One of the more common transactions that we do, from a legal point of view, involves licenses. License arrangements are literally everywhere. When you download an app, you are not buying the program, you are buying the right to use the program- it is licensed to you. When you buy a ticket to see a movie, you are buying a license to occupy a seat in the movie theater to watch a movie. Indeed, the movie theater has licensed the right to show the movie to you from a studio or its distributor. Apart from the various consumer transactions that we deal with, licenses are serious business devices that are used in everyday commerce. While this article is written primarily from the point of view of the one extending the license ( the “licensor”), correlate concerns (on the other side) will also affect the one receiving the license (the “licensee”).
Basically, all licenses extend a right given by the licensor to another person to use certain property subject to conditions. Thus, the licensor must own (or have the right to sublicense) an interest is some sort of property, either real or personal. Real estate licenses basically grant a short term interest to enter on or use somebody’s real estate for a specific purpose for a limited period of time, like the movie theater ticket. More significant commercial applications of real property license rights extend to things including granting rights to a seismic crew to enter upon and conduct surveys of an owner’s land and the disposition of the data obtained. These typically are fee-based arrangements between the parties and the terms of such licenses define the licensee’s rights and scope of the license.
Licenses in personal and intellectual properties constitute the majority commercial license applications. In granting a license in such properties, the following should be considered.
First, what is the licensor’s ownership rights to the subject property. A licensor can only license that which the licensor owns or has a right to sublicense. It is therefore common in license agreements to require the licensor to warrant its ownership rights in a given property and to provide indemnities to the licensee if the licensor’s ownership is defective. A typical form of such assurances is an indemnity against infringement of patents or copyrights.
Second, the scope and duration of the license need to be defined. The time period that defines how long the licensee may use the license needs to be clearly defined as well as events that may otherwise terminate the license earlier. For example, it is usually necessary to provide for early termination of the license if the licensee misuses the license. Scope issues present challenges of definition and limitations. How much of the property is licensed? What territories are covered by the license (especially with respect to franchise or distributor agreements)? How many seats (i.e. locations) are covered under the license? How may the licensed property be used or attributed when incorporated into another product? If the license may be re-licensed, how many times and to whom? These and many more issues of scope are matters that need to be clarified and documented in a proper license agreement. Third, are issues of compensation. A one time use license (such as a seat in the movie theater) can be handled with a simple one-time payment. However, licenses that accompany a product or that may be reused (such as performing a piece of music or sales of books) may be subject to payment of royalties based on each instance of use or sale. In all compensation issues, a redetermination of rates, royalties, or other payments also need to be addressed, whether such are based on the length of use, amount of use, or otherwise.
Fourth, there may be the need for special covenants pertaining to the license itself, or who or under what circumstances, the use the license is permitted. The license may be restricted to a single user or a class of users. Use may be restricted to certain classes or types of users with specialized skills or training. The license may apply to some use applications, but not to others. There may be restrictions on “reverse engineering” of the underlying property. Who owns improvements or modifications to licensed property that may be developed by the licensee?
Lastly, basic contract formalities need to be dealt with, including what law applies, audit rights (especially in the case of royalties), record keeping, etc. Always bear in mind that certain contracts need to be in writing in order to be legally enforceable and that the terms of the written license agreement need to be clearly and completely stated.
Licenses are a valuable and pervasive commercial tool. You should seek professional assistance in establishing rights to the underlying property to be licensed, as well as the negotiating, drafting, and enforcing of licenses in other than trivial instances.