Technology Licensing Primer for Entrepreneurs – Part I: Non-Financial Terms
January 13, 2015
If you’re developing a product that requires certain technology that can’t be developed in-house (because of cost, time, human resources or complimentary assets), it might make good business sense to use technology that has already been developed by others and is available on the market.
A technology license is essentially an agreement between the licensor (the owner of technology) and the licensee (the party that wants to use that technology), in which the licensee gets the right to use the technology and the licensor gets something of value in return. I’ll deal with the value in return side in Part II of this two part blog series.
Technology licensing only occurs when one of the parties owns intellectual property, which gives that party the legal right to prevent others from using it, and so a technology license can be viewed as a consent by the owner to use the IP in exchange for something of value.
Although the key terms of a technology license agreement vary depending on what sort of technology is being licensed, similar issues arise in all transactions in which technology containing intellectual property rights is being licensed. This Part I of a two part series on technology license agreements will cover non-financial terms. Part II will cover financial terms.
What exactly is the thing that’s being licensed? This sounds pretty obvious, but it’s an underestimated issue that could lead to disputes if not identified accurately. The technology being licensed could be a product, software program, formula, specification, protocol, documentation or a combination of these. The licensor will generally seek to narrow the definition of what’s being licensed, while the licensee will typically seek a broad definition of the technology. In approaching this issue, think about whether you need only a patent license or rather the right to use a particular product or technology that practices the patent? Also, if you need a license to use the name or logo of the technology or product in connection with the sale and distribution of your product, then you’ll need a trademark license in addition to the patent license. This would be the case, for example, where the technology or product alone is not as valuable as the product distributed with a familiar trademark.
Scope deals with what it is that you’ll be permitted to do with whatever it is you’re licensing. A broad scope will give you greater flexibility; a narrower scope will be less expensive. The grant may include the right to reproduce the technology, display it, modify it, make derivative works from it, make it or have it made, distribute or sell it or sub-license it to others who may do any or all of the above.
The scope of the license should conform to your needs. You may only need the right to distribute the technology in its existing form, for example a distribution license for a commodity product. On the other hand, you may need to make fundamental changes to the licensed technology, create new versions and distribute the new versions to groups of sub-licensees who will also have the right to reproduce and customize the technology.
IP rights are territorial, and the license agreement must specify whether your rights are worldwide or specific to designated countries or regions. In negotiating the territory, you need to consider where you plan to manufacture and sell. Also, where do you plan to distribute products bearing the mark or logo? The license agreement should be clear that you have the right to display the mark “in connection with” the sale of products throughout the territory. If you plan to distribute products electronically or on the Internet, the license agreement needs to provide as much.
Exclusivity is one issue on which it’s tough to reconcile the interests of the licensor and licensee. The licensor will generally resist “putting all his eggs in one basket” with an exclusive license because it limits his freedom to expand through, and earn royalties from, other licensees. It may also result in the technology never becoming commercially successful if the exclusive licensee underperforms.
An exclusive license could be justified, however, when the licensee is making a significant investment to commercially exploit the technology, and where the investment cannot be used for a different purpose. This would be the case, for example, if the licensee is investing in custom equipment, hiring specialized labor or setting up a business in a new territory. In these situations, there are ways to mitigate against the exclusivity risk to the licensor. For example,exclusivity could be conditioned on the licensee achieving certain minimum royalty payments or product sales. Also, exclusivity need not be made coterminous with the license period; instead, a “head start” provision can limit exclusivity to a shorter time period during which the licensee can establish his business.
Somewhere in between exclusive and non-exclusive is a “sole license”, in which the licensor will not license any other licensees but has the right to continue using the technology himself.
The licensee may want the right to grant sub-licenses in the territory, particularly in an exclusive license. If so, this needs to be specifically negotiated and stated in the agreement. Two aspects of this issue that often get hotly negotiated are whether the licensor’s prior written approval is required for granting any sub-licenses (and the circumstances under which such prior approval would not be required), and whether or not the sub-license comes to an end when the primary license is terminated or expires for any reason.
Very often, the licensor will continue research and development efforts during the term of the license agreement, which may lead to new versions, enhancements or new models of the technology. The licensee would have legitimate concern that the licensor may come out with another release, version or product and offer it to a competitor of the licensee, or that the licensor’s new offering will render the “old” licensed technology product obsolete.
It’s important for the license agreement to define what is an “improvement”, and therefore covered by the license, and what is a new technology or new intellectual property, which is not covered and which may necessitate a new license agreement. Coverage for improvements could occur automatically, or the agreement could provide that there would be an option in favor of the licensee.
In Part II of this two part blog series, I’ll discuss the financial terms of license agreements.