Licensing Agreement Term Sheet: Fast Facts
Licensing is one of the many ways to commercialize Intellectual Property (IP) rights. When licensing use of your IP to another company, it is important to have in mind a predetermined set of conditions under which you are willing to grant the license. A licensing agreement should also always contain a description of the subject matter of the license. This description should include which IP rights/technology the licensor intends to license.
Some of the other essential terms of an IP licensing agreement are listed in the table below and shown as applied to the Sample Agreement:
Sample Agreement:
Foodstuff Manufacturer (Company A) grants Pizza Shop (Company B) an exclusive license to use Company A’s secret recipe Tomato Sauce. This license permits the use of Company A’s sauce only on pizza sold directly to consumers from Company B’s Pizza Shop locations within the state of New York for a period of three years. Company B shall pay Company A a monthly royalty of $2.00/per pizza sold using Company A’s sauce.
Essential Terms
Exclusivity
Exclusivity refers to whether or not a licensee has an exclusive license to use the technology within the scope of the other terms of the license.
In the example, due to the exclusivity, Company B is the only entity that can use Company A’s sauce on Pizza sold within New York during the designated period.
Generally non-exclusive licenses are far less attractive to licensees since the licensor could grant as many licenses as possible to similar companies within the same geographic area, decreasing the competitive value of the IP license to the original licensee. Exclusive licenses, however, should also be approached with caution, and appropriately limited so as to not pose any antitrust issues or unduly limit the licensor from developing their remaining interest in the IP.
Geographic/Territorial Scope
The geographic/territorial scope of a license limits the area in which the licensee is allowed to use the technology.
In the example, Company B can only use Company A’s sauce within New York State.
Craft your geographic scope carefully as licensing your technology to a Company for use within a larger geographic scope than they are currently operating in can limit your ability to license with other companies in those geographic markets.
Term of Use
The term of use of a license is the period of time over which the licensee has permission to use the technology.
In the example, Company B can use Company A’s sauce for a term of three years.
In deciding the term of the license, consider potential future licensing agreements, advances in technology, and the overall trajectory of your company, as well as that of the potential licensee.
Field of Use
The field of use is a limitation on which industry(s) a licensee can use your technology in.
In this example, Company B can only use Company A’s sauce on pizza sold directly to the public from it’s Pizza Shop locations. Company B cannot bottle the sauce and sell to grocery stores under this Field of Use limitation.
It is important to limit the field of use consistent with the needs of the licensee. Your technology could have applications in other fields, and you want to retain the ability to exploit these uses.
Royalties/Fees
Licensing agreements will also include a royalty fee schedule. This schedule will state the basis for determining the amount of royalties and how often they are to be paid out to the licensor. Licensing agreements often include provisions for the payment of a licensing fee which may include the costs associated with negotiating the licensing agreement.
In the example, Company B is to make a monthly royalty payment to Company A in the amount equal to $2.00/per pizza for each pizza sold using Company A’s sauce.
Royalties and fees are a highly technical business decision that should be determined in light of the value of the technology being licensed as well as the business model of the licensee.
This is just a starting point and there are many other terms that should be included like sublicensing permissions, maintenance requirements, remedies, termination, and confidentiality requirements.
If you would like to discuss your licensing term sheet with an attorney at The Long Law Firm, please go to https://long.law/intake to set up a free 30-minute consultation.