The Waterfront Partnership

A Brief Summary

If you are the owner of an intellectual property right ("IPR") and you want to allow another person or entity to make use of the IPR in some way, then you will need to put in place a licence agreement with that person or entity.

Below is an indicative but non-exhaustive list of the types of clauses you will find in most licence agreements:

1.         Date of Licence Agreement 

This normally refers to the date that the licence agreement is signed by both parties. Sometimes it may refer to a specific date upon which the licence is to start, or it may link the start date to a specific event (for example, the date of delivery of certain technology to the Licensee).

2.         Parties to the Licence Agreement and their full details 

Unless the agreement uses the company's names to refer to the parties, the owner of the IPR is normally referred to as the "Licensor" and the party who wishes to make use of the IPR in question, the "Licensee".  In the case of some types of licence the parties will be referred to as "Supplier" and "Customer".

3.         Recitals

This clause will contain "broad-brush" background details of the transaction and the nature and interests of the parties.

4.         Definitions 

This clause defines the terms used within the licence agreement, which are specific to the transaction in hand.

5.         Licence Grant 

Particular attention should be paid to this clause as it will usually detail:

• the IPR (i.e. patents, know-how, software, design rights, etc) in respect of which the licence is granted;

• the scope of the grant of the licence, i.e., what the licensee can do with the IPR without committing an infringing act;

• whether the licence is ‘exclusive', ‘non-exclusive' or ‘sole';

• whether the Licensee has any rights to grant sub-licenses, and if so on what terms; and

• what territory the licence covers, i.e. UK or worldwide.

6.         Provision of Know-How 

If know-how is to be supplied by the Licensee to the Licensor, then this clause details when and how this is going to occur.

NB. If know-how is to be delivered to the Licensee as part of the licence agreement (this is usual with patent licence agreements), then the Licensee must promise to keep such know-how confidential.  This may be dealt with in a separate confidentiality clause.

7.         Payments

This clause will detail the payments to be made to the Licensor by the Licensee in return for the use of the IPR under the licence agreement. These may include:

• an initial lump sum payment; and/or

• annual payments; and/or

• milestone payments; and/or

• royalty payments linked to sales (which may include licence fees collected from sub-licenses); and/or

• an equity stake in the Licensee's company; and/or

• provision for indexation (particularly important when payments are staged over a number of years).

8.         Accounting

Depending upon the payment mechanism(s) agreed it may be appropriate to detail how the Licensee will keep its financial records so that the Licensor can easily identify what monies are owed to it and further can verify that the payments made by the Licensee are correct.

9.         Payment Terms, Currency and Interest
 

This clause could also form part of the payment clause and will usually detail:

• full bank account details for payments;

• provision for currency conversion if necessary (e.g., all payments should be made in £ or € and that the other party will convert at an agreed daily rate according to Bank X); and

• interest on late payments.

10.       Licensee's Obligations

Depending on the structure of the deal the Licensor may wish to consider imposing various obligations on the Licensee, e.g., a minimum number of sales per year, specific marketing efforts and reporting obligations.

11.       Exclusive Licensees

Under many national laws (including England), depending on the IPR in question, exclusive licensees may sue (in their own name) entities infringing the exclusively-licensed IPR, provided that the licensee joins the rights owner into the legal action.

Accordingly, either the Licensee or Licensor may wish to insert provisions into a licence agreement which deal with who controls such proceedings, what is the obligation on the Licensor to ‘assist' and who gets what share of any damages awarded.

12.       Improvements

In the event that a Licensee is permitted to make improvements to anything in which intellectual property rights subsist, the Licensor may seek to control the Licensee's use of such improvements. Under English law, the extent to which the Licensor can control the Licensee's use and exploitation of such improvements is governed by various competition laws and needs careful consideration.

For example, in a commercial context, a Licensor cannot insist that the intellectual property rights in all improvements made by the Licensee are assigned back to it.

13.       Trade Marks

This clause will detail the trade marks under which licensed products are to be marketed, state restrictions upon and requirements of such use, and identify quality control and advertising, if necessary.      

14.       Confidentiality

A clause preserving confidentiality indefinitely is crucial to the Licensor if know-how is being licensed.   

It is also common to ensure that any disclosures of confidential know-how are limited to technical personnel on a ‘need to know' basis and that any copying of such know-how is prohibited.

15.       Warranties

There is a natural tension between the Licensor and the Licensee when negotiating this clause. The Licensor will want to give as few warranties as possible, whereas the Licensee will generally be seeking as many warranties as possible and for them to be strong enough to protect its interests. The following is a non-exhaustive list of the types of warranties that may be included:

• the Licensor is the legal owner of the IPR;

• the Licensor and Licensee both have the necessary right and title to enter into the license agreement;

• the IPR is not and has not been infringed by any third party;

• there is no other IPR owned by (or licensed to) the Licensor under which the Licensee requires a licence to commercially exploit the IPR as described in the licence agreement; and

• the use of the IPR by the Licensee will not infringe the intellectual property rights of any third party.

16.       Liability

It is key to any agreement that both parties' liability is limited. Generally the limitation is set to be the same as the value of the agreement, although it may be that the negotiation power of one of the parties results in unlimited liability being imposed on the other. We would strongly urge against this result. A compromise could be achieved where unlimited liability for certain provisions is accepted (for example, breach of warranties) but that a liability cap applies to all other provisions.

17.       Commencement and Term

This should stipulate the date from which the licence agreement is effective and the date the licence agreement will end (if not terminated earlier in accordance with the termination provisions).

18.       Termination

This will set out how the licence agreement may be terminated other than through the effluxion of time.  For example:

1. by the Licensee or Licensor upon written notice, for any reason;

2. termination by the Licensor in the event of:      

• _{^{a breach of the agreement by the Licensee which is either not remediable or has not been remedied within a notice period, e.g., non-payment of monies due;}}
• _{^{change of control of ownership of the Licensee;}}
• _{^{insolvency of the Licensee; and}}
• _{^{the IPR being held to be invalid.}}

Termination of the licence agreement also usually results in the termination of any sub-licence agreements granted by the Licensee.

19.       Rights on Termination

This clause will specify what rights, if any, accrued under the licence agreement will continue after termination and for how long. For example, it may cover issues such as the Licensor's rights to claim unpaid monies and outstanding royalties; and the Licensee's rights to sell manufactured but unsold products and to continue to use improvements to intellectual property.

This clause could also list which clauses will survive termination.

20.       Infringement

If the Licensee does not have ‘exclusive' rights or the ability to bring legal actions in its own name in the event the licensed IPR is infringed by a third party, they may wish to consider inserting a clause which will detail the nature of the parties' obligations in the event there is an infringement of the IPR. 

This clause should specify:

• who will be responsible for bringing the action;

• how the costs will be dealt with;

• who bears the risk (avoid doing so if at all possible!); and

• how monies may be dealt with in the event that such action is successful and damages are awarded.

21.       Dispute Resolution
 

There may also be a section which deals with how disputes may be dealt with prior to taking them to court.  Generally these clauses are not hugely helpful since mediation is not binding and arbitration can be as expensive as a court action.  However, one benefit of an arbitration process is that it takes place in closed proceedings rather than in open court, which may be advantageous if sensitive commercial information will need to be revealed.

22.       General / ‘Boilerplate' Clauses

The final part of the licence agreement before the schedules or the signature clauses will list some ‘boiler plate' clauses which are a collection of standard clauses such as:

• no assignment of the licence by the Licensee;

• no waiver of rights by not enforcing any rights provided for under the licence;

• if any clause is deemed invalid for any reason the rest of the agreement still stands;

• all amendments to the agreement are to be made in writing and signed by both parties;

• Contracts (Rights of Third Parties) Act 1999 does not apply so no other party (for example, any other party that is referred to within the licence) can enforce any term therein; 

• how notices may be delivered (notification of breach, etc);

• how announcements (press or otherwise) may be dealt with;

• no agency or partnership exists between the parties;

• that this agreement (plus any other relevant agreements, if necessary) constitutes the entire agreement between the parties;

• headings will not affect the interpretation of the contract in any way; and

• what law and jurisdiction the licence will be construed in accordance with and governed.

23.       Schedules

Schedules are used when further detail needs to be added to the agreement, but the insertion of this detail in specific clauses could lead to ambiguity and break the logical flow of the agreement. Schedules are also used to give certainty to the rights that are being granted (for example to list technical details or practical arrangements for implementing the agreement).

A specific example of this would be a schedule to a licence agreement for several patents together with corresponding know-how, which lists the registered patent numbers and specifies the know-how. 

24.       Signature clauses

This section would contain the signatures of the Licensor and the Licensee.

PLEASE NOTE:  THIS NOTE SHOULD BE USED AS A GUIDANCE TOOL TO THE USUAL TERMS FOUND WITHIN A LICENCE AGREEMENT. IT DOES NOT CONSTITUTE LEGAL ADVICE REGARDING ANY SPECIFIC LICENCE AGREEMENT AND SHOULD NOT BE RELIED UPON AS SUCH.  

© The Waterfront Partnership 2006 - 2008

(This document was first produced in 2006 and updated in 2008)