Diligence obligations in Germany
Exclusive licences
The parties often explicitly agree upon an obligation to exploit the licence (Ausübungspflicht). If the parties have not done so, such an obligation may nevertheless be implicit upon the licensee based on the principle of good faith embedded in the German Civil Code (sec. 242 BGB). In this respect, German law differentiates between exclusive and non-exclusive licences. The courts generally recognise an implicit obligation to exploit in the case of an exclusive licence where the volume of utilization determines the licence fees, for example in the case of a quota licence. The reason for assuming an obligation to exploit in this case is that the licensor does not have any other means to draw economic benefit from the invention but through the royalties to be paid by the exclusive licensee for the use of the licence. However, the assumption of an obligation to make use of the licence as well as the content, scope and term of the obligation is always a question of fact and balancing of interests and requires detailed examination. In each case the wording of the contract, all surrounding circumstances, the purpose of the contract, and the parties´ interests are to be considered.
Non-exclusive licences
In the case of non-exclusive licences, the licensee is never under an obligation to exploit the licence if the parties did not explicitly agree upon such an obligation. An obligation to exploit cannot be assumed because the licensor is not limited in his right of use. Consequently, the licensor has no interest which deserves protection.
Scope of obligation to exploit
The scope of the obligation to exploit the licence mainly depends on the intended purpose of the contract. The courts emphasize, however, that the duty is limited by the principle of good faith (sec. 242 BGB) und must therefore be reasonable. The licensee is not required to sacrifice his own commercial interest. However, not every economic risk concerning the production and distribution of a product leads to the limitation of the obligation to use the licensed patent. The licensee bears the risk of economic usability. Before determining unreasonableness a detailed examination of the market opportunities is required.
Remedies
If the licensee does not comply with his obligation to exploit the licence, he breaches his contractual obligations. The licensor is entitled to claim damages and to withdraw from the contract unless the licensee can prove that his failing to make use of the licence was not due to his fault. Providing for a contractual penalty applicable in the event that the licensee does not attend to his obligation may be advisable.
Conclusion
Although German courts usually assume an obligation of the exclusive licensee to exploit the licence, the details of this obligation depend on the specific circumstances in each individual case and the determination of the judges is difficult to foresee.
Therefore, an explicit "best endeavours" obligation should always be included in the licence agreement. Wherever specific steps are required to make use of the licence and can be identified at the time of executing the agreement, they should be set out explicitly.
Dr Manja Epping
Manja is a partner and Head of Life Sciences for Germany based in our Munich office.
