Brief Analysis of the Warranties and the Disclaimers of Warranties for Technology Licensing Agreements (Taiwan)

Albert Yen[1]

Technology licensing means that the licensor (the technology provider) agrees to allow the licensee (the technology requester) to use all or part of the rights to a patent, copyright, trade secret or other technological know-how of the licensor for an agreed-upon period of time.  The term “technology transfer” is sometimes used synonymously with “technology licensing,” but a closer look would reveal that the two are not exactly the same.  Since “transfer” is not a legal term (but “assignment” or “licensing” is), the term “technology transfer” more accurately refers to the various services provided by the technology owner during the “technology assignment ” or “technology licensing” process, including: providing technical data, educating and training personnel, assisting with the establishment of a production line or acquisition of a certification, etc.

In the era of industry globalization, technology licensing has become an important way to promote the commercialization of technologies.  For a licensor, a technology license can not only generate revenues but also transfer the risk of expanding the technology market to the licensee; and for the licensee, although sometimes a technology license is an “alliance under duress” in the face of litigation hardships, sometimes it can also be a positive means of acquiring technologies, reducing R&D costs or establishing business relationships.  Since “technologies,” unlike “tangible assets,” do not have a well-defined subject matter of assets and scope of rights, the comprehensiveness of contract clauses is particularly important for technology licensing.

Of all the common clauses in a technology licensing agreement, the warranty/ disclaimer clause is one of the more controversial portions and is one of the focal points of the negotiation phase for both parties.  In a technology licensing agreement, in general, the warranties that the licensee seeks from the licensor can be generally categorized into two aspects: the “efficacy of the technology” and the “legality of the technology.”

1. The warranty on the “efficacy of the technology” means that the licensor warrants that the licensed technology, if properly utilized, will achieve the agreed-upon efficacy (e.g., to warrant that the licensee will achieve the target production capacity or yield within a certain period of time, to warrant that the licensee can solve specific technical problems…, etc.). In some cases, however, the efficacy of technology licensing may be particularly dependent on the licensee’s own capability and experience, or the parties may find it difficult to make a complete assessment of the “efficacy of the technology” at the stage of contract negotiation.  As a result, the licensor is reluctant to warrant the “efficacy of the technology” (or even the licensor may specifically state that it does not warrant the “efficacy of the technology” in a disclaimer clause).  At this time, the licensee may have to settle for the second best option, which is to require the licensor to warrant the accuracy and completeness of the technical information provided by the licensor, and to stipulate various kinds of obligations that the licensor should assume in “technology transfer” clauses, supplemented by penalty clauses and termination clauses to control risks.

2. As for the warranty of the “legality of the technology”, it is conceptually similar to a warranty against defects of rights, which means that the licensor should warrant that the rights actually exist and that no third party can assert rights against the licensee. However, as noted above, since “technology” by its very nature does not have a clear scope of rights, many questions arise as to how the warranty against defects of rights can apply to a technology licensing agreement.

First, the both parties often have a difference of opinion on whether the licensor warrants that “the implementation of the licensed technology will not infringe the intellectual property rights of third parties.”  In the vast majority of cases, the licensed technology is a further improvement of the “prior art,” and even if the licensed technology is indeed independently developed by the licensor, it is impossible to conclude that “the implementation of the licensed technology will not infringe the intellectual property rights of third parties.”  Therefore, from the perspective of the licensee, it seems quite common to add a disclaimer clause to reject to warrant that “the implementation of the licensed technology will not infringe intellectual property rights of third parties.”  However, in some cases where licensees with obviously stronger bargaining power than the licensors, if the licensor has no choice but towarrant that “the implementation of the licensed technology will not infringe intellectual property rights of third parties,” striving to reduce the scope of the “third parties” in the warranty clause and performing a “freedom to operate search” in advance to reasonably assess risks would be feasible alternatives for the licensor. On the other hand, from the perspective of the licensee, when it is difficult to require the licensor to warrant that “the implementation of the licensed technology will not infringe intellectual property rights of third parties,” the licensee should strive to add indemnification  clauses in the contract by clearly stipulating that in the event of any third-party infringement claim, the licensor is obligated to assist with the design around, provide alternative technical solutions or indemnify the costs in litigation.

In addition, if the subject matter of the license is a patent, the warranty of the “validity of the patent” is also a common issue.  Although a patent is filed with and approved by the competent authority, a high percentage of patents are subsequently invalidated (or deemed invalid by the court in litigation) in reality.  Therefore, under general circumstances, the licensor is usually reluctant to warrant the “validity of the patent.”  This raises another issue: “if the patent is invalidated, should the licensor return the royalties paid by the licensee in the past?”  In this regard, it is viewed in domestic practices[2] that the main obligation of the licensor is to enable the licensee to practice the patent in accordance with the license agreement during the term of the patent license, and even if the patent is subsequently invalidated, the license agreement between the parties is still valid before it is invalidated, and the licensee shall still pay royalties for the period in which the patent is practiced.

In addition to the above-mentioned warranties/disclaimers of warranties, there are a number of other important points that should be noted in a technology licensing agreement, but it is not possible to delve into each and every one of them in detail in this article.  Technology licensing is a highly complex type of transaction that involves a variety of technical, financial and legal aspects.  Therefore, inter-departmental collaboration is critical.  When negotiating, both parties should also pay attention to the review of the contract clauses in addition to assessing the technical value, feasibility, licensing strategies and other aspects to ensure achieving the purposes of the transaction and eliminating potential contract problems such as omissions, imprecise definitions or difficulties in execution.

[1] The author is a lawyers at Lee , Tsai & Partners.  However, the contents of this article merely reflect personal opinions and do not represent the position of this law firm.

[2] Refer to the 101-Min-Zhuan-Shang-58 Civil Decision of the Intellectual Property Court and the 104-Shang-1279 Civil Decision of the Taiwan High Court.