Almost every industry and innovative business must implement technology at some point to improve or grow their processes, products, or services. Given the options of buying, building, or licensing the critical technology, many businesses will choose to license. Since this option means some aspect of the business will be tied to a third party licensor (at least for a time) licensees should follow five crucial steps to ensure a successful licensing relationship.
Before you reach the negotiating table, clearly define your requirements and commercial objectives in securing the license and research the other party and target technology. Knowing the licensor’s ownership position, as well as the benefits and weaknesses of the technology, can help you asses the counterpart’s relative leverage, and evaluate their (and your) positions on key negotiating terms. A successful technology license requires two parties with divergent (and often competing) interests to reach agreement on a complex array of terms. Spending a little extra time beforehand will go a long way toward a smooth negotiation.
Identify Required Rights
There is no one-size-fits-all technology license. Technology licensing arrangements are not merely patent licenses, but generally implicate myriad different types of intellectual property and proprietary rights. So licensees must identify which rights they require to develop, implement, integrate, and/or commercialize the desired technology. These may include patents, copyrights, trademarks, mask rights, know-how, trade-secrets, or other proprietary rights. As a practical matter, the licensee may also require the licensor’s services, such as providing customer service to end-users or teaching the licensee’s employees or consultants how to use or implement the licensed technology. As a result, an effective license arrangement may also require a variety of ancillary agreements including service, development, distribution, and manufacturing agreements.
Start With a Term Sheet
Rather than diving into one party’s standard form agreements, begin with a term sheet outlining basic commercial terms. This can help parties quickly determine whether they can reach a deal at all. If parties do not share a common vision of their mutual goals in the deal and cannot both sense the agreement will be a ‘win,’ this divergence will become obvious before negotiations become mired in the weeds of legalese and boilerplate language. In addition, mutually acceptable deal terms thoughtfully outlined in a term sheet will serve as guideposts to keep the negotiation of long form agreements focused on the parties’ end goals.
“Technology licensing arrangements are not merely patent licenses, but generally implicate myriad different types of intellectual property and proprietary rights.”
Focus on the Scope
At the term sheet stage, parties should resolve the key elements of the scope of rights. Will the licensee be limited by product, territory, term, or industry? Will the licensor be restricted from exploiting the technology itself or permitting others to use it within any territory or product line? In defining the scope of the license, and any applicable exclusive rights or restrictions, avoid relying on supposed common understandings of words such as a “perpetual,” “universal,” “irrevocable,” “sole,” or “exclusive.” Specify in clear, descriptive language the parties’ intent as to the rights and restrictions under the agreement to avoid future – and potentially costly – misunderstandings about the agreement’s scope.
Plan for the Future
Given the rapid evolution of technology, the parties should articulate a clear understanding regarding future developments. Does the license include improvements or new versions or derivations of the licensed technology? Who owns such developments and what restrictions apply to their use? Will the release of new developments or versions impact the economic arrangements of the transaction? Carefully considering and resolving these questions in the term sheet will set the stage for smoother negotiations of the long form agreement.
Licensing technology can be a complicated and overwhelming process for any business, but with careful planning, a focus on key issues, and clear and careful drafting, even the most complex licensing and technology development efforts can be a success – for all parties.