Top 6 elements for a Licensing Agreement

Top 6 elements for a Licensing Agreement

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In License Agreement Review
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A licensing agreement, also known as a license agreement, is a legal document that outlines the terms and conditions of a licensed intellectual property (IP) such as a trademark, patent, or copyrighted work. It is essential for the success of such an agreement that the parties understand the key elements involved in a licensing agreement.

Most people will be exposed to software license agreements during their lifetime. However, I will go over this specific topic in a later post, given the vast amount of considerations to have when reviewing software licensing (and they are my favorites). This blog post will overview what typical IP licensing agreements cover.

In any event, it is essential for licensing agreements that both licensors and licensees understand the critical elements of a license agreement. This will serve the purposes of correctly protecting the intellectual property rights of the licensor and the successful execution of the licensing agreement for the two parties involved.

An abstract oil painting of what a licensing agreement looks like according to AI.

This is an abstract oil painting of what a licensing agreement looks like, according to AI.

Here are the top six elements to consider when reviewing a licensing agreement:

  1. Definition of the Licensed Intellectual Property

One of the most essential elements of licensing agreements is a clear definition of licensed intellectual property. This includes identifying the specific IP, such as a trademark, patent, or patented technology, and describing it in detail so that there is no confusion as to what the licensing agreement covers. This can help protect the licensor’s IP rights and prevent disputes over using the licensed IP.

Some definitions will include limitations or restrictions on the licensed IP, but most licensing agreements will dedicate a section specific to this subject. For example, if the IP is a trademark, the definition may include restrictions on using the trademark in specific industries or on certain types of products. If the IP is a patent, the report may include limitations on the invention’s geographic area or field of use.

The definition of intellectual property needs to be clear and accurate, as it establishes the rights and responsibilities of both the licensor and the licensee. This helps to protect the licensor’s intellectual property rights while also ensuring that the licensee is aware of and compliant with the terms of the agreement.

Practical explanation

If the IP is a trademark, the definition should include the exact wording of the trademark, any logos or designs associated with it which can be attached as exhibits, and the goods or services it covers. If the IP is a patent, the definition should include the patent number, the invention it covers, and the date of issuance.

Example

Here is what an extensive patent definition could look like in a licensing agreement:

“Patent” or “Patents” means (a) all patents listed in Exhibit TBD ; (b) the right, title and interest in the listed patents and any related patent applications, and in all divisionals, continuations and continuations-in-part of the applications, or reissues or extensions of letters patent or patents granted thereon, and in all corresponding applications filed in any and all jurisdictions; (c) the right, title and interest to any and all developed ideas, trade secrets, confidential information, and copyrightable matter directly related to the Inventions (defined herein); and (d) all extensions, modifications, new developments, improvements, supplements, technical data, scientific know-how, and all other property, legal, equitable, and contractual rights directly and indirectly relating to said Inventions, whether now existing or hereafter arising.

Practitioner’s tip

As a general comment, it is good practice when reviewing the licensing agreement definition to verify that the licensor is the rightful owner of the intellectual property. You can use this opportunity to check that the IP is not subject to any publicly disclosed infringement or other legal challenges. This can be done by conducting a trademark or patent search or by consulting with your dedicated trademark or patent agent.

  1. License Grant

The license grant is the license agreement section that outlines the licensee’s rights and responsibilities. It is the critical element of licensing agreements, as it establishes the specific rights and permissions that the licensor is granting to the licensee to use the licensed intellectual property.

The license grant should be clearly defined in the agreement, including the type of license, such as an exclusive or non-exclusive license, as well as the scope of the license, including the geographic area, the specific uses of the intellectual property, and the duration of the license.

The license grant should also include any conditions or requirements that the licensee must comply with to maintain the license, such as paying royalties, paying pre-determined fees, or meeting certain sales or revenue targets.

Practical explanation

For instance, an exclusive license would grant the licensee the exclusive right to use the intellectual property within a particular geographic area or for a certain period, while a non-exclusive license would allow the licensor to license the intellectual property to multiple parties. The scope of the license may also include specific restrictions, such as limitations on the use of the intellectual property in specific industries or certain types of products.

Example

Here is what a very extensive and exclusive patent license grant could look like:

Licensor hereby grants to Licensee the exclusive, irrevocable, worldwide, transferable, sublicensable license of all Intellectual Property Rights conferred by the Patents, including, without limitation, the rights of any kind to, or conferred by, the Patents to (a) use or otherwise practice any art, methods, processes, and procedures covered by the Patents, (b) make, have made, use, offer to sell, sell, import, and otherwise distribute or dispose of any inventions, discoveries, products, services, or technologies covered by the Patents, (c) otherwise exploit any rights granted in the Patents and/or any invention or discovery described in the Patents, and (d) exclude other persons from exercising any of such rights.Exclusive rights

Practitioner’s tip

If you had only one section to pay special attention to, this is it. It is critical for your client that you double-check every word in the license grant to make sure that the intended use of your client (and probably wider to cover future use cases) is covered.

  1. Licensing Agreements Exclusive rights

Exclusivity and non-exclusivity are essential considerations in a licensing agreement as they determine the level of control that the licensor has over the use of its intellectual property and the level of competition that the licensee will face in the marketplace.

Exclusivity means that the licensor grants the licensee the exclusive right to use the licensed intellectual property in a specific market or for a particular purpose. This means that the licensor cannot license the same intellectual property to any other party for the same market or purpose.

This can benefit the licensee as it provides them with a competitive advantage in the marketplace, but it also limits the licensor’s ability to generate revenue from the intellectual property.

Non-exclusivity, on the other hand, means that the licensor can license the same intellectual property to multiple parties for the same market or purpose. This can increase the licensor’s revenue potential but also increases the competition for the licensee.

When considering exclusivity or non-exclusivity, both parties should consider the market conditions, the competition in that market, and the revenue potential for the intellectual property in question. The licensor should also consider the potential for licensing the same intellectual property to multiple parties and the impact that this may have on the licensee’s ability to compete in the marketplace.

Practical explanation

Exclusive licenses are typically more valuable to the licensee, as they provide a competitive advantage over other businesses in the same market. However, they also limit the licensor’s ability to license its intellectual property to other parties, which can have a negative impact on their revenue. It’s therefore essential to be clear about the scope and duration of the exclusivity in the agreement, as well as any conditions that may lead to the termination of the exclusivity.

For example, a licensing agreement may grant an exclusive license for a certain period, but with a provision that the exclusivity will be terminated if the licensee fails to meet certain sales or revenue targets.

Practitioner’s tip

I firmly believe a good quality exclusive licensing agreement will limit the scope, duration, and territoriality of the exclusive rights as much as possible. It is essential in such cases to closely monitor sales of the product or service, doubled with sufficient reporting obligations and audit rights. This will incentivize the licensee to perform according to expectations and allow the licensor to plan revenues ahead.

  1. Determination and Payment of Royalties

Licensing agreements should also include the terms of payment and royalties for using the licensed IP. This consists of the initial payment and any ongoing royalties or other fees that may be required.

The agreement should also include provisions for how royalties will be calculated and reported, such as a percentage of sales or a flat fee, with any annual increases. The current economic environment suggests that an inflation-based approach should be taken for not percentage-based payments. It’s also essential to include a provision for late payments, indicating how long the licensee has to make payment and the consequences of non-payment, such as interest charges or termination of the agreement.

In addition to the financial terms, the agreement should also include provisions for audits and record-keeping to ensure that the licensee is complying with the terms of the contract and that the licensor is receiving the appropriate compensation for the use of their intellectual property.

  1. Term and Termination

The term and termination are also essential parts of licensing agreements. This includes the length of the contract, as well as any conditions under which the agreement can be terminated.

The agreement should also include provisions for the termination of the license. The most common cause of a typical licensing agreement is “termination for breach” of the agreement by either party, such as failure to pay royalties.

It’s essential to have a transparent and fair termination clause that protects both parties; the licensor needs to be protected from the unauthorized use of the intellectual property, and the licensee needs to be protected from sudden termination of the agreement and the consequences of it, especially for longer-term licensing agreements which involve heavy investments on the licensee’s part.

Practitioner’s tip

General commercial principles command that termination for convenience is an undesired or risky element for any long-term agreement. Any unilateral decision to terminate a relationship should be avoided when either of the two parties is investing in the performance of its obligations. In other words, only termination for cause should be contemplated, and depending on the importance of the deal, a period to cure any breach should be provided.

  1. Representations and Warranties

Representations and warranties are statements made by the licensor and the licensee that are intended to protect the interests of both parties.

These will typically include representations about the ownership of the licensed IP and warranties about the quality and condition of the licensed IP. This could include some language about the fact that, to the licensor’s best knowledge, the licensed IP is not infringing on any third-party intellectual property rights.

If the licensor breaches any of the representations or warranties, the licensee may have the right to terminate the licensing agreement or seek compensation for any damages suffered.

The licensor needs to review the representation and warranties clause and make sure that they can make the statements and promises with confidence and that they align with the reality of the intellectual property.

In conclusion, a licensing agreement is a legal written contract that outlines the terms and conditions of a licensed intellectual property. Both licensors and licensees need to understand the critical elements of a license agreement to protect intellectual property rights and the successful execution of the licensing agreement. This includes the definition of intellectual property, the license grant, exclusivity rights, payment and royalties, term and termination, and representations and warranties. With a clear understanding of these critical elements, both parties can be confident that their interests are protected and that the agreement complies with the terms of the contract.

Any questions? Contact me!

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