In the present day business environment, nearly every company depends on some form of technology product or technology service. Generally, whenever technology is utilized, most businesses will have to license the technology. From licensing patents to licensing software-as-a-service (SaaS), tech licensing is ubiquitous in modern commerce. Despite their significant importance, however, far too many companies lack due diligence when drafting or negotiating technology licenses. Unfortunately, many companies assume that technology licensing agreements are “standard” and are a one-size-fits-all agreement. Consequently, companies face long-term repercussions, including being bound to a product or service that no longer meets their needs. Further, an ambiguous agreement or one that has been poorly drafted may lead to costly, protracted litigation, which has the potential to destroy professional relationships, deplete a company’s resources, and divert a company from its goals. The information provided below highlights important considerations businesses should take into account when negotiating a technology license.

Assess Important Business Objectives

Whenever a company licenses technology from an outside party, the main objective of doing this will be to achieve important business goals. Still, many companies will often sacrifice their goals and aspirations for the sake of obtaining the “right-of-use” of proprietary technology. Companies often make the critical mistake of using a “standard” or cookie-cutter contract, which has terms and conditions that could potentially inhibit their operations. In order to avoid this dilemma, a company has to fully understand what its business objectives are before even entering into the negotiation portion of an agreement. Moreover, the company has to actively communicate with the Licensor and negotiate favorable provisions.

The Technology Licensing Agreement Must Be Reviewed

In light of their business objectives, it is important for companies to review the terms of their contract with a well-established technology licensing attorney. It is imperative for companies to scrutinize every single provision of the proposed tech licensing agreement. This will help to ensure the company’s goals and aspirations are not eventually suppressed, but rather encouraged to succeed and prevail.

Provisions that should be closely reviewed include the following substantive provisions:

• Exclusivity – This provision will determine whether the Licensee has exclusivity over the technology, which would prevent other companies from using the rights to the license.
• Reservations and Restrictions – The scope of the license should be defined at the early stages of the agreement. It is important to determine whether there are any limitations to the use of the license. The restrictions could include geographic restrictions, sublicensing, and permissible channels of trade.
• Term and Termination – This provision highlights the duration of the tech license and if there are any grounds on which either party can terminate the agreement. Additionally, it also underlines what the rights and responsibilities are of the individual parties, especially in the event of an expiration or termination of the technology license.
• Maintenance and Improvements – Here, the Licensee will acknowledge their responsibilities for protecting the rights of the Licensor. In addition, it will address whether the Licensor will own any of the improvements the Licensee makes to the technology.
• Payments Made to the Licensor – In essence, every type of technology licensing agreement will include an initial payment to the Licensor as well as ongoing royalties made to them. When it comes to royalty formulas, however, these vary widely. Therefore, it is important to discuss whether the royalties will be based on net sales, gross sales, net profits, minimum payments made over time, or a fixed sum made whenever a product has been sold. In some cases, a sliding scale can be negotiated. To the Licensee, this will provide an incentive for their good performance.
• Assurance, Quality Control, and Protection – Every technology licensing agreement must include standards for the quality control of the marketing, production, and distribution of the products and/or services offered by the Licensor. Additionally, the agreement should include any procedures that would allow Licensors the opportunity to enforce their standards. Depending on the needs of the parties, this may include inspecting the Licensee’s property, reviewing and approving or rejecting the Licensee’s products, and the advertisement materials used in relation to the technology.

Be Wary of Pre-Contract Agreements

Aside from focusing on the terms of the technology licensing agreement, companies must also be wary of the steps that lead to the final construct. A Memoranda of Understanding, letters of intent, emails made before the contract is finalized, non-disclosure agreements, along with other forms of written and oral communication can lead to costly and protracted litigation. In certain situations, an agreement to negotiate that is made in “good faith” will be considered to be legally binding by a court and will be enforceable. This means that a company can be legally prevented from insisting on terms seen as radically different. They can also be disallowed from backing off from the contract without first negotiating.

Licensing Agreements Shouldn’t Be Taken Lightly – Speak to an Experienced Attorney Today

Technology licensing agreements will dictate the conditions of important components of day-to-day company operations. For this reason, it is imperative that companies scrutinize the entirety of the technology licensing agreement with a well-versed attorney before an agreement is entered into. When seeking to enter into an agreement, hiring a proficient attorney will help save significant time, save on unnecessary expenses, and provide a sense of security in knowing that the agreement will represent your company’s best interests.

One last thing, if you are dealing with an inflexible party, be pragmatic.

Carefully review their terms, identify your concerns, then try to determine the 2 or 3 most critical points. Then take the time to explain in no more than 2 sentences why that term is problematic to your business; and try to offer a solution that may address the bulk of your issue but in a manner that does not offend the other party. If you remove all the “nice to have” stuff (and let them know that you have done this), and focus on just a few critical points, rationalize them, and show them a path forward, you are more likely to get a positive result.

New Jersey Technology Licensing Attorney John P. O’Brien has many years of dedicated experience in tech licensing drafting and negotiation. Attorney O’Brien understands that the transfer of technology is a unique process and there are many important factors that should be carefully considered before an agreement is entered into. Technology licensing agreements should always have a significant amount of scrutiny since these agreements can potentially be detrimental to a company’s success. When done correctly, a licensing agreement will ensure the rights and interests of the parties are protected. To protect your interests, consider obtaining the proficient legal support of Attorney John P. O’Brien. You can schedule a complimentary consultation by completing the online contact form here.