by Lauri Donahue, Esq.

A version of this article originally appeared in the August, 1998 issue of The Computer Lawyer. Reprinted with permission.

Introduction

The meat of an intellectual property (“IP”) license is in the grant of rights clause. For example:

“Licensor hereby grants to Licensee, its subsidiaries, divisions and affiliates a non-exclusive, worldwide license to use, reproduce for archival purposes, and display the Software in object code format. Such license shall include the right of Licensee to sublicense to Licensee’s contractors if necessary. ”

Negotiating rights clauses can be contentious, especially in complex deals where new IP is to be created. A well-drafted clause can maximize a company’s return on its intellectual capital; a poorly-drafted one is an invitation to litigation.

The charts that follow are intended to help both attorneys and business people recognize the range of options available when contemplating an IP license, and to provide fallback positions.

Throughout these Exhibits, “Creator” is the party developing the IP and “Customer” is the party for which the IP is being created.

Exhibit I

Ownership and Licensing of Intellectual Property Rights: A Range of Options

1 2 3 4 5
A Exclusivity Term Revocability Geography Scope
B Creator owns; no license to customer exclusive to Creator perpetual N/A worldwide Creator retains all rights
C Creator owns; narrow license to customer Creator may grant rights to all others short term (e.g., six months) Revocable by Creator on minimal notice limited to geographic area; e.g., US only Creator retains most rights
D Creator owns; broader license to customer Creator may grant rights to limited class (e.g., not to Customer’s competitors) longer term (e.g., three years) Revocable by Creator on longer notice limited to larger geographic area: e.g., North America only Rights are shared equally
E Creator owns; broadest license to customer exclusive to Creator and Customer Perpetual Irrevocable worldwide Creator grants most rights to Customer

SHARED OWNERSHIP — SEE EXHIBIT I-A

F Customer owns; broadest license to Creator exclusive to Customer and Creator Perpetual Irrevocable worldwide Customer grants most rights to Creator
G Customer owns; broader license to Creator Customer may grant rights to limited class (e.g., not to Creator’s competitors) longer term (e.g., three years) Revocable by Customer on longer notice limited to geographic area: e.g., North America only Rights are shared equally.
H Customer owns; narrow license to Creator Customer may grant rights to all others short term (e.g., six months) Revocable by Customer on minimal notice limited to smaller geographic area; e.g., US only Customer retains most rights
I Customer owns; no license to Creator exclusive to Customer perpetual N/A worldwide Customer retains all rights

Annotations to Exhibit I

1. Exclusivity

“Exclusivity” means the extent to which certain license or ownership rights may only be exercised by Creator or the Customer, or to the extent to which Creator (or Customer) is restrained from licensing those rights to third parties.

Exclusivity relates to the Scope of rights: it is meaningless to say that one has an “exclusive” license without specifying an exclusive license to do WHAT. While one may have an exclusive right to exercise ALL of the rights associated with an item of IP, one might also have, for example, an exclusive license only to reproduce a piece of software (without having any right to modify, distribute, etc., that software).

2. Term

“Term” means the length or duration of the Agreement as a whole, or of a specific IP license within the Agreement.  For example, the overall term of the Agreement might be five years, with Customer having an exclusive license to specified IP for 2 years, and a non-exclusive license thereafter.

The term of an IP license generally starts from the Effective Date of the Agreement (sometimes, but not always, the signature date), but can also start from a later date. e.g., the date upon which a new version of a product is released.

Where Creator owns the IP, its rights are inherently perpetual. However, “perpetual” does not mean “until the end of time,” but only for the life of the IP rights.

A short-term license may benefit Creator as it limits the period of time during which the Customer may exercise the IP rights. This allows Creator the option of renewing the license at the end of the term, perhaps for an increased royalty, or not renewing and perhaps granting rights to others. If Creator’s compensation is to be based on royalties tied to Customer’s sales of products incorporating the IP, Creator may want to keep the initial term short until it sees whether sales (and thus royalties) meet Creator’s expectations. If sales are low, Creator may want to condition renewal of the license on higher per-unit royalties.

Rights may be exclusive for a short period and non-exclusive thereafter, to allow Creator to earn additional license fees from additional customers after the exclusivity period is over; this is a compromise which allows a Customer to recoup its investment in the IP developed by Creator, and to assume early leadership of the market, and also gives Creator the opportunity to possibly earn more from the IP it has developed than where the IP rights are exclusive to Customer for the duration of the Agreement.

A longer term license is of greater benefit to the Customer than a short-term license; Customer can make long-term plans based on the knowledge that its rights (and royalties) are locked in. A long-term license can also be better for Creator than a perpetual license: rights will, at some point, automatically revert to Creator, at which point Creator can decide whether to renew the license (perhaps increasing royalty rates) or not, and, if the license has been exclusive, can make it non-exclusive for the renewal term.

Where a license to a Customer is “perpetual,” the Customer may exercise the IP rights granted for the duration of those rights. This is of benefit to the Customer, which does not need to worry about its rights lapsing or the terms of its license changing for (generally) at least the market life of the product in which the rights are embodied. However, a perpetual license may not be in Creator’s interest where a license is exclusive to the Customer, since this may foreclose Creator from other, more profitable, licenses of its IP. Although a license may be perpetual, it may also be revocable.

3. Revocability

“Revocability” means the extent to which a license can be revoked (terminated) before its expiration date, due to some act or omission of the licensee or a third party. For example, Creator may revoke Customer’s license if Customer fails to make timely royalty payments or if Customer breaches its confidentiality obligations. Creator may also need to terminate the license if Creator’s IP is found to infringe a third-party’s IP rights.

If a license is revocable by Creator on minimal notice, that means that Creator can terminate the Customer’s license rights with little advance warning. For example, if a Customer fails to make a scheduled royalty payment, Creator might terminate the license after giving the Customer a 30-day grace period to make the payment. Or, if the royalties are based on meeting minimum sales goals, the license may terminate if Customer fails to meet its goals for a quarter. Or, if Customer breaches confidentiality terms, Creator may terminate immediately upon written notice to Customer.

Note that an Agreement may set different notice periods for different forms of breach; a breach of confidentiality cannot be “cured” in the same way a failure to pay royalties is — once the “cat is out of the bag,” the confidentiality is lost — and thus a swift termination (to punish the transgression and prevent further breaches) is appropriate.

If a license is revocable by Creator on longer notice, the Customer has more time to either cure the breach or to adjust its business to the prospective loss of the license. For example, Customer may be given 60 days (rather than 30) to make a late royalty payment. Or, Customer may have an entire year (rather than a quarter) to meet a sales goal on which royalties are based. Or, Creator may allow a license to continue in effect for six months after Customer has failed to meet a sales goal, in order to give Customer another chance to meet the goal, or to allow Customer to find another source of IP or do without it. Notice periods for breach of confidentiality provisions, however, should not be extended, for the reasons addressed above.

If a license to a Customer is irrevocable, it cannot be terminated by Creator for any reason. The only circumstances under which Creator would allow this kind of provision are where Customer has paid its licensing fees in advance (i.e., a paid-up license rather than a continuing royalty obligation) and where there are no confidentiality or other continuing obligations of Customer.

4. Geography

“Geography” refers to geographic (territorial) restrictions on an IP license.

When Creator owns IP rights, it can generally exercise them worldwide, or at least in all countries in which it has IP rights. For example, a computer program copyrighted in the United States may be sold world-wide, and is protected against illegal copying (more or less successfully) in all countries which have signed international copyright treaties with the US. A product covered by US patents may also be sold worldwide, so long as it is not known to infringe any foreign patents in the countries in which it is sold; however, Creator will only be able to enforce its patent rights against unauthorized use in countries in which the Creator technology is patented.

Worldwide copyright protection is essentially “automatic” once Creator has obtained a US copyright. Foreign patents, however, must be applied for on a country-by-country basis, at considerable expense. Determining whether a product is covered by a foreign patent is also expensive and time-consuming. Therefore, Creator cannot guarantee that a licensee will be able to sell a product covered by a US patent in any particular foreign country without a challenge (justified or not) from a patent holder in that country.

Creator may limit a Customer’s IP license to a particular geographic area, e.g., the United States only. This may be for the practical reason that Creator has no rights outside the specified area and does not purport to grant them, or it may be that Creator wishes to grant rights to different customers for different territories, or retain certain rights itself. For example, Creator might grant an exclusive right to Customer A to market certain Creator software in Canada, retain the exclusive right for Creator to market the Software in the United States, and grant the non-exclusive right to Customers B, C, and D to market the software in Europe and Asia.

When Customer has a world-wide license, Creator may be concerned about distribution (especially of software) to countries in which IP protection is poor or non-existent, especially where such a country is known for exporting bootleg copies. Thus, even with an otherwise worldwide license, Creator may want to identify countries in which Creator’s IP will not be distributed, and/or require that special precautions be taken in such countries. Also, some IP (such as software containing certain levels of encryption) cannot (under US law) be exported outside the US and Canada, or cannot be exported to a specified list of countries, and this should be recognized in the license agreement.

5. Scope

Scope” refers to the nature of the IP rights that are being granted. Each form of IP comes with a particular bundle of rights, as summarized in Exhibit II. An IP license may grant all of the rights associated with a particular form of IP, or only one or a subset of rights. Creator may retain some rights and grant others, or may grant certain rights to Customer A and other rights to Customer B. For example, Creator might grant Customer A the right to make copies of a software program only for internal use (i.e., a site license), grant Customer B the right to make copies and distribute the software to third parties, and retain for Creator the right to modify the software.

One way to limit the scope of a license is to restrict the “field of use” in which the license rights may be used. For example, rights may be granted only within the automotive industry, or only outside the electronics industry. A field of use limitation may be combined with an exclusivity clause: with respect to a patent, for example, one licensee may have exclusive rights to use the patent in the consumer electronics market, and another licensee may have exclusive rights for industrial (non-consumer) applications of the patent. Each licensee may be willing to pay more for these exclusive rights within its industry than it would be if its competitors also had access to this technology. Crafting field of use restrictions as narrowly as possible lets Creator parcel out rights to the highest bidder in each market segment/industry. However, since exclusivity and field of use restrictions are particularly subject to antitrust scrutiny, such provisions should be carefully reviewed by antitrust counsel BEFORE being presented to the licensees.

The scope of rights also pertains to the right to redistribute (sublicense) the IP. For example, if Creator licenses an item of software, that software might be used only for the Customer’s internal purposes (most restrictive), or may be redistributed only as part of Customer’s system (i.e., “bundled”) (less restrictive), or may be redistributed as a stand-alone product (least restrictive).

Exhibit I-A

Shared Ownership

In a shared ownership scenario, the parties agree that both will own the IP jointly. They may also agree to put contractual limitations on the ability of each owner to exercise its rights, and they may agree that those rights may not be equal. In the absence of any contractual restriction, each party will be free to exercise ALL of the rights associated with the IP. Following are some examples of ways in which the parties may agree to share rights.

1 2 3 4 5
Exclusivity Term Revocability Geography Scope
A Creator rights are dominant Creator has unlimited license rights; Customer’s rights to license to third parties are limited N/A N/A Creator has right to IP in broader geographic territory; Customer has right to IP in narrower territory Scope of Creator’s rights is broader
B Creator and Customer have equal rights Creator and Customer have the same rights N/A N/A Creator and Customer have the same or equivalent rights Scope of Creator’s and Customer’s rights is the same or equivalent
C Customer rights are dominant Customer has unlimited license rights; Creator’s rights to license to third parties are limited N/A N/A Customer has right to IP in broader geographic territory; Creator has right to IP in narrower territory Scope of Customer’s rights is broader

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Exhibit II

Rights Associated with Intellectual Property

1 2 3 4
A PATENTS COPYRIGHTS TRADEMARKS TRADE SECRETS
B make copy
C have made modify/ 

make derivative works

D use perform use use
E sell distribute copies disclose
F offer for sale display
G import