How to prepare a license agreement?
As you can conclude from article "Licensing", patent license agreements have several advantages and they can contribute to building mutually-beneficial business relationships. However, negotiating the best terms for a patent license is difficult and takes time.
Before starting the negotiations with a potential licensee, you should do some preparations and collect information about the future prospects of the relevant market and technology. Furthermore, you should think about the financial value of your patent, your business objective and how entering into a licensing agreement can fit into your short- and long-term business strategies.
In this article, a few ideas are listed about how to prepare a license agreement. It is however only a rough guide with questions to help you. It is strongly recommended to have the agreement prepared by a lawyer qualified in this specific area and having experience with the type of IP you are dealing with (patents, trademarks, design patents, copyrights, trade secrets, know-how...).
Topics to consider and include in the written agreement:
Type of license
Exclusive? Non-exclusive? Cross-license? Is the licensee allowed to grant a sublicense?
Duration
Geographical territory
Limitations
Are there any limitations? Acts which are permitted for the licensee? Is the volume of the licensed products limited?
Value of the license
The amount of fees payable by the licensee is subject to negotiations between the parties.* What is the value of the license to the licensor? What is the value of the license to the licensee?
Payment structure
What type of fees should be paid, how and when? Lump sum fee? Partial lump sum fee and royalties?
Royalties
Running sale royalties? Running profits royalties? Independent royalties (independent of sales or profit results, such as milestone payments or minimum royalties)? If the royalties are based on the profit or sales, what audit rights does the licensor have?
Field of use
What type of products can be made/sold/used by the licensee? Is it limited to a certain group of products?
The obligations and liabilities of the parties
Who monitors infringing activities? Who will bear the costs? How often must the licensee report to the patent owner?
Obligations and liability of the licensor: The general obligations and liability of the licensor are to make available and maintain the registration of the licensed patent, to defend it against attack and to enforce it in accordance with the terms of the licence agreement.
Obligations and liability of the licensee: The licensee’s primary obligation and liability concern the payment of royalties for the use of the licensed rights, and perhaps – as an accessory obligation – the monitoring of infringing activities in the geographical area where the licensee operates. The licensee also undertakes to use its “best endeavours” to exploit the subject of the licence during its subsistence.
Particularly in the case of an exclusive licence, the parties may additionally agree that the licensee should take on some of the obligations and liabilities that would otherwise be the responsibility of the licensor.
Dispute resolution
Which country's law will govern disputes over the license? Alternative dispute resolution?
Termination of the agreement
What are the conditions to terminate the agreement?
* "The licensor and licensee should share in the profitability of products embodying the patented technology. The a priori assumption is that the licensee should retain a majority (e.g., 75%) of the profits because it has undertaken substantial development, operational, and commercialization risks, contributed other technology/intellectual property, and/or brought to bear its own development, operational, and commercialization contributions."
Robert Goldschieder, John Jarosz, and Carla Mulhern. In Intellectual Property: Valuation, Exploitation, and Infringement Damages, eds. Gordon V. Smith and Russell L. Parr (2005), 412.
Author: Zsofia Pintz
Published: August 2020
Updated: July 2023
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