Last updated October 2005

Licensing agreements are the most characteristic means of transferring technology. An option contract or option clause within a preceding R&D agreement may link an R&D project with a licensing agreement for the exploitation of any results.

Licensing agreements refer to all kinds of intellectual property rights and to secret know-how. They are concluded between the owner of the intellectual property or a party that is authorised to grant licenses (the “licensor”) and the party that is granted user rights (the “licensee”).

Licensing agreements can be negotiated and contracted individually, or accepted as the licensor’s General Licensing Terms and Conditions. The latter is mostly used with software end user licences where the conditions may be implemented in the program, and have to be accepted by the user in order to operate the licensed software.

The core content of licensing agreements consists of the following items:

The Preamble defines the intentions of the contracting parties (e.g. a patent holder authorises a company to produce and distribute a certain subject of patented technology), and lists the intellectual property rights concerned.

Definitions are important for a unified interpretation of the agreement and for a common understanding of the scope of the licence. They refer to the subject of the contract or licence, for which the licensee e.g. enjoys production and distribution rights (this may include further development and improvements), and to the licensed or contractual property rights as described in the preamble.

Licensed software is specified in terms of its form (object-code or source-code), media package and accompanying documentation.

Know-how can be specified in an attachment that is to be kept confidential.

The territory or field of application/use defines the area or scope, e.g. branch of technology, for which the licence is granted.

Exploitation means e.g. the production, offering, marketing and use of the subject of the contract or licencein the defined territory/field of application or use.

As regards software end user licences, these differentiate most frequently between single-user licences (i.e. the licence permits the software to be installed on a single computer only and may not be used by more than one user at one time), or network licences (i.e. the licence permits the software to be installed on a network server and allows concurrent use by as many users as specified in the agreement).

Scope of the licence/grant can refer to the production, distribution, making, use, sale and leasing, or merely to use for own internal/research etc. purposes, and can vary from non-exclusive to exclusive, or exclusive for a defined territory, field of application or use. The licence can include the right to grant sub-licences, and can be assignable to third parties, or not.

Technical assistance / training / installation can be offered by the licensor in individual cases.

It can be agreed that improvements and modifications of the subject of the licence by the licensor can become the subject of the licence under the agreed licensing conditions. The use and exploitation by both parties as well as allocation of the intellectual property rights to improvements and modifications made by the licensee can be settled as well.

A due diligenc e clause can describe the licensee’s obligation to use his best marketing efforts to exploit the subject of the licence.

Royalties are at the core of the negotiation of a licensing agreement. Issues for negotiation are e.g. the R&D efforts of the licensor, the background-input, his investment in development, the estimated demand in the market, and the investment of the licensee in further R&D, production and marketing activities.

Royalties can include:

• A down payment, particularly in the case of an exclusive licence. This means a single fixed sum which is due to be paid at the beginning of the licence period and which is independent from an exploitation profit.
  
  
• Recurrent royalties, usually referring to the licensee’s turnover by selling/sub-licensing the subject of the licence. These are usually agreed as licences per unit (a fixed amount for each sale or sub-licensing by the licensee), or as a percentage licence (a certain percentage participation referring to e.g. the net sales prices invoiced ex works or, respectively, to the royalties which the licensee himself receives by sub-licensing the subject of the licence). The term “net sales prices ex works” is defined as the invoiced net price, i.e. excluding insurance, taxes, expenses, packaging and transportation costs, after deduction of discounts.
  
  The percentages need to be negotiated based on the interest situation on both sides. Published surveys on percentages, which have been contracted in practice within different branches of industry in different countries, may help.
  
  
• Minimum royalties, (also in progressing steps), particularly in exclusive licensing agreements, in order to ensure that the licensee will make the appropriate effort as regards commercialisation. It is possible to agree that the actual recurrent royalties can be credited against the minimum royalties.
  
  

The copyright royalties for software are usually fixed prices for a defined licence period.

Clauses on payment conditions , the licensee’s duty to keep records and to report periodically on the revenues, as well as the licensor’s right to have the books and business documents relating thereto inspected by an authorised accountant or tax consultant, make the licensing agreement manageable and controllable.

Due to the fact that intellectual property is licensed, the parties need to agree on provisions for the sake of its continued existence and its unrestricted availability for commercialisation, e.g.:

• The parties’ responsibilities with regard to the maintenance and defence of the intellectual property right , including litigation in case of an infringement of the intellectual property right.
  
  
• The consequences of a complete or partial invalidation of the licensed intellectual property right , such as a possible adaptation of the royalties, or a termination right.
  
  
• A no-contest clause providing that the licensee will not support a challenge of the intellectual property right’s validity.
  
  
• The parties’ responsibilities with regard to third party intellectual property rights , such as investigation and notification of third party intellectual property rights that might be infringed by the agreed exploitation, and to responsibilities in the event that the licensee is sued by a third party for an alleged intellectual property right infringement.
  
  
• Non-competition clauses and confidentiality clauses in order to prevent the licensee from using the licensor’s technical information for manufacturing and selling competing subjects.
  
  

In software licensing agreements, a clause usually states that the licensor is the owner and copyright holder of the software, and that any copyright notices need to be preserved on any copies in an unmodified way.

The warranty and liability of the licensor is usually limited as regards the scope and the legal consequences in case of violations.

Clauses on the term , termination and expiration , as well as clauses on the applicable law , dispute resolution , jurisdiction or arbitration , language , a Salvatorian clause and a clause containing form provisions , complete the agreement.