I believe more cross - licensing aggreements signed by EDIG , it will be used in updated version of eVU and building of future products in military ,hospitals and etc.

Cross licensing arrangements generally involve two parties licensing a group of patents or other intellectual property (IP). CLAs are typically non-exclusive agreements and parties may enter into CLAs with multiple parties with respect to the same IP. The exchange of these rights may take many forms, but the licenses have one primary function: to provide each party with the freedom to operate, i.e., the ability to continue one's business without fear of litigation for infringing on another's IP.

CLAs are also used in co-development arrangements where two or more parties make available pre-existing IP to develop a commercially viable product. These arrangements permit parties to share one another's expertise to increase the likelihood, and lower the cost, of developing a marketable product.

These agreements are important because they give CLA participants the freedom to operate without fear of patent infringement litigation, in the case of cross licenses, and access to otherwise unavailable IP, in the case of co-development agreements. By providing such freedom, the agreements obviate detailed analyses and reviews of prior technology owned or controlled by the other party. CLAs are neither barter exchanges nor revenue-generating licensing transactions as those terms are normally understood in business commerce; rather, they exist to provide a measure of protection and permit companies to design, manufacture, and sell products worldwide in a more efficient manner. The arrangements normally do not involve the transfer of an IP ownership right, which would include a transfer of the right to preclude others from using the IP.

Often these CLAs will not involve cash payments between the parties. In some cases, however, a royalty is paid based on one another's negotiated agreement. The parties do not, however, need to agree about the fair market value of the respective technologies; rather, they need only reach an agreement on the amount of any cash payment. Appraisals are not normally conducted; the amount of the fee, if any, is an amount agreed upon by the parties as a result of their arm's-length negotiations reflecting the relative bargaining power of each party. Any payment due from one party to the other does not address the respective values of each party's IP.

Significantly, the parties do not normally recognize revenue from these agreements for financial accounting purposes. Under U.S. generally accepted accounting principles (GAAP), revenues and gains can be recognized only if they are both (i) realized or realizable and (ii) earned; revenues and gains are realized when products are exchanged for cash or claims to cash. Revenues and gains are realizable when the assets received are readily convertible to known (or quantifiable) amounts of cash or claims to cash. Under this standard, any revenue (other than cash payments) under a CLA cannot be properly recognized, since the rights conveyed under such agreements cannot be converted to known amounts of cash or claims to cash.

Recognition of noncash revenue from a CLA is also improper under the special revenue recognition rules for nonmonetary (barter) transactions. Under these rules, parties must generally recognize gain or loss based on the fair value of the properties exchanged. The rules apply, however, only to "exchanges," which by definition occur only if the transferor has no substantial continuing involvement in the transferred asset. Patent CLAs clearly do not transfer all substantial continuing involvement in the portfolios. (2)

Under the tax rules, gross income requires an accession to wealth, which can occur only when income has been realized, which itself requires that the value be established with certainty. In the case of CLAs, which are typically equivalent to covenants not to sue, no realization of income has occurred because the parties generally do not realize any gains, but rather receive only the assurance that they develop their own technology without risk of litigation. In co-development CLAs, no realization event occurs upon entry into the arrangement because one cannot ascertain whether a commercially exploitable product will result, thereby making the amount of any income indeterminable with reasonable accuracy.

Under the withholding tax rules, a withholding obligation is triggered only if the U.S. taxpayer has control over "money or property" belonging to the foreign licensor from which it could withhold and had knowledge of the facts giving rise to the payment. In a CLA with no monetary payments, there is no money or property of the foreign licensor that is in the custody or control of the U.S. taxpayer. Such arrangements are similar to cancellation of a debt, which does not trigger a withholding obligation because of the lack of custody or control over money or property. This treatment is also consistent with the tax treatment of CLAs in foreign jurisdictions.

Under a CLA, income tax is properly imposed on any actual cash payments made pursuant to the CLA. TEI understands, however, that the IRS is considering whether income tax may be imposed upon the imputed fair market value of the IP rights subject to a CLA, treating any cash payment as a "net amount" reflecting the purported difference in the imputed fair market value of the IP owned by each party. Regrettably, imposing tax on these phantom "payments" under a CLA could significantly inhibit research and development projects as companies forgo CLAs because of valuation difficulties. (Because these agreements are not valued for IP purposes, the tax valuation--outside the normal negotiation process--would take place in a vacuum.) Moreover, because, we believe, no other country imposes a withholding obligation in respect of these arrangements, U.S.-based taxpayers would also suffer a competitive disadvantage vis-a-vis their foreign counterparts. Thus, the U.S. party would undoubtedly bear the additional cost of the tax. Finally, because imputed amounts under CLAs are not reflected in a company's financial accounting records, requiring taxpayers to determine a fair market value and recognize imputed amounts as income or expense for tax purposes would create a heavy (and unjustified) compliance burden.

In sum, the unrelated parties involved in cross licensing arrangements are in the best position to determine that such arrangements do not represent an exchange of value. The IRS should affirm its longstanding practice of not imputing income to parties that participate in such agreements.

The Value of Cross Licensing Arrangements for Business

Addressing the questions raised by Notice 2006-34 requires an understanding of how intellectual property is developed and why many enterprises choose to enter into cross licensing arrangements in order to help manage and exploit their own IP. These agreements are not entered into for tax purposes, but rather to permit the parties to operate in a climate free from the very real threat of patent infringement litigation. The need for cross licenses stems, in part, from the rights conferred in a patent and the value of patents in a technology-oriented society. The most notable of the rights conferred in a patent is the right to exclude others (through the use of a court injunction or otherwise) from the use of the patented innovation. As technology-based products and their components have grown, the number of suits asserting patent infringement has also grown.

The development of new innovative products requires knowledge of and reliance on prior innovation, thereby increasing the likelihood of so-called blocking patents or patents that are at least commercially desirable to incorporate into future products. Moreover, the increasingly multifaceted nature of technology products contributes to the likelihood of competing and complementary patent interests. Thus, a company may need access to multiple patents in order to create a single, useful product. Often, a company obtains rights to the prior technologies to better manage the risk of patent infringement claims.

Also known as a reciprocal license, CLAs generally involve two (or more) parties nonexclusively licensing a group of patents or other intellectual property (usually a portion of the total portfolios, known as a "field of use"). The agreement may be in the form of (i) licenses granted to manufacture, sell, use, or dispose of products, or (ii) an exchange of covenants not to sue each other (including, in some cases, each other's customers) in the defined field of use. The license or covenant provides the other party with a measure of freedom to operate, i.e., the ability to continue one's business without fear of litigation based upon a claim of patent infringement. Under patent law, licenses generally include exhaustion of the licensed patents ("patent exhaustion") to protect the licensee's customers from the same patent risks, (3) whereas covenants not to sue generally are granted to a specific party and, unless specified otherwise, have no downstream effects. In each case, however, equivalent results can be achieved.

For example, an enterprise may find that its efforts to create a single, useful product may implicate claims made in multiple patents held by its competitors; the competitors likewise may find that their efforts to make their own competitive products implicate claims made in the patents held by the enterprise. In such cases, the enterprise and its competitors may enter into CLAs to avoid the risks of costly, uncertain, and potentially debilitating patent litigation. In this context, CLAs do not involve the transfer of ownership in the IP, which would include a transfer of the right to exclude others from using the IP--substantially more than just the right not to be sued. As previously explained, CLAs are typically non-exclusive agreements and parties may, and often do, enter into CLAs with multiple parties with respect to the same IP.

CLAs are also used in co-development arrangements pursuant to which two or more parties make available to one another their extant IP to develop a commercially viable product. These arrangements are often employed, for example, in the pharmaceutical industry, permitting parties to share one another's expertise to increase the likelihood, and lower the cost, of developing a marketable drug. During development, the parties may grant each other rights to their IP, limited to the conduct of the co-development activity. On a going-forward basis, each party may need a license to the others' IP to allow each party to commercialize any new products developed as a result of the collaboration. The cross license needed for commercialization may be on different terms from the one needed for the co-development activity.

By providing taxpayers the freedom to operate without fear of patent infringement litigation (in the case of cross licenses) and the access to otherwise unavailable IP (in the case of co-development agreements), CLAs obviate detailed analyses and reviews of prior technology owned or controlled by the licensee. A decision to tax these phantom "payments" between parties to a CLA would spawn valuation difficulties in respect of the cross licenses and likely inhibit research and development projects. Fewer CLAs could engender more patent litigation, deeper review of prior technology, and greater scientific efforts to work around existing patents rather than focusing on providing advanced, cost-effective features, functionality, and benefits to the consumer. Because no other country imposes a withholding obligation (or income taxes) in respect of these arrangements, U.S.-based taxpayers would also suffer a competitive disadvantage vis-a-vis their foreign counterparts if CLAs give rise to a taxable event. Indeed, imposing such an obligation would be directly contrary to the U.S. Department of Treasury's policy of increasing the competitiveness of U.S. companies in the world economy.

Even assuming that the agreements transfer something valuable, the value of the transferred rights would not be easily ascertainable. Indeed, TEI is concerned that taxing cross licenses would be unduly burdensome and unadministrable because no business need exists to determine the respective value of each party's licensed patents. Valuing CLAs for tax purposes would be done in a vacuum outside the normal negotiation process. Moreover, because imputed amounts under CLAs are not reflected in a company's financial accounting records, requiring taxpayers to value and recognize these amounts as income or expense for tax purposes will create an extraordinary compliance burden. (The starting point for preparing corporate tax returns is a company's financial accounting records; when items do not exist for financial accounting purposes, there is nothing to adjust for tax purposes.) Finally, collecting withholding tax on the deemed income may prove unfeasible because there are normally no funds on which to withhold.

The Use of CLAs

1. Covenants Not To Sue. The use of CLAs may differ from industry to industry, but in many cases they are used when the company must adhere to certain industry standards or applications. In the bulk of these agreements, what particular technology is owned by each party may be unknown and values are not ascertainable. The parties are generally seeking to develop their own product without fear of infringing another's IP. (Cash, if transferred, is transmitted only to the party having greater perceived bargaining power.) Often the agreement will include IP that has yet to be developed, but may arise over the life of the CLA. (4)

Many technology-based products are extremely complex, and it is difficult for a company to operate without concern that it may infringe on another company's patents. This is particularly true when all the companies must adhere to some acceptable technology standard, while holding hundreds or thousands of patents and continually developing new technology. Standards-setting bodies typically require that participants license certain patents--which the participant declares to be essential to the standards adopted by the body--to others before including the technology in the standard. (5) If a company does not agree, the standards-setting body undertakes to "design around" those essential patents. Companies in these standards-setting industries (such as semiconductors and telecommunications) frequently implement cross licenses because the parties desire freedom of action with respect to equipment that complies with the particular standard. (6)

In this context, CLAs are usually limited to patents and do not include the transfer of other technology, such as know-how, instruction, or supervision. One party often may not own or control any patents of interest to the other party; in such a case, the cross license simply ensures immunity from patent infringement litigation in the event that there are any unknown patents in the cross-licensor's portfolio or the cross-licensor develops a new invention that may apply to the products related to the CLA. It is also conceivable that the cross-licensor may prospectively contribute to an update or revision of the standard that incorporates essential patents.

In other words, a CLA often involves only a covenant not to sue for "passive" use of the licensed patent by the licensee. Hence, the only benefit from CLAs is the freedom to operate without review and analysis of the other party's patent portfolio.

Although the language of a CLA may refer to rights to "make, have made, import, sell, lease, use, or otherwise dispose of" licensed equipment for use in licensed applications, this is standard language used by IP lawyers to ensure patent exhaustion when that is the desired outcome. Notwithstanding this language, the parties may be unable to actually use the technology implementing the other party's patents if a CLA does not include any transfer of the know-how necessary to successfully exploit the technology embodied in the underlying patents. (7)

2. Co-Development Agreements. In some cases, such as in the pharmaceutical industry, unrelated parties may share resources to co-develop a product pursuant to a cross license. For example, an established drug company may collaborate with a specialized bio-technology company with a promising portfolio of target molecules. Under such an arrangement, each will grant the other a non-exclusive right to use each other's preexisting IP, both patented and unpatented, within the field of use. Such arrangements may provide that each party will share in an agreed portion of the costs of development.