Licensing Technology

Below is a checklist of the potential issues that we should address when negotiating a Licence Agreement. Most of these issues should be addressed in some format in the Licence Agreement. Some issues are more formalistic and others are more substantive.

Definitions:-

What is the technology that you are licensing?

Is the technology solely covered in the patent or will it also include trade secrets and know-how?

Extent of Licence:-

Limitations:-

Geographical limitations (if applicable):

Where can the licensee market and sell the invention?

Technological limitations:

If the invention has a basic functionality that can be sold in a variety of formats, in some instances the licensor may wish to limit the technological area the licensee can market the technology (i.e field of use licence).

Exclusive/Non-exclusive:

In many instances, when the licence is for a new product which would be marketed nationally (or internationally) the licensee may want exclusive rights, at least for the United States (and sometimes Canada), leaving the licensor the right to grant licences in other countries of the world. Or the licensee may want a worldwide licence. In other circumstances it may be more desirable to grant a non-exclusive licence so that the licensor would be free to licence a large number of manufacturers in that industry.

Payments:-

Timing:

When will payments be made (monthly, quarterly etc)

Calculation:

The royalty is usually based upon the gross sales price of the licensed product. The royalty rate may change. For example, the royalty fee can be made at a higher rate if the patent issues, and if it does not, then there could be a perpetual lower royalty rate.

Guaranteed minimums:

What is the minimum amount the licensee must pay you in order for them to keep their licence? In other words, if they were not selling the product that falls under the licence you would want to terminate the licence.

There can be two sets of minimums, a first minimum where the licensee will lose the exclusivity of the licence (see Extent of Licence above), and a second (lower) minimum where the licensee will lose the licence to manufacture the technology all together.

Rights:

Generally there is a power to inspect books for the licensor.

Patent Enforcement and Procurement:

Enforcing Against Infringers:

The agreement should clearly define how the responsibility of abating an infringement by some third party should be handled.

Payment of Improvement Patents:

If there are improvement patents there should be a clause outlining who is responsible for the patent costs.

Improvements:

Ownership

If any improvements are made that fall under the scope of the technology that is licensed, quite often these improvements will be included within the scope of the licence.

If the licensee makes a patentable improvement, the Licence Agreement should address whether the licensee must assign the improvement to you (the licensor).

Funding:

In some instances a licensee will fund the licensor for development of the licensed technology.

Term and Termination of the Licence:

Timing:

When should the licence end? Would the term extend beyond the patent term, but possibly at a reduced royalty rate? The term could extend beyond the patent term if you give the licensee a jump on the market where purchasers identify the licensee as the first source for the licensed product.

Termination of Occurrence of Events:

If the licensee fails to meet the guaranteed minimums, the time frame to terminate the licence should be addressed. Further provisions should set out the time frame to give the licensee a chance to "pick up the pace" and make up the difference by future sales, or simply paying the amount of the deficiency in meeting minimum payment obligations.

Insurance and Indemnification:

In some instances, it may be that if there was a product liability claim related to the licensed technology, and even though the licensor is not responsible for the specific design and also the manufacture of the product, the licensor may still be named as one of the defendants. Accordingly, consideration should be given to a clause where the licensee would not only indemnify the licensor, but also carry adequate product liability insurance, naming the licensor as one of the insured.

Quality Assurances:

As a licensor you may want to have a provision that allows you a final say as to whether the product the licensee is selling is of sufficient quality.

Other Responsibilities/Restrictions:

Best efforts clause:

There usually should be clause that the licensee should put forth their best efforts to market and develop the licensed technology.

Transferability:

Generally it is a good idea to restrict the ability of the licensee to transfer their rights to others. However, a common exception is where substantially all of the assets of the licensee are being transferred to another company.

Assistance by licensor:

The responsibilities of the licensor should be addressed. Generally the inventor/licensor has the most technical knowledge and desire to see the invention to fruition. Thus, there may be a separate consulting agreement where the licensor would provide support for the licensee.

Confidentiality:

Both parties should make best efforts to keep confidential information confidential.

Indemnification and Warranty Provisions:

Each party will provide certain warranties (e.g licensor is the inventor and did not steal the idea from someone else).

Release:

In the situation where the licensee has sold product in the past that infringes upon the licensor's patent, a release must be negotiated where the licensee makes a payment accounting for prior sales.

Other Intellectual Property:

Associated Trademarks with the Licensed Technology:

Is there a Trademark that is associated with the licensed technology? If so the ownership of these trademarks or licensing under the trademarks should be addressed.

Copyrights:

Is there any copyrightable material that is a part of the Licensed Technology? For example, a computer programme that is distributed with the licensed technology may be copyrightable and a part of the licence.

Individual Liability of Licensee:

A clause that makes an individual responsible as well as the corporation or other entity to help avoid having a licensee hide behind a corporate shell.

General Provisions:

There are a number of stock provisions that are common in many agreements (e.g jurisdiction, severability, force majeure etc). Arbitration and "no joint venture" clauses are two general provisions that should be addressed in a licensing agreement as well.

This list is not an exhaustive list of issues due to the fact that there are potentially more issues that may arise depending on the unique nature and circumstances of each licence (e.g technology, distribution scheme, relationship between licensor and licensee etc). However, this is a good starting point to think about which party is going to handle a future responsibility. It is much better to hammer out these issues before a future problem develops and neither party wants to deal with it.

One final consideration is a fundamental question of whether the alliance with the prospective licensee if a good fit. We can help you out with this answer by asking the licensee some of the more "hard questions". These hard questions include enquiring about their manufacturing capabilities and track record. Sometimes it is difficult for our clients to ask about these issues because you are trying to build rapport with the prospective licensee.