A cross-license is a transaction in which a license is granted from Party A to Party B, and at least part of the consideration provided by Party B is a similar license in return to Party A of intellectual property (“IP”) belonging to Party B. Thus, a cross-license essentially represents a combination of two grants, one in each direction.
Cross-licenses are particularly useful where each party holds patents or technology that effectively prevents the other party from exploiting its own technology (known as a “blocking patent” situation). Such situations may be resolved with a cross-license whereby each party obtains from the other the non-exclusive rights necessary to exploit the patent or technology.
With a cross-license, each firm is free to compete, both in designing its products without fear of infringement and in pricing its products without the burden of a per-unit royalty due to the other. Thus, cross-licenses may solve the complements problem, at least between two firms, and thus be highly pro-competitive. In cross-license agreements, a firm may have to pay a one-time licensing fee to the other, depending on the value of IP at stake and volume of sales involved.
For example, IBM paid a one-time “balancing payment” of $10 million to Intergraph in 2003, in a cross-licensing agreement that was the result of a patent dispute. Seldom the debtor in such arrangements, IBM generates over $1 billion in yearly revenue simply from licensing its patent portfolio to other companies. Qualcomm, which holds patents essential to the function of many of the world’s cell phones, earned about sixty percent of its 2005 profits in royalties by licensing its technologies to other semiconductor companies.
The software, semiconductor and biotechnology industries require a constant supply of new products and technology to survive and hence, research and development is the lifeblood of their business models. This results in a consistent flow of new products in the market, which often forms the need for defensive patent strategies.
By aggressively pursuing patents on as many innovations as the company’s research and development department may stumble upon, the company develops an arsenal of patents that it would likely be able to assert in cross claims should a competitor ever file a claim of infringement. Other companies in the same industry tend to develop the same philosophy, thus leading to a virtual patent arms race in a given technology market.
During any dispute or litigation between parties, a strategic use of patents might result in cross-license arrangements, provided the parties to the dispute own patents of mutual interest. An open-ended option on cross-licenses could prove to be an essential tool for negotiation during disputes because often, the parties realize that prolonged litigation and the limited terms of patent rights could prevent them from further developing their products or processes, thereby incurring huge revenue loss.
If the patent dispute is to be settled through mediation, it may result in the parties coming to an agreement to resolve their disputes, as mediation requires that parties work together towards a resolution of their dispute. In such cases, cross-licensing arrangements become an essential tool for negotiation.
Many patent disputes never end up in courts; especially in a country like India where a grant of patent is not conclusive proof of its validity and the statute embodies a very robust mechanism of opposition at different stages, i.e. pre-grant opposition, post-grant opposition and revocation procedure. The validity of a patent could be challenged by any interested party and a substantial number of patent disputes tend to to be settled out of court and cross-licensing arrangements are considered an important tool for dispute resolution between parties.