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Intellectual Property Licensing
A
license is permission to do something
that the licensor could otherwise prohibit. A patent
owner, for example, could exclude others from making,
using or selling an invention covered by the claims
of its patent. Licensing involves the transfer of
rights that are less than a transfer of the entire
ownership. A nonexclusive license to a copyrighted
software product, for example, can give limited rights
to the licensee to use the software, while the licensor
can retain ownership and the right to license the
software to others.
An
intellectual property license is
permission for a person or entity to take some action
with respect to software, movies, inventions, or whatever
it is that is being licensed. For many companies,
especially start up and relatively young technology
companies, intellectual property is the principal
asset of any substantial value. Licensing, therefore,
can be quite critical to such companies.
IMPORTANT
PROVISIONS TO CONSIDER
Many
intellectual property license agreements have certain
provisions in common. However, each type of intellectual
property requires certain unique provisions. Trademark
license agreements should include quality control
provisions. On the other hand, quality control may
be less relevant to certain patent license arrangements.
The following are some provisions that should be considered
for inclusion in most types of intellectual property
licenses. The below list is not complete, and an attorney
should be consulted to tailor a license agreement
for the particular situation.
Exclusive
or Non-Exclusive License
An
exclusive license prevents the
party granting the rights (the "licensor")
from granting those rights to any one else other
than the first party receiving the rights (the
“licensee”). A non-exclusive
license allows the licensor to grant
licenses for the same intellectual property to
more than one licensee.
A
prospective licensee often tries to negotiate
the right of exclusivity in order
to prevent competitors from using the intellectual
property. Some variations on full exclusivity
can include a license that is exclusive (a) for
a period of time that is less than the entire
term of the license; (b) only within a specific
area of expertise or (c) only within specific
states, regions or countries.
Exclusive
licenses frequently include a provision for minimum
royalty payments that are due
whether or not the licensee is successful in commercializing
the intellectual property. Sometimes exclusive
licenses contain diligence provisions
whereby the licensee must diligently pursue the
sale and advertising or marketing of the intellectual
property. Sanctions can include a reduction to
nonexclusive license status or termination of
the license.
Right
to Sublicense
The
right to sublicense is the right of the licensee,
in turn, to grant a license of the intellectual
property to other persons/companies. Whether or
not this right is granted should be stated in
the license.
Termination
Provisions
License
agreements often specify the “term”
as the number of years that the agreement is effective.
Other related provisions that should be considered
include addressing the possibility that one of
the parties will want the ability to terminate
the license agreement before the term has expired.
These rights of termination can include:
Material
Breach - a material breach of the agreement
by one party gives the other party the right
to terminate. What constitutes a material breach
varies from situation to situation. Examples
can include the failure to make payment of royalties
within 30 days of receipt of an invoice along
with a failure to cure this non-payment within
a specified period of time.
For
Convenience - a right of termination
for convenience allows a party to get out of
the license agreement without having to prove
that a material breach has occurred. Often there
is a requirement for several months’ notice
of the intent to terminate and for a payment
to the non-terminating party if a termination
takes place.
Insolvency
- the insolvency, bankruptcy or other business
failures of a party are often included as grounds
for allowing the other party to terminate the
license.
Field
of Use
These
provisions define the field in which the licensed
intellectual property may be used. They may be
relative to market sector, such as wholesale,
retail, mail order, on-line, etc. The specific
technical field in which the licensed intellectual
property may be used can be defined, such as fields
directed to medical devices, semiconductor manufacturing
equipment, microscopes, etc.
Licensed
Intellectual Property
These
provisions define “Licensed Intellectual
Property” in order to delineate the scope
of intellectual property that is acquired by the
licensee. The Licensed Intellectual Property is
frequently set forth in a schedule attached to
the license agreement. The schedule lists specific
trademarks, patents, trade secrets or other intellectual
property.
Licensed
Products/Processes
These
provisions set forth the products or processes
that the licensee is authorized to make, use and
sell. Sometimes, the set of licensed products
and processes is less than the set of products
and processes falling within the definition of
Licensed Intellectual Property. For example, the
licensed intellectual property may include a patent
directed to an optical measurement device and
related control circuitry and may have some patent
claims directed to the optical device alone and
other patent claims directed to the combination
of the optical device and the control circuitry.
While there may be two different license agreements
with the same definition of Licensed Intellectual
Property, one agreement may have a Licensed Products
definition that is limited to optical devices
and not the optical device/control circuit combination,
while the other agreement may have a definition
that is limited to the optical device/control
circuit combination and not the optical device
alone.
Payment
by Licensee
In
exchange for the use of the intellectual property,
licenses usually provide that the licensee must
provide some form of consideration or payment
to the licensor. Monetary consideration generally
includes either fixed payments or running royalties
or some combination of the two. Fixed payments
can involve one full payment that is made at the
time the license agreement is signed, or can involve
several payments made over specified time intervals,
or fixed payments made upon the occurrence of
certain events or milestones. Running royalties
are usually a percentage of Net Sales (see below).
These royalty formulas can include a fixed amount
per unit sold, or can be a percentage of the licensee’s
profit margin, cost savings or cost of goods sold.
Net
Sales
In
license agreements where periodic royalty payments
are to be made, payments are sometimes based on
the licensee’s Net Sales. Net Sales are
generally calculated by subtracting from gross
sales, certain cost items such as taxes (excise
& sales), shipping costs, etc. Care must be
taken by licensors to try to avoid certain tactics
or loopholes that licensees may use to reduce
the amount of their royalty payments. Issues may
include when net sales are deemed to occur (e.g.,
when sales are invoiced vs. when payments are
received), and how to account for intra-corporate
transfers of licensed products that might otherwise
be subject to license royalty payments.
Territory
These
provisions describe the geographic region where
the licensee may use/sell the licensed intellectual
property. These regions can be of any size, including
a city, state, region, country or world wide.
Rights Conveyed
Rights
conveyed set forth the things that the licensee
may do with the licensed intellectual property.
Copyright licenses involve conveyed rights that
vary widely due to the large range of subject
matter protected by copyright. Often, the copyright
grant includes one or more of the following rights:
reproduce, distribute, publicly display, publicly
perform, prepare derivative works, and transmit
digital sound recordings.
A
license grant to trademarks usually allows the
licensee to use the mark to identify specified
goods or services.
For
licenses involving patents or trade secrets, the
rights conveyed frequently include the right to
do one or more of the following: make, have made,
use, offer for sale, sell and import. Some licenses
include the right to “lease and otherwise
dispose of” the licensed products. Other
examples include the right of the licensee to
make a product for its own use, but not sell the
product, or on the other hand, the right to sell
the product, but not make it.
Reports/Audits
Where
royalties are part of the consideration paid by
the licensee and in other situations where the
consideration due is dependant upon actions of
the licensee, it is common to require that a report
be provided by the licensee and to provide the
licensor with the right to audit the licensee’s
records. The right to audit can include a right
to review the licensee’s sales and other
records in order to confirm that all royalties
and fees earned have been paid. The licensee’s
report may be required to include a description
of products on which the royalties are being made,
the royalty rate (when more than one rate is specified),
the deduction from gross sales to reach Net Sales,
and total payments made.
Warranties
These
provisions deal with the question of whether the
licensor or licensee offers any warranties or
whether any warranties are specifically disclaimed.
Frequently the licensor will warrant that it has
the authority (corporate or other internal) to
grant the license, that it owns and has the right
to license the intellectual property, and that
the licenses do not conflict with other agreements
involving the licensor. Many other warranties
may be included in a license agreement and depend
upon the intellectual property licensed, the industry
involved, etc.
Indemnification
Many
license agreements provide that one party will
indemnify the other party if certain events occur.
Examples include infringement or products liability
claims that other companies or persons may assert
against the licensee with respect to the products
that are the subject of the license agreement.
The licensor may agree to defend the licensee
in court and to pay any damage award that is assessed
against the licensee. In other license situations,
the licensee may agree to indemnify the licensor
if certain other events occur.
DUE
DILIGENCE
Rather
than merely accepting the representations and warranties
of the licensor, prospective licensees should consider
conducting their own due diligence prior to entering
into a license arrangement. For example, it may be
important to verify that the licensor has maintained
all the licensed patents in force, has obtained enforceable
patent assignments from all named inventors, or has
not assigned the patents to another person or company.
In other situations, the licensor may want to investigate
the licensee as well, such as the likelihood of the
licensee satisfying its obligations to market and
sell licensed products. Other investigations may pertain
to whether the licensed intellectual property can
be made, used or sold without infringing the intellectual
property of third parties, or whether the license
that is being negotiated is consistent with other
licenses that may have been granted by the licensor.
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