Technology: 5 keys to drafting technology licenses

License agreement grant provisions are the most critical section of the agreement

This series addresses the needs the legal community has for licensing technology knowledge by laying out the basic concepts that one should understand, identifies traps for the unwary and offers drafting and negotiating tips. Click here to read part one.

The grant provisions in a license agreement should be considered the most critical section of the agreement and should constitute the core around which all the other provisions revolve.

General Principles

The overall goal is to have a clearly understood and complete description of the rights being granted to the licensee. While this may seem obvious, I am regularly asked to review and interpret agreements that have failed to meet this basic requirement.

As a starting point one needs to understand the applicable intellectual property laws, particularly the exclusive rights possessed by the owner of a patent or a copyright (see part one for a summary). Beware of provisions, however, that may appear comprehensive but are merely regurgitations of the formal words under the patent statutes (e.g. make, use, sell) or copyright statutes (e.g. reproduce, distribute, make derivative works). If properly drafted the license grant will address these statutory rights, but it will also lay out the parties’ intentions in clear and unambiguous language that can be understood by the business and technical people who will be operating under the agreement.

In addition, one needs to have a clear understanding of the difference between words that define the scope of the license or create conditions regarding the exercise of the licensee’s rights, and words that are merely contractual covenants. This distinction is important because action outside the scope of a license (if within the licensor’s IP rights) is infringement of the licensor’s IP and the licensor will have access to the many owner-favorable statutory provisions under the IP laws.

In contrast, a breach of a contractual covenant may lead only to a breach of contract claim with the need to prove, among other things, licensor’s damages. A breach of a contractual covenant may not necessarily give the licensor the right to terminate the license grant and prevent the licensee’s continuing use of the technology.

Drafting Tips

1. Include all scope and condition language in the license grant section rather than elsewhere in the agreement. Also, given its preeminence, I recommend having the license grant section be at or near the beginning of the agreement.

2. Be careful about relying solely on the typical licensing terms such as “exclusive,” “sublicensable” or “have made.” These terms are important, but can be the subject of varying expectations or interpretations and the best practice is to explain the parties’ intentions in more detail. As an example, a license grant section might have a subsection for each of the foregoing concepts.

3. Pay close attention to the defined terms in the agreement, particularly as they may impact the scope of the rights granted. Given the complexity of the underlying subject matter, license agreements frequently have many defined terms that are often interrelated or overlapping. To avoid misunderstandings or unintended outcomes, these need to be tightly drafted and made as simple as possible under the circumstances.

4. A promise to grant is not a grant, so avoid language such as “shall grant” or “agrees to grant.” It should be unambiguous that the licensor is making a present grant (even for future rights), so use “hereby grants” or the like.

5. Take care when the parties agree to additional refinements or limitations to their respective rights, whether during the initial negotiations or subsequently as amendments to the agreement. The best practice is to carefully review the core license grant provisions and revise them as necessary to integrate the new concepts. A common mistake is to instead draft additional provisions reflecting the new concepts without reconciling them with the existing framework. In my experience this is very likely to lead to a license agreement that fails to meet the general principles above.

Additional Drafting Tip for Licensors

If you are going to grant an exclusive license, you need to think through what will happen if your exclusive licensee does not perform as expected. An inadequate agreement can leave you trapped in a bad relationship with no way to harvest the value of your technology. Ultimately, you are most likely going to need measurable milestones and/or performance requirements for your exclusive licensee. These requirements can take many forms depending on the circumstances, such as minimum royalties, minimum commitments for engineering resources or sales and marketing, or obtaining regulatory approvals by certain dates.

The appropriate consequences for failing to meet the agreed requirements also vary depending on the circumstances, but would generally be one of the following: a damages claim, the licensor’s right to make the license non-exclusive or the licensor’s right to terminate the license.

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