Sometimes the best way to start structuring a license deal is to think about how to end it. Intellectual property licenses seem straightforward, but in reality are tricky business. On their face, these instruments simply confer specific rights to licensees for a period of time in exchange for some consideration (such as a monetary royalty). In practice, however, such licenses are never that easy, and require careful consideration of many factors, including but not limited to field considerations, sublicense rights, and oversight (not to mention warranties, limitations, and intellectual property indemnification, just to name a few). Failure to address any of these (and other) provisions properly can result in unintended consequences that can adversely impact the parties. Most licensors (and licensees) think that the termination provisions of the license will help unwind the agreement in such circumstances. Unfortunately, this is not always the case, and can bite you if you’re not careful when structuring the license in the first place.
It goes without saying that intellectual property licenses have a lot of moving parts. Of course, there are the underlying rights to be licensed and how they are licensed: non-exclusive versus exclusive, personal versus freely-transferable, field-limited versus worldwide, royalty-free versus fee-bearing, etc. The complexity only grows from these underling rights when potential sublicense rights are made a part of the agreement, requiring the parties to address the scope of the sublicense rights, how they are policed and overseen as well as how the licensor is compensated for such sublicenses, at a minimum. When the license is incorporating the licensed intellectual property into products containing the licensee’s own intellectual property, things get even more complicated due to infringement indemnity issues as well as liability and damages limitations language.
The point here is that the rights initially conferred under the agreement and subject to all of these clauses all remain subject to potential termination under the agreement. The problem is that termination should never — never — be ignored or otherwise left to standardized clauses. Doing so leads not only to potential termination problems, but undesirable effects of termination as a result. Oddly, there are three things you can do at the outset to help your intellectual property licenses avoid being set up for failure and otherwise structure them to terminate with a soft landing:
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1. Think About the Triggers for Termination of the License. The reasons for a license to terminate are many, but depending upon your perspective as licensor or licensee, the weight given to these triggers differ. As a licensor, termination may be sought after not only a specified time, but upon breach (which may require materiality). Upon breach, there may or may not be a right to cure and timeframe to do so. Further, termination may also be required for failing to meet minimal sales requirements or other factors. As a licensee, termination may be sought after a specified time or breach (whether or not material) as well, but usually requires a right to cure. The licensee, however, may also require a certain number of days following written notice, as well as a specific sell-off period for inventory. Notwithstanding the foregoing, general events triggering termination remain a valid consideration, such as expiration of intellectual property rights, a finding of invalidity, or events surrounding the party’s operations (such as assignment for the benefit of creditor’ bankruptcy or receivership).
2. Think About What Happens After the License Terminates. The effects of termination are easily overlooked yet easily addressed. First, the parties should consider a process for the licensee to stop or otherwise taper use of licensed rights. This process should consider whether there is any allocation of intellectual property rights between the parties and how they can be unwound including but not limited to whether rights revert back to licensor, the licensee retains any rights and sublicense rights considerations. Return of confidential information (or destruction of such information and certification to same) should be a part of any effects of termination provisions. Any sell-off period for inventory should be addressed, as well as survival provisions to address rights that must remain in place post-termination (such as indemnification, limitations, confidentiality, and payment of outstanding royalties). Needless to say, a lot of possibilities exist post-termination that should be addressed with specificity in the license agreement.
3. Think About How the Structure of the Deal Affects Potential Termination. Believe it or not, this point is the most obvious yet often overlooked. When structuring a license deal, it is incredibly easy to get caught up with the license rights and consideration for them. In fact, these provisions are less of a concern in relation to the whole — why these rights can (or should) be terminated and how these rights can (and should) be unwound in the event of termination are pivotal to the underlying agreement. Whether viewing these rights from the perspective of licensor or licensee, the overall structure of the deal will help determine the “why” and “how” above in ways that standardized clauses simply may not accommodate.
When you really think about it, the point is counter-intuitive but clear — you need to end it before you begin it. Taking the time to consider how the structure of a license deal should be unwound in the event of specific plausible triggers is not only good practice, but a necessary element to crafting a well-balanced agreement. The effects of termination should then flow from these triggers to properly balance the interests of the parties to achieve the intended result. So be careful when structuring your intellectual property licenses and take termination provisions into account at the outset — if not, you may be setting yourself (and your client) up for failure at termination from the get-go, and finding yourself at the wrong end of termination as a result.
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Tom Kulik is an Intellectual Property & Information Technology Partner at the Dallas-based law firm of Scheef & Stone, LLP. In private practice for over 20 years, Tom is a sought-after technology lawyer who uses his industry experience as a former computer systems engineer to creatively counsel and help his clients navigate the complexities of law and technology in their business. News outlets reach out to Tom for his insight, and he has been quoted by national media organizations. Get in touch with Tom on Twitter (@LegalIntangibls) or Facebook (www.facebook.com/technologylawyer), or contact him directly at [email protected].