By UpCounsel Commercial Contracts Attorney Umar Farooq

Intellectual property (IP) comes in many different forms, such as copyrights, trademarks, patents and trade secrets. Each type of IP requires specific knowledge, but there are certain key areas of licensing that apply across the board.

Although you are most likely to come across licensing issues when negotiating the terms of a commercial agreement, IP licensing agreements may also be negotiated as part of a mergers and acquisitions or financing transaction.

Below are the steps you should go through when negotiating an IP licensing agreement.

Identify the IP to be Licensed

The first step in negotiating any licensing agreement is identifying the precise IP to be licensed and determining whether it is registered or unregistered. If registered, the IP will likely be registered with the US Patent and Trademark Office (USPTO) or the relevant state registry. Check to make sure the licensor actually owns the IP or has the rights to sub-license it.

Be aware that most software is not registered, with the exception of software registered ahead of preparing a claim in court. Almost all software has some snippets of code that the licensor acquired under an open source license (i.e. GNU or MIT license). The licensor must pass such code to the licensee under the terms of the original license and identity the start and end elements that are passed under the open-source license.

Pinpoint the Reason for Licensing

What does the licensee intend to do with the IP? You must answer this question before proceeding. Is it to be used internally by the licensee for its business needs, or sub-licensed to licensee’s customers or end users? Will the licensee be able to create derivative works or adopt the IP to a specific product? Usually, licensors insist that they keep rights in any derivative work or adaptations unless the licensee pays additional royalties.

Determine the Terms of the Grant

Every IP license has restrictions on use, duration and circumstances under which it can be terminated. Representations and warranties, as well as indemnification provisions, are also important parts of IP licensing agreements. Make sure that you consider all of these terms carefully.

Use

Typically, the licensee pays a royalty to the licensor for the license, and the grant of a license is limited by territory and field of use. “Field of use” may be limited to a certain industry (e.g. cable or telecommunications) or a delivery channel (e.g. online versus retail).

Although not common in standard commercial licensing agreements, licenses can give the licensee exclusive rights to use the IP. The license may also be assignable, transferable and sub-licensable.

Both parties should also consider what will happen if there is change in control of a party (e.g. change in ownership) and whether the license may be assigned to any successors or assigns.

Duration

Licenses usually include fixed or renewal terms, although you may come across licenses granted for perpetual terms. Perpetual terms are more common when the transaction is an alternative to an outright assignment or transfer of IP, or if otherwise granted as an ancillary agreement to an underlying transaction that dictates that the terms of the license be perpetual.

Termination

Related to the term and duration of the license are the circumstances under which the license can be terminated. For example, certain license agreements can be terminated “for convenience.”Others require that termination occur only in the event of a default (e.g. failure to pay royalty payments) and the licensee fails to cure such a default.

When negotiating the termination provisions, it is also a good idea to discuss what happens to the IP and other rights (e.g. under a related agreement) if termination occurs for any reason.

Representations and Warranties

Most license agreements include specific representations and warranties from the licensor stating that it owns the IP, no other party has any rights to the IP, it is not infringing on the rights of any other party and that it has the power and authority to enter into the license agreement and perform its obligations. Licensors usually insist that the licensee make representations and warranties that it will comply with all applicable laws in using the license.

Indemnification Provisions

Licensees typically seek indemnification protection from licensors for any infringement claims by third parties against the licensee’s use of the IP. The licensor may also require the licensees to indemnify them if they use the IP beyond the scope of the license.

Finally, both parties should consider what happens if there is change in control of a party (e.g. change in ownership) and whether the license may be assigned to any successors or assigns.

The Takeaway

IP licensing is a complicated process chiefly because there are many decisions to be made regarding rights and responsibilities that the licensor relinquishes and the licensee gains through the transaction. That’s why knowing which terms to pay special attention to is key to negotiating an IP licensing agreement well and getting it signed quickly.

Before entering into the agreement, be sure that you know which IP is being licensed and why, and that you have paid special attention to the following terms:

  • Field of Use
  • Duration
  • Termination
  • Representations and Warranties
  • Indemnity Provisions

Doing so will ensure that your IP licensing agreement includes language that addresses any issue that might arise due to the use or misuse of an IP license.

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About the author

Umar Farooq

Umar Farooq

With over nine years of experience, including time at a global law firm, Umar is able to provide personal service and practical solutions to tackle your most challenging legal issues.

Whether it’s helping to get your business off the ground or handling tough negotiations in a pivotal transaction, Umar is available to provide insightful legal counsel and trustworthy guidance.

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