Breach of License Agreement or License Infringement?
Two companies enter into an intellectual property licensing (IP) agreement. Later, a dispute erupts over whether the licensee has used the IP outside the scope of the license agreement such as marketing a brand on a new product line or selling patented goods in another territory. Does this extra-license use constitute breach of license agreement? Infringement of the IP rights or both? Or, is it license infringement? Often, these types of disputes lead to expensive intellectual property litigation.
Breach of License Agreement, IP Infringement, License Infringement?
The distinction matters because remedies for infringement differ from contract damages. For example, a copyright registered pre-infringement entitles the owner to elect statutory damages over actual damages as well as recovering attorney’s fees. A successful plaintiff in a trade secret or trademark case can potentially recover exemplary damages in addition to actual damages recoverable in a breach of contract action. In patent and trademark actions, treble damages are available. Recovery of attorney's fees, while provided under the Patent Act and Lanham Act, are generally easier to recover in connection with a successful breach of contract action. Therefore, these differences make careful consideration of claim pleading necessary to maximize recovery. For purposes of this article, we equate IP infringement with license infringement.
Distinctions between Breach of License and IP Infringement
While it may not always be clear at the onset whether an extra-license use constitutes a breach of contract or an infringement of IP rights, the following provides some guidelines between where a license ends and infringement begins:
Type of Intellectual Property License
The threshold issue is determining whether the license is an exclusive license or a non-exclusive license. Courts have held that where the licensee has been granted an exclusive license, unlicensed use of the IP is merely a breach of contract. The underlying rationale stems from the understanding that an exclusive license transfers ownership of the IP rights. The licensee is incapable of infringing an interest in IP that it owns. Thus, any use of the IP beyond the scope of the license agreement would result in breach of contract, rather than infringement. Conversely, if the licensee has only been granted a non-exclusive license, any use of the IP beyond the scope of the license agreement could result in the licensee being liable for infringement.
Which License Provision was Breached?
Another key issue in distinguishing between a breach of contract or IP infringement is determining whether the provision of the license agreement breached is a contract covenant or a condition precedent. If the provision were a contract covenant, then the breach would result only in a breach of contract. However, if the provision were a condition precedent, then the condition was not satisfied and the contract effectively does not exist. Therefore, any use of the IP would result in infringement.
Differences in Limitations between Contract and Infringement
Similarly, if the license agreement is limited in scope and the licensee acts outside the scope, then the licensor can bring an action for infringement. To prevail, the licensor must establish that the license terms are limitations on the scope of the license, rather than independent contractual covenants, and that the licensee's actions exceed the scope of the license. In certain instances, courts have concluded that a license agreement has created both contractual covenants and conditions precedent or both contractual covenants and limitations on the scope of the license. In such cases the courts have held that both breach of contract and infringement causes of actions are available.
License Drafting Strategies
As discussed above, there are important distinctions between breach of license agreement, IP infringement, and license infringement. If these issue arise, counsel should carefully consider the options on which claims or defenses to assert.
Counsel may also analyze which remedy provides the best relief for his/her client later in the event that a dispute arises. This analysis should include a comparison of the relief provided by IP claims versus the relief available for a breach of contract claim. Based on the differences, a strategy can be crafted to maximize protection for a client under a variety of circumstances.
License Infringement Disputes
For more information on IP litigation, visit our intellectual property litigation overview page. For more information on breach of contract litigation, visit our business litigation overview page.
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