The scenario is familiar. Your company is expanding product sales worldwide or restructuring to form subsidiaries outside the US. New entities – whether third parties or corporate affiliates – need patent rights. Your company may think that a global license with distribution rights will accomplish this result. But does this license have the same effect everywhere? And when litigation arises, do your licensees have standing to take part and collect damages?
This issue is especially critical in Japan, the world’s second largest pharma market and manufacturer of 25 percent of the world’s technology products. Japan’s patent system differs significantly from that of the US. Its system of licensing and the remedies available when patent disputes arise diverge from the rules so familiar in the US.
In the US, the basic rule is that the patent owner and exclusive licensee have standing to sue for patent infringement. Injunctions and damages are possible remedies to both the owner and the exclusive licensee. An exclusive licensee need not have all substantial rights to have standing and entitlement to damages. For example, rights in an exclusive field of use can be sufficient to establish standing. However, if the exclusive licensee does not hold all substantial rights, the patent owner is required to join the litigation. Non-exclusive licensees do not have standing to sue or even join as a party with the patent owner, and they are not entitled to damages. As a result, it is difficult for the patent owner to collect damages on behalf of its affiliate when the affiliate is not an exclusive licensee and cannot join as a party.
Japan has three types of licenses: (i) a senyo license; (ii) an exclusive tsujo license; and (iii) a non-exclusive tsujo license. Each type has different standing requirements and available remedies.
A senyo license is created only when an exclusive license is registered as such with the Japan Patent Office. A senyo licensee may hold less than all of the rights under the patent. A senyo licensee has standing to sue on its own for patent infringement and to seek both an injunction and damages.
A tsujo license grants the right to practice the patented invention. It can be non-exclusive or exclusive. An exclusive Tsujo licensee has standing to sue for patent infringement on its own and can seek damages. However, under current interpretations of Japanese law, an exclusive tsujo licensee may not have standing to seek an injunction.1 Only the patent owner can seek an injunction against an infringer. Non-exclusive tsujo licensees do not have standing to sue for patent infringement and cannot seek damages or an injunction for infringement.
Given the differences between jurisdictions, patent owners and licensees should consider these questions:
What activities will each entity perform in a jurisdiction? Which entities will sell, manufacture, import and perform R&D and regulatory and clinical testing? What rights are necessary to accomplish these activities?
What considerations shape the choice between exclusive and
non-exclusive licenses? For example, are there tax implications, particularly between company affiliates? Does the company have arrangements with multiple manufacturers and distributors that require non-exclusive arrangements or dividing the rights by territory? Has the company previously distributed patent rights to third parties that would prevent it from providing these rights on an exclusive basis, including to its affiliates?
What possible future scenarios may arise with regard to potential patent infringers? In which jurisdictions may infringement likely occur? What remedies will be sought – injunction, lost profits, reasonable royalty? Which entities will seek remedies? What type of patent rights does each hold in each relevant jurisdiction?
Understanding the variables you may encounter and keeping jurisdictional differences in mind from the outset will help your company tailor licensing agreements to fit your unique circumstances. Then, should trouble arise, the players will be entitled to seek appropriate remedies and can stand together to defend the patent.
1 Japanese law is not settled on this issue. Under rare circumstances, the licensee may have standing to seek an injunction by “using” the patent owner’s rights (for example, the patent owner and the licensee may have specifically agreed that the patent owner is obligated to take action against infringers).