When negotiating a technology licensing agreement, it is important to take the matter seriously and carefully consider all factors before entering into the contract. For this reason, it is important to know what to avoid in order to protect your rights, your intellectual property, and promote a deal that will bring your organization maximum revenue.

The following is a short list of issues you should keep in mind when entering into a technology licensing agreement:

1. Recognize that the scope of the tech license does not equate to an obligation for the licensee to pay royalties

IP owners have to be very careful to not create loopholes in the agreement that would encourage a payment clause that does not fully capture the value of exploitation of the granted rights of the license. For instance, many agreements include the right to “use” the licensed technology but they fail to specify that the right to use will be subject to royalty payments, in addition to sales. Generally, an agreement will state that the licensor will grant the licensee an exclusive license for the interns use of the licensed product. The term “use” should be further defined, it is this defined “use” that represents the licensee’s scope of the license. For instance in a Reseller license, that scope might permit the Reseller, to copy, modify and use in accordance with the terms of the (Reseller Agreement), but it might preclude distribution through lower tier re-distributors; or it might constrain the sales to a stated Territory. Is the other party authorized to make derivative works, or add API interfaces, if so who owns those works, and/or what rights does the other party have to re-use those works?

2. Clarify diligence requirements

Failing to provide benchmarks and detailed performance expectations, could prevent licensors from making the most out of their intellectual property. In essence, licensees would be permitted to make no sales and/or make any meaningful performances all while facing no repercussions and continue to have exclusivity on the product. Often this leads to non-exclusive Territories and relatively shorter initial terms, on Reseller Agreements so that both parties can get comfortable with the other party’s performance. Consequently, including performance expectations, like minimum sales limits, initial marketing dates, and minimum royalty expectations becomes unequivocally important.

A successful technology licensing agreement will need to avoid any language that could potentially weaken the agreement. For instance, making the requirement that licensees may merely use their best efforts to achieve license milestones can be problematic and insufficient. To strengthen this clause, the agreement may read: “The Company must use its best efforts in order to bring the licensed product to the market. To partially satisfy diligence obligations, the Company will need to achieve (the milestones) by the time set below.”  Often Reseller Agreements might include a sales staff and/or training staff requirement, or a duty to maintain an office location within the Territory.

3. Minimum royalties that only kick in after the licensee’s first commercial sale

Licensees should not be allowed to delay any royalty payments until after their first commercial sale as this could not only prolong payments, it could also wipe out the value of any minimum royalty provisions. In order to ensure the digilent provision of the product, it is important to seek to begin minimum royalties in the latter stages of the product’s development.

4. Warranties should be clarified

Initial licensing agreement drafts often state that the product will be provided “as-is” and without warranty. Contingent on how important the warranty is to the licensee and how it will affect its computer systems, excluding a warranty may be acceptable. However, negotiating specific warranty protections may be necessary.  It is not unreasonable to limit the warranty to performance in accordance with the SOW or product specification; to require written notice of all warranty claims within the time-frame of the warranty; i.e. 90 days; and to provide a remedy obligation to remediate that claimed defect at the licensor’s cost and expense. In return the Licensor generally requires that the warranty remedy be made an exclusive remedy, and that UCC implied warranty of merchantability or fitness for a particular purpose be disclaimed.

5. Failing to provide approval of marketing or advertising materials of the product

This clause is of utmost importance and should therefore be treated as such. Marketing and advertising materials will shape the potential customer’s perspective about the patent. In turn, this would help determine a customer’s willingness to use the product.

Aside from the aforementioned, not having the right to approve the marketing materials could prevent licensors from being able to realize the vision they had for the technology created from their own intellectual property. An agreement should consider having a clause such as: “Neither licensees nor any subsidiaries have the right to market and/or release advertising and marketing materials without first obtaining the approval of the licensor or any authorized personnel acting on behalf of the licensor.”

6. Pay close attention to dispute and termination provisions

It is not uncommon for a license to be terminated up to six months after a breach, given that multiple notices may be provided to the party in violation. Further, cure periods are usually included. For this reason, it is recommended to shorten the provision for dispute resolution over payment disputes. When possible, it is important to pursue the condition that interest will accrue on any payments that become held up while the dispute is ongoing.

Avoid Common Pitfalls in Your Tech Licensing Agreement – Hire Experienced Legal Support Today

The tech industry is considered the backbone of the global economy by many. Considering its importance, it is vital that companies protect their interests when seeking to license a product; therefore, it is critical that a careful legal review of the agreement is executed before the contract is finalized. While a well-rounded agreement can be independently drafted by any party, there are many provisions that require additional scrutiny. There are a plethora of pitfalls in an agreement that may be unnoticeable without sufficient legal understanding.

Technology Licensing Attorney John P. O’Brien is familiarized with the unique intricacies of these licenses. Attorney O’Brien has successfully drafted and negotiated a variety of technology licensing agreements related to intellectual property, along with other matters. Whether you are an entrepreneur considering bringing new software to market or are a seasoned company with many years in the industry, Attorney O’Brien can bring you sound legal advice that will help you ensure the success of your tech business.

Attorney O’Brien has many years of dedicated experience representing both small and large companies in both public and private sectors. He understands the unique needs of businesses that operate in the tech industry. To ensure your tech agreement is developed and executed with utmost scrutiny, consider hiring Attorney John P. O’Brien. Obtain a free, no-obligation consultation by completing the online form here. Prospective clients can also contact John P. O’Brien, Technology Attorney by calling the office at (732) 219-6641 today.