Key Clauses in a License Agreement

In Continuation with my previous blog entry.

Every License Agreement should contain a framework which provides support for other clauses or systems of clauses in the License Agreement.

An IP License Agreement typically has the following clauses:

1. Identification of the Parties
2. Recital Clause
3. Definition Clause
4. Grant Clause
5. Intellectual Property (IP) Rights Clause:
6. Consideration Clause
7. Obligations of the Parties:
8. Term and Termination Clause
9. Other Common Clauses

Identification of the Parties: Agreement should be made between the party who has the right to grant the license and the party who will be exercising that license. The identification section of a license agreement includes the identifying information of both the parties involved in the transaction.  If the licensor/ licensee are a company, then the name of the company with the registered address is provided. If the licensor/ licensee is an individual, the name and residential address is listed.

Recital Clause: Recital clause is a useful tool in explaining the context and background of the license. The recital clause also helps in the interpretation of the Agreement.

The purpose or idea behind the transaction is explained in the recital clause. For instance, if the Licensee has approached the licensor for manufacturing rights of the patented technology owned by the licensor, the recital clause should lay down the sequence leading to the transaction in clear terms. To quote an example, “Where as the licensee is engaged in the business of manufacture of (include the details) and the licensor owns a patent in relation to (include the details)

Whereas the licensor and the licensee wish to collaborate for the purposes of manufacture, distribution and sale of certain products in relation to (include details)”

Now therefore, the parties agree as follows:

Definition Clause: Definition clause acts as a dictionary for the Agreement. Critical terms that influence the transaction should be defined clearly. It has to be borne in mind that if a word or terms are defined in the Agreement, the defined meaning will take precedence over any other common meaning for the word or terms. Licensed products/ materials should be defined clearly, since the entire transaction is based on the same.

Grant Clause: It sets out the scope and extent of the rights granted to the licensee, as well as any limitations on those rights. It is important to clearly define what the licensee is entitled to do by use of clear and proper grant language. This clause may also lay down certain restrictions on grant of license. For instant restriction on sub licensing, modifying the fundamental character if the licensed work etc. This can be best explained using an example of a grant clause:

Subject to and conditional upon the payment of consideration and full and timely performance of the terms and conditions of this Agreement by the licensee, the licensor hereby grants to the licensee a non-transferable License during the term for the territory to :

1. create the licensed products;
2. manufacture the licensed products  (other terms of grant can be listed here)

Intellectual Property (IP) Rights Clause: The IP clause forms an integral part of the IP License. The Licensor should retain the ownership of the IP that is being granted through the license. This clause should also state that the Agreement cannot be construed as an Assignment or transfer of ownership of IP. An example of an IP clause is given below:

1. All Intellectual Property Rights on the licensed materials shall exclusively vest with the licensor and nothing under this agreement shall be deemed to transfer any rights on the licensed materials from the licensor to the licensee or any third party.
2. All Intellectual Property Rights held by the licensee, prior to this agreement or independently created during the subsistence of this agreement shall be exclusive property of the licensee. Nothing under this agreement shall be deemed to transfer any rights in such Intellectual property from the licensee to the licensor.

Consideration Clause: Consideration is the amount of compensation owing to the licensor. This clause also lays down the timing and frequency of payments etc . The details of the payment/ mode of payment etc can either be stated under this clause or may be given as a schedule to the agreement.

 Obligations of the Parties: This clause states the specific obligations that must be fulfilled during the term of the Agreement and even beyond the expiry or termination of the Agreement. The obligations of the parties are clear and unambiguous. These obligations may range from positive obligations such as a duty to report infringement, to negative obligations such as a duty not to compete with the licensor.

Term and Termination Clause: License Agreement should have both a defined term and provisions outlining when a party may terminate the agreement, and for what reason. If an Agreement is terminated before completion of its term, the consequences of prior termination should also be clearly laid down. An example of this clause is given below:

1. This agreement shall come into force on ____ and shall continue to remain in force for _____ years unless terminated by the parties as provided under the Agreement.
2. Both parties may mutually terminate this agreement in writing at any time during the term of this agreement.
3. Either party may terminate this agreement any time during the term by giving a notice of ___ days to the other party if there is a material breach of the terms of this agreement by the other party and such breach has not been cured during the notice period.
4. The provision relating to Intellectual Property, Confidentiality and Dispute Resolution shall survive the expiry and termination of this agreement.

Other common clauses: Certain other clauses such as Force Majeure, severability etc also may be incorporated to make the terms of Agreement more effective. These clauses are explained below:

1. Force Majeure: The performance of any part of this agreement by either parties shall be excused to the extent that such performance is hindered, delayed, or made impractical by flood, fire, war, or riot or any other cause beyond the reasonable control of either party. Upon the occurrence of any such event the party whose performance is affected shall notify the other party of such an occurrence.
2. Severability: If any provision hereof is held invalid or unenforceable by a court of competent jurisdiction, such invalidity shall not affect the validity or operation of any other provision and such invalid provision shall be deemed to be severed from the Agreement.

Appropriate care should be taken to ensure that clauses, which are considered unlawful, are not included in patent licensing agreements. Further, once the agreement is entered into, appropriate steps should be taken to keep the agreement valid and enforceable.

by Aruna Mukundd

Photo by opensourceway / CC BY