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Partially adapted from the
"Training Manual on Technology Transfer", by
United
Nations Industrial Development Organization
(UNIDO)
Introduction
Warranties in patent licence agreements
Warranties in know-how
licence agreements
Warranties in trade mark
licence agreements
Warranties
in other agreements
Annex
Introduction
Forms of
Technology Transfer
Difference between
warranties and guarantees
Meeting of
warranties and guarantees in this module
Warranties in different
licence agreements
Warranties in different legal systems
The risk element
in technology transfer agreements
This module is devoted to the topic of warranties connected with technology
transfer agreements. For the purpose of this module, the terms "Warranty" and
"Warranties" are used to encompass the meaning of warranties and guarantees. In
technology transfer the technology may encompass the meanings of warranties and
guarantees. In technology transfer the technology may encompass different kinds
of technical knowledge and/or rights. And the transfer itself may take place in
numerous ways and as part of practically any kind of business or commercial
agreement.
Licensing is one form of technology transfer agreement. The primary purpose of a
licence is to permit an organization or individual to use a protected secret or
unaccessible industrial right or knowledge. Typical licence agreements include
patent licence agreements, utility model licence agreements, trade mark licence
agreements and knowhow licence agreements. The rights granted through such
agreement are commonly referred to as industrial property rights. This module
analyses the various warranties and guarantees a licensor may undertake when
concluding this type of agreement. It does not deal with other licence
agreements, such as copyright licence agreements, franchise licence agreements,
such as copyright licence agreements, franchise licence agreements, industrial
design licence agreements or (copyright) software licence agreements because
they are not considered industrial property rights.
Technology may also be transferred by numerous other arrangements, for instance,
by an agreement to supply a complete industrial plant turnkey contract or by
engineering contracts, management agreements, technical assistance agreements
and the like. Technology may also be transferred by direct foreign investment, a
wholly foreign owned subsidiary or a joint venture.
This module concentrates on warranties and guarantees in industrial property
licence agreements (patent, utility model, trade mark and knowhow) because these
are the licence agreements most frequently used in industry. However, for
comparison purposes, it also discusses warranties in the other types of
technology transfer agreements mentioned above because they offer alternative
sources of proprietary technology.
A licence is given by an industrial property owner to third persons. The purpose
of a licence is to grant a right to use knowledge embodies in a specific
unaccessible, technological achievement. In the case of patents, utility models
and trade marks, the right to use them is protected by law and by registration
requirements. In the case of knowhow, the knowledge is not accessible because it
is a secret.
Forms of technology transfer
Technology may be transferred by agreements other than licences or technology
transfer agreements. Thus, for example, a simple sale-of-machinery agreement or
a supply-of-equipment may be a vehicle for technology transfer. However, unless
technology transfer is specified as a subject of an equipment supply agreement,
the warranties and guarantees connected with the agreement will be regulated by
the rules applicable to sales transactions, not by the rules applicable to
technology transfer transactions. A similar situation may exist in a technical
assistance agreement, where, for example, there may not be any warranties for
technology transfer at all. In such an arrangement, the technology transfer may
only be implied in the performance of some duties connected with implementing
such agreements.
The same is true of agreements for constructing large industrial plants. In such
agreements, if technology transfer is a specific issue, i.e. if the new owner
wished to acquire the right to use a patent, a trade mark or some other knowhow,
a separate technology transfer agreement must be concluded. But if technology
transfer is not outlines as a specific obligation, the transfer will be only
implied as incidental to using the machinery.
Difference between
warranties and guarantees
"Warranty" is a term that originated in the common law of Great Britain, and it
is used today in countries where the legal system is based on common law. A
warranty is a contractual promise. The individual making the promise is regarded
as undertaking contractual liability. This contrasts with mere statements or
representations, which are not the equivalent of a promise. Simple statements
were not considered warranties unless responsibility was expressly undertaken.
However, overtime it became common to consider an affirmation at the time of
sale a warranty, provided it appeared to have been so intended. The present
tendency is towards readier imposition of liability and less stringent
requirements for express statements by the parties. If a warranty exists, the
maker undertakes strict liability for what he asserts.
Although warranties have a long history in British common law, the modern
concept of warranties is best expressed in the British Sale of Goods Act of
1893. In that Act, "warranties" and "conditions" are used differently.
Warranties are less important promises than conditions. As the Sale of Goods Act
states, warranties give rise to a claim for damages but not to a right to reject
the goods and treat the contract as repudiated or discharged. On the other hand,
a condition is a contractual term on which the very contract depends.
For example, a contract may contain a specific condition stating that the
property will not be transferred until payment occurs. In this case, payment is
a condition of the contract. Similarly, if delivered goods do not correspond to
their description in the contract, the buyer may reject the goods. Some of these
terms have become implied conditions by law in contracts of sale. If the
condition is not fulfilled, the contract may be repudiated. However, it should
be pointed out that the parties are free to either contract out a condition or
to vary it.
Consequently, British law does not use the term "guarantee" to describe the
promises described above, where in relation to warranties or to conditions. The
terms "guarantee" or "suretyship" in British law are used mostly in connection
with bank guarantees. In such a relationship, there are three parties: the
creditor, the debtor and the guarantor who undertakes to be liable to the
creditor if the principal debtor fails to discharge his obligation. The
arrangement between the creditor and the guarantor is called the "contract of
guarantee".
In international trade, the contract of guarantee often has a different meaning,
namely, that of an independent undertaking by the guarantor to pay if the
conditions of the guarantee are not satisfied. The word guarantee is also
sometimes used simply as an undertaking. The term warranty/warranties is used in
this module to encompass both meanings.
In German legal practice, as sometimes is the case in modern British and
American legal practice, the term guarantee is used to describe what French
would mean by the term la garantie or what German law would understand by
Gewahrleistung. The fact is that the French term garantie, like force majeure,
has found wide application in international trade. From international trade,
these terms are spreading into everyday usage in different languages.
Meeting of
warranties and guarantees in this module
For the reasons outlined above, when the term warranty is used in this module,
the difference that still exists in English law between warranties and
conditions is not implied. When the term guarantee is used, it is not used in
the meaning of suretyship or bank guarantee. Unless otherwise indicated, the two
terms are here interchangeable and have the meaning that they would have in the
French and German legal systems. However, because the module deals not with
contracts of sale but with contracts of licence, it does not talk about sellers
and buyers but about licensors and licensees. Similarly, in licence agreements
it does not talk abut warranties or guarantees concerning the legal or physical
properties of goods sold but about the legal or other (factual) properties of
the licensed rights or of the technology to be transferred.
Warranties in different
licence agreements
Not all licence agreements have identical warranty provisions. Although there
are similarities between agreements, there are also important differences among
them. The differences stem from the different characters of the subject matter
regulated by each agreement. A patent owner, for example, is not giving
identical warranties to licensees, as is a knowhow or a trade mark owner. For
this reason, the warranty provisions of patent, trade mark, and knowhow
agreements have to be analysed separately. An attempt will be made to point out
these differences and similarities.
Furthermore, the parties to licence agreements are free to structure the
warranty provisions in their agreements as they wish. This freedom may be
curtailed only if there are mandatory applicable legal provisions. However, in
many legal systems there are only a very few mandatory provisions applicable to
the warranty provisions in technology transfer arrangements, so in principle it
is most often up to the parties to set standards of expectations and risks in
their agreements.
It is not implied here that the parties to an agreement should agree in any
specific form to warranties. However, it is assumed that the parties in
technology transfer agreements wish to reach a reasonable balance of rights and
obligations. Such reasonable expectations undoubtedly imply a fair and equitable
structure of warranty provisions. The definition of equitable structure varies
from one case to another and depends on different variables, such as payment
provisions, territorial application and technical preparedness.
If the parties omit to mention warranties in an agreement, it is probable that a
court or an arbitration tribunal with jurisdiction over the dispute will accept
their free decision not to provide for warranties. However, in such a case, if
there are no warranties, the courts or arbitrators will apply the proper rules
of the applicable law to address any omissions.
Warranties in different legal
systems
Many countries have laws and regulations, including court decisions and
precedents, which together create the national legal framework for intellectual
property rights. Depending on the national legal systems, the answers and
solutions to certain questions may differ from one jurisdiction to another. In
principle, the practice of licence agreements within a national legal system
allows the parties freedom to agree on the scope of warranties for transferred
technology. Nevertheless, caution may be warranted, because encroachment by
legislators in this area may not be entirely excluded. In other words, in some
legal systems there may be no mandatory legal rules applicable to licence
agreements. In such a system, the parties wishes, as spelled out in the licence
agreements, will be accepted by the courts. When the parties do not raise a
specific matter in their agreement, or if their intention cannot be derived form
the wording of the agreement, the courts will substitute the will of the parties
by applying non-mandatory legal provisions. In other legal systems, mandatory
rules may apply to the contents of licence agreements and specifically to the
warranty and guarantee provisions of such agreements. In such cases, if the
matter were to come before a court, the courts would overrule the agreement and
apply the mandatory rules. For these reasons, parties to an agreement should
consult the applicable legal system before concluding an agreement.
The risk element
in technology transfer agreements
Technology transfer agreements (patent, trade mark and know how agreements) are
considered "risk" contracts, because there is relatively little mandatory
legislation regulating these transactions' because the parties are free to shape
the contracts as they wish; and because there are no inherent warranties that
the undertaking will succeed. For all these reasons, the parties are left to
structure their relationship, including warranties, according to their own
wishes and needs. In this framework, it is not surprising that the negotiating
skill of the parties, as well as the strength of their market position, often
plays a decisive role in balancing the parties' rights and obligations.
In the area of warranties and guarantees, the risk elements is especially
accentuated, because it is largely up to the parties to set the scope and the
limits of their rights and obligations. Many legal systems are silent on the
warranties a licensor should extend to his licensee.
Normally a licensor attempts to limit his warranties. In order to do so, a
licensor may use all available preferences. For example, a licensee may fail to
conclude a technology transfer agreement if the requested warranties exceed
those acceptable to a licensor. Therefore, licensees structuring licence
agreements, especially the warranty sections thereof, must be alert to protect
their interests.
Warranties in patent licence
agreements
Legal status of patents
Technical
applicability and usefulness of patents
Commercial exploitability of the patent
Third party
infringements
Warranty closes in utility models
The common warranties in an exclusive patent licence
agreement refer to the following matters :
- Legal status of the patent
- Technical applicability or usefulness of the patent
- Commercial exploitability of the patent
- Third-party infringements
In the legal literature, the phrase "deficiency in the thing itself" is used
when a patent cannot be used as foreseen in the agreement between because of its
technical shortcomings. When it cannot be used due to some third-party
infringement of rights, the phrase "legal deficiency" is used.
Legal status of patents
Licensees should clearly understand the legal position of a patent. They must
know if a patent has been granted or if it is only under examination and/or if
an application is filed. Because the future use of a patent depends to a great
extent on its legal status, licensees are entitled to full and detailed
information about patent status.
Consequently, the first reasonable warranty expected from a licensor is that a
patent exists and is legally valid. Of course, a patent may not yet be granted,
but only applied for or requested. In such a case, the licensor should warrant
he exact and described legal status of his patent application or "lay it open
for public inspection".
If a patent has been granted, the licensor should also warrant that he has
unhindered right to grant the patent licence, that there are no mortgages or
pledges of third parties on the patent right, or that the patent is not
dependent on some prior patent or on a utility model. If there is a prior right
to use the patent", the licensor is expected to inform the licensee about it.
An essential feature of patents is that they are valid only in countries where
they have been properly registered. Warranties concerning the legal status of a
patent should include the obligation of a patent holder to register the patent
in the territory where a licence is granted and to maintain its registration.
A patent may become void and be revoked if it is discovered the technology is
not novel and patent protection should not be awarded. In such a case, the
licensee may terminate the contract; there would be no justification to continue
paying a fee for an invention without patent protection. However, the question
of whether a licensor should warrant the novelty of his invention remains.
Furthermore, the question of who should bear the risk of expenses incurred by
the licensee during the period until the withdrawal of the patent must be
answered.
The annex contains 24 sample clauses often found in technology transfer
agreements. They are not intended to serve as "good" or "bad" examples. Of
course, clauses that tend to decrease or entirely eliminate any warranty by the
licensor should be looked upon with caution by licensees. Four such clauses are
presented in order to make them easily recognizable when they are made a part of
contractual proposals.
Generally speaking, a licensor is not responsible for the future validity of a
patent, but the parties may consider the consequences of a subsequent
invalidation of a patent. The usual remedy in such cases is contract
termination, most licensors would not assume liability for damages. The licence
contract remains operable until the patent is finally revoked; a mere danger
that a patent will be declared invalid does not necessarily entitle the licensee
to terminate the agreement (annex, example 5).
The costs of maintaining a patent normally falls, on the licensor. However, if
there is an exclusive patent, the licensor may request the licensee to bear the
cost of patent maintenance. Some developing countries have developed sample
licence agreements in which they attempt to protect the licensees in cases of
infringement (annex, example 6).
When a patent is sold and there is no agreement, a licensor generally does not
warrant its validity. A argument often heard in favour of this approach is that
because patent sale agreements are typically risky contracts licensees should
bear the risk of unpleasant surprises. This explanation is given in spite of the
fact that a patent sale contract is a "contract of sale" in which the sellers'
liability for the quality of goods sold is well established and where it is
clear sellers are liable for defects in goods sold.
Consequently, the invalidity of a sold patent does not necessarily create a
basis for rescission or modification of an agreement. In cases of payment by
installments, payments must be continued. For these reasons, it is very
important for the licensee to provide for an adequate warranty provision in the
agreement.
Technical
applicability and usefulness of patents
Generally speaking, the modern tendency is to hold a licensor responsible for
the technical applicability and usefulness of an invention but not for the
commercial profitability of products based on it. However, because licence
agreements often are not subject to mandatory legal rules, the actual scope of
licensor warranties depends on the agreement's wording.
In many cases, licensees are not acquainted with the technical usefulness of the
patent and rely on the licensors' representations. Licensors should know the
field of application and the usefulness of their patented technology. Licensees
are not expected to validate technology applications before concluding a
contract. Consequently, the licensor is expected to warrant the applicability
and technical usefulness of the patent.
If the parties do not mention a technical usefulness warranty in their contract,
a question may arise concerning the implied warranty of the licensor. Various
laws and authors respond differently to this issue. Sometimes the courts rule
that the warranty is implied and sometimes that it is not.
Licensors often tend to disclaim any responsibility for the legal and technical
deficiencies of their patents (annex, example 7). If the parties wish to specify
the licensor's warranties for technical usefulness, these should be written
precisely and specifically. The parties should precisely describe the technical
function for which the patented technology will be used and describe any testing
that demonstrates the patent's usefulness. If a licensor warrants the technical
usefulness of a patent, a licensee is entitled to terminate the agreement if
such usefulness cannot be demonstrated. Similarly, if the patented technology is
inoperable, the licensee may terminate the agreement.
Commercial exploitability
of the patent
In principle, the risk of commercial exploitation and profit making should be
borne by the licensee. There is nothing to prevent a licensor from providing a
warranty that the protected product or process can be commercially produced and
that it can be sold and distributed. However, these warranties are not standard
or usual and for them to exist, they must be expressly negotiated. In the
absence of such agreements, the normal balance of contractual risks will favour
the licensor.
Licensees may also negotiate for the right to terminate an agreement when
continued working of the patent represents an undue burden. Such situations may
arise when continued production would mean excessive costs, or when production
become unprofitable, economically unreasonable or impossible. The test of
economic viability may be structured in relation to the royalties to be paid.
For example, if a minimum royalty is specified and the commercial results show
that even that minimum royalty has not been reached, the licensee may wish to
exercise his right to terminate the agreement (annex, examples 8, 8, 10 and 11).
It could be argued that a licensee, if commercial potential does not exist,
should have the right to terminate the licence, even if he does not have a right
to be indemnified by the licensor. Likewise, if a licensed technology is
apparently outdated, a licence agreement should not be considered as a "life
rent" for a licensor and should not be allowed to drive the licensee into
bankruptcy.
Third party infringements
In any patent licence the possibility exists that the activities conducted under
the licence could infringe patent or other rights of third parties. However,
seldom will a licensor agree to indemnify the licensee against such infringement
possibility. Licensors are reluctant to undertake this kind of warranty because
they rarely are in a position to know or foresee the nature of a licensee's
future activities nor do they have control over such future activities. For this
reason, in principle, they are unable to evaluate the magnitude of risk in
extending an indemnity obligation.
Nevertheless, licensors sometimes agree to assume the defence of any suit
brought against the licensee for infringing the rights of third parties. Most
often the licensor agrees only if the technology and/or technical information is
applied by the licensee without any substantial modification. If such a warranty
is assumed by the licensor, usually the licensee is required to promptly inform
the licensor of any claim made against him, to give exclusive control of the
defence to the licensor, to limit the overall liability to a certain amount
(usually in relationship to fees paid) and other similar conditions.
Similarly, licensees or third parties (for example), customers of licensees) may
seek remedy against the licensor. Such claims may occur in cases when the
products produced under the licence are defective. Licensors may wish to exclude
liability for such contingencies, and provide contractual provisions to that
effect. If there is a possibility of use in jurisdictions where 'strict
liability" principles would make the licensor liable to third parties, a
licensor may wish to be indemnified by the licensee for costs, damages, expenses
and similar claims enforced against him.
Warranty clauses in utility
models
Utility models can be protected through registration in the form of a
description, a drawing or other picture, or a model. Protection is accorded
using somewhat less strict requirements than for a patentable invention.
Therefore, utility patents offer less protection (for example, shorter duration)
than patents. Otherwise, the rights granted under a utility model are similar to
those granted under a patent.
Licensors usually warranty the existence of the utility model on the date of a
contract. They also guarantee that they own the utility model and that there are
no rights of third parties to the utility model. Licensors also warrant that
they will not abandon the utility model during the contract period.
In cases of infringement, licensors try to transfer the burden of defense to the
licensees (annex example 12). The reason given for obligating the licensee
instead of the licensor to defend the utility model is that he will learn about
infringements in his territory before the licensor. Similarly, licensees have a
paramount interest to use the utility model without any disturbance from third
parties.
Licensors often attempt not to undertake any additional warranties of the legal
kind. However, they are often ready to warrant that the invention, as embodied
and in accordance with the utility model, can be factory-produced and
economically marketed. A warranty of this kind does not necessarily mean that a
licensor is liable if a licensee cannot produce the product due to his own
inexperience or shortcomings. Under such a clause, a licensor will still not be
liable for the profitability or for the economic results of production based on
the utility model (annex, example 13).
Warranties in know-how
licence agreements
Warranties of accuracy and
completeness
Warranties for
the stage of technological development
Adequacy and
suitability for specific production
Third party infringements
Warranty of results
Warranty
against infringement
Secrecy arrangements
Know-how may be secret or non-secret. If the
know-how is secret, licensors want to be sure it is not revealed to third
parties, because it would lose its value. The fact that know-how is not legally
protected implies that licensors are not supposed to warrant its legal
protection, although they are expected to keep it secret or confidential.
Licensors are not expected to reveal the knowhow to the public, because once it
becomes public knowledge, it becomes accessible to everybody, which may destroy
the justification for continuous payment of royalties. Nevertheless, it seems
that secrecy of knowhow is not necessarily one of its essential elements. In
other words, it is possible to consider as knowhow a body of knowledge that,
although not secret, is simply not easily accessible.
It might be expected that a licensor would warrant that using the knowhow will
not infringe third parties rights or that its use will not cause damages to
third parties. However, many knowhow licensors decline to undertake liability of
this or any other kind. Therefore, licensors often decline all warranties for
the transferred knowhow (annex, example 14). In spite of a licensor's tendency
to exclude any specific warranty for knowhow, there still are areas where such
warranties typically are expected and required. In broad terms a knowhow
licensor may extend warranties in two specific areas: (a) a warranty that the
knowhow has certain technical properties and (b) a warranty that using the
knowhow will not infringe the industrial property rights of third parties.
Generally speaking, in knowhow licence agreements, the following areas may
contain explicit warranties from the licensor :
- Accuracy and completeness of technical information
- State of the development of technical information
- Adequacy and suitability for specific production
- Third-party infringements
- Warranty of results
- Warranty against infringement
- Secrecy arrangements
This is by no means an exhaustive list of warranties which a licensee may
request from the licensor of a knowhow: rather, it is a sample. Furthermore,
these warranties may not be sharply differentiated from one another. In such
cases the exact scope of a warranty may be judged only by its description and
definition. In formulating specific warranties, it may easily happen that some
of the extended warranties spill over into a wider scope than originally
intended.
Warranties of accuracy and
completeness
It is usual to demand from the licensor a warranty that the technical
information supplied under the knowhow licence agreement is complete in terms of
what has been described and promised, and that it is complete in the sense that
it contains all the information necessary to achieve the anticipated results.
This is not a warranty of results but a guarantee for accuracy and completeness
of the delivered material. Such a warranty is usual when the knowhow has to be
handed over in tangible form. In these cases, a list of the material's headings
and description of content may be provided in the agreement. Using this
technique, there is no danger of revealing, the content of secret knowhow which
it is possible to specifically identify the items to be delivered and describe
the substance of materials to be delivered.
Due to the intangible character of some technology, there may be a problem in
defining completeness, particularly when the technology is not documented. In
such cases, additional measures may be needed to assure completeness, such as
visiting the plant or receiving training.
In the same manner, a warranty of accuracy of the supplied information may also
be requested. This means the licensor must ensure that the technical information
supplied under the agreement does not contain errors, mistakes, omissions and
similar shortcomings. The warranty of completeness and accuracy, because its
wording is sensitive, may sometimes be a warranty of the results (annex, example
15).
Warranties
for the stage of technological development
The know how licensor may be supplying his latest technology or an older
technology. It could be very useful to clarify, in the agreement, the stage of
technological development. If a disclosure of this kind is not made in the
contract, licensees may not know exactly what they will be receiving. They may
believe they will receive the latest technology, while this may not be the case.
If the licensor gives a warranty that the knowhow is its latest technological
development, it will be responsible for damages if it supplies an older
technology (annex, example 16).
Adequacy and
suitability for specific production
There is nothing to prevent a licensor from warranting the suitability of its
know how for certain technological requirements of the licensee. In cases of
such warranty, the licensor will attempt to acquaint itself with the
circumstances and other relevant technical and environmental conditions under
which the know how will be applied by the licensee. The warranty of suitability
implies not only that the technology is applicable but also that it is
technically suitable. However, such a warranty would not necessarily imply that
the licensor has undertake to warrant the results of applying its technology. It
may be saying only that if specific conditions in the licensee's production
process are met and complied with, then the technology will be suitable for
achieving certain goals. Such a sensitive warranty, often tied to multiple
conditions, requires very exact and precise language to define its precise
scope. Here, licensors are often reluctant to use broad language and very often
the warranties end up being very narrow. Sometimes licensors are ready to
warrant the suitability of technology for specific production but intend to tie
in such clauses to the further provision of technical assistance, the supply of
specific raw materials or similar additional undertakings. Samples of such
warranties show the difficulties connected with them (annex, examples 17 and
18).
Third party
infringements
If a knowhow agreement is explicitly based on secret knowledge, the licensor
warrants, even without any specific provisions in this respect, that the
knowledge is secret and is not known to third parties. Because knowhow is not
legally protected, licensors cannot move against third parties for infringing
knowhow secrets. If secret knowledge covered by the knowhow agreement becomes
public knowledge, the duties of the licensees, and particularly the duty to pay
fees, becomes void.
To protect the secret or privileged information contained in the knowhow,
licensors may bind their own employees not to reveal the secrets to any third
party. Likewise, they can contractually oblige licensees not to reveal to any
third party know how secrets, including all technical drawings, plans, maps,
etc.
Warranty of results
Warranty of results is not necessarily implied in a knowhow agreement. In order
to exist, this warranty must be specifically mentioned in the knowhow licence
agreement, or at least, implied through relevant provisions of the agreement or
other connected circumstances. Nevertheless, there is nothing to prevent a
knowhow licensor, like a patent licensor, from giving a warranty of results.
In a warranty of results, a licensor warrants the licensee to achieve specific
results by applying the delivered know how. This warranty has to be proven by
obtaining the results produced when using the technology. While earlier
mentioned warranties do not imply any warranty for the economic results of the
technology, a warranty of results may imply, or even explicitly undertake, a
warranty for economic results. This guarantee may also contain warranties
concerning the consumption of raw materials, energy or lubricants and similar
economic parameters. A reasonable licensor will agree to this type of warranty
only if issues like training and raw materials are specified in the contract.
Sometimes warranties are formulated in a positive manner, affirming liability
for certain results, but more often one encounters a refusal to warranty any
results (annex, examples 19 and 20). Even when the licensor does warranty the
technical possibility of achieving specific results, this does not automatically
mean the licensor has undertaken a warranty for profitable use of the licence.
Such an obligation could be assumed only if specified in the agreement.
Warranty against infringement
Although knowhow, unlike parents and trade marks, is not protected, its use may
infringe the industrial property rights of third parties. Often a licensor will
warranty that using specific knowhow will not infringe third party rights.
If the licensor is not sure whether his know how is infringing some industrial
right of others, it may at least warrant that it has no knowledge that third
parties' industrial property rights could be infringed by the use of the knowhow.
Regardless of its knowledge, the licensor may warrant that the licensee will be
able to use the knowhow without legal interference by third parties and that no
infringement suits will be filed against him or they are filled, that it, the
licensor, will defend and bear the cost of such defence (annex, examples 21 and
22).
Laws in some countries provide that an agreement between parties may not exempt
the technology supplier from liability in the case of actions by third parties
for infringement of industrial property rights.
Secrecy arrangements
In a knowhow arrangement, a licensee typically agrees to keep received knowhow
secret, because any disclosure could destroy the value of the knowhow, thereby
harming the licensor.
An essential feature of know how is that it can legally be protected only within
a contractual framework. There is a danger of revealing knowhow during
negotiation, when the licensor explains the basic characteristics, traits and
experiences of the knowhow. At this stage, there is no other way to protect
knowhow than to obtain a pledge of confidentiality. For this purpose, a licensor
usually proposes signing a secrecy pledge. This pledge may obligate the licensor
not to use acquired information for his own purposes and not to reveal the
information to third party. Such a pledge may be mutual, if licensees as well as
licensors are likely to reveal privileged information or secrets to each other.
Any pledge may be strengthened by including a penalty or damage liability
clause. Such a pledge would not apply to information publicly known or already
known to the other party (annex, examples 23 and 24).
Warranties in trade
mark licence agreements
Legal status of trade marks
No warranty of
results
Trade mark licensing contains considerably fewer
warranties and guarantees of the foreign licensor than patent and knowhow
licensing. Trade marks generally denote the product's origin and do not have
such a finite character as the technical information contained in patents. In
many cases trade marks are tied to patent and knowhow licences, or they may
constitute one element of another kind of technology transfer agreement.
Nevertheless, trade marks are often the primary and the only subject of a
licence agreement. Moreover, they have become increasingly important in modern
global competition where a distant, but known, name or mark can increase sales
beyond all expectations. Warranties in trade mark agreements could cover the
legal status of the trade mark, with no special warranty of results.
Legal status of trade marks
In a trade mark licensing agreement the licensor may warranty the legal status
of a trade mark. It usually warrants that the trade mark hs been properly
registered and that the trade mark has been properly registered and that its
registration will be maintained in force throughout the duration of the
agreement. At the same time, the trade mark ownership should be duly recognized
and not be subject to any sort of qualifications.
In some countries the condition for continued validity of a trade mark is
continuous use by the owner. "Use" may sometimes mean manufacturing and selling
a product bearing the trade mark. Use by a licensee is considered the same as
use by the trade mark owner. In such cases licensor seek a reverse warranty from
the licensees stating the trade mark will be "used", within the meaning required
by local regulations, in order to maintain the registration. Licensors may
require bona fide intention to use the mark for goods nd services as a
legislative shield against stockpiling trade marks by people who have no
intention of ever using them. Such requirements may be reflected in trade mark
licence agreements.
No warranty of results
A trade mark licensor will almost never warrant the quality of any product
produced by a licensee. In most cases the licensor retains the right to control
products manufactured under the licensed mark. In a way, this is a logical
distribution of risks. On one hand, a licensor has no control of the production
process. This is true even when the trade mark licensor provides instructions
for manufacturing the product. It is the licensee's obligation to abide by the
production instructions. However, the trade mark owner has a bested interest in
ensuring that the products manufactured under his trade mark are the same
quality the public is used to receiving. Therefore, trade mark owners seldom
extend any warranties concerning the goods produced with the trade mark but
retain a right to inspect goods before they are put on the market.
Warranties in other agreements
Warranties in sale transactions
Warranties in turnkey arrangements
Warranties in engineering contracts
Warranties in technical
assistance agreements
Warranties in management contracts
Warranties in joint-venture agreements
As already mentioned, there are alternative means
for transferring proprietary technology including, but not limited to a simple
sale of machinery and equipment, turnkey arrangements, foreign investments and
management agreements. This section examines the use of warranties in these
technology transfer agreements.
Warranties in sale transactions
Warranties in a sale transaction tend to be limited to the quality and quantity
of goods comprising the transaction. If machinery and equipment are being sold,
the warranties focus on the quality of goods and the ability of the equipment to
perform the functions and operations for which it has been manufactured. For
example, if a pump is sold the seller may warrant it will operate as specified
for a certain period of time (usually 12 months). The period through which the
warranty remains in force is called the guarantee or warranty period. Once this
period expires, the seller, in principle, will not have any further warranties.
An implied warranty is that the seller has title to the goods sold and that he
may transfer that title by delivering the goods.
In an outright sale, there are no warranties for the transferred technology. The
technology embodied in the pump is not the subject of the transaction. The
transaction deals with the pump itself; therefore the warranty is on the pump's
quality and operation for a specific period.
Warranties in turnkey
arrangements
The subject of a turnkey contract is usually a whole plant, including the
individual pieces of delivered equipment and machinery. These contracts warrant
that the plant will function and perform according to the warranted parameters.
If some machinery and equipment does not function as contracted, the contractor
has to remedy the defects. A contractor also is obligated to provide a plant
that produces the contracted output. The output is usually measured for a
limited period of time (testing period). Once tests show the plant produces the
agreed quantity at a certain quality, the warranty period begins. Because the
contractor is no longer in charge of the plant after the tests are complete, it
no longer warrants the plant will actually produce a certain quantity or
quality. Nevertheless, the contractor remains obligated to connect all machinery
and equipment defaults through the warranty period. This period is often called
a maintenance period.
The difference between a guarantee or warranty period and a maintenance period
often lies in the slightly different contractor obligations. Under a warranty
obligation, the contractor is obliged to replace at his own cost the machinery
and equipment that defaults in performance. In a maintenance obligation, the
contractor is only expected to do whatever is necessary to rectify defaults, at
the expense of the facility owner.
Again, in some turnkey agreements there is no special warranty for the
transferred technology. If, for example, the turnkey arrangement involves
supplying and erecting a hydropower station, the owner will receive all the
technology needed to run the station. The combined working and operating
machinery delivered implies that specific results can be achieved. The machinery
warranty implies a warranty of technology. However, as in sales arrangements the
technology is not the subject of the contract.
However, if the owner believes the machinery and equipment will not enable him
to manufacture the intended goods without additional insight into using the
technology, he may request a special technology transfer agreement. Such an
agreement may be either a direct licence agreement or an indirect technology
transfer agreement such as a technical assistance agreement or a management
agreement. In such cases, there may be special process performance guarantees
based on separate technology transfer agreements. A detailed discussion of
process performance guarantees that become particularly relevant in case of
complex industrial projects is given in module 18, on contracting complex
industrial projects.
Warranties in engineering
contracts
For the purpose of this review, engineering contracts are considered to be
contracts concluded by engineering firms. These firms provide the wide range of
services required to conceive, design and begin operating complex,
capital-intensive industrial and metallurgical projects, including licences and
technology, with management, recruitment and training.
The warranties engineering firms undertake vary depending on the type of
obligations they agree to assume. If the subject of the contract is to provide
technology through licensing or to provide management or training services, the
scope of warranties must be agreed by the parties. If the agreement is a turnkey
one, the warranties shall be as described above. In combined turnkey/technology
transfer/technical services agreements, the warranties reflect the warranties
typical of such contracts.
Warranties in
technical assistance agreements
A technical assistance agreement provides for one party to render technical
assistance to another party. The party rendering the assistance may agree to
send technical experts to the other party or to train the technical experts of
the other party or to maintain certain equipment or to perform some similar
function.
There is no doubt that technology transfer is taking place in a technical
assistance agreement. However, the main subject of such agreements is not
technology transfer, but technical services. Therefore, any warranty is directed
toward properly fulfilling obligations connected with rendering the service, not
with transferring the technology.
Warranties in management
contracts
The purpose of management contracts is to assume certain management functions
for one party. Such contracts are usual, for example, in the hotel industry, but
they are also feasible in other industrial sectors. In this arrangement, a
management contractor warrants the performance of his management functions.
Within these functions, he may be obliged to transfer knowhow and technology to
the recipient.
In principle, this transfer is not the main object of the contract but
incidental to the management function. Such contracts usually provide for
training the recipients personnel in such a manner that they acquire the
knowledge necessary to run the business by themselves. However, the knowledge
and skills transferred during management operations are not the subject of these
contracts. The subject is the management function itself. Therefore, the
warranty in such contracts is directed towards performance of the management
functions rather than towards the technology transfer- and skills.
If the parties to a management agreement wish to achieve the transfer of
specific knowhow, they may prefer to conclude a separate transfer of knowhow
agreement.
Warranties in joint-venture
agreements
Joint venture agreements represent a form of foreign direct investment. In such
arrangements, foreign investors combine their investments with the participation
of local partners. Foreign investments may be in a tangible or intangible form.
Intangibles are usually rights owned by foreign invetors. Most often such rights
are industrial property rights such as patents, trade marks or knowhow.
If the investment is not comprises of industrial property rights, it is likely
that a foreign investor will invest tangible assets, such as money or machinery
and equipment. In such cases, it is also very likely the foreign investor will
conclude a separate contract for technology transfer with its local partner or
with the newly established joint venture company.
In the first case, i.e. when industrial property rights are invested as capital,
foreign investors are expected to warranty certain properties of the transferred
technology just as if the technology was being transferred under a separate
contract. Local recipients of foreign technology are entitled to expect the same
quality and protection regardless of whether a technology is invested as capital
or is licensed under separate contract.
Annex
WARRANTY CLAUSE OFTEN FOUND IN TECHNOLOGY TRANSFER AGREEMENTS
Example 1
If the use of the patent forming basis of this agreement results in a claim for
infringement against the licensee, the cots and any damages awarded against him
shall be borne by -------------(either licensee or licensor).
The costs and expenses of any country-claim or of settling a claim shall be
borne by ----------(either licensee or licensor).
The licensee shall inform the licensor of any claim made against the licensee
for infringement and shall enable the licensor to join in any legal proceedings.
Example 2
The licensor also warrants that one the date of signing of this agreement, to
the best of his knowledge, it is not aware of third parties valid patent rights
or similar protection for inventions which would be infringed upon by licensee's
use of the technology subject to this agreement.
Example 3
Licensor guarantees that it is not aware of any legal deficiencies of the patent
licenses hereunder. It particularly guarantees that it is aware of neither any
third party's prior rights to use, nor of a dependency of the licensed patent on
third party's patents, nor of technical deficiencies of the invention on which
this patent is based. Licensor assumes no liability for lack of deficiencies
mentioned.
Example 4
The licensor does not warrant the novelty of its invention, but should it
transpire that the patent is void by reasons of its publication, whether
wittingly or unwittingly, the licensee shall be entitled to determine the
agreement wholly or in part by notice in writing.
Example 5
Partial or complete invalidation of the licensed patent
This agreement and its validity shall not be influenced by the fact that the
licensed patent should finally be declared invalid. Licensee shall, however,
have the right to terminate this agreement within three months from such a final
declaration of invalidity of the licensed patent or to request from the licensor
an adjustment of royalties with respect to the licensed knowhow.
Previously paid royalties shall not be refundable. Royalties which were due
prior to the final declaration of invalidity, but have not yet been paid, have
to be paid by the licensee. The latter does not apply if the licensee has
informed the licensor by registered mail of the fact that competitors infringe
the licensed patent and have refused to sign a cease and desist declaration
submitted to them with a warning letter. If licensee does not file a patent
infringement complaint within a reasonable period, it shall remain obligated to
make royalty payments hereunder.
If the licensed patent is partially invalidated or the licensed patent is
determined to be dependent upon an earlier patent, licensee has the right o
request an adaptation of this contract to changed circumstances. This does not
apply to a case of dependency of an earlier patent, if licensor holds licensee
harmless, e.g. by royalty payments to the owner of the earlier patent.
Example 6
Infringement
1. The licensee shall promptly advise the licensor in writing of any notice or
claim of infringement and of the commencement of any suit or action for
infringement of any patent against the licensee which is based upon the use of
any invention that is the subject of the patent(s) or of any patent of an
improvement granted to the licensee and which is used by the licensee under the
authority and in accordance with the terms of this agreement.
2. The licensor shall upon receipt of such notice and if promptly requested in
writing to do so, undertake at its own expense the defence of any such suit or
action and the licensee shall have the right to be represented therein by
advisory counsel of its own selection at its own expenses. The licensee agrees
to cooperate fully in the defence of any such suit or action and to furnish all
evidence in control.
3. In the event the licensee undertakes the defence of any such suit or action
against it, the licensor shall nevertheless bear the expenses of, and fully
cooperate in, such defence and shall have the right to be represented therein by
advisory counsel of its selection.
4. Neither the licensor nor the licensee shall settle or compromise any such
suit or action without the consent of the other if the settlement or compromise
obliges the other to make any payment or part with any property or assume any
obligation or grant any licence or other rights or be subject to any injunction
by reason of such settlement or compromise.
5. The licensor will release, acquit and discharge the licensee from any and all
claims or liabilities for infringement or alleged infringement of the patents
prior to the date of validation by the -------------- Government authorities of
this agreement.
Example 7
Licensor undertakes no liability whatsoever for legal deficiencies of the patent
and is not aware of any rights of third persons on the patent. Licensor is
likewise not aware of any deficiency or defects of the invention. Licensor is
not assuming any guarantee or warranty or other liability for legal or other
defects of any kind.
Example 8
The licensor undertakes no responsibility for the risks of industrial
realization, which are assumed solely by the licensee. The licensee shall be
deemed to understand the subject matter of the licence and shall undertake its
industrial realization. If it fails to do so within a period of
-----------------(it is advisable to specify a date before which determination
may not take place) the licensor shall be entitled to determine the contract. It
shall also be entitled to recover damages. (This variant may be used when the
subject matter has bee manufactured before the contract is made.)
Example 9
The licensor does not warrant that the invention is capable of industrial
realization nor shall it be responsible for the consequences of any failure to
realize it. If industrial realization proves impossible or too difficult for the
licensee, either party may determine the contract. In such a case neither party
shall be liable in damages to the other.
Example 10
The licensor does not warrant that the invention is capable of commercial
exploitation. The risks of such exploitation shall be assumed solely by the
licensee.
Example 11
Licensor guarantees neither the patentability and validity of the licensed
patent nor the commercial exploitability and/or readiness for plant use of the
invention, and shall not be liable accordingly.
Example 12
Obligation to defend
1. Licensee promises to defend the utility model against challenges by third
parties at licensee's costs. In the case of an infringement of the utility model
it is incumbent upon the licensee to pursue, at its costs, infringements within
the licensed territory. This is inapplicable if the infringing activities are
insignificant and the litigation costs will be disproportionate to possible
losses of sales.
2. If the licensee fails to pursue infringers, then licensee shall not have the
right to back payments or reduction of royalties. In the case of a successful
prosecution of an infringer, the possible damage awards shall belong to the
licensee.
3. If third parties bring an invalidity suit against the utility model, the
royalty payments are reduced to one half, regardless of whether the third
parties abide by the utility model or not. The other half of the royalties is to
be paid into escrow account until the final decision in the invalidity suit. If
the utility model is cancelled the amount in the account is paid to the
licensee; if it is upheld, the payment goes to the licensor.
Example 13
Liability for defects
1. Licensor assures that it is not aware of legal defects with respect to the
utility model, and that it is not aware of any technical defects of the
invention underlying the utility model. Licensor shall not be liable for any
unknown defects, particularly resulting from patents or utility models of third
parties.
2. Licensor guarantees that the invention in accordance with the utility model
can be factory produced and economically marketed en gros.
Example 14
Warranties
1. The knowhow and technical data which are provided under this contract are
those which the licensor itself uses in the production of the licensed article.
Nevertheless, the licensor does not make any guaranteed promises that the know
how and technical information is correct and without defects, that the use of
the information makes possible the adequate production of the licensed article
or that the technical information is complete.
2. There is no warranty that the use of the licence does not infringe third
parties rights or does not cause damages for third parties.
3. All warranty claims are excluded as far as these are based on the technical
data or the knowhow transferred. No warranty is made for the reliability, the
quality, the economic utilization, the usefulness of the licensed article for
the intended purpose or for any other purpose.
Example 15
Guarantee by transferor
Subject to the terms and conditions hereinafter set forth, the transferor makes
to the transferee the following guarantees; al the written knowhow and the
technical information handed over or disclosed to the transferee pursuant to the
provisions of this agreement will be correct, complete, up-to-date and adequate
to (manufacture the product) (apply the process).
Example 16
Licensor guarantees that the technical documentation supplied by licensor to
licensee with the contract shall be the latest technical documentation which is
actually used by licensor and the improved and developed technical documentation
shall be supplied in time by licensor to licensee in the course of the contract.
Example 17
The licensor hereby warrants that the technical information supplied as knowhow
as described in this agreement is suitable for manufacturing the product as
stipulated herein, but provided that the technology is used under the same
conditions, and with same intermediaries and other materials, as used by the
licensor as its plant at the time of the signing of the contract.
Example 18
The transferor guarantees that the process has been technically tested in its
works and that the process has resulted in the production of the product.
However, transferor will take no part in the use made by the transferee of the
knowhow supplied under this agreement and accordingly gives no guarantee that
the transferee will obtain the same or similar results in the use thereof.
Example 19
The licensor guarantees that the knowhow delivered under this agreement and
transferred to the licensee will enable the recipient, through its acquisition
and application to achieve the proposed technical aims …
Example 20
Licensor does not warrant that the invention and knowhow are capable of
industrial realization nor shall it be responsible for the consequences of any
failure ---------------- to achieve this. If industrial realization proves
impossible or too difficult for the licensee, either party may determine the
contract. In such a case neither party shall be liable in damages to the other
---------------- Similarly, licensor does not warrant that the invention and the
delivered knowhow are capable of commercial exploitation. The risks of such
exploitation shall be assumed solely by the licensee.
Example 21
Licensor guarantees that it has lawful ownership of all the know how and
technical documentation supplied by licensor to licensee in accordance with the
contract, and that licensor has the right to transfer them to the licensee. In
case a third party brings a charge of infringement, licensor shall take up the
matter responsibilities which may arise.
Example 22
Warranty by the transferor
The transferor hereby warrants that as of the date of the signing of this
agreement, it has no knowledge of any patents granted or rights insuring to
third persons that would prevent the full enjoyment of the technical information
furnished under this agreement.
Example 23
Confidentiality
The licensee undertakes to preserve the confidentiality of all designs,
drawings, technical information and knowhow furnished by the licensor and shall
not divulge any part thereof, except what is normally required for the sale and
use of the products covered by the licence, and for manufactures of parts and/or
components or raw materials in (the country name). The licensee shall place his
staff under strict obligation not to divulge the knowhow, in any circumstances,
during the period of validity of the contract.
Example 24
Licensee agrees to keep the knowhow and technical documentation supplied by
licensor under secret conditions within the validity period of the contract. If
a part or the whole of the above mentioned know how or technical documentation
will be opened to the public by licensor or any third party, licensee is no
longer to have the secret obligations to the opened parts.
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