Three Core Considerations in IP Licensing Agreements

Three Core Considerations in IP Licensing Agreements by Katie NeidigMost of us have heard the adage that each contract is a puzzle. As an in-house attorney with a focus on intellectual property, my favorite part of working with contracts is the interconnection of certain puzzle pieces. Specifically, there is an undeniable link between intellectual property (IP) rights and common contract provisions in IP licensing deals.

An IP license is an agreement wherein the owner of IP rights grants a third party (or third parties) the right to use the owner’s IP while retaining ownership of its own IP.

In this article, I discuss three underlying considerations that are fundamental to IP licensing agreements. These points are fundamental because they can be used to align the contract provisions with the parties’ expectations, rights, and obligations. And when the parties are aligned, we mitigate the risk of a future dispute.

1. Define Ownership

The foremost determination of any contract involving IP licensing is ownership. Without ownership, there is no license or agreement. Determining ownership defines many key elements that mold the parameters of the license. Thus, a preliminary examination of ownership requires identification and definition of the following elements:

  • Licensor (aka the owner of the IP)
  • Licensee
  • Scope
  • Restrictions or prohibitions on grantor and grantee
  • Rights and obligations of grantor and grantee
  • Downstream ownership or use

Of course, the complexity of this analysis will change depending on the type of agreement. IP rights ownership is straightforward in simple agreements. For example, in a simple sign advertising deal, the advertiser owns the IP rights to its designs and logos and is granting a license to the sign company to use the designs and logos.

Conversely, ownership identification can be complex in co-development agreements (also known as joint development agreements), which frequently necessitate lengthy and difficult negotiations to create a thorough understanding of which party owns each aspect of any IP right and any downstream use or ownership. Thus, an initial analysis of IP rights ownership should be performed to create a strong foundation of clarity for the license and the rest of the agreement.

2. Understand Rights and Obligations

IP Owner’s Rights

With ownership comes rights, such as the right to dispose or retain all or any part of the IP rights. An IP owner possesses rights to do any act, including:

  • Grant limited control
  • Grant licenses
  • Receive compensation
  • Share in revenues
  • Restrict or prohibit assignments, transfers, and sublicenses
  • Dispose of all IP rights

Licensee’s Rights

Through IP licensing agreements, the owner grants a right to the licensee to use the owner’s IP in a certain (usually limited) capacity. A licensee’s rights are limited to the scope of use defined by agreement, which can restrict:

  • Method
  • Purpose
  • Time
  • Territory
  • Assignability

IP Owner’s Obligations

In addition to rights, ownership creates obligations. Most IP licensing contracts allocate the following responsibilities to the IP owner:

  • Authority to grant the license
  • Restrict license scope to rights necessary for purpose of agreement
  • Protect from infringement on others’ IP rights
  • Confidentiality obligations
  • Pursuing and maintaining any trademark, copyright, and patent registrations and prosecuting any infringements thereof

Licensee’s Obligations

Similarly, ownership allows the owner to require certain obligations of the licensee. These obligations usually focus on protection of the owner’s IP rights and information, such as:

  • Limit use of licensed IP to scope of agreement
  • Oblige sublicensees to IP owner’s license terms
  • Monitor and if necessary, revoke use of license by sublicensees
  • Protect licensed IP rights from infringement
  • Confidentiality obligations

3. Derive License, Reps, Warranties, and Indemnification

Reps and Warranties

After defining ownership, the license provision will address the parties’ rights, while the representations and warranties provision governs the parties’ obligations. Understanding the parties’ expected rights under the scope of the license and associated obligations stemming from such license will assist in aligning the license and representations and warranties provisions with the expectations of the parties.

Returning to the simple sign advertising deal, the IP owner grants a limited license for the purpose of publishing its designated advertisement on a sign for a specific time period and represents that it has the authority to grant such license. The licensee represents and warrants to not use the license for anything outside such purpose. In summary, the license is restricted to the purpose of the agreement and the representations and warranties reflect the parties’ expectation that the license is restricted to such purpose.

Each IP licensing deal is unique. Some may need separate provisions to expound certain terms related to the license and rights and obligations of the parties, examples of which include exclusivity provisions and provisions specifying each party’s duties associated with pursuing trademark, copyright, or patent registration.

Third Party IP Indemnification

Indemnification provisions are intimidating. Thankfully, the license and representations and warranties provide a basis that can be leveraged to tackle the indemnification provision. Again returning to the simple sign advertising deal, the IP owner agrees to indemnify the licensee for any third-party claims of IP infringement related to the advertisement. This type of indemnification is referred to as “third party IP indemnification.” Similarly, the licensee agrees to indemnify damages arising from any use of the license outside the scope of the agreement.

Although many factors, including the specifics of the deal, risk tolerance, business relationship, and bargaining power, will affect the indemnification provision, the license and representations and warranties should be a fundamental basis for indemnification in IP licensing deals.

Each IP licensing deal is unique. Some may need separate provisions to expound certain terms related to the license and rights and obligations of the parties, examples of which include exclusivity provisions and provisions specifying each party’s duties associated with pursuing trademark, copyright, or patent registration.

IP licensing agreements are a fascinating melting pot of contractual provisions that converge to grant rights and create obligations associated with IP. Utilizing the parties’ expectations, rights, and obligations to inform these provisions reduces misalignment of the parties and mitigates risk.

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