Updated October 30, 2020:

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.

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.

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.

If you need help with crafting a technology license agreement, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.