Licensing IP in Outsourcing

As a protective measure, make sure you have the rights you value most. Do this by understanding the different rights of licensing.

by John Gliedman

Whether you are a provider or customer, it is critical to understand the concept of intellectual property (IP) licensing. An IP license is permission for an entity to take some action with respect to software, data, or whatever is being licensed. It is important to make sure that the terms of a license are as broad or narrow as necessary to achieve your goal. The type of action—to make, use, sell, modify, copy, etc.—and the degree of permission—how long, how exclusive, etc.—are up to the parties to negotiate as part of the overall license agreement. Here are some key questions you should consider asking:

Does the license agreement contain an exclusive license? An exclusive license prevents the party granting the rights (the licensor) from granting those rights to others. During negotiations, the party receiving the license (the licensee) should try to obtain the right of exclusivity to prevent competitors from using the IP. A licensor pressed to grant exclusivity may want to arrive at a middle ground between total exclusivity and non-exclusivity. A compromise between the two may be a license that is exclusive only within a specific geographic territory or for use only within a given field of expertise.

If an exclusive license of any sort is being considered, the licensor should first determine whether the licensee is seeking exclusivity that not only restricts third parties but also would prevent the licensor from using the IP for internal purposes. This should be carefully clarified.

Does the agreement contain the right to make developments based on the licensed work? A licensor negotiating a contract may want to prevent the licensee from making developments based on the IP. On the other hand, the licensee’s plans might include trying to improve on the IP by undertaking such developments. The parties should understand each other’s intentions and make sure to reach an understanding that can be easily put down on paper.

Does the license agreement include the right to sublicense? This right entitles the licensee to grant a license to outsiders. You might think that including this right is obvious, but it is not necessarily in all agreements. For example, if a licensee wants to use the IP for internal research purposes only, then it would not necessarily want the right to sublicense the property.

The licensor may want to qualify the right to sublicense in a variety of ways, such as a limitation on sublicensing within a specific geographic territory. The licensee needs to remember that even if it has the right to sublicense, it can only do so for the specific right granted.

Under what circumstances can the license agreement be terminated? The license agreement will normally contain the number of years it is effective (the term). However, often overlooked at the time of contract negotiation is the possibility that one of the parties will want the right to exit from the relationship before the term has expired. The right of termination comes in several forms.

License agreements typically state that a “material breach” of the agreement by one party gives the other a right to terminate. What constitutes a material breach is fact-specific, so specifying what constitutes a material breach is necessary. For example, a licensor may want to consider stating that the licensee’s failure to make payment of fees or royalties within 30 days of receipt of an invoice and failure to cure such non-payment within a specified timeframe constitute a material breach.

The right of termination “for convenience” enables a party to get out of the contract for just that—its convenience. It can do so without having to prove that a material breach occurred. This provision will normally only apply when an ongoing payment obligation over multiple years exists. The license agreement will usually require several months between giving notice and the effective date. Agreements containing convenience clauses often specify a payment to the non-terminating party. The size will depend on when the termination took place and typically declines in proportion to the amount of time remaining on the contract.

Aside from “convenience” and “material breach,” several other occurrences may be considered a reason for termination, such as the non-terminating party’s insolvency.

Asking a few good questions before signing the licensing contract is an important to-do on any business checklist. Answering such questions to your advantage helps ensure you control the all-important IP
revenue stream.

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