IP Draughts’ friend Ken Adams is an expert in contract drafting. His blog provides stimulating commentary on drafting issues, and usually IP Draughts agrees with the general approach that Ken takes.
Ken’s recent posting about licenses deals with a technical point about language categories, to which it seems difficult to object. The topic can be widened, though, to a discussion of why we use the word license.
First, spelling. Conventional US practice is to use the word license as both a noun and a verb. Conventional UK practice is to treat license as a verb, and licence as a noun.
Ken considers the following alternatives forms of grant clause:
- Acme hereby grants Widgetco a license to use the Marks in …
- Acme hereby grants Widgetco the right to use the Marks in …
- Widgetco may use the Marks in …
Ken takes the view that all three of these forms convey the same meaning, but plumps for the first as the best to use in a contract. We agree with that high-level conclusion, but for different reasons.
We are not convinced that these forms do convey the same meaning, or at least not to an IP lawyer. Ken may be right that they convey the same meaning to a general reader, if one can find a general reader who is prepared to express a view on what is clearly legal-sounding wording and yet who lacks a specialist knowledge of IP law and practice.
To make the following discussion more comprehensive, we propose to add a fourth alternative to the three grant clauses quoted above:
Acme covenants not to sue Widgetco in respect of Widgetco’s use of the Marks in…
Our starting point for these examples is that the Marks are likely to be registered trade marks (US spelling: trademarks), or applications for registered trade marks. Unregistered rights exist, eg under the law of passing off or, in Continental Europe, the law of unfair competition, but drafting practice tends to be based on the primary and strongest form of intellectual property protection, here registered trade marks.
The following comments apply equally to other primary (for want of a better word) forms of intellectual property protection, including patents, copyright, registered designs and unregistered design right. These comments are based on UK intellectual property law, and it is quite possible that different legal considerations may apply in the US, where Ken Adams is based.
IP is a creature of statute, and we need to look primarily at the relevant statute to determine what legal rights can exist in respect of the IP. In addition, the UK IP legislation usually refers to the IP being “personal property”, which enables certain general property law principles to be applied to IP, where they are not overriden by special provisions contained in the IP legislation. For example section 22 of the (UK) Trade Marks Act 1994 (the TMA) states: “A registered trade mark is personal property (in Scotland, incorporeal moveable property).”
The TMA refers to the grant of “licences” to use trade marks, but does not refer to the grant of “rights” to use trade marks. The core provision on licensing are contained in section 28, which provides as follows:
28 Licensing of registered trade mark.
(1) A licence to use a registered trade mark may be general or limited. A limited licence may, in particular, apply—
(a) in relation to some but not all of the goods or services for which the trade mark is registered, or
(b) in relation to use of the trade mark in a particular manner or a particular locality.
(2) A licence is not effective unless it is in writing signed by or on behalf of the grantor. Except in Scotland, this requirement may be satisfied in a case where the grantor is a body corporate by the affixing of its seal.
(3) Unless the licence provides otherwise, it is binding on a successor in title to the grantor’s interest. References in this Act to doing anything with, or without, the consent of the proprietor of a registered trade mark shall be construed accordingly.
(4) Where the licence so provides, a sub-licence may be granted by the licensee; and references in this Act to a licence or licensee include a sub-licence or sub-licensee.
Thus, if you want to obtain the right to use a trade mark from a trade mark owner, and don’t want to buy the trade mark outright, you would be well advised to seek a licence. Two obvious benefits of having a written licence signed by the licensor (as required by section 28(2) above) can be seen in sections 28(2) and (3). In summary:
- the licence is binding on a subsequent owner of the trade mark; and
- if the licence so provides, the licensee can grant sub-licences.
There may be other benefits of being a licensee, eg if there are express or implied obligations on the licensor. For example, there might be an implied representation or warranty that the licensor is the owner of the trade mark. A licence may be registered at the Trade Marks Registry (see section 25(2)(b) of TMA) and certain benefits flow from being registered.
So, if we examine the four alternative clauses quoted above:
- Acme hereby grants Widgetco a license to use the Marks in … this form of words is explicit that a license (licence) is being granted, so it is the best version. It needs to be supplemented by additional language, which could appear in this clause or elsewhere, including as to whether it is exclusive or not, the territory of the licence, how and where the Marks are to be used, and so on.
- Acme hereby grants Widgetco the right to use the Marks in … this form of words grants some unspecified “right” to use the Marks. The nature of those rights is unclear, so this form of words should be avoided. A “right” could be interpreted as more than a licence, or as a licence, or as less than a licence. For example, might it be possible to persuade a court that “the right” is more than a contractual licence, and grants some ownership rights in the Marks, or carries with it the implication that Acme warrants that no-one else can stop Widgetco from using the Marks?
- Widgetco may use the Marks in … this form of words is really unclear. It could be (a) a rather indirect way of saying something like “Acme allows Widgetco to use the Marks”, or (b) another way of saying that Widgetco has a choice as to whether he uses the Marks or not. Assuming that the drafter intends meaning (a), ie it is a form of permission to use the Marks, this would seem to be like a licence, but without clarity that Widgetco benefits from the statutory position of a licensee under the TMA. There is some ambiguity as to whether it is a licence or something like the covenant not to sue, below.
- Acme covenants not to sue Widgetco in respect of Widgetco’s use of the Marks in … this formula – a covenant not to sue – has some fans among IP owners. In principle, we dislike the use of the word covenant as it tends to be used by way of rhetorical flourish. Traditionally, a covenant is an undertaking given in a deed, although the word is sometimes seen in ordinary contracts. However, we don’t feel strongly enough to delete the word if it appears in someone else’s draft. The main reason why covenants not to sue are used seems to be that, depending on how it is drafted, the covenant is a purely personal undertaking that does not carry with it the statutory “baggage” of a licence (some of which is described above). For example, the drafter might word the covenant so that it would not be binding on a subsequent owner of the IP, and might be trying to avoid any implied obligations on the IP owner, eg to maintain the IP.
Usually, what parties want is a licence, so version 1 would be the most appropriate of these four alternatives.
4 responses to “A licence by any other name: does it smell as sweet?”
Pingback: Differences Between U.S. and U.K. Drafting Usages - Adams on Contract Drafting
Pingback: Koncision » Differences Between U.S. and U.K. Drafting Usages
Ken, like you I dislike magic words in contracts. But I am coming to the view that there are some magic words that cannot be avoided. If I want to buy a house (including the land on which it is built) outright, I want the comfort of knowing that I have the “freehold” rather than a long lease, and part of getting this comfort is to see the word freehold in the conveyancing documents. If I buy leasehold property, I want the contract to state that I have a lease rather than a licence to occupy.
It seems to me there are some basic legal categories that lawyers should refer to with the correct names, which do not necessarily form part of everyday speech. We can call these magic words. If parties, through ignorance or wilfulness, choose not to use the magic words, then the court may have to interpret what they have written.
In this type of situation, I think we should encourage use of accurate magic words (and probably encourage use of qualified lawyers to advise on the transaction). At the same time, there should be safety valves to allow courts to interpret documents that don’t use, or misuse, the technically correct word.
There may be other situations in which magic words should be used, but I haven’t yet stumbled across them, so for now I will limit this view to basic legal categories such as types of property. I think this approach can be distinguished from unnecessary use of magic words out of habit, laziness or a desire to retain mystique for legal documents.
So, I will continue to be critical of a licence agreement that uses imprecise, albeit everyday language, in which the licensee “may use” the licensed IP.
Mark: As always, delighted to have your take on this.
If the legislation refers to a license, then it would make sense to use the word “license” when granting rights in trade marks.
But in a rational world, as opposed to a magic-words world, what would matter is the meaning conveyed by a contract, not whether you used the right magic word. For example, section 2-313(2) of the Uniform Commercial Code, as enacted in the U.S. states, says that for something to be a warranty, you don’t have to use “formal words” such as “warrant”.
So even if a contract contains the “may use” formula, a court should be willing to entertain the notion that that constitutes a license.