Agreements affecting intellectual property assets are critical to the underlying value of those assets. Great intellectual property can be diminished through agreements of poor quality. Likewise, the relative value of any intellectual property can be enhanced through thoughtful and effective agreements. Our licensing practitioners routinely handle more than 100 different types of intellectual property licensing and technology agreements for organizations ranging from start-ups to technology transfer offices to multinational corporations.
Our licensing professionals provide world-class strategic assistance with licensing and technology agreements via a unique combination of skill sets: a deep understanding of the underlying technology, significant business acumen, and a thorough understanding of the applicable legal principles. Our skilled professionals previously served as in-house business advisors or have owned their own businesses. The combination of these legal and practical skill sets allows our licensing professionals to be a valued part of your efforts to protect and commercialize your intellectual property.
A licensing agreement is a partnership between an intellectual property rights owner (licensor) and another who is authorized to use such rights (licensee) in exchange for an agreed payment (fee or royalty). A variety of such licensing agreements are available, which may be broadly categorized as follows:
Technology License Agreement
Trademark Licensing and Franchising Agreement
Copyright License Agreement
In practice, all or some of these agreements often form part of one single contract since in transfers of this nature many rights are involved and not simply one type of intellectual property right. You may also come across licensing agreements in other circumstances, such as, during a merger or acquisition, or in the course of negotiating a joint venture.
All of these mechanisms either on their own or in combination will provide your innovation or business, as a licensor or licensee, a wide variety of possibilities in conducting business in your own country or elsewhere. As an intellectual property owner and a licensor, your innovation or business can expand its business to the frontiers of your partners’ business and ensure a steady stream of additional income. As a licensee, your innovation or business can manufacture, sell, import, export, distribute and market various goods or services which it may be prevented from doing otherwise.
In the international context, a formal licensing agreement is possible only if the intellectual property right you wish to license is also protected in the other country or countries of interest to you. If your intellectual property is not protected in such other country or countries then you would not only be unable to license it, but also you would have no legal right to put any restriction on its use by anyone else.
This is an essential part of your IP portfolio which our professionals will walk you through as you build your enterprise.
What are the components of a license?
A typical patent license will specify the rights granted, the term of the grant, the consideration in exchange for the grant, records and reporting, representations and warranties regarding the patent, how infringement issues will be handled, tort liability for products or services covered by the license, and other factors.
The grant clause sets forth what patent rights are being conveyed. The grant can be exclusive (i.e., only the licensee has the right to exploit the patent rights) or non-exclusive (i.e., the licensor can grant similar rights to other parties). The grant can be limited by geography (such as U.S., worldwide), and field of use (such as for cellphones but not laptops).
A patent license can also define each party’s rights to improvements of the patented technology. Depending on the negotiation, improvements might be solely owned by the licensor, licensee, or jointly owned by both. The party with more bargaining power often insists on controlling the rights to improvements.
The payment of consideration can be structured in many ways. The license agreement typically requires a licensee to pay an upfront license fee as well as ongoing royalties based on a percentage of sales or on a per-unit basis. The license can also require minimum annual royalties or minimum annual product sales to be sure the licensee is diligently marketing the products or services covered in the patent. The license agreement can also require that the licensee provide reports to the licensor, e.g., of sales or revenue, to ensure accurate royalty payments.
Milestone payments are a particularly useful way to deal with the speculative nature of IP rights and ensure that the licensor shares in the success of commercialization. For example, milestone payments upon capitalization of the licensee or FDA approval of a product that embodies the IP are common provisions.
Shifting the financial responsibility for the ongoing pursuit of patent rights or maintenance of such rights is another form of consideration that a licensor may seek as part of the agreement.
A patent license can also control each party’s responsibilities for enforcing the patent rights along with apportioning liability if the licensee is sued for infringement. Generally, each party wants to have control of any infringement litigation but also wants to avoid being required to defend or indemnify the other party.
Depending on the terms of the agreement, an exclusive licensee can have the right to sue for infringement. The license agreement can determine how the costs of litigation are apportioned between licensor and licensee. For example, the license can provide a licensee the right to withhold all or part of royalties to offset costs of litigation. The license agreement can also define how the proceeds of successful litigation are divided. Damages can first be allocated to cover litigation costs and then divided between the parties according to predetermined percentages, for example.
License agreements can require due diligence by the licensee to develop and/or commercialize the IP. Such terms are typical in university license agreements to ensure that the IP is used and not just put on the shelf. For example, the licensee can be required to use reasonable efforts to develop and commercialize products covered by the license. License agreements will also typically include milestones that must be met in order for the licensee to maintain the license. The license can also require submission of periodic reports regarding the licensee's activities related to the development and testing of the products covered by the licensed IP.
Indemnities and product liability
Licensors and licensees can provide various indemnifications to each other in a license agreement. The license can include representations and warranties concerning the IP and can require indemnification against any inaccuracy or loss arising from those representations and warranties. For example, the license can include representations by the licensor that they own clear title to the IP, that the IP is valid and enforceable, and/or that none of the products produced under the IP are known to infringe other IP held by third parties. In turn, the licensor can require the licensee’s compliance with applicable laws, such as export controls, tax codes, etc.
The license agreement can also include indemnification terms ensuring that liability for defective products produced by the licensee does not extend to the licensor, who likely has limited if any control over the actions of the licensee. Alternatively or in addition, the licensor can require that the licensee carry sufficient liability insurance.
License agreements can require the parties to provide notice of any breach of the agreement and can specify periods during which any such breach can be cured. The license agreement can also be drafted so as to provide in advance for arbitration or mediation of disputes. For example, the agreement can require binding arbitration rather than litigation.
License agreements can provide the licensee a right to sublicense or assign the IP. The licensor can require approval of any such sublicense or assignment. For example, the licensor may wish to prevent a competitor from obtaining license to the IP. However, it can be important for the licensee to have the ability to assign the license without restriction as part of the transfer of the business.
License agreements can include negotiated provisions that establish how and for what reasons the agreement can be terminated. For example, the agreement can specifically provide for termination upon breach of certain terms of the agreement. Note, however, that clauses that provide for automatic termination of the license agreement if one or the other party seeks or is placed under bankruptcy protection may not be enforceable. On the other hand, clauses that provide for termination for failure to pay royalties may be enforceable regardless of bankruptcy.