The Grant-Back Clause in Your Technology License

By Thomas B. McGurk | January 17, 2013

With the flurry of construction long past and the capabilities of your plant ascertained, you may have decided it’s time to upgrade your production process.  With your years of experience producing biodiesel, you may have developed ways to improve your plant’s performance. Alternatively, you may have turned to a vendor offering the latest innovations in process technology. But there may be more to the story than simply improving your plant processes and enjoying the fruits of your efforts. Upon review of your original technology license, you may discover that it contains a provision that obligates you to license the improvements you developed back to the original technology provider. You wonder where you stand and what your obligations are.

This type of provision is generally known as a grant-back license, and it obligates a licensee to license any improvements made to a licensed technology back to the original technology licensor. The grant-back clause is common in technology license agreements in many industries. Grant-back clauses typically arise in the context of the licensing of patented technology. Consequently, such clauses, while viewed in terms of contract law, also fall within the intersection of patent and antitrust law. Whereas a patent grants for a limited time to the patent holder the right to exclude others from engaging in certain conduct in regard to the patented technology, antitrust law generally prohibits anticompetitive business practices. Courts have balanced the competing aspects of these two areas of the law in crafting the legal theories by which grant-back licenses are judged.

Grant-back licenses generally are considered acceptable means of protecting a technology licensor’s interests while promoting the licensing of the underlying technology. A properly drafted grant-back license can encourage the licensing of technology by removing the fear that the licensor could find itself competing with a licensee who has developed an improvement to its technology. However, an improperly drafted grant-back clause risks being viewed as an anticompetitive provision that inhibits innovation.

The courts generally apply a “rule of reason” to the review of grant-back provisions. Courts will evaluate several aspects of the grant-back license to determine its validity. Key aspects include: the relationship of the improvement to the licensed technology, whether the grant-back license is exclusive or nonexclusive, and, whether the term of the grant-back license is less than or equal to the term of the patent protection on the underlying technology. Courts are more likely to find a grant-back license valid and enforceable if the improvement is closely related to the patented technology, the license does not grant an exclusive license to the improvement, and the term of the grant-back does not extend beyond the term of the patent protection on the underlying technology. Courts also will factor into their analysis whether there are alternative technologies available to the licensee at the time the technology transfer agreement was entered.

The nature of your improvements, the scope of the original technology license, and the specific language of the grant-back provision all will affect your particular situation. Of course, concerns about the ramifications of a grant-back clause on your ability to innovate are best addressed during the negotiation of the original technology license.

These comments are for general educational purposes and should not be considered legal advice. Since the terms of grant-back provisions can vary significantly, and the relevant facts surrounding the improvement applied to production processes can vary from one biodiesel producer to another, it is important to seek legal assistance in evaluating your specific situation. 

Author: Thomas B. McGurk
Managing Member, McGurk Intellectual Property Advisors
[email protected]

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