Top 5 howlers in IP licence agreements: definition, definition…

Here are some mistakes that people make when drafting intellectual property licence agreements.

      1. The IP being licensed is not well defined.  Eg a definition such as “all Intellectual Property that protects the Licensed Products.”  Usually, it is important to list the IP, eg in a schedule to the licence agreement.  For example, patents and registered trade marks need to be listed by number, description and territory (and the list needs to be checked by the licensor’s patent agent), while know-how should be defined by reference to specific documents or places where the know-how is set out.  Bear in mind the requirement under Article 1(1)(i) of the EU Technology Transfer Regulation for know-how to be “secret, substantial and identified.”
      2. The licensed products are not well defined.  Eg, to take an extreme example, defining the licensed products as products protected by the licensed IP, and then defining the licensed IP as IP which protects the licensed products. If the licensed IP has been well defined, then a definition of licensed products such as “products which are within Valid Claims of the Licensed Patents in the country of manufacture or sale” could work.  If a more specific product definition is to be used, avoid a definition such as “the Bloggs Software” which uses a brand name and may be used very loosely, and instead use technical product definitions.
      3. The scope of the licence is not well defined.  Eg “X grants Y the right to use the Licensed IP.”  Licence grant clauses should identify issues such as the IP, the degree of exclusivity, any field and territory restrictions, and the licensed activities, as in the following example: X hereby grants Y an exclusive, worldwide licence under the Licensed Patents to make, use and sell Licensed Products in the Field.  Other issues, such as whether the licensee can sub-contract and sub-license, may also need to be addressed.
      4. The duration of the licence, and associated payment obligations, are not well defined.  Eg there is no expiry date to the licence and royalty terms in the licence agreement.  Often, in well drafted patent and know-how licence agreements, we see a duration of the longer of (a) the life of the patents, or (b) 10 years from first commercial sale.  This is usually on a country-by-country basis.  If no duration is stated, the court may imply a term allowing termination on reasonable notice, eg in England following the leading case of Martin-Baker Aircraft Company v Canadian Flight Equipment Company [1955] 2 QB 556.
      5. The amounts to be paid are not well defined.  Eg there is a milestone payment on “successful completion of Phase III trials” where successful completion is not defined, or a royalty payment of 5% of net sales, where net sales are not defined or the definition is unclear or does not clearly cover an intended route of commercialisation (e.g. use of the licensed product to provide services).

How can these howlers be avoided?  Careful drafting and attention to detail are required.  In addition, the drafter should consider how the definitions work together (eg to avoid circularity), and should think through practical scenarios to see whether the defined terms and associated obligations work in context.

3 Comments

Filed under Licensing

3 responses to “Top 5 howlers in IP licence agreements: definition, definition…

  1. Chuck T

    One problem is that in a large-scale technology license of global scope, it can be difficult if not impractical to identify precisely all the various IP. There is always a possibility that a patent, a trademark, etc will be inadvertently overlooked… leading to the inclusion of “without limitation” language, which somewhat defeats the purpose of precise identification.

    Licensees are often at a disadvantage in these situations because their due diligence cannot be as strong as the licensors’; the licensees simply want everything that they need at a royalty structure that is fully known up-front.

    I have also heard that in some jurisdictions, identifying IP individually may open the door to a court’s adjusting royalty payments should, for example, a licensed patent be subsequently invalidated.

  2. Chuck, if you mean that, from the point of view of the licensee, you don’t want to omit IP, then in my view the answer is still to identify the IP being licensed (so as to have legal certainty) and perhaps ask for a warranty that the licensor doesn’t own any other IP in a defined field or protecting a defined product.

  3. Chuck T

    I don’t know that #1 is a howler. Explicit lists of IP pose risks.

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