Key Takeaways

  • A technology license agreement grants permission for the use, modification, or sale of intellectual property while protecting ownership rights.
  • Licensors must have clear legal rights to the technology and both parties should benefit from the arrangement.
  • Agreements should define scope, terms, payment, performance standards, quality control, IP protection, warranties, and dispute resolution.
  • Categories include licenses for specific uses, universal use, or operation in a standardized market.
  • Additional considerations include exclusivity, sublicensing rights, export control compliance, dispute resolution methods, and post-termination obligations.
  • Common mistakes include vague definitions, inadequate royalty terms, and unclear IP ownership provisions.

A technology license agreement is an arrangement that involves an owner (licensor) of some technological intellectual property who accepts compensation (consideration) to let someone else (licensee) use, change, or resell the property.

What Is Required to License Technology?

  • The licensor can only license technology if he or she owns exclusive rights to it.
  • Both parties must receive a benefit from the partnership. It must fit in well with other agreements.
  • In order to be successful, the licensor has to work closely with the licensee as the technology is incorporated and adapted.

Exclusivity and Sublicensing Rights

A technology license agreement should clarify whether the license is exclusive, non-exclusive, or sole.

  • Exclusive licenses grant rights only to the licensee, meaning even the licensor cannot use the technology within the defined scope.
  • Non-exclusive licenses allow the licensor to license the technology to multiple parties simultaneously.
  • Sole licenses permit the licensor to use the technology but prohibit granting licenses to other parties.

The agreement should also address sublicensing rights, specifying whether the licensee may grant sublicenses to third parties. If sublicensing is allowed, define the approval process, revenue-sharing terms, and compliance obligations to ensure the technology is used appropriately and in accordance with the licensor’s standards.

What Should Be Included in the Agreement?

Before you agree to license your technology, you should look for specific terms and conditions. Contracts vary depending on the type of business.

  • Scope: The scope and subject matter covered by the license must be explicitly defined. If there are restrictions based on geography, uses, trade channels, sublicensing, or expansion, they should be spelled out in detail.
  • Terms and renewal options: The start date, length of the contract, and options for renewals or extension are critically important. A way for the licensee to notify the licensor of the intent to renew or not can help avoid a lot of confusion. Grounds upon which either party can terminate the agreement, obligations of each party post-termination, and any reversionary rights that the licensor may hold must also be covered.
  • Performance standards and quotas: If the consideration paid to the licensor depends on royalties derived from revenue, the licensor may want a set minimum budget to be devoted to the support of sales. This could be an advertising budget or dedicated human resources, for example. The licensee usually prefers something more vague, like a "best efforts" provision. One way to compromise is to agree that the licensor will be paid a minimum amount, regardless of revenues.
  • Payments to the licensor: Almost every agreement includes an initial payment and then continuing royalties. The formula for the royalties may be based on gross or net sales, profits, a fixed amount per unit sold, or a minimum payment at a regular interval for a set period of time. Sometimes the formula uses a sliding scale to incentivize the licensee.
  • Quality control, assurance, and protection: Standards should be set by the licensor for production, advertising, and distribution. The contract should include a mechanism for the licensor to monitor and enforce those standards. For example, the licensor may have the right to review and sign off on packaging design, labeling, or advertising materials.
  • Insurance and Indemnification: The licensor must be sure that the licensee is obligated to protect and indemnify the licensor against claims or liabilities arising from the licensee's use of the technology covered by the license.
  • Accounting, reporting, and audits: The licensee will meet reporting and record-keeping requirements set by the licensor to ensure accurate calculation of consideration. The licensor gets the right to audit those records. The agreement should cover who will be responsible for any expenses associated with the audit if underpayments are identified.
  • Duties to preserve and protect the intellectual property: The licensee, its agents, and employees must respect the confidentiality of the technology and be truthful about the ownership of it. Any required notices that must be included with products distributed under the license should be spelled out in detail.
  • Technical assistance, training, and support: If the licensor has an obligation to help the licensee implement the technology in the form of services or documentation, the terms and conditions of that should be detailed. If the licensor is to be compensated for such support outside the royalties and licensing fees, the specifics of that must be included.
  • Warranties: A licensee may ask for warranties related to ownership of the technology. They may want to be sure there are no infringement claims or restrictions pending, or they may want a guarantee that the technology performs as presented in negotiations.
  • Infringements: Procedures should be laid out for what happens if a claim of direct or indirect infringement is made. Who is responsible for the costs of defending against the claim should be clear.

Export Control and Regulatory Compliance

Technology licenses, particularly in sectors like software, biotech, or defense, may be subject to export control laws and industry regulations. The agreement should:

  • Require the licensee to comply with all applicable export laws, including obtaining any necessary licenses before transferring technology across borders.
  • Specify any restrictions on use in prohibited countries or with sanctioned entities.
  • Address compliance with sector-specific regulations, such as FDA guidelines for medical technology or FCC rules for telecommunications equipment.

Failure to address these issues could result in fines, loss of licenses, or other legal consequences.

Dispute Resolution and Governing Law

A well-drafted technology license agreement should outline how disputes will be resolved. Common options include:

  • Mediation or arbitration to resolve disputes outside of court, which can save time and costs.
  • Choice of jurisdiction and governing law to determine which state or country’s laws will apply.
  • Specific procedures for handling claims of intellectual property infringement, including timelines and cost responsibilities.

Including clear dispute resolution mechanisms helps prevent prolonged legal battles and ensures a predictable process for both parties.

Are There Different Categories of Technology Licensing?

A business can choose from three different kinds of licensing agreements.

  • Licenses for specific activities such as printing a copy of a book
  • Licenses for the universal use of intellectual property: This means you give someone a license to use all the parts of the technology.
  • Licenses to operate in a standardized market: An example here is granting someone a license to create a device that is USB-compatible with the technology.

Common Pitfalls to Avoid

When negotiating a technology license agreement, avoid these common mistakes:

  • Vague scope definitions that lead to disagreements over permitted uses.
  • Unclear royalty structures that create disputes over payment obligations.
  • Omitting IP ownership provisions, risking loss of control over proprietary technology.
  • Failure to address termination consequences, leaving ambiguity about post-termination rights and obligations.
  • Neglecting confidentiality clauses, which can expose trade secrets and sensitive information.

Addressing these issues upfront creates a more durable agreement and reduces the likelihood of disputes

Frequently Asked Questions

1. What is the difference between an exclusive and non-exclusive technology license?

An exclusive license gives rights only to the licensee, while a non-exclusive license allows the licensor to grant rights to multiple parties.

2. Can a licensee sublicense technology to another company?

Only if the agreement permits it, and typically with the licensor’s written approval and clear revenue-sharing terms.

3. Why is export control important in a technology license agreement?

Certain technologies require compliance with export laws; violations can lead to fines or legal penalties.

4. How are royalty payments usually structured?

Royalties may be based on gross sales, net profits, a fixed amount per unit, or a combination, often with minimum payment requirements.

5. What happens if the agreement is terminated early?

Post-termination clauses should explain how existing inventory, outstanding payments, and ongoing confidentiality obligations will be handled.

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