This is an ongoing series providing tips on best practices for licensing intellectual property, whether it be as the IP rights owner/licensor or the licensee. Tip #1 suggested that the license should not usually be the first agreement between the parties. Tip #2 advised that investigation and due diligence on a potential business partner is critical before signing an agreement. Without further ado, we bring you Tip #3: Get the definitions right.
Definitions in any agreement can be critical, but particularly so in licenses. Be sure you spend enough time thinking through and wordsmithing the definitions for the following terms:
- “Licensed Rights”: First and foremost, define what is being licensed. If it is a trademark, be sure both parties understand whether new designs, updated logos, or future variations of the mark will be included in the license. If the license covers patents, trade secrets, or even software, what happens if the licensor comes out with an updated version or “new and improved” technology? What happens when the patent expires or the technology becomes outdated?
- “Licensed Products”: What’s the difference between “socks” and “hosiery?” Between “diagnostic reagents for medical use” and “diagnostic reagents for scientific use?” Spell it out. Give examples, if possible. If there are multiple licensees for different products or services, disputes may arise about what is licensed to one or the other, or an exclusive licensee may argue that their definition of “Licensed Products” precludes the licensor from making and selling a new product line. Include provisions for resolving disputes between a licensor and its licensee, or between competing licensees, regarding what category a new product or an expanded product line falls into. Licensors will want to provide that all decisions regarding “Licensed Products” are at the sole, subjective discretion of the licensor. Licensees will want to define “Licensed Products” as broadly as possible.
- “Territory”: It may be helpful to differentiate between sales territories and manufacturing territories. Also, does anyone really know what countries are in “North America” versus “South America,” or in “Latin America” as opposed to “Central America?” Consider defining the Territory very specifically.
- “Channels of Distribution”: Similar to the definition of Licensed Products, you may need to spend some extra time crafting a very specific definition for the acceptable Channels of Distribution. If the licensee may only sell to “high-end department stores,” spend a few extra words defining what these are, perhaps by giving examples. You may wish to list specific, pre-approved retailers or customers. Also, consider whether internet sales will be allowed, and how. Again, generally speaking, licensees will want to be as broad as possible and licensors will want to define “Channels of Distribution” narrowly.
- “Improvements” and other Subsequent Rights: The licensor will want to own improvements to technology or patents, but the licensee may not want to give away such rights unilaterally before he/she knows what those improvements might be. If the licensor and licensee cannot agree on who will own improvements, be sure to include a mechanism for resolving such a situation. More importantly, throughout the course of the relationship, be sure both sides know who’s going to own what before disclosing potential improvements to the other side.
If a trademark license is involved, the trademark owner will oftentimes want to be sure it owns any sub-brands developed for use with the licensed brand because, generally speaking, the consumer will identify any sub-brands or slogans with the main brand. If you are the licensee, be sure you include a provision that allows you to carve out trademarks that you already own but may want to use as sub-brands for your licensed mark, as well as any trademarks, slogans, collection names, and the like that you might develop after the agreement is signed but may wish to keep after the license agreement expires or terminates.
- “Term” and other Time-Related Terms: How long will this relationship last? If the licensee says the “Term” is three years, for example, is that three years from the Effective Date, from the date of the last signature on the license, or from some other date? Can the term be extended or renewed? If so, how? If “Deemed Approval” is defined as “five days” or the submission will be deemed approved by the licensor, is that five business days or five calendar days?
This list is not exhaustive; there are many terms in a license agreement that should be carefully defined, from “Indemnification” to “Quality Control,” from “Net Sales” to “Royalties.” As with any agreement, be sure you have defined terms as narrowly (or as broadly) as you can, depending on the circumstances, and that you have considered and understand the potential ramifications of any ambiguities.