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Sales and Distribution Arrangements – A sales or distribution arrangement limits a licensee’s
freedom to organize its distribution system independently of the licensor. There are three basic
approaches to the regulation of these agreements. One group of developing countries prohibits
any interference by the licensor in the licensee’s distribution system. A second group of
developing and developed countries prohibits only those provisions that give the licensor
exclusive distribution rights. Finally, a third group of generally developed countries only prohibit
those exclusive sales arrangements that tend to allocate or monopolize markets.
Price-Fixing – A price-fixing clause requires a licensee to sell products at a price specified by the
licensor. It may specify either maximum or minimum prices. It may be restricted to the
technology or goods being licensed, or it may cover other products as well. It may apply only to
the price charged by the licensee, or it may extend to the prices charged by retailers who purchase
the goods from a wholesaler-licensee. Price-fixing also arises in the context of cartels, particularly
cross-licensing and patent pools. Most developed and developing countries prohibit all forms of
price-fixing.
Noncompetition Clauses – Noncompetition clauses forbid a licensee from entering into
agreements to acquire or distribute technologies or products that compete with ones furnished or
designated by the licensor. In general, noncompetition clauses are prohibited in all countries.
Direct prohibitions may include an understanding that the licensee is not to manufacture or sell
competing technologies, or that the licensee is to terminate the use of particular technologies or
terminate the manufacture and distribution of particular products. Indirect prohibitions may
require the licensee not to cooperate with a competing business or not to pay higher royalties for
competing products.
Challenges to Validity – No-challenge clauses forbid a licensee from challenging the validity of
the statutory right granted by the licensor. The purpose of these clauses is to ensure that a licensee
will comply with the agreed-to restrictions and payment obligations. Only a few countries permit
no-challenge clauses generally. Most consider such a clause in a patent or copyright license to be
a restrictive trade practice. No-challenge clauses in trademark licenses are regarded in the same
negative way by developing and some developed countries. The United States, however, does not
regard a no-contest clause in a trademark license as violating either its trademark laws or its
anti-trust laws.
Tying Clauses – A tying clause is a provision that requires a licensee to acquire or use, separately
from the technology wanted, additional goods (such as raw materials, intermediate products,
machines, or additional technology) or designated personnel either from the licensor or from a
source named by the licensor. In other words, the acquisition of these additional goods or services
is a prerequisite to obtaining the technology license. In general, tying clauses are illegal in
virtually every country. Most countries, however, provide for exemptions in varying degrees.
Quantity and Field-of-Use Restrictions – Countries regulate licensing arrangements with
quantity and field-of-use restrictions in three ways.
Developing countries generally regard limitations on the quantity of goods that may or must
be produced, or limits on the fields in which goods may be used or sold, as illegal.
A second group of countries, including Japan, the European Community, the United States,
and most countries in the developed world, regard quantity and field-of-use restrictions as
implicit elements in the statutory rights of a licensor.
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Intellectual Property
A third approach to quantity and field-of-use restrictions is found in Germany. There,
restrictions on both statutory and nonstatutory rights—including limitations on the use of
know-how and trade secrets—are expressly allowed.
Restrictions on Research and Development – Restrictions on research and development may
relate to two different kinds of activities: (1) the research, adaptation, and improvement of the
transferred technology or (2) the research and development of competing technologies. Both of
these are condemned in almost all countries.
Quality Controls – Requirements that a licensor meet certain quality standards or comply with
certain quality controls imposed by the licensor are almost uniformly accepted in all countries.
Quality control clauses are justified where the trademark of the licensor is being applied to a
product manufactured and/or distributed by the licensee. They are also justified when they are
imposed for the purpose of avoiding product liability.
Quality control clauses are prohibited where they are used as a means of improperly tying in other
products or services, where they seek to make the licensee dependent on the licensor, or where
they seek to allocate trade territories.
Grant-Back Provisions – A grant-back provision requires a technology recipient to transfer back
to the supplier any improvements, inventions, or special know-how that it acquires while using
the technology. Such a provision may be unilateral or reciprocal, exclusive or nonexclusive.
A unilateral grant-back provision requires one of the parties—usually the licensee—to transfer
back new knowledge, whereas a reciprocal provision requires both to do so. Sometimes a
reciprocity agreement will require both parties to exchange their developments but at other times
only one party will be required to transfer new knowledge, while the other will be required
merely to pay adequate compensation. An exclusive grant-back provision requires one of the
parties—usually the licensee—to transfer any rights in the new development to the other party. A
nonexclusive provision allows the parties to share these rights.
Most countries prohibit grant-back provisions that unilaterally require the licensee to transfer
exclusive rights to the licensor. In contrast, most countries do not prohibit grant-back provisions
that are reciprocal and nonexclusive.
Restrictions That Apply After the Expiration of Intellectual Property Rights – Countries
generally hold that payment obligations or restrictions based on statutory intellectual property
rights must terminate when the statutory right expires. The principal problem that arises in
connection with the expiration of statutory rights involves package licenses. Package licensing is
the transfer of multiple statutory rights under a single license.
Generally, if the licensing agreement was entered into voluntarily by both sides and the payment
obligations do not extend beyond that of the last-to-expire statutory right, these agreements will
be enforceable. On the other hand, if the licensee was at an economic disadvantage and given
only the option of taking or leaving the arrangement, it will commonly be found to be illegal as a
form of statutory misuse.
Concerning restrictions and payment obligations in connection with nonstatutory rights, in
particular trade secrets and other secret know-how, there are several different approaches. In
Germany, a licensor may not enforce payment obligations or other restrictions once the
©2013 Pearson Education, Inc. Publishing as Prentice Hall
Intellectual Property
know-how has lost its secret character or becomes economically worthless or technically
outdated. In some developing countries, national legislation prohibits any restriction on the free
use of know-how once a reasonable period has lapsed following the transfer of the technology.
In other developing countries, the obligation to pay for the use of secret know-how will cease
when it “becomes public knowledge otherwise than through the fault of the licensee.” By
contrast, in the United States, a licensee’s agreement to pay for the use of secret know-how will
remain in effect even after the secret becomes public knowledge, so long as the licensee’s
contractual obligation was “freely undertaken in arm’s length negotiations.”
Restrictions That Apply After the Expiration of the Licensing Agreement – Licensing
agreements may impose obligations on the licensee that continue even after the expiration of the
license.
The national regulations that apply to these kinds of arrangements can be categorized into three
groups. One group of countries allows licensors to impose most types of reasonable restrictions.
The second group of countries generally takes the same approach as the countries in the first
group, except that they hold that a former licensee has a right to continue to use any acquired
know-how so long as the licensee pays reasonable compensation. The third group of countries
holds that a former licensee is free to use or dispose of the statutory property rights or secret
know-how once the licensing agreement terminates.
Compulsory Licenses
Compulsory licenses arise when the owner of intellectual property refuses or is unable to work
the property in a particular country within a certain period of time. In such a case, a third party
may apply for a compulsory license, which will be issued by the government without the consent
of the owner.
Patents – The International Convention for the Protection of Industrial Property (the Paris
Convention) recognizes the right of countries to “grant compulsory licenses to prevent abuses of
the exclusive rights conferred by the patent.”
The WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS)
similarly allows its member countries to grant “use of the subject matter of a patent without the
authorization of the right holder,” provided that
a proposed user is unable to enter into a licensing arrangement with the patent holder on
commercially reasonable terms or there is a national emergency or other circumstance of
extreme urgency.
the license is non-exclusive.
the license is non-assignable.
the use is primarily in the domestic market.
the patent owner is paid adequate remuneration.
Copyrights – Two types of compulsory licensing apply to copyrights. A statutory copyright
license authorizes third parties to use a copyrighted work in exchange for a fee, which is fixed
either in the legislation itself or by a public or private agency authorized to fix, collect, and
distribute license fees.
©2013 Pearson Education, Inc. Publishing as Prentice Hall
Intellectual Property
A compulsory copyright license compels a copyright owner to grant a license, but it allows the
owner to negotiate the terms of the license. The Berne Convention for the Protection of Literary
and Artistic Works recognizes the right of countries to impose compulsory licenses for
broadcasting and recording.
II. Chapter Questions
Copyright Infringement
1. Students’ answers may vary. Some may point out that making photocopies of a book purchased
Moral Rights of Authors and Artists
2. Students’ answers may vary. The personal rights of authors to prohibit others from tampering
with their works are called moral rights. The three basic moral rights include: (1) the right to
Can a Similar “Look and Feel” Be Copyright Infringement?
3. Students’ answers may vary. Some may argue that Clone has not infringed First-to-Market’s
Patents on Previously Known Technology
4. Students’ answers may vary. Characteristics of inventions that qualify to be patented include:
An invention is new if no other inventor has obtained a patent for the same invention and if it
Trademarks and the Shape of Goods
5. Students’ answers may vary. To be registered, a trademark must be distinctive and one of the
Nonuse of a Trademark
6. Students’ answers may vary. The Agreement on TRIPS requires WTO member states to protect
©2013 Pearson Education, Inc. Publishing as Prentice Hall
Intellectual Property
Importation of Gray Market Goods
7. Students’ answers may vary. When protected products are manufactured outside the nation,
8. Students’ answers may vary. A class activity may be conducted where students may voice their
Legality of Patent Pools and Cross-Licensing Agreements
9. Students’ answers may vary. A cartel is an agreement between several business enterprises that
is designed, among other things, to allocate markets, to fix prices, to promote the exchange of
The EU forbids cartel-type arrangements when they have as their purpose or effect the
In the United States, cross-licensing and patent pooling are not unlawful unless they are used to
In Japan, manufacturing cartels, which are designed to avoid economic depression of an industry
through restrictions on production facilities, production quantities, or sales volumes, are valid.
Noncompetition Clauses
10. Students’ answers may vary. Noncompetition clauses forbid a licensee from entering into
agreements to acquire or distribute technologies or products that compete with ones furnished or
©2013 Pearson Education, Inc. Publishing as Prentice Hall
Intellectual Property
III. Key Terms
Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement)—
Annex to the Agreement Establishing the World Trade Organization; it creates a multilateral
and comprehensive set of rights and obligations governing the international trade in
intellectual property.
Artistic property—Artistic, literary, and musical works.
Berne Convention for the Protection of Literary and Artistic Works—Requires member states
to establish common minimum rules to protect the pecuniary and moral rights of authors
without requiring them to comply with particular formalities.
Bottleneck principle—Participants in an industry-wide patent pool must grant reasonable
access to the pool to any firm wishing to compete so that no firm will be disadvantaged.
Capable of industrial application—The product or process of an invention can be used in
industry or commerce.
Cartel—A combination of independent business firms organized to regulate the production,
pricing, and marketing of goods by its members.
Certification mark—A mark or symbol used by a licensee or franchisee to indicate that a
particular product meets certain standards.
Chain-style business—A franchise in which a franchisee operates under the franchisor’s trade
name and is identified as part of the franchisor’s business.
Collective mark—A mark or symbol used by a group to identify itself to its members.
Common origin doctrine—Owners of the same intellectual property right who acquired it
from a common predecessor cannot restrict each other from using the right.
Common rules principle—Common minimum standards for granting copyrights must be
observed by all member states.
Compulsory copyright license—Compels a copyright owner to grant a license but allows the
owner to negotiate the fee.
Compulsory license—The grant, by state decree, of a license to use a statutory right when the
owner has failed to work it.
Convention for the Protection of Producers of Phonograms Against Unauthorized Duplication
of Their Phonograms—Requires member states to protect producers of phonograms from the
unauthorized reproduction of their works.
Convention Relating to the Distribution of Program-Carrying Signals Transmitted by Satellite
—Requires member states to prevent the unauthorized transmission of electronic
communications by satellite from their territory.
Copyright—An incorporeal statutory right that gives the author of an artistic work, for a
limited period, the exclusive privilege of making copies of the work and publishing and
selling the copies.
Council for Trade-Related Aspects of Intellectual Property Rights (TRIPS Council)—Organ
of the World Trade Organization responsible for administering the Agreement on
Trade-Related Aspects of Intellectual Property Rights.
Cross-licensing agreement—An agreement to exchange licenses.
Design patent—Patent granted to protect new and original designs of an article of
manufacture.
©2013 Pearson Education, Inc. Publishing as Prentice Hall
Intellectual Property
Distinctiveness—Possessing a unique design that distinguishes a product from other similar
products.
Distribution rights—The right of an author to place a copy of a copyrighted work into
circulation for the first time.
Distributorship—A franchise in which a manufacturer licenses a dealer to sell its products.
Exclusive license—A license that restricts who may compete with the licensee.
Expression—The exact manner in which a particular work of authorship is set down in a
tangible way.
Exhaustion-of-rights doctrine—Once a good made or sold under license is in circulation, the
licensor has no further right to control its distribution.
Field-of-use restrictions—Provision limiting the fields in which goods acquired or produced
under license may be used.
First sale doctrine or doctrine of exhaustion—Once a copy of a copyrighted work is in
circulation, the author has no further right to control its distribution.
Franchise—Special license that requires the franchisee to work the licensed property under
the supervision and control of the franchisor.
Grant-back provision—Agreement that a technology licensee will transfer to the licensor any
improvements, inventions, or know-how it acquires while using the technology.
Gray marketing—The domestic sale of products manufactured under a license that only
grants a foreign licensee the right to sell the goods overseas.
Horizontal competition agreements—Agreements between competitors that have the effect of
diminishing competition.
Industrial property—Inventions and trademarks.
Intellectual property—Useful artistic and industrial information and knowledge.
International Convention for the Protection of Industrial Property (Paris Convention)—
Requires member states to provide national treatment, right of priority, and common
minimum rules to protect owners of industrial property rights.
International Convention for the Protection of Performers, Producers of Phonograms, and
Broadcasting Organizations (Rome Convention)—Prohibits the unauthorized recording of
live performances, the unauthorized reproduction of recordings, and the unauthorized
recording or rebroadcasting of broadcasts.
Inventive step—The subject matter of an invention was not obvious at the time of the
invention’s making to a person having ordinary skill in the art of the subject matter.
Know-how—Practical expertise acquired from study, training, and experience.
License—Authority granted by the owner of an intellectual property to another allowing the
latter the right to use it in some limited way.
Madrid Agreement for the Repression of False or Deceptive Indications of Sources of Goods
—Requires member states to deny importation to goods bearing false or misleading
indications as to their source.
Manufacturing or processing plant franchise—A franchise in which the franchisee sells
products it manufactures from a formula or from ingredients provided by the franchisor.
Moral rights—The right of an author to prohibit others from tampering with a copyrighted
work.
Multiple licensing agreement—A contract for the licensing of industrial property rights to
two or more licensees.
Neighboring rights—Rights similar to copyrights that are protected by different statutes.
New—An invention is new if no other inventor has obtained a patent for the same invention.
©2013 Pearson Education, Inc. Publishing as Prentice Hall
Intellectual Property
No-challenge clause—Provision forbidding a licensee from challenging the validity of a
licensor’s claim to a particular statutory right.
Noncompetition clause—Provision forbidding a licensee from competing with the licensor.
Nonconditional protection principle—Protection is not to be conditioned on the use of
formalities.
Originality—Creative effort invested by an author in raw materials that gives them a new
quality or character.
Package licensing—The transfer of multiple statutory rights under a single license.
Patent—An incorporeal statutory right that gives an inventor, for a limited period, the
exclusive right to use or sell a patented product or to use a patented method or process.
Patent Cooperation Treaty—Establishes an international mechanism that allows inventors to
make a single application for patent protection that is equivalent to making a filing in all
member states.
Patent pool—An agreement to share patents and other technology.
Pecuniary right—The right of an author to exploit a copyrighted work for economic gain.
Petty patent—A statutory right given to the authors of minor inventions.
Plant patent—Patent granted for the creation or discovery of a new and distinct variety of a
plant.
Price-fixing clause—Provision requiring a licensee to sell products at a price set by the
licensor.
Protection independent of protection in the country of origin principle—Protection is granted
to any person publishing a work in a member state, even if he or she is not a national of a
member state.
Quality control clause—Provision requiring a licensee to meet quality standards or operate
under quality controls set by a licensor.
Quantity restriction—Provision in a license limiting the quantity of goods that may or must
be produced.
Right of performance—The right of an author to communicate a copyrighted work to the
public.
Right of priority—For a period of one year, an application for a patent in a second member
country will be treated as though it had been filed on the same date as the application made in
the first member country.
Right of reproduction—The exclusive right of an author to make multiple copies of a
copyrighted work.
Rule of reason—Court-adopted rule that allows a reviewing court to consider the overall
impact of a particular agreement on competition within its relevant market.
Service mark—A mark or symbol used to identify a person who provides services.
Statutory copyright license—Authorizes a third party to use a copyrighted work for a fee
stipulated in the statute.
Trademark Law Treaty—Requires member states to establish common minimum rules to
protect trademarks.
Trade name—A mark or symbol used to identify a manufacturer or merchant.
Treaty on Intellectual Property in Respect of Integrated Circuits (Washington Treaty)—
Requires member states to provide national treatment and common minimum rules to protect
owners of integrated circuits.
True trademark—A mark or symbol used to identify goods of a particular manufacturer or
merchant.
©2013 Pearson Education, Inc. Publishing as Prentice Hall
Intellectual Property
Tying clause—A provision requiring a licensee to acquire or use, apart from the technology
wanted, goods or personnel designated by the licensor.
Utility patent—Patent granted for the invention of a new and useful process, machine, article
of manufacture, or composition of matter.
Vertical competition agreements—Agreements between sellers and buyers.
Work—An artistic, literary, musical, or scientific creation.
World Intellectual Property Organization (WIPO)—Intergovernmental organization
responsible for administering the principal international intellectual property conventions.
World Intellectual Property Organization Copyright Treaty—Requires member states to
extend the provisions of the Berne Convention to computer programs and databases.
©2013 Pearson Education, Inc. Publishing as Prentice Hall
