Negotiate Licensing Agreements

Negotiate Licensing Agreements Like a Pro with these Tips

Licensing is an important part of many business relationships and is often a great way for toe-dipping in an area without full commitment. Franchise agreements are a classic example of licensing agreements because one party is allowing another party to use their property, but not have ownership or control over that property. When someone purchases a franchise of his or her favorite fast food venue, he or she are not sold the trademarks or rights to use those marks outright. They are given a license to use those assets to help to further their business, but they cannot claim any ownership.

Like all agreements involving the exchange of rights or services for money, it is very important to understand how these licensing agreements work as they have some particular quirks that are not featured in your garden variety agreement. The best way to understand is to have an attorney who understands licensing agreements, in particular, to assist you in the negotiation, drafting, and review of these agreements.

Remember that a license agreement is in some ways, an agreement to lease use of something for a limited period of time. Most licensing agreements cover intellectual property including trademarks, copyrights, trade secrets, and patents. There are situations involving architectural plans and software, too. Those end user licensing agreements (EULA) that we all must accept before being allowed access to software is an example that everyone is familiar with. Businesses will encounter EULAs, but in this situation, there is no bargaining power on the part of the party seeking to use the software. Either you accept the licensing agreement as it is written, or you do not use the software. Not all licensing agreements, however, are so one-sided. Where the parties have relatively similar bargaining positions and can negotiate the terms of the licensing agreement, here are the terms that must absolutely be included.

• Identification of the parties. In situations with corporate entities who are licensing or seeking to be licensed, this is actually a difficult determination sometimes. Many times, intellectual property is held in a separate entity apart from the main corporate entity. If this is the case and the license is negotiated with the main corporate entity, you will have just signed a null agreement that does not get you anything because the main corporate entity does not own or have any rights to the property that you are seeking to license.
• The whereas-es. You may skip over “the whereas” paragraphs as a matter of course, but they usually are the best place to start to understand the nature of the agreement. They are the closest thing to a description of what the parties are trying to do with the agreement and give the abbreviated version of the relationship being contemplated.
• Define it. Lawyers love definitions and for good reason. In licensing situations, definitions are incredibly important. In a trademark licensing agreement, the definition of “trademark” may be limited only to specific marks making it clear that the licensee only gets right to those particular marks.
• What is being granted? Licenses should be carefully crafted to ensure that what is being granted is neither overstated nor understated. At a bare minimum, the language granting the rights should be explicit and specific. The parameters should include the term, whether the license is exclusive or non-exclusive, if there are certain rights that are being withheld, etc. This section should also address whether the licensee has the right to sub-license their rights to a third party and any restrictions on the license, including territory (most often seen in franchise agreements) as well as the rights that are retained by the licensor.
• If the licensor is a non-profit entity, it may also want to specify what rights are reserved for non-profit research, humanitarian, or educational purposes under the Bayh-Dole Act. Excluding this reservation of rights can be costly down the road.
• Terms. While some of these are alluded to in the prior sections, the Terms paragraph is where all of the details are set out in a straightforward manner. What is the date when the agreement becomes effective? How long will the agreement last? What will end the agreement?
• Improvements: for patent licenses, if there are improvements made to the patent, this section will address the rights and responsibilities of the party that makes the improvement and how that affects the rights of the other party.
• Consideration. This is a fancy term for the concept of payment. Of course, payment here may not be in dollars. It may come in equity, rights in future agreements, or some other format. The key is that it is something of value that compels the other party to participate. In license agreements, this can also include royalties, payments for milestones, and net For net sales, it is very important that the parties come to an agreement as to the definition of “net sales” as it will determine the royalties owed. In some situations, this can be a percentage of gross sales, but in others, it may be a percentage of overall profit. In that situation, the parties need to agree on how net profit is determined.
• Guaranteed payments: In lieu of royalties, or sometimes in addition to them, the license can specify that the licensee pay to the licensor minimum amounts for the right to use the licensed property. These “minimums” can be calculated based on projected sales. The licensee can lose heavily under these terms, however, as the minimums are considered to be earned upon the execution of the agreement, not the actual sales.
• Reports & Auditing: Of course, trust but verify is a usual method of licensors and for good reason. If the license agreement is royalty-based determined by sales, the licensor has a vested interested in assuring that the licensee is being truthful about their actual sales. Thus, the licensor should have the right to audit the books of the licensor and at a bare minimum, should expect reports from the licensor of sales.
• Right of inspection/quality control: The licensor as the owner of the property has an absolute obligation to police the use of that property so as to ensure that the products that are produced under the license meet the quality standards of the licensor. In trademark agreements, this language must be included, or the entire agreement can be deemed void, or worse, the marks themselves can lose their value. Thus, it is vitally important for them to have the right to inspect the products or services that are being made and sold under the license as it is their name, not that of the licensee, that is at stake.
• Confidentiality: Parties in a licensing agreement will learn valuable information about the other party that placed in the hands of a third party could be harmful. Thus, a confidentiality clause between the parties is essential to ensuring that the information stays where it needs to be.
• Infringement. To the extent that most licensing agreements deal with the intellectual property of some sort or another, it is always a good idea to have a paragraph addressing what to do if a third party begins to infringe upon the IP that is being licensed. Questions to be answered are who will be responsible for pursuing the infringer if the Licensor will indemnify the licensee to go after the infringer, and if there is recovery, how it will be divvied up.
• Representations and warranties. It is one of the more rote paragraphs, but essential nonetheless. It is always a good idea to explicitly state that each party has the right to enter into the agreement, that the property that is being licensed is valid and existing, and that the licensor owns it.
• Export regulations: If there is technology and it is being exported outside of the United States, those products must be in compliance with U.S. laws on export and control.
• How to settle disputes: Whether it is arbitration or full-on litigation, the parties need to agree on the venue and method of settling their disputes. Arbitration will probably be the preferred method, but it is best to set it out in the contract ahead of time.
• Assignment: Can the licensor assign their interest in the agreement to a third party? What about the licensor? Consider this the succession planning portion of the agreement as it recognizes that both parties may not remain in the agreement but may be substituted by successor entities. By identifying the conditions under which successor entities can take over the agreement, the parties eliminate the uncertainty that may prevent them from moving ahead with mergers or acquisitions.
• Termination: All good things must come to an end. While the agreement will certainly set forth the term, there need to be other “outs” for both parties if certain events occur. For example, if one party breaches the agreement in some way, e. does not pay royalties, or it turns out the licensor does not, in fact, have the rights to the property, the other party should have an option to get out of the agreement. This section can also cover acts of God or “force majeure” situations including civil unrest, natural disasters, and other events that are out of control of either party and what the expectations are of the parties in terms of the relationship at that point.
• Miscellaneous Provisions: These may get short shrift, but they are still really important and include a statement that the agreement supersedes all other agreements between the parties, a choice of laws provision to determine whose law will govern disputes, and how modifications can be made to the agreement.