License agreement terms
License agreements come in many different shapes and sizes, depending on the nature of the licensed technology and the terms of the business arrangement underlying the license. The following are some of the key terms included in most licenses, though there are many more details negotiated in each license agreement and each such agreement is unique:
- Licensed technology. What is the licensed technology? Is the licensed technology comprised of patents, copyrights, trade secrets, software, designs, materials, compounds or other? Define the scope of the licensed technology clearly. Consider whether to include rights in future-developed technology that arises for some time period after the date of the license agreement.
- Exclusivity and field of use. Will the license be exclusive or non-exclusive? If so, in what geographic territory, and in what field of use? If you are licensing technology core to your business from a university, hospital or other institution your investors may require that the licenses be exclusive in all fields of use throughout the world, but the result depends on the context. Learn about licensing IP from a university or hospital. What level of royalties must be paid, or sales of covered products made, in order to retain exclusivity? If an arrangement is exclusive, it is critical to define that exclusivity as clearly as possible, particularly from the perspective of the licensor. Read more about exclusivity agreements.
- Sublicensing. The license should make clear whether a license is sublicensable or non-sublicensable. The of a licensee may be permitted sublicenses, even if other third-parties are not. Even if sublicensing is permitted, there may be restrictions on the type of sublicense or customer. Depending on the anticipated business model, sublicensing is often required in order to effectively utilize a license.
- Fees, royalties and milestones. How much will be paid up front, in ongoing royalties and/or upon achievement of development or commercial milestones? Some licensees do not have readily available cash, so prefer royalties, while other licensees are prepared to pay more substantial amounts up front in order to reduce or avoid future payments such as royalties and milestone payments. The rate is usually a significant topic of negotiation, with rates varying depending on many factors, particularly the value of the intellectual property and the additional work or third-party intellectual property required to develop a commercial product or service. The rate is often higher where derived from sublicensing of the licensed technology. It is important to carefully define the net sales, gross or other triggers of any ongoing royalties or milestone payments. An provision may be included, which allows the licensor to conduct of the licensee’s records to verify proper payment of royalties and milestone payments.
- Equity. Some licensors will require equity in the licensee, depending on the context. Such equity are fairly common, for example, in license by universities and hospitals.
- Control of patent prosecution and enforcement. Who will prosecute and maintain licensed patents? Who will have the right to sue third-parties for infringement? Where there is an exclusive license, these rights often are held by the licensee, while non-exclusive licenses often retain these rights to the licensor.
- Improvements to the licensed technology. If the licensee improves the licensed technology, will the licensor have any rights under those improvements?
- Confidentiality. Many license arrangements require the licensee to keep the licensed technology, and/or the deal terms, confidential.
- . What does each party make to the other in connection with the agreement? While a warranty of proper authorization to sign the agreement is common, numerous other of either party may be relevant as well.
- Indemnification. Indemnification is commonly used to define the scope of each party’s responsibility for third-party claims that arise from the license agreement. The proper scope of that indemnification is highly context specific.
- Limitations of Liability. Disclaimers and limits of liability are commonly included.
- Support. Will the licensor provide ongoing support in connection with the licensee’s or its customers’ use of the licensed technology? Support services are common in software licensing, but can also be relevant in know-how and other licensing arrangements.
- Escrow. In some license arrangements, most commonly software, a third-party escrow arrangement may be established. The suitability and nature of these arrangements is highly context specific, though there are fairly standardized third-party technology escrow services available.
- Export Restrictions. Some technologies are subject to restrictions on export, which must be evaluated in advance of any license agreement. Further, the license agreement often will restrict further export of the relevant technology.
- Assignment. Will the license be assignable without consent to any third-party, to buyers of the licensee, or not at all? The assignment clause is an extremely important provision because it defines whether a buyer of the licensee can continue to utilize the license. If the license is important to the licensee, restrictions on assignment of the license can have significant adverse effects on the licensee (for example, it may make the licensee less attractive by potential acquirers and investors).
- Ancillary Agreements. License agreements are often accompanied by development agreements, reseller agreements or other commercial terms establishing greater detail regarding the interactions of the licensor and licensee. These ancillary arrangements may be embedded in the license agreement itself or may be in separate agreements.