrate the problems encountered by other companies that licensed out under similar circumstances.

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