Intellectual property (IP) licenses are complex contracts that typically deal with the commercialization of new inventions. Although the technologies at the center of IP licenses are often quite complex, the language of IP licenses doesn’t have to be.
As with any contract, an IP license should be written in clear language that avoids excess legal jargon. The goal when drafting an IP license should be to make it easily understood by the contracting parties as well as any other parties who may be called upon to review the agreement.
Writing at a level of clarity that reaches all possible audiences can help ensure that the license is used appropriately and that the licensee’s obligations are clearly defined and the licensor’s rights are protected.
The use of clear language with minimal legalese is particularly important for any contractual obligations, such as a duty to make a payment, the schedule or conditions for payments, or to perform or agree not to perform a specified act or acts, that are included in the IP license.
Including well-defined terms of obligation in an IP license agreement is important in order to clearly outline the responsibilities and duties of both parties involved. The following are some tips on how to use terms of obligation in IP licenses.
Use Clear & Specific Language
In order to avoid any confusion or ambiguity, obligations should be clearly defined and specific. Clear definitions are particularly important because the terms of the license agreement will govern the relationship between the licensor and licensee and will define the scope of the license and the parties’ respective rights and obligations from the time of ratification/execution to the time of expiration or termination.
Using clear and specific language helps ensure that the obligations are clearly understood by both parties and can be enforced if necessary. For example, it is preferable to state that the licensee should not use the IP for any unlawful or unethical purposes as opposed to stating that the licensee should use the licensed IP “responsibly.”
Clear language also helps to avoid ambiguities. Ambiguities, as a general rule, are construed in a manner least favorable to the drafter of the agreement where one contracting party is in a superior bargaining position.
Where contracting parties have equal bargaining power and similar levels of sophistication, a court interpreting ambiguous contract terms will look outside the four corners of the contract to determine the parties’ intent, such as the parties’ course of conduct during the contract negotiations and the contract term. In either case, resolution of ambiguities by a court is undesirable.
Use Mandatory Language
In order to make it clear that compliance is mandatory and failure to comply will result in termination of the agreement or other consequences, terms of obligation should use mandatory language.
However, use of the word “shall” can cause confusion and a lack of clarity since some users interpret the term as requiring a certain action while others interpret the term as permitting or suggesting a certain action.
Some alternatives to “shall” come with their own problems, such as the use of “agree.” IP Agreements usually include an introductory portion stating something to the effect that the parties “hereby agree as follows.”
In such a context, the later use of “agree” is redundant and can introduce enough ambiguity so as to be construed as simply an agreement to agree. And while some may prefer “must” to “shall,” its use can be problematic as well. Similar to “agree,” “must” can seem superfluous in light of introductory affirmations.
“Must” can also imply that a party is less than willing to comply with their obligations and has to be compelled to do so under constant threat of breach. A preferred alternate term to “shall” is “will.” Its usage aligns with its everyday English language use, and does not introduce redundancies or implications associated with “agree” or “shall.”
Regardless of which word is used, it is recommended that IP Agreement drafters include a definition clause to clarify that the use of the word “X” in reference to a party is a term of obligation such that the party has a duty to do (or not do) the specified act.
Clearly Identify The Obligations
The obligations that each party needs to fulfill under the license agreement should be clearly identified. The obligations should be specific and measurable so that both parties can easily understand what is expected of them.
Avoid using vague terms such as “reasonable efforts” or “best efforts.” Instead, use specific language that clearly outlines what is expected of each party. For example, instead of saying that the licensee must make reasonable efforts to promote the licensed product, state specifically what promotional activities the licensee is required to undertake.
Some IP license obligations include maintaining the confidentiality of the licensed IP, adhering to any restrictions on use of the IP, and royalty payments. Other obligations may include the fact that the licensee is required to only use the licensed IP for a specific purpose, in a certain way, or in a specific geographic area or market.
When drafting the terms of obligation, it is important to consider the specific circumstances of the license agreement and to tailor the obligations accordingly. For example, if the licensed IP is subject to third-party rights or has limitations on its use, the terms of obligation should reflect these restrictions and ensure that the licensee is aware of them.
Make Sure Obligations Are Reasonable
The obligations should be reasonable and appropriate for the specific license agreement. It is important to consider the nature of the IP being licensed. For example, if the licensed IP is a patent, the licensor may have an obligation to maintain the patent and defend it against any infringement claims.
The licensee may have an obligation to use the patent in a specific field or for a specific purpose, and to pay royalties to the licensor for the use of the patent. If the licensed IP is a trademark, the licensor may have an obligation to monitor and enforce the trademark rights, while the licensee may have an obligation to use the trademark in a specific way and to maintain its quality.
It is also important to consider the industry and market in which the IP will be used. For example, if the licensed IP is software, the license agreement should include obligations related to the protection of the source code and the prevention of unauthorized use or distribution. If the licensed IP is a product design, the obligations may include requirements for the licensee to maintain the quality and consistency of the product design.
Furthermore, effort should be made to ensure that obligations align with the ownership of the IP. If the licensor does not own all of the necessary IP rights, it is important to ensure that the obligations reflect that the licensor must obtain those rights before providing access to the IP. This may involve obtaining permissions or licenses from third parties, or acquiring additional IP rights from the original owners.
It is also important to ensure that the licensee is aware of any limitations on the licensed IP, and that the license agreement includes appropriate terms and conditions to address these limitations. For example, if the licensed IP is subject to patents or other third-party IP rights, the licensee may need to obtain additional licenses or permissions to use the IP in a particular way or in a particular field.
In some cases, it may not be possible for the licensor to obtain all the necessary IP rights, or it may be too costly or impractical to do so. In such cases, the licensor may need to limit the scope of the license or exclude certain uses or fields. It is important to ensure that the license agreement reflects these limitations, and that the licensee is aware of them.
Include Consequences For Non-Compliance
To ensure that the terms of obligation are enforceable, IP licenses will typically include remedies for breach of obligations. For example, the IP license may state that failure to fulfill an obligation will result in the licensor’s right to terminate the agreement.
The IP license should specify the consequences of failing to comply with stated obligations, such as termination of the agreement, damages, or other legal action. These provisions serve as a deterrent and help to ensure that both parties fulfill their obligations under the agreement.
Specify The Duration
When preparing an IP license agreement, it is important to specify the duration of the obligations included in the contract. This means that not only the general term of the license should be defined, but also the obligations that come together with it, such as confidentiality obligations or the payment of royalties.
It is worth noting that such obligations may have different terms and duration. For instance, confidentiality obligations may last longer than the payment of royalties. These duration differences must be clearly expressed in the IP license.
Consider Including An Indemnification Clause
Depending on the circumstances, it may be appropriate to include an indemnification provision in the IP license agreement. This is the case particularly when the licensed IP carries a risk of infringement or other legal liability.
An indemnification provision is a contractual clause that requires one party (the indemnifying party) to compensate the other party (the indemnified party) for any losses, damages, or expenses incurred as a result of certain specified events, such as a third-party claim of infringement.
In an IP license agreement, the licensor may include an indemnification provision requiring the licensee to indemnify and hold the licensor harmless from any claims of infringement arising from the licensee’s use of the licensed IP. Alternatively, the licensor may agree to indemnify the licensee for any claims of infringement arising from the licensor’s actions or omissions.
Including an indemnification provision in an IP license agreement can help clarify the parties’ responsibilities and mitigate risk. However, it is important to carefully draft the provision to ensure that it is clear, specific, and enforceable.
Contact The Intellectual Property Law Attorneys At METROLEX IP Law Group
Overall, including clear terms of obligation in an IP license agreement is important to ensure that both parties understand their responsibilities and duties under the agreement. It can also help to mitigate any potential disputes or issues that may arise during the course of the agreement.
Whether you need help with IP licensing matters or other intellectual property matters of any kind, the attorneys at METROLEX IP can provide you with high-quality counseling, advice and work product. For more information, or to get started, contact our team today.