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Originally Posted On: How a Technology Licensing Agreement Can Be Beneficial For Your Business (johnpobrienesq.com)

A licensing agreement is a contract between two parties, usually the developer or publisher that the developer is working with in the role the “Licensor” and the customer/end-user of the software as the “Licensee”. In this contract, the Licensor will grant specific rights to the Licensee for the ability to use their software in accordance with a specific grant, often this might be for the Licensee’s internal use; for a reseller or distribution license it might allow a third party to sell licenses to third parties, subject to the Licensor’s formal End User License Agreement (“EULA”) reseller and distribution agreements also contain other rights like a license to use the Licensor’s trademark, brand, or patent technology in support of their sale of software licenses to customer’s in the market under the Licensor’s EULA. The contract can also grant the Licensee the ability to produce or sell unique goods owned by the Licensor. In general, licensing agreements grant Licensees the opportunity to use intellectual property that is owned by the Licensor.

Licensing agreements are important because they outline the rights and obligations of the parties involved. Effectively a license grants the Licensor some rights that are less than actual ownership, you need to carefully understand what rights are granted and what restrictions are stated. In typical licensing agreements, Licensors will agree to provide Licensees with the intellectual property rights of their technology, to do certain things and often those rights are only for a limited period of time (“Term”). Older style licenses were often perpetual, like the license to your Operating System on your PC, but as the market has evolved most licenses now are for a limited Term and generally, they include updates and support. Under the earlier perpetual license model customers needed to enter into a separate update and support agreement for the software. Actually, if you add the hosting service to that Software term license you have a SaaS Agreement (beyond the scope of this article)Licensees will then agree to pay Licensors with an upfront fee or a royalty fee to the Licensor. Royalties are ongoing fees paid for the right to use the intellectual property. Typically, these fees are paid up front at the beginning of the Term (monthly, quarterly or annually), and billed thereafter at the beginning of the anniversary. These license, now often referred to as subscription fees, are generally non-refundable, unless terminated with cause.

Technology can be licensed only when the following elements apply:

• Licensors can only license technology that they own and have appropriate rights to license from the owner.
• Both the Licensor and the Licensee should receive a somebenefit from their agreement (even if its just to secure a right to use software they may not ever actually deploy).
• To be successful in actual operation over time, Licensors must work closely with their partners as their technology is not only incorporated, but also adapted (where permitted under the License terms) by Licensees.
• Licensees must ensure that they have appropriate support provisions in place.

Whether you are the Licensor or Licensee, it is important to remember that the terms and conditions of the licensing agreement should be tailored to your company’s specific needs, both today but also for the future. With regard to this last item, if the Licensor is using Software for an important aspect of their business operation, they may want to ensure that the Licensor will not increase the price by more than a stated % (e.g., 2.5%) at the end of the Term.

The following are just a few examples of Reseller distribution licensing agreement advantages for the Licensor:

• Licensors face lower capital requirements as well as lower costs since they do not need to invest in the distribution of their unique product;
• Licensors can use the Licensee’s distribution network in order to enter quickly into new markets and geographical regions;
• Licensors can gain the skills and expertise of the Licensees; and
• Through their royalties, Licensors can generate passive revenues.

The following are examples of licensing agreement advantages for the Ressler Licensee, often referred to as a Value Add Reseller (VAR):

• Licensees will be able to generate revenue by using the unique property of Licensors;
• Licensees will avoid having to gather resources to conduct their own research and development for the products and services provided by the license; and
• Licensees will gain access to an already established intellectual property, as well as be able to enter into a market much faster.

Both parties can mutually benefit from the licensing agreement as a well-established agreement fosters fewer legal and financial risks. By establishing a well-written licensing agreement, each party should be able to fully understand their rights and obligations. It is important to note the Technology Licenses cover a broad range of relationships, from situations where the Reseller-Licensor simply adds their name to the sales quote, but the License, support and Billing are all conducted in the name of the Licensor, to hybrid where the transaction is conducted entirely in the name of the Ressler Licensor but the Licensee is advised that the Licensor technology is included, like “Intel ® inside” approach, or a completely “white-label” approach where the product is licensed in the name of the Reseller Licensee (technically sub-licensed) under pre-approved terms with the Licensee.

License agreements involve a series of components that when working together, make a well-founded contract. Every part of a technology licensing agreement is negotiable. Whether you are the Licensee or Licensor, having a strong negotiating position will ensure the agreement leans more in your favor.

The following are common components of a technology licensing agreement. Each of these components is not only negotiable, they are all non-obligatory.

Reseller Technology Licenses often work best for supplementing the Licensor’s direct sales and distribution into geographic territory where the Licensor as no other local presence (i.e., The South West US and name several states), or in a market where the Reseller has related industry knowledge (i.e., pharmaceutical manufacturers). Often te Reseller has a deep understanding of the Customers in that area and/or the market-specific preferences and can help present and leverage the Licensor’s Software to address those market needs, without re-inventing the wheel. When they are implemented properly Technology Licenses are like leverage in a M&A financial context. They can dramatically expand the potential of the Software beyond the Licensor’s direct capeabilities.

Technology licenses can be “exclusive” but that is rare, generally the Licensor as well as other Resellers and VARs but they can, and most frequently are, they can also be “non-exclusive”. If an agreement is exclusive, that is almost always linked with a minimum sales quota or minimum annual license fee, because the Licensor is giving up their right to do all other sales in the Territory. This structural distribution depends on whether the Licensor wants to allow one or more parties to have rights to the intellectual property that is subject to the agreement. Usually, when the Licensee has exclusivity, the costs may be higher, the commitments more definitive (like a duty to attend Licensor technical or sales training) but among other rights the Licensee will be able to enforce their rights against any infringers. On a “non-exclusive” technology license, the Licensor will be the only one who has the right to file a lawsuit for any infringement.

Any territory covered by a technology license typically involves a geographic territory the NY, NJ and CT or perhaps the United States, however, there may be limitations as to what states Licensees can operate in. Sometimes the Technology License may be stated as 200 miles from the Licensee’s sales office locations.

Some technology licenses will require the Licensee to pay an up-front fee to obtain the license; or a minimum sales quota over a stated period of time. In some Technology Agreements the Licensor purchases an inventory of the Software (i.e., 200 licenses) and they have a right to distribute them within a stated Term; in some cases they may roll-over unused rights to future periods, but sometimes that is prohibited.  Licensees may encounter this when there are several non-exclusive Licensees, the unique product is particularly desirable, or when the Licensee simply needs to obtain a license to carry out a competitive activity. Depending on the agreement, this up-front fee may be credited against the royalties earned by future sales, but the fee may also be in addition to the royalties already earned.

The royalties can be based on a percentage of the sales but it can also be based on a set amount of money. Usually, royalties will be owed based on the number of sales made in a specific period. The royalties may need to be accompanied by a report that specifies the number of units sold, the price for which the technology was sold, whether there were any returns made or any other variables that could affect the amount owed. Generally, there is license reporting obligation on the Licensee, for sales in process, and for actual licenses granted. Typically, the Licensor has a right to receive a copy of accepted license, and a right to audit the Licensee.

Every agreement has the option of whether to allow the Licensee the ability to sub-license the product. If a Licensee is allowed to sub-license the product, the Licensor will usually have the ability to profit from the Sub-Licensee’s sales. Otherwise, the Licensor will only be able to make a profit from the Licensee’s aggregate sales.

Entering into a technology licensing agreement has many advantages for both Licensor and Licensee. It can allow both parties control over who can use that product and how the product can be used. However, because technology licensing agreements are complex, it is important to seek the legal advice of a knowledgeable intellectual property attorney before entering into a legally binding contract.

Whether you are the Licensor or Licensee, it is critically important that you have the legal guidance and support of a knowledgeable intellectual property attorney at your side.

Attorney John P. O’Brien has vast experience drafting and negotiating technology licensing agreements that serve to protect the interests of a company while optimizing its revenue. Clients come to Attorney John P. O’Brien because he is not only experienced in licensing agreements, he is well-versed and knowledgeable in technology licensing. Attorney O’Brien finds creative ways to leverage your licensing agreement. If you are considering licensing your patent and would like more control over who uses your product, how it is used, and how much is made, consider scheduling a no-obligation consultation with Attorney O’Brien today. Likewise, if you need to obtain the rights to use another’s intellectual property, contact Attorney John P. O’Brien to conduct a free initial consultation.