One of the most popular articles on this blog is Ten Words and Phrases You Should Never Use in IP Contracts. To celebrate reaching 50,000 viewings on this blog, here is a companion piece to that article, in which we identify 10 words and phrases that should be used in IP contracts, and which make Mr Pettifog
happy [marginally less irritable].
- Hereby. IP Draughts tries to avoid words such as hereinafter and whereof in contracts. However, he makes an exception for hereby, specifically in the context of hereby grants and hereby assigns. It may be important to be clear on whether the agreement is granting a licence or assigning IP now, rather than merely promising to do so in the future. For example, using the words hereby assigns rather than shall assign or agrees to assign places beyond doubt that the assignment is occurring now, under the present instrument, rather than in the future.
Grants. Sometimes contracts, particularly some American ones, use a blizzard of words where one will do. See the example quoted opposite. IP Draughts prefers to find the correct word and stick with it. In the case of licences (but not in the case of assignments), the correct verb to use is grants, as in X hereby grants Y a licence… If authority for this proposition is needed, the word grants is used in relation to licences in various IP legislation – eg see section 30(4) of the UK Patents Act 1977, which includes the words “a licence may be granted under any patent…”
- Exclusive / non-exclusive. Licences should be specific as to whether they are exclusive, non-exclusive, sole or in some other category (eg semi-exclusive). Non-exclusive is fairly clear. Exclusive causes some people confusion, to the point where some licence agreements use the formula exclusive (even as to the Licensor) . The words in brackets are intended to make explicit that the licence is exclusive and not sole. If in doubt, terms such as exclusive can be defined in the agreement. More information on the differences between different types of licence can be found in standard textbooks, including our own (eg Technology Transfer).
- Licence. Various IP legislation refers to the possibility of granting licences under the IP in question. For example, see the extract from section 30(4) of the UK Patents Act 1977, quoted above. Therefore use words such as X hereby grants Y a licence… Other formulas should be avoided, eg …grants Y the right, or …leases to Y. In UK English, the conventional spelling of the verb is license and of the noun is licence.
- Under. Licences are granted under specified IP, as in the phrase X hereby grants Y an exclusive, worldwide licence under the Licensed Patents to make, use and sell Licensed Products.
- Assigns. The correct term for transferring ownership of IP is assign. See for example section 30(2) of the UK Patents Act 1977 which includes the words “any patent …may be assigned”. Therefore, the operative clause of an IP assignment should use words such as X hereby assigns the Patents to Y… In IP Draughts’ view, using words such as conveys and sets over, as in the example quoted above, confuse the nature of the transaction and should be avoided.
- Royalty. Periodic payments for the use of IP, such as those calculated on the sale price of licensed products, are conventionally referred to as royalties. IP Draughts has encountered one anti-monarchist businessman, in Ireland, who asked for them to be called something else in a franchise agreement, but this is a very rare exception. Sometimes tax advisers give upfront payments different names to try to put them in particular tax categories (eg “contribution to research costs” rather than “licence fee”), but IP Draughts has not encountered this with royalties.
- Warrants. The conventional name for a contractual promise that stated facts are true is warranty. Warranties are distinguished, under English law, from representations; breach of the latter may give rise to liability under the law of tort rather than the law of contract. In IP Draughts’ view one should tread very carefully in the naming of these types of obligation, so as to ensure the correct interpretation by the court. An alternative view, from US contract drafting guru Ken Adams, appears in his blog here.
- Diligent Efforts. IP Draughts tries to avoid using the expressions reasonable efforts (or endeavours) and best efforts, as well as other variants that may or may not have been considered by the courts and have an understood meaning (eg all reasonable efforts or commercially reasonable efforts). Instead (and assuming that it is not possible to avoid general expressions of this kind altogether, eg by substituting measurable obligations such as minimum annual sales obligations), he prefers to use a defined term which sets out the level of obligation a little more precisely. Sometimes, in licence agreements, he sets up a defined term Diligent Efforts and uses a definition such as the following: Exerting such efforts and employing such resources as would normally be exerted or employed by a reasonable Third-Party company for a product of similar market potential at a similar stage of its product life, when utilizing sound and reasonable scientific[, medical] and business practice and judgment in order to develop the product in a timely manner and maximize the economic return to the Parties from its commercialization
- Shall. For the reasons given above, it is sometimes appropriate to use a formula such as X hereby grants a licence to Y… This formula is used only in limited situations, though. Most obligations that are found in licence agreements (and to a lesser extent in assignments) are straightforward contractual obligations, that are best expressed by a formula such as X shall… [notify Y (etc)]. Shall is the conventional word to use, rather than agrees to, undertakes to, covenants to, or other, more wordy variations. Will is an acceptable alternative to shall provided there is consistency of usage in the agreement. Should is not suitable for contractual obligations, as it could mean something like ought to, but is not contractually obliged to…