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That License Looks Fair
©2024, Melissa C. Marsh.
Written: 2/15/2006  
By: Melissa C. Marsh

This is not a do it yourself project. Negotiating and drafting the terms of an intellectual property (IP) license can be difficult and time-consuming. However, those who decide to skip or skimp on the troublesome details of a license agreement often later face severe consequences. Even more frustrating is the experience of drafting a license that diligently attempts to address the business or legal issues thought to be important at the outset, only to later discover that a crucial issue was overlooked or inadequately addressed. This article seeks to outline some of the most commonly encountered pitfalls.

  1. Use Of Form Software License Agreements.. Although many of the terms in a license may, and often are, modeled on similar clauses from previous, similar agreements, each business arrangement is unique, and the process of drafting a license agreement from a form is not a simple task. Often the underlying form will not accurately reflect the true intentions and understandings of the parties. Therefore, while a form agreement does provide a "starting point" for a given agreement, it must be altered to ensure that (a) it accurately reflects the intent of the parties, and that (b) its terms do not create any unintended consequences in light of the unique features of the pending business deal.

  2. Intellectual Property Ownership And Control. Generally both parties to a license agreement want a certain modicum of control and interest in the underlying IP. Consequently, it serves the parties interest to define clearly, and to maximize, their legal and beneficial interest in the underlying Intellectual Property. When negotiating a deal it is therefore particularly important to address the following: (a) the licensee’s right to sublicense or otherwise pass through to third parties the licensor’s IP rights; (b) the licensor’s agreement to indemnify the licensee against third-party claims of IP infringement (and specifically, the nature and extent of the licensor’s indemnification responsibilities); (c) any provisions or pre-existing agreements that should extend a party’s IP rights or obligations to its "affiliates"; and (d) any covenant not to sue granted from licensor to licensee (and/or to the licensee’s affiliates). If clauses addressing these issues are not properly worded, the license could unwittingly grant a right of use in the licensor’s IP to a large segment of the licensor’s competitors.

  3. Scope and Field Of Use in the License Agreement. Probably the most difficult and most neglected portion of any IP license is the scope or field of use. Although it is possible for a licensor to allow the licensee to use the licensed IP for any purpose, most agreements only intend to allow use of the licensed IP for a fairly specific field of endeavor. Ideally, the licensor should negotiate to limit the license with that licensee to cover only the licensee's actual product. On the flip side, the licensee should negotiate to have the license as open ended as possible. While this sounds simple, it is in actuality quite complex. For example, assume the licensor has a created of a new and patented software code that has potential uses in multiple applications and hardware. Further assume that the intended licensee manufacturers personal entertainment sound systems. If the language in the license agreement was limited to sound systems and stereos, does that include commercial sound equipment, car stereos, mp3 players, portable music players, computers, etc… If the parties are not in specific agreement at the outset on the "field of use," costly litigation may ensure if the licensee later discovers a newly evolved commercial application for the license that the licensor never intended, discussed or addressed but dramatically enlarges the "field of use."

  4. Considering Future Transactions. Finally, in negotiating and drafting a given license agreement, it is important to keep in mind that your business plan may change in the future, the company/subsidiary involved may be sold or merged, and that the underlying IP assets may be (or may need to be) transferred in the future. Accordingly, licenses should be negotiated with an eye toward keeping your options open.

  5. Definitions And Recitals. The often overlooked definitions and recitals should be carefully reviewed to ensure they reinforce the agreed upon terms of the license agreement. Definitions are often used to define complex concepts and a subtle change in the meaning of a definition can have a significant impact on the whole agreement. The recitals, while not strictly a part of the agreement, will be used by the court to interpret a vague or ambiguous term in the agreement. If any term or clause in the license is subject to multiple interpretations, the court will look to the recitals to determine the parties' intent (reasons for executing the agreement, basic motivations, and economic expectations) and in turn to interpret the ambiguous clause. Careful scrutiny should also be given to each of the major terms to ensure both parties are on the same page and that the language is clear and concise so multiple interpretations are not possible.

Most Intellectual Property (IP) license agreements begin with a "term sheet" or a letter of intent where the parties have outlined the substantive terms of their "to be" business relationship. However, having a thorough understanding of the common problems that most often arise in IP licenses can give either the licensor or licensee a considerable tactical advantage in preparing the initial deal memo and in the initial negotiations so as to avoid time consuming and costly revisions when the parties finally agree to prepare a final agreement. Before your begin negotiations or send out that proposal, consult an attorney familiar with licensing agreements to explore your options. If you have been presented with a term sheet or letter of intent, don't assume you understand the meaning of every clause. Seek the advice of a local licensed attorney to explain the agreement and revise it as necessary.

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