A company’s intellectual property (IP) can be a significant source of revenue. Using the IP rights themselves to make a product or service, assigning (selling) the rights to another party to develop a product or service, or licensing them to another party to do so are the three major ways intellectual property (IP) owners produce income from their IP rights. One of the most frequent methods is to license all or part of the IP rights to another party (the “licensee”) for use in exchange for a fee (commonly referred to as a “royalty”). A licensing of IP rights does not imply that the IP is owned by the licensee; it only allows the licensee to use the IP in accordance with the conditions of the IP licensing agreement (the legal contract by which the IP rights are licensed). The following are the three main types of IP licenses:
- An exclusive license gives the licensee the exclusive right to use the IP rights and prevents even the IP owner from using those rights while the license is in effect.
- A sole license gives the IP owner the right to continue using the IP but prevents it from granting licenses to other licensees while the license is in effect.
- A non-exclusive license gives the licensee the right to use the IP rights without exclusivity and allows the IP owner to continue to use them itself, to simultaneously license them to other parties to use, or both.
Important Terms in Licensing Agreements for Intellectual Property
Whatever type of license the IP owner provides, it’s essential that the IP owner participates in a written IP licensing agreement that is properly designed to meet the requirements of any laws that apply to the IP right in consideration, as well as to effectively protect the IP owner’s rights. An IP licensing agreement can be long and complicated, with terms that vary based on the IP right being licensed and the conditions of the agreement. However, these ten essential terms are typically included in all IP licensing agreements:
1. Grant. Identification of the licensed IP and the scope of the rights granted, including any geographical limits, the grant’s degree of exclusivity, and whether the licensee has the authority to sublicense the IP rights (and if so, any related restrictions or limitations).
2. Restrictions and Reservations. Any restrictions on the licensee’s ability to utilize the licensed IP rights for certain purposes.
3. Term & Termination. The duration of the license, the grounds for terminating it, and the parties’ rights and duties upon termination or expiration of the license. In many circumstances, it will be necessary to require the licensee to cease utilizing the IP rights immediately and delete any references to the IP from all of its materials once the agreement is terminated or expires, in order to effectively protect the IP owner’s ownership of the IP rights. However, depending on the nature of the IP, the nature of the industry in which the licensee operates, and the cause for the termination, the scope and extent of the licensee’s responsibilities in this respect may vary.
4. Acknowledgement. The licensee’s agreement not to challenge the IP owner’s exclusive rights and the parties’ admission of the IP owner’s exclusive rights.
5. Maintenance & Improvements. The licensee promises to take whatever effort is needed to protect the IP owner’s rights, and that any enhancements the licensee makes to the IP rights will be owned by the IP owner.
6. Confidentiality. The information that the parties exchanged, as well as the terms and conditions of their confidentiality obligations.
7. Representations & Warranties. The IP owner’s representations and warranties regarding the validity of the licensed IP right(s); confirmation that the license does not infringe on any third party’s IP rights; and the licensee’s agreement to indemnify the IP owner for any loss caused by its acts and/or omissions, as well as any limitations on the licensee’s liability to do so.
8. Royalties. The number of royalties the licensee must pay the IP owner, the payment terms, the licensee’s obligation for any taxes, and the IP owner’s reporting and audit rights.
9. General “legalese”. The “standard” (but still important) contract clauses, such as the “governing” law (the laws governing the licensing agreement); the IP owner’s and licensee’s rights to assign the license agreement; what constitutes a “change of control” of a party (such as a sale or bankruptcy, for example) and the consequences of such a change of control; and the severability of the agreement clauses.