Technology Licensing Agreements: What Every Business Needs to Know, Crain's Chicago Business
This article originally appeared in Crain's Chicago Business on March 7, 2022.
In today’s business environment, virtually every company depends on one form of technology or another. And for most businesses, much of that mission-critical technology is licensed. From licensing software to manage operations and interact with customers, to licensing patents or other forms of intellectual property to develop products, technology licenses are ubiquitous in modern commerce. Yet despite their vital importance, companies often pay insufficient attention to the actual terms of those licenses—assuming it is all “standard.” As a result, companies often find themselves with a license that does not further their business needs. Even worse, poorly drafted or ambiguous licenses can lead to protracted, expensive litigation that can destroy business relationships, drain companies’ resources, and distract companies from their actual business goals. This article addresses key considerations to keep in mind and common pitfalls to avoid when negotiating technology licenses.
Understand Your Business Goals
Companies license technology to achieve business goals. Yet they often forget those goals when negotiating and signing licensing agreements—entering into cookie-cutter contracts with “standard” provisions that can actually inhibit operations. To avoid this result, a business must have a concrete idea of its goals before entering into negotiations and communicate them to the negotiating team.
Review Agreements With Counsel in Light of Those Goals
Once the business case is set and communicated, a company should scrutinize each provision of a proposed license agreement with counsel to ensure that it furthers those goals. That includes substantive provisions like termination, maintenance, and cure provisions. It also includes what some think of as “boilerplate” contractual provisions, such as limitation of liability, choice of law, and arbitration provisions, as those provisions can truly shape the parties’ rights and responsibilities.
And most importantly, parties should be prepared to walk away from a licensing deal if the terms conflict with their business goals or would not be commercially beneficial. Don’t assume past performance will continue despite ambiguous or negative contract terms. And don’t let momentum dictate that execution of a deal is inevitable.
Be Careful About Pre-Agreement Contacts
Along with focusing on the licensing agreement itself, companies should also scrutinize the steps leading up to the final agreement. Letters of intent, memoranda of understanding, non-disclosure agreements, pre-contract emails and other written communications, and oral sales representations can all lead to protracted and expensive litigation. In some circumstances, agreements to negotiate “in good faith” are binding and enforceable, and they can prevent a party from insisting on radically different terms or from walking away from the deal without negotiating. Courts in Illinois and elsewhere have awarded parties substantial damages, including lost profits and contract expectation damages, for a party’s breach of its agreement to negotiate in good faith.
Pitfalls with Common Licensing Provisions
While companies should carefully review all aspects of a licensing agreement, certain provisions have proven especially likely to give rise to disputes between the parties. Parties should pay particular attention to these provisions when analyzing licensing agreements:
- Scope: Not every license grants the same rights to the licensee. Disputes over license grants often occur because the licensing metrics are not entirely clear. Does a software license by user mean that a single user can simultaneously use the software in multiple locations? Does a patent license only include the specific claims in the patent, or does it include related intellectual property, such as copyrights, trademarks, and third-party integrated IP?
- Royalties: Royalty disputes often arise from ambiguities in the royalty metric set forth in the contract or in the duration of the royalties. These issues become particularly important with legacy license agreements that do not consider the implications of new technologies. For example, in the software context, a license agreement drafted before cloud-based models became prevalent may not operate as intended if the technology migrates toward those models.
- Territory: Parties to licensing agreements frequently overlook provisions governing the territory of the license. Licenses need to be express about territory. If they are not, courts will likely interpret the license as applying to the most expansive territory possible under the circumstances.
- Limitations of Liability: Limitations of liability are often ignored as “boilerplate” but can dictate the result of a dispute more than any other clause in the agreement. Does the omnipresent disclaimer of “incidental, special, punitive, or consequential damages” exclude a party’s liability for lost profits? How about for loss of data? It all depends on the circumstances and substance of the license agreement. And when the limitation of liability limits the parties’ liability to “the amounts paid under this contract,” does that mean that the licensor is not liable at all if the licensee has yet to pay. Many courts will say yes. Again, it is important to think of the business case for the license and ensure that the limitation of liability permits recovery of an appropriate amount should there be a breach.
- Termination Clauses: Termination clauses can be extremely problematic in the licensing context, particularly for licensing of software. If you are licensing software to run your business, the ability of a licensor to terminate that license for anything other than non-payment can be disastrous. On the other hand, a licensee’s inability to terminate a license for breach without an extended cure period can lead the licensee to pay for two licenses at one time to keep its business running. Even after valid termination, questions often arise regarding the parties’ continuing rights and obligations. Licensors need to be careful about creating implied licenses through conduct, while licensees often have a continued interest in maintenance of the software. Some courts have suggested that continued de minimis use may not be a copyright violation, but the issue is not entirely clear.
Licensing agreements dictate the terms of critical components of most companies’ operations. For that reason, companies should carefully review and analyze all licensing agreements with counsel before entering into them. Engaging experienced counsel on licensing issues before signing the agreement can save substantial time, expense, and headaches after the agreement is signed.