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Intellectual Property License Agreements:Concluding the Business Romance with a Prenuptial Agreement

Based on a presentation by James. T. Nenniger to the Canadian Industrial Innovations Centre, Waterloo, Ontario symposium Licensing Successfully held February 28, 1998.

© 1998 Piasetzki Nenniger Kvas LLP

Introduction

Intellectual Property is a term used by lawyers to cover patents, trademarks, industrial designs, copyright, and trade secrets and know-how. While these are different rights, they are all property rights. Like tangible physical property, they may be bought and sold, and importantly for today's discussion, licensed. In general terms it should be understood that giving a license to someone under Intellectual Property Rights is like renting them the property for a period of time. A license agreement, like a lease, defines the respective rights and obligations of the property owner (in the case of a patent for example the patent owner) and the renter (for example, a manufacturing company).

License agreements, like leases, include a number of standard terms and provisions. However, because intellectual property rights have many unique characteristics, license agreements can be structured in many different ways to accommodate the business interests and objectives of the property owner and the licensee. In my presentation today, I would like to present you with my perspective, as a lawyer in the intellectual property field, of the important issues to be addressed in an intellectual property license, and how the issues are viewed from the owner's perspective and from the licensee's perspective. To do this, I will discuss the important points to be covered in a license agreement.

At the same time, I would like to make it clear that there is no "typical" or standard license agreement. Unlike leases, which may be of a standard form, license agreements are as varied as the business plans and objectives of their signatories. The language of the contract is then drafted to suit the requirements of the parties and to reflect the business transaction the parties have in mind. Because each transaction is different, the language of each contract is also typically different and must be individually prepared for each case. To rely on any existing contract as a model, rather than focusing on the often unique and specific requirements of the parties, could easily result in a licensing agreement which heavily favours one side, or which fails to cover unexpected situations arising during the life of the contract. Therefore, I do not propose to provide any sample contract language, but rather to talk about the business issues which underlie the contract provisions.

To simplify my talk a bit, I would like to refer to a hypothetical situation. Mr. Inventor has a patent on the new plumbing fixture he has invented. He and Mr. Manufacturer would like to enter into an agreement whereby Mr. Manufacturer uses the technology to make and sell these fixtures. While this scenario is quite simplistic, it allows me to explain some of the points I want to make more easily.

The main licensing issues that I will address today include the following:

  1. Who the parties to the contract should be
  2. The Preamble
  3. Definitions
  4. Territory
  5. Grant of a license
  6. Royalties
  7. Accounting reports
  8. Obligations of the licensor
  9. Obligations of the licensee
  10. Issues relating to Licensed Intellectual property rights
  11. Improvements
  12. Term
  13. Product Liability
  14. Termination and
  15. Miscellaneous provisions
Parties

One of the first issues for a lawyer in preparing a licensing contract is to identify who are the proper legal entities to sign the license agreement. Only those legal entities which enter into the contract become bound by it, so it is important to identify the appropriate legal entities in order to ensure that the respective rights and obligations that the parties wish imposed by the contract are effectively imposed.

For example, Mr. Manufacturer may wish to ensure that he has access to the inventor for the purpose of ongoing consultation with respect to manufacturing and selling the invention. In that case, it may be appropriate to have Mr. Inventor personally named in the contract. Mr. Inventor, however, may prefer not to be a party to the contract but rather to use a corporation as the contracting party for personal tax and liability reasons. In addition, with respect to each of the terms of the contract, it is necessary to ensure that the person who has the ability to perform the obligation or the need to obtain the benefit, is a signatory to the contract. I will go into more detail on this when I discuss Licensee and Licensor obligations.

Of course, it is fundamental to a proper license agreement that the party purporting to grant a license to the property rights being licensed is legally entitled to grant such a license. If Mr. Inventor has already assigned the property rights for his invention to someone else, he is the wrong person to be negotiating with. Therefore, in preparing a license agreement, a due diligence review should be made of the property rights being granted, and their ownership, to ensure that the proper parties are signatory to the contract.

Preamble

This is the portion of the contract which usually occupies the first page below the identification of the parties to the contract. The preamble typically is not considered part of the binding terms of the contract, unless it is expressly stated in the contract that it is to be binding. Usually, the preamble simply identifies the background circumstances to the entering into of the contract. For interpretation purposes, if the preamble contains admissions by one or the other party, they may in future be bound by such admissions. Thus, the preamble should be carefully reviewed to ensure that it does not contain any unnecessary, or, worse, inaccurate admissions.

Typically, the preamble will state that the licensor owns certain intellectual property rights that it wants to license to the licensee. The preamble may further state that the licensee wants to take a license under those intellectual property rights owned by the licensor on certain terms and conditions, as set out in the agreement that follows. Then, the preamble would conclude with a clause which sets the foundation for a binding contract between parties which lawyers refer to as the consideration clause. In this clause, in exchange for the mutual covenants and in some cases, a specified amount of money such a one dollar, the parties agree to be bound to the terms and conditions which follow.

Definitions

The definitions section of a license agreement is one of the most important, and also sometimes one of the most difficult sections of the contract to draft. In intellectual property licenses, it must be understood that there is difference between the right being licensed and the underlying object to which the rights relate. For example, in a patent license, there is the actual invention which may be defined as a product, and, the patent rights which are defined as the exclusive right to make, use or sell that invention1. In our example, the plumbing fixture is the product. The patent rights are the property rights, and they are what is being licensed. These may be defined respectively as the licensed product and licensed rights. Of course, the licensed product is usually defined as product falling within licensed rights.

In a software license, there is the actual code in any material form, such as on a floppy disk, which constitutes the software program, and then there is the copyright in the code which is defined as the exclusive right to authorize the making of copies of the code2. To be most clear, the license agreement should identify both the underlying piece of property, and, the property rights which attach to the underlying property.

Another issue that is addressed in the definition section, is to define an Improvements term. Improvements are new developments that arise in respect of the original subject matter of the license. Improvements might originate with the licensor or with the licensee. Depending upon how broadly the improvements definition is drafted, improvements might include things directly related to the licensed property, or, might include things which are only remotely connected to the licensed property. What is required for a definition of an improvement, is clarity so that each party understands the limits of what is covered and therefore what is excluded from the scope of the contract. Often however, even with the most precise drafting, clarity is difficult because it is dealing with things not yet in existence. Thus, it can be difficult to adequately define improvements to accurately reflect the parties' intentions.

In general, the licensor will want a very broad definition of improvements. From Mr. Inventor's perspective, no improvements would have been possible without his original invention, therefore he should benefit from any improvements, even those made by Mr. Manufacturer. Further, the licensor wants the contract to be flexible, to deal with allowing the property to be improved on a going forward basis, without being concerned about the application of the contract to the improved product. Conversely, the licensee might want a more narrow definition, although not necessarily. A more narrow definition suits the licensee, because if a new development is made which in essence replaces the licensed product, the licensee may not wish to pay royalties on the new development. The rationale for the licensee is: "I agree to pay for your rights to a specific product or idea, and, if I need to adopt a different idea or product, I should no longer be paying you for something that I am not using " An appropriate scope for an improvement definition will vary therefore, depending upon the industry, and circumstances such as the relative negotiating strength of the parties, and their belief in the value of the property being licensed.

Another typical term included in the definition section is a definition of the royalty base. The royalty base is the income that is received by the licensee through an exploitation of the licensor's property. The typical way to define the royalty base is to define a net selling price for the licensed product. The net selling price typically means the gross invoice price of the licensee, less certain deductions. Typical deductions include taxes, returns, discounts, and transportation and handling costs. The definition of the net selling price is the subject of negotiation, and, varies from industry to industry in accordance with the typical invoicing trade practices of the industry.

Territory

Another definition should be the territory covered by the license agreement. The territory can vary from a small area, such as a city or town, to a province, to a country such as Canada, to North America (Canada, the United States and Mexico) to the world. Any portion of the world may be included or excluded from the license agreement depending upon the circumstances of the parties.

Another consideration is to provide to the licensee options on extending the territory of the license agreement in the event the licensee's performance is at a certain agreed level. In other words, if Mr. Manufacturer is a successful licensee, both on his own account and in terms of generating income for the licensor, it would be smart for Mr. Inventor to give him the option of expanding the territory. Conversely, if Mr. Manufacturer turns out to be ineffective at exploiting the licensed rights, he should not automatically be given any extended territory. Where a step-wise option exists in the business plan, it may appropriate to include a definition of an extended territory in the agreement.

One strategy that I have used in the past, is to allow the licensee to expand the territory to cover additional areas, but to do so, the licensee has to assume additional responsibilities to secure the licensed rights in the extended territory. These additional responsibilities may include paying the patent costs in the jurisdictions of the extended territory. Also, the licensee may assume the obligation to make certain minimum payments in respect of exploiting the extended territory. In this way, the concept of extending the territory is tied to the licensee assuming some responsibility for the extended territory.

A number of other definitions are also important, including the legal effect of any schedules, the legal effect of clause and subclause references, the legal effect of any headings, the definition of the currency and the mode of payment, the effect of the invalidity of any provisions of the agreement, and, in the cases of long term license agreements, an inflation adjustment. Depending upon the circumstances, other additional definitions may also be desirable. However, these are some of the more important ones for drafting a comprehensive contract.

Grant of a License

Once the definitions are established, it is then possible to draft the raison d'etre of the license agreement, namely the grant of the license from the licensor to the licensee. The grant clause covers a number of important business decisions. Is the license exclusive or nonexclusive? What is the nature of the license? Is it a license to make, use, sell, copy, or even, to grant further licenses? The appropriate license grant depends upon the business plan or model which is being implemented. For example, an inventor may grant to a third party manufacturer the exclusive right to make and sell the patented product. A software license, between a developer and a software distributor, might include the grant of an exclusive license to make copies for distribution to customers. Alternatively, the software license may be a specific license to use which does not include the right to make copies. The license grant is central to a proper license agreement and one which can be structured in many different ways to suit the needs of the parties.

To draft a proper grant clause involves knowledge of the nature of the rights being granted and the nature of the business to which the licensed product relates. The lawyer must understand how the product fits into the licensee's business strategy in order to prepare a commercially optimal contract. Where will the product be sold? Who are the potential end-users? Similarly, the licensee and the licensor must have a keen understanding of the scope of the rights being licensed to prepare an effective and realistic business strategy.

In legal terms, the grant of the license is giving permission to Mr. Manufacturer to do what would otherwise be an infringement of Mr. Inventor's rights. It could be said that a license agreement is an agreement by the licensor not to sue.

Royalties

The next most important issue set out in a license agreement is the royalties, or the "rent" that will be paid for the licensed property. The royalties may be paid in any of a number of ways as indicated below.

Typically, a licensor will be looking for some kind of upfront fee. The upfront fee may be justified as compensating Mr. Inventor for the time, effort and expense, of creating the invention, developing it to the point that it is at the time it is delivered to the licensee, and spending whatever money has been spent to date to protect the technology. While it is true that a licensor has typically incurred certain expenses, the licensee may or may not be willing to compensate the licensor for those expenses. In some cases, the market value of the invention is not sufficiently high for the inventor to fully recover his development expenses. Typically, a licensee will wish to have as low an upfront payment as possible.

Another business reason the licensor will want to have a larger upfront payment is to secure the licensee's commitment to the project. The more the licensee has invested, the more effort the licensee will devote to quickly realizing on the business opportunity.

Upfront fees may be made irrevocable, which means that they are paid no matter what happens to the license agreement or they may be made revocable in the event of some contingency. For example, if Mr. Inventor has applied for, but not yet received a patent on his plumbing fixture, Mr. Manufacturer may wish to make payment of the fees contingent on a patent actually issuing. The licensor obviously tries to negotiate that the upfront fee is to be irrevocable.

Upfront fees may also be credited against future royalty payments and this credit may be applied either immediately, on a dollar for dollar basis, or more gradually over time, on a maximum credit basis like up to a maximum of one-half of the royalties otherwise payable. Thus, the earlier and larger the initial sales, the bigger the credit for the upfront fee. I prefer the divided approach rather than an immediate, fully-refundable upfront fee. The problem with the refundable upfront fee is that it provides the licensee with a royalty holiday; the inevitable end of this holiday can act as a disincentive to further sales when it ends.

In drafting royalty clauses, it is important to state what the royalty base actually is, and the amount of the royalty payable. Royalty rates vary from industry to industry, and are always a matter of negotiation. Typically, the stronger the property rights, and the hotter the product the better the royalty rate that can be obtained.

Another issue for the license agreement is whether or not there are performance objectives contained in the license agreement. Performance objectives might be set out in terms requiring a licensee to achieve a minimum number of sales for a given period of time. This minimum sales requirement would typically be drafted in a way to permit the licensee to pay royalties equivalent to that performance level, in the event that the sales are slower initially than first anticipated. The consequences of not making the minimum royalty payments range from loss of exclusivity to termination of the contract. In general, minimum royalty provisions should be set at a reasonable rate, to encourage the licensee to exploit the licensed rights, but not at such a onerous level as to cause the licensee to become disenchanted with the license agreement and to lose interest in the project in the event that sales are lower initially than anticipated. Also, the minimum performance obligation may be varied in amount over time, being first at a low level, then increasing, then even declining again. Often the performance obligations are derived from marketing projections developed by the parties to the contract. Performance obligations can be difficult to negotiate.

Another key aspect of any royalty provision, is to specify when the royalty payments are to be made. They may be made quarterly, semiannually or at any other frequency desired by the parties, provided that it is clearly set out in the contract. Typically, royalties would be payable quarterly, within thirty days of the end of the calendar quarter in which the sale occurred.

Accounting Records, Reports and Audits

The companion provision to establishing to the royalties is to require the licensee to keep records and the books of account so that, in the event of a dispute arising, the licensor can audit the books and determine for itself whether the full royalties have been paid. These accounting terms can vary in severity. For example, at one extreme, the licensor could require the licensee to provide audited royalty reports. A more moderate approach is to require that the licensor receive a royalty statement signed and certified by the principal of the licensee that the figures are accurate. An even less onerous scenario is to stipulate only that the royalty reports be provided as a matter of course, and that the books and records will be made available for review by an accounting expert only in the event that the licensor wishes to conduct a formal audit.

One of the additional considerations in the royalty provision is to specify the form of the royalty report that is going to be provided by the licensee. Often, licensors have in mind a form of report which includes certain information and yet when they receive the actual royalty report get much less information than they anticipated. Unless the contract specifically articulates the category, subcategories and attachments to the royalty report, it is unlikely the licensee will provide any additional information. Therefore, the licensor should carefully review what it believes is necessary to be included in the royalty report and articulate that in the contract.

Licensor Obligations

The next section is the licensor's obligations. One of the first things to consider is how much technical assistance is the licensor going to provide to the licensee during the course of the contract. In particular, is the technical assistance going to be in addition to the royalties under the contract, by way of consulting fees, or will it be included as part of the royalty payments? Who pays the costs for travel and attendance of Mr. Inventor at Mr. Manufacturer's premises? Is the licensor needed to attend trade shows and the like? Is there a minimum amount of consulting that is required from Mr. Inventor, or a specific ongoing function?

Licensee Obligations

The licensor typically wants the licensee to assume certain responsibilities to help promote the product. Many of these responsibilities will directly benefit the licensee in any event, but in some agreements it is beneficial to spell these out in detail. Some of the responsibilities might include the following:

  1. Advertising - What efforts will Mr. Manufacturer use to advertise the products in what territory? How will the Mr. Inventor regulate the advertising? Will the licensor be provided with samples of the product being made under the license agreement? Will the licensor be provided with samples of the advertising material before it is used to ensure that it is appropriate? Will the licensee ensure that any rights created in any advertising are appropriately vested in the licensor?
  2. Production - Will the licensee agree to manufacture goods of a particular quality and to provide sufficient samples to the licensor to enable the licensor to evaluate the quality? Will the licensee manufacture in accordance with generally accepted standards and in accordance with the licensors' wishes? Will suppliers to the licensee be required to assign any improvements to the licensor?
  3. Meeting Demand - Will the licensee agree to maintain or have access to adequate manufacturing, sales and shipping facilities and inventory to ensure prompt delivery of product? Will the licensee undertake to produce and sell products by particular date? Will the licensee be able to sell outside of the territory or, will the licensee be prohibited from selling outside of the territory? Will the licensor agree to use the trademark in a manner that is appropriate to preserve the distinctiveness of the trademark for the licensor? Will the licensee agree to comply with applicable government standards? Will the licensee agree not to pledge as collateral, the key assets that relate to the intellectual property being licensed, such as a mould for the licensed product?
  4. What about the form of the product? Can the licensor decide how to make it, in what form and style, or does the licensor have any say in this?
  5. Territory - will the licensee be permitted to sell outside the specified territory?
  6. Trademark Use - Will the licensee agree to use any trademarks in a manner that is appropriate to preserve the distinctiveness of the trademark for the licensor? Who decides what to name the product, who pays the costs of registering the name and who owns the name?
  7. Ownership and Control of Property -The licensee should, for example, agree not to pledge as collateral, the key assets that relate to the intellectual property being licensed, such as a mould for the licensed product.
Issues Relating to Licensed Intellectual Property Rights
  1. Ownership

    Once the obligations of the licensee and the licensor are clearly sorted out, it becomes necessary to consider in particular detail some issues that relate to the intellectual property rights. For example, it may be appropriate to include an acknowledgement of ownership. The acknowledgement of ownership is for the purpose of clearly establishing that the intellectual property rights are the rights of the licensor and not the licensee.

    The next issue is to identify any obligations that the licensee might have with respect to the intellectual property being licensed. For example, it may be desirable to register a confirmatory license agreement at appropriate Patent Offices in order to perfect the licensee's rights to commence actions in certain foreign jurisdictions relating to the patents. Thus, it may be desirable to have the licensee and licensor agree to sign such documents for the purpose of obtaining such registrations. The licensee may have to mark all of the licensed product appropriately with proper patent numbers and trademark numbers as required by applicable law in the territory. The licensee may agree to pay expenses incurred in prosecuting or maintaining the intellectual property in the territory.

  2. Infringers

    A significant issue arises may arise when there is a third party who may be infringing the licensed rights. It is necessary to decide in advance how to handle such infringements. One argument is that as the property rights belong to Mr. Inventor, he has the obligation to protect those rights. Alternatively, it could be argued that limited property rights have been licensed to Mr. Manufacturer and he should bear the costs. A third option might be to arrange for a cooperative effort between the licensor and the licensee with both of them agreeing to be equal participants in the lawsuit and to divide the costs and benefits accordingly. Under Canadian law, both Mr. Inventor and Mr. Manufacturer will have the right to sue. However, a procedure needs to be worked out in advance as to how these rights will be enforced. In the absence of any specific provision, there is likely to be confusion and mutual blame.

    There is usually a notice clause whereby each party is required to let the other know all details of any potential infringement. Deciding how to approach a third-party competitor who maybe infringing is not always simple. The first issue is to evaluate the strength of the case. Each of the parties may wish to consult with their own advisors, based on the information in the notice. However, the parties have different motivations with respect to the lawsuit. If the royalty rate is high, Mr. Manufacturer may not see much advantage to winning a case against the infringer. If he wins, he has to keep paying royalties. If he loses, he can stop paying royalties, lower his selling price, and get an increased market share. (Of course, he also loses his monopoly position.)

    In my experience, the licensor usually wishes to control the progress of any lawsuit, to ensure that it is pressed forward properly. How the parties will share the costs of any litigation, however, is a matter to be negotiated, and stipulated in the licensing contract.

  3. Third Party Claims

    A similar issue arises in respect of claims made by third parties. Due to the nature of the patent system, it is not always possible to guarantee, even for a patented product, that exploitation of that patented product will not infringe a third party's rights. An example may provide some clarification. Mr. Inventor has been issued a patent on his plumbing fixture. Another manufacturer of plumbing fixtures then comes forward claiming that the fixture is very similar to one which he has been producing for many years, and claiming that Mr. Inventor's patent is therefore invalid. Even worse, he may have his own prior patent, which he now claims is being infringed. Consideration must be given as to how this claim will be dealt with as between the licensor and the licensee. From the licensor's perspective, it may wish the licensee to assume responsibility for the infringement claim, since the licensee has control over the manufacturing and selling. Mr. Manufacturer might see the situation differently, feeling that unencumbered property rights are what he contracted for. Each of these issues must be separately negotiated and an agreement arrived at based on each party's tolerance for risk.

  4. Further Production

    Another consideration for a licensor, is the ability to require the licensee to stop making or selling while the licensor deals with any third party claim. If Mr. Inventor is given sole responsibility to deal with the third party claim, he does not want Mr. Manufacturer to continue to make and sell product as quickly as possible, because that will increase his liabilities to the third party if their claim against him is successful.

  5. Validity of Licensed Rights

    Of central concern in intellectual property licenses, is what kind of a guarantee is being made about the validity of the rights being licensed. In general, it is impossible to guarantee that any given patent is valid. Even though a patent may have issued, there may be additional facts or circumstances that bear on the validity of the patent which have not yet been considered either by the licensor, or by the Patent Office in granting the patent, because such facts and circumstances weren't known at the time the patent was obtained. In some cases, the licensee will ask the licensor for a guarantee that the patent is valid. Essentially, this simply allocates risk as between the licensor and the licensee and provides the licensee with a remedy in the event the patent turns out to be invalid. In other cases, the licensor may say to the licensee, "I have done everything in my power to ensure that the patent is valid. If you are interested in obtaining these exclusive rights, do your own research and if you still want them, then sign the agreement. But because of the nature of the patent system, I am not willing to make any guarantee that the patent is valid or will be valid in all circumstances and therefore, you have to assume some of the risk in this transaction." There is an obvious tension between these two positions, and the actual contract language will reflect how effective the negotiations have been by each party.

Improvements

Improvements may arise from the licensee, or the licensor. In some cases, the licensor may be in the sufficiently strong bargaining position, to claim ownership of all improvements. The licensor's rationale is "but for my disclosing my invention to you in the first place, and providing you access to my property, you would not have been in a position to create any improvements. Therefore, any improvements you licensee create should belong to me." Alternately, the licensee may take the position that the licensor has delivered a particular defined set of property to it, and any contributions the licensee makes should belong to the licensee. Thus, in some cases, the licensor may retain ownership to its improvements, while the licensee retains ownership to its improvements. Ownership of improvements may turn out to be important, and typically, one negotiates as forcefully as one can for ownership of these improvements.

Another issue to consider with respect to improvements is whether or not any third party supplier might create improvements. For example, where the licensee is primarily a marketing company, as opposed to a manufacturing company, which contracts out its manufacturing, a third party supplier may end up creating improvements. If this is the case, then it becomes appropriate to ensure that the licensee, who deals with the third party supplier, requires third party supplier to assign any improvements as appropriate. The assignment might be to the licensee, or the licensor, depending upon what the parties negotiate.

Term

The next issue typically covered by a license agreement is the term. The term of the license agreement is how long the license agreement lasts. In some cases, it might be for a specified term such as three or five years. In other cases it might be for the length of the patents, or the other intellectual property rights that are being licensed. In each case, the term should be appropriate having regard to the business considerations incorporated into the agreement. If the licensee is unwilling to commit to realistic performance obligations, then the term of the agreement should be made shorter. Alternately, if the licensee is willing to commit to performance obligations which provide the licensor with a certain guarantee of royalty, a longer term might be appropriate. However, in every case, the term is dictated by the negotiations between the parties.

Product Liability

The next important part of the agreement is the issue of product liability. Product liability concerns vary, depending upon the nature of the products involved in the license agreement. In some cases, product liability concerns arise because of the way the licensor has designed the product. In such a case, where the product is inherently risky, the licensee may want an indemnity from the licensor with respect to product liability claims. Alternatively, the product liability might arise by reason of the failure of the licensee to manufacture goods of sufficient quality. In such circumstance, it may be appropriate for the licensee to assume responsibility to indemnify the licensor for shoddy workmanship.

In general, indemnities are inadequate to appropriately protect the parties. An indemnity is only as good as the party giving it. Therefore, insurance should also be placed and the contract should identify whose responsibility it is to carry the insurance and pay for it, and, who is covered by the insurance. Again, this is a matter of negotiation between the licensee and the licensor.

Termination and Events of Default

It is often very important to articulate in a license agreement what events constitute events that permit the agreement to be terminated. Some times, the obligations may not be met by the parties as defined in the agreement. However, these obligations may be not of a sufficiently serious nature to warrant termination of the agreement. Therefore, it is common to provide a list of the kinds of events that are so serious as to cause a termination of the agreement. This articulated list protects both the licensee and the licensor and is typically not the subject of any dispute between them.

The next and companion provision is to describe what happens upon termination. Typically the license agreement will require that any monies owed by the parties at the date of termination will be promptly paid to each other. The agreement might also provide that the licensee will immediately discontinue manufacturing the licensed product. The agreement might provide that the licensor has the right to purchase moulds, tooling or the like used to make the licensed product from the licensee at some depreciated value. The agreement might provide that the licensee has a right to dispose of inventory over a certain period of time, provided however that the inventory disposal is a royalty bearing transaction. The agreement might provide that any confidential information in possession of either party be returned to the other party promptly upon termination. Lastly, there may be a provision dealing with competition after termination. In the event the licensor is in a strong negotiating position, the licensor may require that the licensee not compete with the licensor's licensed product after termination of the agreement. This non-competition clause is likely to provide only limited time and geographic scope, but, can be very effective in preventing the licensee from terminating the license agreement and attempting to sell product slightly different than the licensed rights in an effort to avoid paying royalties.

Miscellaneous Provisions

In addition to the foregoing, a number of other issues are typically dealt with in a license agreement, and I will just touch on these briefly. One is an assignment right, which means whether, and in what circumstances, can either party assign their rights and obligations under the agreement. Another is notices, a provision that identifies how notices are to be given to each other under the agreement. A third is applicable law; regardless of the terms of the contract, the parties are subject to the prevailing laws of the relevant jurisdiction. Normally this jurisdiction is specified in the terms of the contract; there will be a clause stating which jurisdiction's laws prevail. Therefore, it is important to know what laws are in effect. Confidentiality is often another provision, requiring that each party hold information divulged by the other party in confidence.

Other terms might be necessary as well, depending on the interests of the parties involved.

I have discussed what I consider to be the essential elements of a good licensing agreement. However, you are not going to get a contract that works in your favour without strong negotiating skills on your side of the table.

1Canadian Patent Act, R.S., C. PO4, S.1. Section 42
2Canadian Copyright Act, R.S.C. 1985, C.C.-42, as am. Section 32

James Nenniger is a founding partner of the firm of Piasetzki Nenniger Kvas LLP, Barristers & Solicitors, Patent and Trademark Agents, a firm that restricts its practice to patents, copyrights, trademarks, industrial designs and related causes. Piasetzki Nenniger Kvas LLP is located in Toronto, Canada.