A license is an agreement between an owner of an intellectual property right (the “licensor”) and another party (the “licensee”) which permits the licensee to use the intellectual property right in exchange for the payment of a royalty or other consideration.  The licensor retains ownership of the IP; in contrast, an assignment transfers IP from one party to another.  Any type of intellectual property can be licensed, including patents, trademarks, trade secrets and copyrights.  It is common for a license to include more than one type of IP.  For example, a party that wishes to construct and operate a plant may need to license both the patents and trade secrets owned by the originator of the technology to be used in the plant.  While licenses often are granted by owners wishing to realize more value from their IP portfolio (for example, by permitting others to pursue business opportunities for the IP outside the areas of interest to the owner), in some cases licenses are entered into as a way of settling disputes over IP rights.

 

 

A license may be exclusive or nonexclusive.  In an exclusive license, the owner does not retain any rights to practice or further license the intellectual property (i.e., the licensee will be the only party able to use the IP).  In a nonexclusive license, the licensor will still be able to grant licenses to others or continue to practice the IP itself.  If two parties agree to license each other, such an agreement is referred to as a “cross-license.”  The term “package” license is sometimes used where the licensor is licensing more than one IP right.  It is generally possible to restrict the scope of the license granted; that is, the licensor is not required to permit the licensee to enjoy unlimited use of the intellectual property.  For example, a “field” license may limit the licensee to certain specified technical fields or markets.  In the case of a patent, the licensee may be granted the right to practice only certain narrower claims.  A license may also limit the geographic territory within which a licensee may operate or the quantity of licensed products the licensee may produce. However, in certain cases, antitrust considerations may place limits on the restrictions that can imposed through licensing.

 

If the IP being licensed is at an early stage of development or if the licensee is unsure whether it wants to commit to a license, it is common to negotiate an option agreement wherein the prospective licensee has the opportunity to more fully evaluate the technology and later notify the licensor of its interest in exercising the license option.  Typically, at least the essential terms of the license are agreed to upfront.

 

 

In many cases, the licensee will be obligated to pay a running royalty to the licensor during the life of the license.  The running royalty is often based on a percentage of the net sales of the licensed products or on a set amount per unit made or sold under the license.  The running royalty may be on a sliding scale, with the rate dropping as sales increase.  In some cases, the parties may agree to a lump sum payment that is independent of the actual sales or use of the licensed products.  If the license is an exclusive license, the licensor will generally seek a minimum royalty to ensure that the licensee receives a stream of income even if the licensee is not diligent in pursuing opportunities for the licensed IP.  When the license is non-exclusive, the licensee typically will want to secure a “most favored licensee” clause, which protects the licensee against the possibility that the licensor will grant another license to a competitor containing a lower royalty rate.

 

 

If the license is exclusive, the licensee will often want the licensor to be obligated to enforce the licensed IP against third party infringers or unauthorized users.  Since enforcement actions can be very costly, licensors typically resist assuming such obligations, but may agree to participate as a named party in an action brought by the licensee at its expense.

 

The extent of warranties provided by the licensor is frequently a subject of intense negotiation by the parties.  In general, licensors will seek to disclaim all warranties, except perhaps a warranty of good title to the licensed IP and a warranty that it has the legal authority to grant the license.  It is unusual for the licensor to warrant that the licensed IP will not infringe or violate any third party rights, although in most instances the licensor will agree to represent that it has not been notified of any claim of infringement or violation.  In some cases, the parties may agree that the royalties will be reduced if the licensee is forced to defend itself against a charge of infringement.  Although prospective licensees often request it, licensors rarely agree to warrant that the licensed patents are valid or that the subject matter of pending patent applications is patentable.

 

If the license involves registered IP rights such as patents or trademarks, the licensor often will be required to maintain such rights in force or at least notify the licensee in advance of the expected lapse of the rights to afford the licensee the option to assume responsibility for their maintenance.  In many cases, of course, it will be in the best interest of the licensor to maintain such rights, since their lapse may relieve the licensor of certain royalty obligations.  

 

 

If the license involves trade secrets, the licensee will normally be required to maintain such information in confidence.  A licensee may also be obligated to disclose and license back to the licensee any improvements made to the technology being licensed.  The licensee may be required to meet certain minimum performance criteria or exert its “best efforts” in commercializing the licensed IP, particularly where the license is exclusive.  If the licensee is to use the licensor’s trademarks, the licensee usually must take steps to ensure that the products sold under license fulfill certain quality requirements.  All such limitations must be considered for possible impacts that will trigger antitrust review or infect the related IP, possibly rendering it invalid or unenforceable. 

 

 

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