Drafting Patent License Agreements in Japan: Key Legal Considerations for U.S. Licensors/Licensees

Japanese Attorney at Law - Bengoshi L.L.

• 9 min read

Patent license agreements are fundamental tools for commercializing technology, allowing patent owners to generate revenue and extend the reach of their innovations, while enabling licensees to access valuable technology. For U.S. companies and other international entities engaging in patent licensing in Japan, a thorough understanding of Japanese patent law as it pertains to these agreements is crucial. Japanese law delineates distinct types of licenses, each with its own legal characteristics, registration requirements, and implications for enforcement. This article explores the key legal considerations when drafting and negotiating patent license agreements in Japan, focusing on the two primary forms of consensual licenses: exclusive licenses (Sen'yō Jisshi-ken) and non-exclusive licenses (Tsūjō Jisshi-ken).

The Two Main Pillars of Consensual Patent Licensing in Japan

When a patentee in Japan voluntarily grants another party the right to work their patented invention, the agreement will typically establish either an exclusive license or a non-exclusive license.

1. Exclusive Licenses (専用実施権 - Sen'yō Jisshi-ken) - Patent Act Article 77

An exclusive license under Japanese patent law is a powerful right, granting the licensee the sole and exclusive authority to work the patented invention within the scope (e.g., territory, field of use, term) defined in the license agreement.

Nature and Effect:

  • Real Right-Like (Bukken-teki) Character: An exclusive license is considered more than a mere contractual right; it has characteristics akin to a real right (property right). It is an exclusive right that is effective erga omnes (against all third parties) once properly established.
  • Exclusivity Against All, Including the Patentee: A defining feature is its exclusivity. Once an exclusive license is granted and effective, even the patentee is barred from working the patented invention within the specified scope of the license, unless the exclusive licensee grants them permission (Patent Act, Article 68 proviso). This is analogous to how a landowner's rights are restricted when a superficies right (chijō-ken) is established on their land.
  • Independent Enforcement Rights: The exclusive licensee has the independent right to sue infringers in their own name, seeking remedies such as injunctions (Patent Act, Article 100) and damages (Patent Act, Articles 102, etc.).

Creation, Scope, and Registration:

  • Establishment: Exclusive licenses are typically established by a contractual agreement between the patentee and the licensee, though they can also be created by will or arise from service invention regulations (Patent Act, Article 35(2)).
  • Registration is Mandatory for Effectuation: For an exclusive license to come into effect and be enforceable, it must be registered in the Patent Register maintained by the Japan Patent Office (JPO) (Patent Act, Article 98(1)(ii)). This registration is an "effectuation requirement" (kōryoku hassei yōken). The scope of the exclusive license (e.g., duration, territory, field of use) must be specified in the registration application; if the scope is not defined in the registration, it is deemed to be unlimited.
  • Defining Scope: The license agreement should meticulously define the scope. If a licensee operates outside the registered scope (e.g., works the invention beyond the agreed term or for unagreed products), such acts can constitute patent infringement, not merely a breach of contract. However, it's generally understood that breaches of certain types of limitations, such as quantity restrictions or some territorial restrictions within Japan, might primarily be treated as contractual breaches, with the products themselves not automatically becoming infringing goods subject to seizure from downstream purchasers if they were not infringing when first sold by the licensee (though the licensee would be liable to the licensor for the breach).

Relationship Between Patentee and Exclusive Licensee:

  • Patentee's Retained Rights: While the patentee cannot work the invention within the exclusive scope, they generally retain the right to assign the patent itself (subject to the existing license) and, as affirmed by the Supreme Court on June 17, 2005 (in the "Stable Complex Structure Search Method case"), the patentee can still independently sue third-party infringers.
  • Exclusive Licensee's Control: The patentee requires the exclusive licensee's consent to abandon the patent (Article 97(1)) or to request a trial for correction of the patent specification (Article 127), as these actions could affect the exclusive licensee's rights.
  • Assignment and Sub-licensing by Exclusive Licensee: An exclusive licensee cannot assign their license, create a pledge over it, or grant non-exclusive sub-licenses without the patentee's consent (Article 77(3) and (4)), except in cases of transfer with the entire business or general succession like inheritance.
  • Consideration: While royalties are typical, an exclusive license can be granted gratuitously.

Extinction of Exclusive Licenses:
Exclusive licenses can terminate upon expiry of the agreed term, termination of the underlying license agreement, abandonment by the licensee (which also requires registration to be effective, per Article 97(2)), merger of the license with the patent right (e.g., if the licensee acquires the patent), or if the underlying patent itself is extinguished (e.g., through invalidation or expiry).

2. Non-Exclusive Licenses (通常実施権 - Tsūjō Jisshi-ken) - Patent Act Article 78

A non-exclusive license grants the licensee the right to work the patented invention but does not, by default, preclude the patentee or other licensees from also working it.

Nature and Effect:

  • Contractual Right (Saiken-teki Kenri): Unlike an exclusive license, a non-exclusive license is fundamentally a contractual right. It is primarily a right enforceable against the licensor (the patentee or an exclusive licensee who is granting the sub-license), obligating the licensor to permit the licensee's working of the invention—essentially, a promise not to sue the licensee for infringement within the agreed scope. It is analogous to a lease (chintaishaku-ken) in civil law.
  • Multiple Licenses Possible: The licensor can grant multiple non-exclusive licenses for the same patented invention covering the same scope.

"Exclusive" Non-Exclusive Licenses (独占的通常実施権 - Dokusen-teki Tsūjō Jisshi-ken):
Parties can contractually create a non-exclusive license that has elements of exclusivity. This is typically achieved by the licensor agreeing not to grant similar licenses to any other third party within a defined scope. If the licensor further agrees not to work the invention themselves within that scope, it is sometimes referred to as a "completely exclusive non-exclusive license" (kanzen dokusen-teki tsūjō jisshi-ken).
However, it is crucial to understand that the "exclusivity" in such arrangements is contractual. A breach by the licensor (e.g., by granting another license) primarily gives rise to contractual remedies (like damages for breach) against the licensor. It does not automatically transform the non-exclusive license into a real right enforceable independently against third-party infringers in the same way as a registered exclusive license.

Perfection Against Third Parties and the 2011 Amendment (Article 99):
A significant development concerning non-exclusive licenses was the 2011 amendment to Article 99 of the Patent Act, which introduced a system of "automatic perfection" (tōzen taikō).

  • Pre-2011: To be effective against third parties who subsequently acquired the patent right or an exclusive license (e.g., a new owner of the patent), a non-exclusive license generally needed to be registered with the JPO. Without registration, the licensee might not have been able to assert their license against such a new right holder. However, patentees were often not obliged to cooperate with registration, and consequently, very few non-exclusive licenses were actually registered.
  • Post-2011 (Current Law): Under the amended Article 99, a non-exclusive license, once validly granted, can be asserted against any person who subsequently acquires the patent right, an exclusive license over that patent, or a pledge on the patent, without the need for registration. This "automatic perfection" applies to non-exclusive licenses granted on or after April 1, 2012 (the effective date of this part of the amendment) and even to those granted before, under certain conditions. This change substantially strengthened the position of non-exclusive licensees, as their right to work the invention is secure even if the patent changes hands.
    The scope of what is "perfected" against the new patent owner is primarily the core right to work the invention as a defense against an infringement claim from the new owner. Complexities can arise regarding whether the new patent owner is also bound by ancillary obligations from the original license agreement, such as duties to provide technical assistance or to pursue infringers. Generally, the new owner is not automatically burdened by all such positive contractual obligations of the original licensor unless they explicitly assume them.

Rights of the Non-Exclusive Licensee, Particularly Standing to Sue Infringers:
This is a complex area:

  • General Non-Exclusive Licensees: It is well-established that a holder of a simple, non-exclusive, non-registered (even pre-2011) license generally has no independent right to sue third-party infringers for patent infringement (either for injunctions or damages). Their right is contractual against their licensor. They also typically cannot compel the patentee to sue or sue in the patentee's name through subrogation (saikensha daii-ken), as established in cases like the Osaka District Court judgment of April 26, 1984 (the "Frame Material Mounting Bracket case").
  • "Exclusive" Non-Exclusive Licensees:
    • Injunctions: The majority view in Japan, supported by court decisions like the Osaka District Court judgment of December 20, 1984 (the "Set Brush case"), is that even an exclusive non-exclusive licensee does not have independent standing to seek an injunction against a third-party infringer. The right to an injunction is typically tied to the proprietary nature of the patent right itself or a registered exclusive license.
    • Damages: This is more debated, but prevailing academic opinion and a trend in case law have leaned towards allowing an exclusive non-exclusive licensee to sue independently for their own damages resulting from third-party infringement. This is often based on the idea that the third-party infringement interferes with the licensee's exclusive contractual benefit. Cases such as the Tokyo District Court judgment of May 29, 1998 (the "O-leg Gait Correction Tool case") and the IP High Court judgment of March 11, 2009 (the "Seal Base Material case") have, for the purposes of calculating damages under Article 102, treated exclusive non-exclusive licensees similarly to registered exclusive licensees. This pragmatic approach recognizes the commercial reality that exclusive non-exclusive licenses are often used as a substitute for registered exclusive licenses (perhaps to avoid the complexities or publicity of registration).
    • Subrogation: If the licensor has a contractual obligation to the exclusive non-exclusive licensee to take action against infringers but fails to do so, the licensee might be able to sue the infringer by subrogating the licensor's rights, but this depends on the specific contractual terms.

Assignment and Sub-licensing of Non-Exclusive Licenses:
A non-exclusive license can be assigned (transferred) by the licensee only with the consent of the licensor (and the exclusive licensee, if the license was granted by an exclusive licensee), or if it is transferred as part of the licensee's entire business, or through general succession (e.g., inheritance) (Patent Act, Article 94(1)). Sub-licensing by a non-exclusive licensee is generally understood to also require the licensor's consent, though not explicitly detailed in the same way as for exclusive licenses. The relationship becomes a three-party one (patentee, licensee/sub-licensor, sub-licensee), and the sub-licensee's rights are ultimately dependent on the main license.

Extinction of Non-Exclusive Licenses:
These licenses can terminate due to expiry of the agreed term, termination of the license agreement (e.g., for breach), abandonment by the licensee (Article 97(3), which may require consent of any pledgee), merger, or if the underlying patent right or exclusive license (if the sub-license was granted by an exclusive licensee) is extinguished.

General Considerations for Drafting Patent Licenses in Japan

Regardless of the type of license, several key areas require careful attention when drafting agreements under Japanese law:

  1. Clear Definition of Scope: Precisely define the licensed patent(s), the licensed products or processes, the field of use, the territory (e.g., Japan only, or wider), and the duration of the license.
  2. Royalties: Structure the royalty payments clearly (e.g., running royalties based on sales, lump-sum payments, milestone payments). Include provisions for calculation, reporting, payment terms, and audit rights. Note that both exclusive and non-exclusive licenses can be royalty-free.
  3. Improvements and Derived Inventions: Address the ownership and rights to use any improvements or new inventions made by either the licensor or the licensee that relate to the licensed technology.
  4. Infringement Actions: Define the responsibilities and procedures for taking action against third-party infringers. This includes who has the right and/or obligation to sue, how litigation costs and any recovered damages will be shared, and the level of cooperation required from each party.
  5. Warranties and Indemnities: Address warranties regarding patent validity, ownership, and non-infringement of third-party rights. Include indemnification clauses for breaches of these warranties or for third-party claims arising from the licensed activities.
  6. Confidentiality: Protect any know-how, trade secrets, or other confidential information exchanged between the parties during the course of the license.
  7. Term and Termination: Specify the term of the license and the conditions under which it can be terminated (e.g., material breach, insolvency of a party). Outline the consequences of termination, such as the cessation of licensed activities and the return or destruction of confidential materials.
  8. Governing Law and Dispute Resolution: While a Japanese patent is governed by Japanese law, parties can sometimes choose the governing law for the license contract itself, though for matters intrinsically tied to the patent right (like validity or effect against third parties), Japanese law will be paramount. Specify the mechanism for resolving disputes (e.g., court litigation in Japan, arbitration under specific rules).
  9. Co-ownership of Patents (Article 73(3)): A critical due diligence point: if the patent being licensed is co-owned by multiple parties, the grant of either an exclusive license or a non-exclusive license requires the consent of all co-owners. Failure to obtain consent from all co-owners can render the license invalid or ineffective.

Conclusion

Drafting effective patent license agreements in Japan requires a nuanced understanding of its specific legal framework, particularly the distinct characteristics of exclusive (Sen'yō Jisshi-ken) and non-exclusive (Tsūjō Jisshi-ken) licenses. The mandatory registration for effectuating exclusive licenses, and the post-2011 "automatic perfection" of non-exclusive licenses without registration, significantly shape the rights and obligations of the parties and their standing against third parties. U.S. licensors and licensees must pay close attention to these legal distinctions, the implications for enforcement rights, and the necessity of clear, comprehensive contractual provisions to accurately reflect their commercial intentions and effectively manage risks in the Japanese market.