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As the licensor, what’s needed in your IP agreement?

By Jessica Holcombe


For most technology companies, their IP is the crowning jewel, and protecting it from a legal standpoint is key not only to ensuring control over your IP’s fate but also to the valuation of your business. You may need a variety of licensing agreements depending on whether you are licensing directly to a consumer, as in the case of off-the-shelf software, or to a reseller, or to another company that will be bundling your technology with its own. What terms then are essential for you as the licensor in your agreement:

1) Ensure License Grant Contains the Right Restrictions. Because the grant describe in summary what the licensee can and cannot do with your IP, it is important to ensure that the grant terms are specific. Be sure to specify that the agreement is a license and not a sale. Other key restrictions should be addressed in the grant provision. For example, can the licensee distribute your IP throughout the world without your permission or bundle your IP with that of third parties or even your competitors? Is the customer asking for exclusivity (limit this as much as possible)? How are derivative works defined and restricted? How will access be controlled, and is a EULA needed in addition to the B2B license?

2) Payment, Maintenance Terms, and Customization. Most breach of contract lawsuits involve money that must be paid or refunds demanded. For that reason, be crystal clear in your payment terms particularly with respect to maintenance and customization. It is easy to assume that because payment terms for a specific service are clear to the parties negotiating the license, the terms will be equally clear to a judge. Not so. If your attorneys are asking for clarification on pricing, this is a good sign that more specifics or laymen’s terms are needed. A scope of work or maintenance agreement is often an exhibit to the license and includes specific terms in connection with the fees for licensing the IP and whether upgrades are included in that fee. Upgrades should be defined in the license to avoid confusion between what is simply a new version of the IP versus a variation with new functionality. You should also clarify response time depending on the severity of the problem and what the rates will be for after-hour services or additional training at the customer’s site.

3) Indemnification and Release from Licensee; Limitations on Damages. Because you do not have control over what a licensee will do with your IP (even if you have a binding agreement), you will need indemnification from the licensee for any improper use of your IP and a release for any damages of claims that arise outside of your control. I also recommend limiting your liability under the contract to the amount paid by the licensee except where such limitation may otherwise be prohibited by law (i.e. in the event of personal injury).

4) Limitation of Warranties. While it is common to provide for remedying any errors within the first 90 to 120 days, an indefinite IP warranty is unusual. Frequently, licensors will include a warranty limitation and waiver by licensee against claims for damage to hardware, viruses, or other malfunctions caused by the IP and a waiver of related damages such as lost profits.

5) Termination and Continuation of Key Terms. In addition to your right as licensor to immediately terminate the license for breach, improper usage, or bankruptcy, you should also consider assignment rights. For example, if your customer is acquired, do you want approval rights to assign the license to the acquirer? On the flip side, you will need the right to assign the license to an acquirer without your customer’s approval. Otherwise, the deal could be held up. I also recommend requiring the licensee to return any documentation or other hard copy materials to you. A number of licensing agreements require that the licensee either return or destroy any materials from the licensor. However, it is difficult to prove that something has been destroyed. Despite having the right to immediately terminate, you should also be sure that certain terms in the agreement survive termination, particularly payment, indemnification, non-disclosure, arbitration, venue, attorney’s fees, and injunctive relief clauses. Some customers may also ask that you put your technology into escrow if the agreement is terminated. I would not recommend giving the customer easy access to your source code, even in escrow, except in the case of bankruptcy.

Because the value of your business is closely tied to the development of your IP and your protection of it, it is essential to include key terms in your licensing agreement that fit your business model. Be careful of taking licensing agreements straight off the internet without asking an attorney to determine if the terms match your situation. The lack of a strong contract may not only impact protecting your IP but the valuation of your business during a financing or future acquisition.