Licensing Agreements Simplified

I am frequently asked to provide guidance on intellectual property license agreements, and thought a short guide would be helpful to readers. If you compare intellectual property (IP) rights to a bundle of sticks, the licensee would be required to obtain a couple sticks out of that bundle to continue her project. A license is granted when one obtains a subset of the full ownership rights of intellectual property.

What can the licensor and licensee expect to see in a license agreement? These agreements vary greatly, depending on the unique circumstances of each deal, including the type of IP being licensed, the licensee’s intended use of the IP, and the size of the contracting parties. Here’s a list of some of the clauses that are common to intellectual property licenses:

Definition of the intellectual property being licensed. This can sometimes be heavily negotiated because this defines exactly what the licensee can sell by using the licensed IP.

Scope of the license. Licenses can vary greatly. Sometimes there are geographic limitations to where a licensee can exploit her license, sometimes there are temporal limitations. Channels of trade may also be restricted—for instance, a license to use some software license may be limited to software sold in retail stores, or internet stores. The licensee may also be limited in how she can use her license. Licensors may also wish to set minimum or maximum price levels a licensee can sell a product at. There are other elements that can limit the scope of use; these negotiations can become quite complex.

Royalty terms. For obvious reasons, these are some of the most heavily-negotiated terms in a license agreement. Royalties can be paid in a variety of ways—in a lump sum, or on a regular, ongoing basis. The calculation of royalties may be done using a variety of methods, including looking at net sales resulting from the license, or profits resulting from the license. The payment method, term, and regularity will need to be agreed upon by both parties.

Audits. With any calculation of royalties based on a licensee’s sales or performance, the licensor will want to conduct regular audits of the licensee’s activities. Parties will need to decide when these will take place, by whom, and who will bear the costs of such audits.

Enforcement. Parties will also need to determine whose duty it is to enforce the intellectual property associated with the license. There are several ways of organizing this duty, and the stakes can be high for all parties involved.

Modifications to Intellectual Property. Will the licensee be able to modify or improve the intellectual property in any way? Who will own the rights to such modifications?

This list represents a sample of the many considerations that may arise in a licensing transaction. If you have any further questions about licensing agreements, then please contact Veronique Kherian at vkherian@higagipsonllp.com. You can also reach Ms. Kherian by telephone at (415) 692-6520.