Whether you are drafting or accepting a licensing agreement, you must keep in mind that your contract represents the marriage of intellectual property law and contract law. As such, many common terms may carry slightly different meanings in a licensing agreement. Moreover, it is important to understand the basics of intellectual property law so that you know whether or not the agreement you are entering into is valid, enforceable, and fair.
As an initial matter, you must exercise diligence to ensure that licensor is the rightful owner of the intellectual property. If not, you could unknowingly be paying royalties to third parties for licensed rights that belong to another and exposing yourself to infringement liability. Before entering into a licensing agreement, it would be helpful to ask yourself the following questions:
1) What rights are being licensed in the license contract?
License terms are usually defined by licensors. Any intellectual property owner who agrees to grant a license has the right to set the terms and conditions of that license. The licensor can determine the scope of the agreement, which both the licensor and licensee must comply with. It is often standard for the parties to a license agreement to negotiate the scope of the rights being licensed so that the terms are mutually favorable.
One common example of a scope limitation is when a licensor chooses to limit the licensee’s right to use a trademark. The trademark may be registered for a variety of goods and services, but the license agreement may only permit the licensee to use the trademark in connection with only one of those products.
Another common limitation on the scope of the agreement can be found in the renewal terms. License agreements are rarely perpetual, and if the agreement automatically renews it must be clear how and when that renewal takes place. The same is true for termination of the license agreement.
2) How can each party be protected?
To protect both parties, licensing terms must be compliant with the applicable intellectual property laws. Covenants and representations should be included in an agreement to protect the licensee. At a minimum, the licensor should represent that it is the owner of the licensed rights and that the licensee’s performance of the agreement does not infringe on the intellectual property rights of any third party. The licensee should covenant to meet quality standards set forth by the licensor.
Indemnification is another legal protection that would make the other party liable for legal trouble arising from wrongdoing. Such provision will, for example, indemnify a licensor from unauthorized use or misuse of the license, or the licensee from infringement claims.
3) What are the associated fees?
The licensing fee or royalty rate that the licensor is entitled to receive is an important matter that often requires negotiation. The contract might require an initial fixed license fee plus annual or monthly payments. The regular payments could either be fixed or a percentage of sales. If the parties agree to a royalty-based license fee, the licensor may wish to have audit rights.
If the licensee is unable to pay the associated fees due to failing to achieve commercial success under the agreement or bankruptcy, the agreement must indicate how a licensee can terminate the contract.
4) How can the contract take future circumstances into account?
The license agreement must indicate how the sale of a company or its assets would affect licensing rights in the future. A consent requirement may be included in the contract before a party would grant a license to another.
When dealing with licensed software, you should also look into update provisions. Future updates are often included with the software license to improve the product’s merchantability.
Whether you are granting rights for certain licensed products or are planning to license rights for intellectual property, you must first be familiar with the relevant law. Consult with a trusted law firm before proceeding to avoid getting sued. Get legal protection when dealing with license agreements.
Talk to an IP lawyer knowledgeable in intellectual property rights, copyrights, patents, or trademarks. Contact us at War IP Law for assistance.