Strategic Licensing Agreements: Three Key Concerns for Counsel

Strategic licensing, by which the developer of intellectual property, technology or a product embeds it in the licensee's product for distribution, is typically a win-win for the companies involved. The outbound licensor can see an increase in revenue without additional capital or research investment, tap into new markets without investing in property, plants, or equipment, and develop new technologies without expanding research and development resources. The in-licensor acquires needed technology, products, services, and know-how from other companies without having to reinvent the wheel, and shortens its time-to-market. Because strategic licensing deals are critically important to both parties, they require counsel to expend a lot of effort in negotiating and drafting them. Three areas of special concern are price, scope of the license, and foreclosing competition.

Price

Your company's goal in the deal is to get the best price for itself. Your job as counsel is make certain that the price provisions in the agreement are clear, unambiguous, and without redundancy.

Although some strategic licenses are flat-fee deals, most involve a royalty based on sales of the licensee's products. An important issue here is in defining the net sales on which the royalty percentage will be based. Typically the amount will not include return adjustments, charges attributable to internal uses, or sales taxes. The licensor will also seek protection against "loss leader" discounting if the licensed product is capable of being bundled with other products for a single price. That is, if the licensee wishes to give customers a discount on the bundle, the licensor will require that the discount be applied to each product in the bundle for purposes of calculating the royalty. If the cost of the licensed product or technology is not capable of being distinguished in the bundle, the licensing parties will have to agree to an allocation or rely on a reasonable allocation established by the licensee.

Rights Granted by the License

If you're representing the in-licensor, your company is probably concerned with getting all the intellectual rights it possibly can, whether it plans to use them or not. As counsel drafting the licensing agreement, your job is to get sufficient rights to do what the company will foreseeably want to do, and to express those rights clearly so that any court could understand them.

In addition to the grant of general license, the ability of the licensee to sublicense may be expected. If the licensee wants to sublicense under its own trademark, it will want to restrict the licensor's ability to use that trademark. The license agreement should address the licensee's internal use of the technology or product. Ownership of and intellectual property rights in the licensed technology should be made express. Usually the in-licensor will want to disclaim any marketing responsibilities.

Exclusivity

In-licensors frequently would like to foreclose competitors from doing a similar deal with the out-licensor. Clauses may be negotiated to bound the out-licensor's agreements with named competitors of the in-licensor, or to restrict competition by duration, geography, or market segment. If exclusivity is not agreed to, the parties could include an independent development clause in the contract, permitting the parties to sell or license similar technology or products they have developed, provided there is no infringement of intellectual property rights. The in-licensor should also preserve its right to in-license from other sources.