What to consider - License agreements

What to consider - License agreements
Making a license agreement? – What should be considered? – An overview.


1.    Type of license

There are many different ways to describe the degrees of freedom of a license agreement. These are typically categorized as e.g. exclusive, non-exclusive or sole-license.
Exclusive: An exclusive license typically gives the licensee the full right to exploit the intellectual property rights. When making an exclusive license agreement, always consider what the licensee should provide as a minimum and include exit-clauses or milestones that will terminate the agreement or make it non-exclusive if not met.
Non-exclusive: A license may be given without exclusivity or with limited exclusivity e.g. for a specific purpose or region. This type of license is typically used for established technologies, i.e. products where the development has been completed. Non-exclusive licenses imply a lower risk profile.
Sole-license: This is almost the same as an exclusive license, but where the licensor is also entitled to exploit the IP. Even though this is a rarely used type of license, it could be particularly useful in collaborations or partnerships of semi-open innovation, where both parties will benefit from new discoveries and developments.

2.    Payments

Surely, getting payed is the main goal of any licensing agreement, but how this is done and executed is often not an easy task. Payments can be made as down-payments, milestone payments, royalties or as pay-per-use. It is even possible to combine all these types and make the agreement very complex. In all cases, the payments shall be based on objective measures that can be verified, whether it’s a completion of a milestone or the turn-over of a product that forms the basis hereof. Always consider simplifying your payment scheme – the more complex a scheme is, the easier it will be to manipulate and reduce your outcome and disagreements on interpretations are almost inevitable. 

3.    Third parties

The entanglement of companies and businesses is getting increasingly complex. Hence, it will also be crucial to consider if the license should be used by any other parties than the licensee. Consider a situation where the licensee uses subcontractors that are also used by your nearest competitor. If the technology and knowledge is to be implemented by the subcontractor, who is to tell if he is also providing this information for your competitor?
Another situation to consider is if the licensee is part of a merger or reconstruction, how will the license be transferable in that situation? Again, a merger with your nearest competitor could be devastating to your business.

4.    Development

The parties should always agree on how they share new knowledge related to technologies included in the license. Access to best practices and new patents following further development can be valuable to both parties, but agreement on how this can be shared fairly could be necessary. As future patents may potentially block the other party from taking advantage of these developments, it is often a good idea to include a first-right-of-refusal for licensing this IP at a price e.g. 20% under that set by independent valuation.

5.    Tax and fees

Earnings from licensing may become taxable depending on the type and location of such down payments. There is no global tax scheme for royalties or milestone payments, so you should always carefully examine the tax regulations and consequences hereof on the agreed payment schemes, especially if the license is applied to different countries. Furthermore, the establishment and maintenance of regional patents that are a direct consequence of the agreement should be taken into consideration, as filing fees, translations and annual fees for patents may differ greatly from one country to another.

6.    Breach of contract

Bad-will or not, when there is something rotten in the state of Denmark, you should always have the ability to terminate the contract. Typical breaches include delayed payments, underperformance in sales, failing products and bankruptcies.

7.    Responsibilities

The last, but not least important issue, is the responsibilities of the parties. Responsibilities with respect to maintaining and defending the patent family should be clearly stated. Who is going to react on infringements, counterclaims and law suits, and who shall cover the cost hereof? Where will product reliability insurance be implemented? Make sure that all possible situations are covered defining a clear responsible party by using a catch-all-clause.