Licenses are contracts that business people negotiate, so their terms are as variable as the imaginations of the parties. Nonetheless, technology licenses normally have at least the following main components:
Grant of rights
Limits and conditions
Promises by the Licensor
The granting clause is the heart of the license because it describes the rights granted to the Licensee and the scope of those rights. For example, a typical patent license to a product manufacturer might grant
“an exclusive, royalty-bearing license, with the right to sublicense during the term of exclusivity, under the Licensed Patents and Technical Information, to import, make, have made, use, sell, offer for sale, and have sold Licensed Products and Combination Products in the Territory in the applicable Field of Use.”
(The italicized terms both help define the license grant and limit the scope of the right.) The granting clause in a license from a provider of engineering and design services for an algae biodiesel plant would likely be more limited, perhaps covering only
“a nonexclusive, perpetual license to use the Licensed Patents and Technical Information, without the right to sublicense such rights to others, for the following purposes: construction of the Plant; operation of the Plant; maintenance, modification, and optimization or enhancement of the Plant; and selling or otherwise transferring worldwide all products of the Plant.”
This type of technology license limits use of the technology to one particular plant at one location.
Technology license fees come in many varieties. They can be up-front one-time payments, deferred payments, usage-based royalties, milestone‑based payments, or various combinations. Sometimes an up-front fee will be treated as an advance on royalties that will accrue later, when products covered by the licenses are sold. Some types of licenses are essentially a sale, for a fixed price, of a bundle of license rights. This would still be a license, but with no further payments. License fees are usually negotiated on a case-by-case basis.
Royalties, if required by the license, will be paid based on sales of products that use the technology or on sales of products manufactured using a licensed process. They may be based on volumes, such as gallons of biodiesel refined in the plant, or on other metrics, depending on the circumstances. Royalties are often preferred because they are self-adjusting, i.e., the more the Licensee uses the technology, the more the Licensee pays.
Royalties may have minimums associated with them, typically with adverse consequences to the Licensee if the minimums are not met. For example, an exclusive license agreement may provide that if certain royalty minimums are not met, the license will shift from being exclusive to nonexclusive. This approach is used to protect the Licensor from being saddled with an exclusive license that does not generate the expected royalties, with no way for the Licensor to terminate the contract.
Audit rights should always be included in any license agreement that calls for royalties. Typical issues are how frequently an audit can be conducted, who will conduct it, whether the results will be confidential, and who will pay for it. Usually the Licensor will bear the cost of the audit, but if a significant discrepancy is found, with underpaid royalties, then the cost would be covered by the Licensee.
Limits and Conditions
Technology licenses always impose limits on how the Licensee can use the technology and often impose various other conditions and requirements (in addition to fees).
Exclusivity or Nonexclusivity
Exclusivity or nonexclusivity must be defined carefully. For example, does an exclusive license in a particular field of use mean that the Licensor will grant no other licenses in that field of use but may itself use the technology in that field of use, or does it mean that both third parties and the Licensor are precluded from using the technology?
Field of Use
The license could be limited to a particular market, a particular type of plant, or a specified territory. For example, a license to the owner of an algae biofuels plant might only allow the Licensee to use the technology at the particular plant and could require an additional license to expand the plant beyond the specified nameplate capacity.
If the Licensee improves the technology during the life of the license, the Licensee will not usually be required to provide improvements back to the Licensor if the license is nonexclusive. After all, the Licensor could then in turn license those improvements to the Licensee’s competitors. But if the license is exclusive, the Licensor may insist on a grant back to it of any improvements, so that if the Licensee fails to adequately commercialize the technology, at least the Licensor will not have lost all of the development time.
Most algae biofuels technology licenses are likely either to be trade secret licenses or, if they are patent licenses, to include a large trade secret component associated with the patented invention. Because of this, confidentiality clauses play a large role in algae biofuels technology licenses. The Licensee will be precluded from disclosing the technology to third parties or from using the information for purposes other than as allowed by the license.
Because the algae biofuels industry is in its early stages and because people move around, the Licensor may also insist on strict limits against disclosing the information to consultants or vendors that the Licensee might otherwise hire to make improvements or modifications to the plant.
Most confidentiality restrictions will provide for exceptions for information that is part of or becomes part of the public domain, information legally received from third parties, and information independently developed by the receiving party (by personnel with no access to the confidential information).
Term of License
The duration of a patent license is usually either for a fixed term of years or until the patent expires. If the license is for multiple patents, the term will usually be until the last one expires. It is not legal to require that royalties be paid after the patent expires.
With a trade secret, the license term and the royalties can be perpetual.
If the license covers both patents and trade secrets, the royalties should be allocated between those for the patent and those for the trade secrets. Then when the patent expires, the trade secret royalties can continue.
Licensees need to be able to rely on the continuation of the license, but Licensors need the ability to ensure compliance with the license. In most cases the Licensor will have the right to terminate the license if there is a breach by the Licensee, but only after giving the Licensee notice of the breach and a chance to cure the problem to avoid termination.
In some technology licenses, the Licensor will not have the right to terminate the license even if there is a breach. This can happen in trade secret licenses when the Licensee is relying heavily on the license (such as by building a large algae biofuels plant) and when the fees are paid up front.
If the license is truly nonterminable on breach, it should be explicit that the Licensor still has its other remedies available, such as an injunction and damages.
The Licensor’s Obligations
A Licensee will usually need some assurances from the Licensor. Because the Licensee is paying for the license to avoid infringement claims, the Licensee may ask the Licensor for a warranty that the licensed technology does not infringe any other party’s rights, at least to the Licensor’s best knowledge.
The Licensee may seek a warranty as to the functional capability of the licensed technology. In many cases, especially if the license is for patent rights, the Licensor will insist that the Licensee make its own determination about the utility of the patented invention. That’s more feasible with patents than with trade secrets because the patent itself, including its enabling disclosure, is publicly available.
Many technology licenses will include indemnifications that allocate risk between the parties. Frequently the Licensor will be required to defend and indemnify the Licensee from and against any third-party claims that the Licensee’s use of the licensed technology infringes the third party’s patents. Under such an indemnity, the Licensor must defend the Licensee against the third party’s claim and pay the litigation costs even if the claim does not stand up in court.
The Licensor in trade secret licenses will usually be required to provide some enabling disclosure of the know-how. This may involve combinations of documentation, formal training, or hands-on involvement and tutoring in the construction and initial operation of a plant.