10 Key Intellectual Property (IP) Licensing Agreement Terms
February 11, 2020
By Patrick Kerr, Lawyer at McInnes Cooper,
Michael Melvin, Partner at McInnes Cooper
Intellectual property (IP) can be an important source of revenue to a business. There are three main ways intellectual property (IP) owners generate revenue from their IP rights: use the IP rights themselves to produce a product or service; assign (sell) the rights to another party to produce a product or service; or license them to another party to do so. Licensing all or a part of the IP rights to another party (the “licensee”) to use in exchange for a fee (usually called a “royalty”) is one of the most common ways. A license of IP rights does not transfer ownership in the IP; it only gives the licensee permission to use the IP within the terms of the IP licensing agreement (the legal contract by which the IP rights are licensed). The three primary kinds of IP licence are:
- An exclusive licence giving the licensee the exclusive right to use the IP rights and preventing even the IP owner from using those rights while the licence is in effect.
- A sole licence giving the IP owner the right to continue using the IP but preventing it from granting licences to other licensees while the licence is in effect.
- A non-exclusive licence giving the licensee the right to use the IP rights without exclusivity and allowing the IP owner to continue to use them itself, to simultaneously license them to other parties to use, or both.
Whichever kind of licence the IP owner grants, it’s critical that the IP owner enter into a written IP licensing agreement that’s carefully drafted both to satisfy the requirements of any laws applicable to the particular IP right, and to adequately protect the IP owner’s rights. An IP licensing agreement can be lengthy and complex, and its terms will vary somewhat depending on the IP right being licensed and on the deal struck. However, IP licensing agreements typically all include these 10 key terms:
1. Grant. Identification of the IP that’s licensed and the scope of the rights granted, such as any geographical limitation, the degree of exclusivity of the grant, and whether the licensee has the right to sublicense the IP rights (and if so, any related restrictions or limitations).
2. Reservations & Restrictions. Any limitations on the purposes for which the licensee is permitted to use the licensed IP rights.
3. Term & Termination. The length of the licence, the grounds on which the parties can terminate the licence, and the parties’ rights and obligations on termination or expiration of the licence. In many cases, it will be important to require the licensee to immediately cease using the IP rights and to remove any references to the IP from all of its materials in the event of termination or expiration of the agreement in order to best protect the IP owner’s ownership of the IP rights. However, the nature and extent of the licensee’s obligations in this respect may vary depending on the nature of the IP, the nature of the industry in which the licensee operates and the reason for the termination (for example, termination for cause versus expiration).
4. Acknowledgement. The parties’ acknowledgement of the IP owner’s exclusive rights and the licensee’s agreement not to challenge those rights.
5. Maintenance & Improvements. The licensee’s acknowledgement that it will take whatever steps are necessary to protect the IP owner’s rights, and that the IP owner will own any improvements the licensee makes to the IP rights.
6. Royalties. The amount of the royalties the licensee must pay the IP owner, the payment terms, the responsibility for any taxes, and the IP owner’s reporting and audit rights vis-à-vis the licensee.
7. Confidentiality. The information the parties exchanged and the terms and conditions of their confidentiality obligations respecting that information.
8. Representations & Warranties. Often hotly negotiated terms, these typically include: the IP owner’s representations and warranties respecting the validity of the licensed IP right(s); confirmation the licence does not infringe any third party’s IP rights; and the licensee’s agreement to indemnify the IP owner for any loss caused by its acts and/or omissions and any limits on the licensee’s liability to do so.
9. IP right-specific clauses. Particular clauses that are specific to the type of IP right(s) licensed in the licensing agreement, either to ensure the requirements of any applicable laws are satisfied, to ensure the IP owner’s rights are adequately protected, or both. For example, Canada’s Trademarks Act (which in June 2019 underwent significant changes) is the law governing Canada’s trademark ownership and protection regime – including the licensing of trademarks to third parties. If the licencing agreement includes a grant of the right to use, advertise or display a trademark, then to comply with the Act and ensure the IP owner’s rights are protected, it’s crucial to include clauses dealing with the IP owner’s ongoing control over the character and quality of the goods and services associated with the licensed trademark. This includes the IP owner’s right to inspect those products and services to ensure they are of a character or quality required by the IP owner and defined in the licensing agreement.
10. General “legalese”. The “standard” (but still important) contract clauses, including: the “governing” law (the law that applies to the licensing agreement); rights of the IP owner and of the licensee to assign the licence agreement; what occurrences will constitute a “change of control” of a party (such as a sale or bankruptcy, for example) and the consequences of a change of control taking place; and the severability of the agreement clauses.
Please contact your McInnes Cooper lawyer or any member of our Intellectual Property Law Team @ McInnes Cooper to discuss this topic or any other legal issue.
McInnes Cooper has prepared this document for information only; it is not intended to be legal advice. You should consult McInnes Cooper about your unique circumstances before acting on this information. McInnes Cooper excludes all liability for anything contained in this document and any use you make of it.
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