Editor’s Note: José Cortina is a member of the Research Triangle Park law firm of Daniels Daniels & Verdonik, P.A.
RESEARCH TRIANGLE PARK, N.C. – Many business people believe that the creation of a license agreement requires nothing more than filling in blanks on a standard form document. Nothing could be further from the truth. While there are a wide variety of form license agreements available from many sources, such agreements typically serve only as a checklist to insure that the most important provisions are included in the final license. There is no “one size fits all” license, and it is not advisable to use any form agreements without appropriate legal advice to interpret and extrapolate on their terms.
The steps leading to a final license agreement should be well thought out and methodically executed. Since in the technology area many agreements involve licensing of proprietary information or information covered by intellectual property rights, it is often the case that a such agreements are license agreements and generally are fairly complex. The following provides a general guide to steps in licensing.
Be Careful of Communications
In considering steps to take prior to entering into a license agreement with another party, it is important to recognize that simple correspondence between two parties can result in an agreement, even if unintended. As a general proposition all that is required for completion of an agreement is that one of the parties has “signed” a document setting forth in sufficiently clear terms the key points of the agreement. In fact, courts will often enforce such agreements even if not formally signed on paper if there is adequate evidence of an agreement having been made. Thus, in discussions (and emails) relating to licenses, it is important not to make statements such as: “we have reached an understanding on all major points concerning this subject”. Such correspondence can be evidence of a binding contract. In fact, extensive correspondence between parties making offers and/or assurances can result in a multitude of different agreements being completed–unintentionally.
Protection of Confidential Information
Prior to engaging in any discussions regarding a possible license agreement, it is often the case that parties will exchange proprietary or confidential information to allow each to evaluate whether a license with the other is appropriate and/or desirable. Accordingly, prior to any negotiations, it is important to have an executed proprietary or confidential information agreement in place with the other party. Once the technology has been reviewed under the terms and conditions of the proprietary or confidential information agreement, the parties can then decide whether to proceed with entering into a license agreement.
The First Step
If the parties decide that entering into a license agreement is desirable, the first step involves reaching a tentative internal company understanding, subject to review and approvals with the other party, on major points such as exactly what the licensed product will be, territory, exclusivity and compensation. This is frequently done through exchange of a term sheet, which is clearly marked to indicate that it is for negotiation purposes only, and specifically that it is not intended to be an agreement. For major agreements which will take time to negotiate, such understandings can be in the form of a Memorandum of Understanding highlighting major points of agreement. A Memorandum of Understanding can serve as an interim agreement allowing the parties to engage in limited collaborative work in contemplation of and in furtherance of work to be done under a definitive agreement to be entered into at a later time.
Preparation and Approval of the License
Going forward, once the major points in a License Agreement have been outlined, an agreement draft can be prepared, but only for internal review and discussion, and not to be exchanged with the other party until all principals on one side have agreed that the draft meets the business requirements. Once the draft has been suitably changed in accordance with internal discussions, it can then be forwarded to the other party for review and comment.
This leads to what in many cases is the most difficult undertaking in finalizing the license. Unless through some miracle both parties have a common understanding of the goals they wish to reach, the final agreement details must be negotiated, often in one or more extensive meetings with a lot of give and take between the parties. In negotiating the final license details, the parties should always give themselves some leeway by making the document subject to final company approvals, since the final decision maker for either party may not be present at the negotiations. At that point, the final draft can be circulated again within each company and all internal approvals can be obtained. In some cases where the license is lengthy and complex the executives may ask the attorney to provide a summary sheet highlighting the major points of the agreement to make the review easier to undertake. While this may seem to be a somewhat cumbersome process, it provides safeguards in avoiding entering into a final agreement which the ultimate decision maker in a company may not have approved.
The License May Require Government Approval
One often overlooked aspect of license agreements, particularly in the international arena, is that government approval may be required for one or both of the parties to enter into the agreement. When such government approvals are required, the license should have a clause requiring that the appropriate government approval has been obtained or providing a process to be followed in obtaining it—with an out clause if it is not ultimately obtained.
With respect to the United States, the licensor may need to obtain an export license from the U.S. Department of Commerce for the exportation of technical information. If a technology to be exported falls under the arms and munitions list, export approval may also be required from other U.S. agencies. It is important to note that items need not be something that appears to be clearly “arms or munitions,” but can be technology which could be used in implementing advanced weapons systems. For example, a new type of metal that could be used to build more efficient capacitors for use in powering laser weapons systems may fall into this category even though it also has general commercial utility.
Signing the License is not the Last Step
Once the final terms of the license have been reached and all necessary government approvals obtained, execution copies of originals of the license should be prepared and forwarded to the other side for signing. The originals, when signed by the other party, can then be returned for signing. After execution by the second party, one fully executed original of the agreement is returned to the other party, and copies of the executed license distributed to appropriate individuals within the company.
At this point, many of people within the licensee or licensor company who in charge of license agreements think that all of their work is done—but they need to think again. It is important that both parties monitor activity under the license to ensure that its terms are being carried out correctly, and that both parties are performing in accordance with its provisions. Compensation in such licenses typically involves royalty payments over time, and there is an opportunity under the license to audit books and records to of the licensee to insure that an accurate accounting is being made by it, and that thus the required payments are being made. Further, it is not unusual that after the license has been in place for a while, the parties will determine changes to it are required. These changes can be done through an amendment to the license, by supplemental agreement or by side letter.
With all of the above in mind, it is also important to recognize that when two parties are initially far apart on the license terms, they should be prepared to accept that an agreement may not ultimately be reached. On the other hand, if the parties begin discussion and see that the initial position shift as negotiations continue, it may become apparent that the goal of reaching an agreement has taken precedence over the very simple notion of addressing whether the agreement is desirable and possible between the parties. All too often two parties continue to negotiate, and ultimately an agreement is reached which is terminated within a short time period because it failed to address each party’s needs. It is also important to recognize that agreement between the parties may ultimately not be possible, and the contract negotiators should be seasoned enough to know when to walk away from the table.
Put more simply, a license agreement between two parties is merely a vehicle used to achieve common business goals. Often if those goals do not match up, the negotiations are doomed to fail. It is better to recognize this early on instead of wasting large amounts of resources in attempting to reach an agreement which is doomed to failure.
Thus, as one may appreciate, the process of entering into a license agreement is not as simple as filling out a form. It is often more complicated than that, and while it is fairly easy to complete agreements within short time frames, in some cases and depending on complexity, it may take many months before an agreement addressing the business objectives of both parties can be completed.
A. José Cortina is a registered patent attorney with the law firm of Daniels, Daniels & Verdonik, P.A. He focuses his practice on the intellectual property needs of small to large technology companies, including providing patent, trademark, copyright, counseling, licensing, conflict resolution and transactional services. He is experienced in a broad range of technologies, including electronics, communications, computer hardware and software, biomedical, materials, and selected chemical and chemical engineering technologies.