1.13 Introduction to Licensing and the Licensing Process

1.13.1 Licensing Basics

Licensing is the IP equivalent of renting in real estate (see Topic 11: Introduction to Agreements: CDAs, MTAs, JIAs, Licenses, Section 1.11.5). The owner (i.e., the Licensor) of the IP grants the Licensee certain rights to use that IP under certain terms and conditions. Licenses can have many variations – but typically have some common features. Those features include a precise definition of the parties, the IP licensed, the scope of the rights granted, the territory(ies) where those rights are granted, license fees and royalties, payment schedules, management of IP, handling of future inventions, managing disputes, and other special terms and conditions.

Licenses are typically exclusive or non-exclusive but can also vary within these categories; for example, exclusive field of use, or non-exclusive manufacture/exclusive sale, or consortium of Licensees. Licenses are typically customized, built around the particulars of the IP, and the strategic interests of the Licensee and Licensor. Some licenses are not negotiated between Licensee and Licensor but rather created by the Licensor on a “take it or leave it” basis. This is typically the case with non-exclusive licenses in which the Licensor creates all the terms and conditions and signs with any legitimate Licensee willing to meet them. So, licensing can range from design of non-negotiable licenses (see Track III (Advanced-level TTP), Topic 3: Easy Access/Express Licenses, Section 3.3.1) to highly tailored licenses extensively negotiated between Licensor and Licensee.

1.13.2 Initial Contacts and Early Dialogue with Pre-licensees

Once an initial contact has been made with a potential commercialization partner, either by the TTP reaching out to a company contact, or vice versa, the knowledgeable TTP will assist a potential Licensee in exploring the opportunity of the IP/invention. The TTP will initially lead with interesting and non-confidential information – to expect confidentiality agreements too soon is typically off-putting to potential partners. The TTP and inventor must prepare to disclose initial information that is not confidential. This information should focus on the potential benefits of the invention/IP – which the TTP has already uncovered in his/her analysis of inventiveness, market relevance, and the value proposition.

To make initial contact with potential commercialization partners, TTPs should reach out directly to companies. However, which person to contact at a company varies – each company is different. It may be someone in R&D, marketing, sales or senior management. Sometimes, the right starting point will be a person with a title that makes their selection obvious – “Director of Technology Scouting,” or “Innovation Manager,” for example. But such titles are rare. Typical titles of initial contacts include “Business Development,” “Marketing Manager,” “Product Development Director,” “Open Innovation,” etc. When an obvious contact is unclear, we recommend reaching out to someone at the Vice President level. Research & Development can be a good start, but outside technology is sometimes resisted by such personnel. CEOs are often too high up and too busy to be a good starting point – unless the company is small-to-medium, or a start-up. Business Development personnel are often open to and interested in potential acquisition of outside technology. Vice President of Business Development is almost always a good starting point. 

1.13.3 Term Sheets as Precursor to the License Agreement

As described in Topic 12: Negotiation, Section 1.12.5, the Term Sheet provides the skeleton of a potential agreement. The Term Sheet gives the IP owner a framework for laying out a deal structure and its details. The typical sequence of terms is also described here.

The structure and details of the Term Sheet provide the basis for negotiation between the parties, without being distracted by the legal language and less-immediate terms. Once the parties have reached a certain point of agreement – maybe not of all the terms and conditions – the parties will agree to shift to the draft of a full License Agreement. All the terms and conditions of the Term Sheet will be incorporated into the License Agreement. At this point, the Term Sheet will be abandoned when the parties agree that all the terms and conditions have been fully and accurately transferred from the Term Sheet to the License Agreement.

1.13.4 Anatomy of a License Agreement

The typical License Agreement has an anatomy of clauses, sub-clauses, and even sub-sub-clauses. Topic 11: Introduction to Agreements: NDAs, MTAs, JIAs, Licenses, Section 1.11.5, describes the nature of common License Agreements.

1.13.5 License Drafting and the Negotiation Process

Once the potential Licensor and Licensee have shifted from the Term Sheet to a draft of a License Agreement, the negotiation process and license language drafting begins. This dynamic is based on the iterative process of one side preparing a License Agreement draft (with the terms they are proposing) and sending it to the other side. The recipient then reviews and counters with alternative language and returns the draft to other side. This back and forth between the negotiators is typically tracked via the Track Change function in Word documents. It is essential that neither party attempt to hide changes or to slip new clauses or language in by deception. In the back-and-forth of the agreement drafts it is easy to lose track of all the inevitable, numerous changes. To avoid confusion, and to maintain a clear and easily understandable document, the parties should periodically agree to accept all changes that are agreed on by both parties. Ethical professionals will not make any changes to accepted changes without clear approval by the other side. While it may be tempting to do so, making any such changes is not only unethical, if discovered (which is quite likely) the credibility of the perpetrator of this devious change will be damaged, maybe irreparably. Honesty and transparency are the currency of a successful TTP. That said, “Trust but Verify”. The TTP should periodically create their own redline from a previous iteration and check. Finally, before proceeding to signing, the agreement should be carefully read through from the beginning, preferably in a printed paper hardcopy.

1.13.6 Attachments and Related Documents

The art of drafting a License Agreement includes knowing what information to include in the body of the agreement versus what is too voluminous or changeable to be in the main parts of the agreement. Such information belongs as an attachment to the main agreement. For example, although the License Agreement will provide a precise definition of the licensed IP, detailed lists of patent portfolios and other complex IP definitions are normally placed in an attachment. Other attachment examples include work plans for research, marketing plans, extensive calculations of complex royalty structures, etc. A goal for the TTP license drafter and negotiator is to keep the License Agreement as concise and clear as reasonably possible – to do so will require the use of attachments whenever sections of the main agreement become too long.