"Best Efforts" under a Patent License | Practical Law

"Best Efforts" under a Patent License | Practical Law

Especially in exclusive patent license agreements, the patent owner may be concerned that a potential licensee will license the patent only to forego expending sufficient resources to fully commercialize the licensed product, or otherwise put it on the shelf. In these situations, the patent owner should seek to identify ways to ensure that the potential licensee exerts its best or reasonable or commercially reasonable efforts to commercialize the licensed product.

"Best Efforts" under a Patent License

Practical Law Legal Update 6-559-4385 (Approx. 3 pages)

"Best Efforts" under a Patent License

by Practical Law Intellectual Property and Technology
Published on 11 Mar 2014 • USA (National/Federal)
Especially in exclusive patent license agreements, the patent owner may be concerned that a potential licensee will license the patent only to forego expending sufficient resources to fully commercialize the licensed product, or otherwise put it on the shelf. In these situations, the patent owner should seek to identify ways to ensure that the potential licensee exerts its best or reasonable or commercially reasonable efforts to commercialize the licensed product.
In an exclusive license, the licensor typically seeks to include some requirement that the licensee use its best efforts (or reasonable or commercially reasonable efforts) to exploit the licensed patent. A diligence standard for the licensee's activities concerning the licensed product:
  • Aims to protect the licensor from the licensee's poor performance or failure in commercializing the licensed product.
  • Are less typical in non-exclusive licenses since the licensor can freely grant licenses to others to minimize the risk that the licensor will not receive adequate compensation from a single licensee. Licensees typically resist the inclusion of any type of best efforts obligation in a non-exclusive license.
A best efforts, or similar obligation, set out in a license agreement, however, can lead to disputes between the parties because of ambiguity in the interpretation of this type of provision. Rather than an amorphous best efforts provision, the parties should instead consider including a more objective measurement that may result in fewer disputes. For example, two alternative options include either:
  • A minimum royalty obligation, or a minimum sales obligation, either by dollar amount or sales volume. The licensor may consider seeking to have this type of provision escalate as some assurance that the licensee will not be content just to meet a low minimum royalty or sales obligation.
  • A commercialization plan for the licensed product. This type of provision should objectively set out either:
    • the milestones and timetable for the licensee's commercialization of the licensed product. If the licensee wishes to set out a commercialization plan, it should include readily achievable performance milestones and timetables.
    • the specific allocation of resources and personnel the licensee must make toward commercialization.
If the licensed territory includes more than one country, the parties should consider whether to include a separate requirement for each individual country or region to ensure that the licensee is adequately exploiting the licensed patents in each country. In addition, the licensor could seek the remedies for the licensee's failure to meet its obligations on a country-by-country basis.
Where any of these types of provisions is included in the license agreement, the parties should specify:
  • Whether meeting its obligation under the provision is deemed to be complete satisfaction of any best efforts obligation to commercialize the licensed product.
  • The consequences of failure to meet its obligations, such as:
    • conversion of the license to a non-exclusive license; or
    • termination of the license.