What is Exclusive License Agreement?
An exclusive license agreement (referred to in the U.S. as an "exclusive license agreement") is a legal contract in which the owner of a tangible or intangible asset (the "licensor") assigns corporate rights or other benefits or payment streams related to the asset, such as royalties or a share of proceeds from its sale, to another party or participant (the "licensee").
Exclusive licenses are often negotiated and structured based on commercial needs, but involve many of the same principles as a simple license and are legally distinct from non-exclusive and sole license agreements .
The term "license" is a broad term that encompasses a number of different types of contractual arrangements, including non-exclusive licenses, joint and co-licenses, and sole license arrangements. These arrangements differentiate primarily based on the exclusivity of license granted to the licensee. For example, in a non-exclusive license agreement, the licensor may grant the license to more than one licensee, while a sole license leaves the right of use exclusively with the licensee and the licensor reserves no rights for itself.
The Benefits of Exclusive Licensing
Exclusive licensing can be an effective way for licensors to monetize their intellectual property, and it also benefits licensees who are looking to reduce risk and secure strategic partnerships. First, if structured properly, an exclusive license agreement gives the exclusive licensee substantial control over the use of the intellectual property within the scope of the license. Second, an exclusive license may include provisions allowing for the modification, enhancement, or improvement of the underlying intellectual property, thus providing the exclusive licensee with the first right of opportunity to incorporate those enhancements into its offerings to the market. The exclusive licensee is then free to innovate to meet the market demand for the licensed technology.
For example, consider a tech company that holds an exclusive license for manufacturing and selling software solution XYZ. That manufacturer may create feature ABC for XYZ and update its customers accordingly. If the technology licensor decides to market XYZ to a similar industry, it may offer updated version of XYZ with feature ABC, manufactured by a third party. In this scenario, the technology licensor retains ownership and control of all enhancements or improvements made to XYZ, but the exclusive licensee is a barrier to market entry by other software developers with similar technologies. In other words, the exclusive licensee is granted a monopoly within its respective industry and market for any advancements in XYZ that are not pre-existing.
Third, an exclusive license agreement may give the exclusive licensee the rights to enforce the intellectual property in the event of infringement. This is because an exclusive licensee is the beneficial owner and user of the underlying intellectual property. Such rights can be specifically set out in the agreement, or become implied as a result of litigation or enforcement activities.
Thus, the exclusive licensee benefits from exclusivity, access to enhancements and improvements, and enforcement rights in the event that unlicensed third parties attempt to manufacture, use, or distribute the technology, software, process, or product that is the subject of the exclusive license. From the perspective of the licensor, there are significant advantages to exclusive licensing as well. For example, an exclusive license agreement allows a licensor to generate royalties for the use and application of licensed intellectual property without the burden of managing a licensee’s day-to-day business operations.
Drawbacks and Risks
While there are many advantages to entering into exclusive license agreements, it is also important to be fully aware of the potential drawbacks and risks. Depending on the circumstances, the following may be a few common disadvantages and risks:
While the license terms can be negotiated to limit the risk of the licensee’s total dependency on the licensor, negotiating what happens to other licensees upon termination could be a concern for some licensors.
Evaluation of the licensor and/or licensee’s financial resources should be conducted to reduce the risk of dependency and market penetration failure. The social and economic status of the licensee may present a significant factor in its ability to reach the market, or the licensor’s expectations of continuing sales after termination. Licensors might want to seek the right to audit the licensee to ensure financial resources are adequate to meet ordered commitments in regard to products, production, marketing or distribution.
There may be risk for manufacturers who exclusively license their trademarks to others that the trademark will lose its reputation for quality and value in the eyes of the public. This could occur when an exclusive licensee (or subsequent licensee) uses and/or advertises the trademark in a way that possibly tarnishes or dilutes it.
Contingencies of exclusivity in business relationships change over time, and the licensor’s exclusivity might eventually result in exclusion from new opportunities. This exclusivity may prevent the licensor from expanding into a market if such expansion is part of a term of the exclusive license.
Key Elements of an Agreement
The exclusive license agreement should outline in detail the scope of rights granted, territories, duration and financial terms. These are typically defined as follows:
A. Scope of Rights: The scope of rights generally defines the rights that the licensee has to practice and enforce the patent throughout the term of the license agreement. The scope may be defined narrowly in the license agreement to describe the specific market, customer base or field of use for which the licensee intends to practice the patent. In such cases, a non-exclusive license may be granted for the same rights in the remaining markets, fields of use or customer bases, with the option to obtain exclusivity to those markets, fields of use or customer bases. Narrowly defining the rights helps ensure that the licensee does not grow beyond the scope or limits of the license agreement, while at the same time allowing necessary flexibility for the licensee to renegotiate exclusivity at a later date as needed. The scope of rights may also be defined broadly to enable the licensee to fully expand its business operations without having to renegotiate the license agreement every time.
B. Term and Territory: The parties should agree on the term of the agreement, and the territory in which the licensee’s rights to practice the patent exist. The parties may include default provisions that will apply in the event the inventor(s) is/are not available to sign a formal assignment or license agreement, including a survivorship provision such that the licensee can file a continuation application in order to prosecute claims that have been allowed in a pending application to the patent office. The license language should clarify that if the patent is granted, and rights are then assigned to the licensee, the term of the agreement starts from the date of the grant of the patent, unless otherwise agreed to in writing by the parties. If the parties wish to agree in advance on terms of territory, e.g., international rights, or rights limited to specific countries, this should be explicitly addressed in the agreement. Another option allows the licensee to obtain new territories as it becomes more established in an industry; unless expressly stated otherwise, a license agreement will not automatically grant the licensee territorial rights outside of the country of the patentee’s residence.
C. Compensation: The compensation framework that the licensee will pay under the agreement may vary, and could include either a one-time payment, milestone payments, or royalty payments based on sales of the licensed product(s). The milestone payment approach should include payment thresholds at which the licensee’s rights become exclusive (by market, field of use or territory); licensing agreements can also include provisions that allow a payback of the royalties over the first few years on an annual basis. The per-unit royalty rate may be based on the average unit price of a product sold by the licensee, or calculated in relation to the revenues and expenses of the licensee. Royalty rates can also be based on the number of patents that the licensee can use to manufacture a particular product.
D. Declaration of Use: As a practice tip, license agreements that involve the transfer of patent rights to an invention should always include a declaration of use.
Effective Agreement Drafting
To the extent that exclusive license agreements are permitted by the relevant intellectual property laws, it is important for parties to draft a comprehensive and legally sound agreement that contains at least the following essential terms:
(i) The scope of the agreement, such as the types of intellectual property (e.g. copyrights, trademarks, trade secrets or patents) and the applicable territory.
(ii) Restrictions on the licensor’s ability to license the intellectual property to third parties.
(iii) Restrictions on the licensee’s ability to further assign or sublicense its rights in the intellectual property.
(iv) Payment details, which typically include a payment to the licensor of a cash fee or royalty based on sales or production, and clearly state when in the course of dealing payments will be made.
(v) Whether and how the licensor will assist the licensee in obtaining necessary regulatory approvals for sales in particular jurisdictions , or whether the licensee must obtain all such approvals itself.
(vi) The term of the license agreement and circumstances under which it can be terminated.
Most commercial laws concerning general contracts, commercial transactions, copyrights, trademarks, trade secrets, patents, competition laws, and so forth, do not generally apply to the agreement. For example, commercial laws concerning consideration, offer and acceptance, and certainty of terms might not apply to the agreement, depending upon the relevant jurisdiction. Exceptions to the generality of the commercial laws might be made where they contradict with the laws of competition (such as fair competition, anti-trust or anti-monopoly), public policy (such as laws protecting consumers or workers), or international treaties such as the TRIPS Agreement.
Examples and Case Scenarios
Real-life examples of exclusive license agreements abound in the innovation world, whether in academia, small start-ups, or large corporations. When examined, these agreements can provide insight into the benefits and downsides of this type of relationship for all parties involved.
One frequently-cited example of licensing is the University of Michigan, which conducts a prolific program of patent and technology commercialization and is active in bringing numerous technologies from concept to market. The university’s Office of Technology Transfer has been a major player in Michigan’s economic development. This office regularly licenses technology to companies of all sizes, from small start-ups to large multi-nationals. The university also maintains a portfolio of patented technologies, available for exclusive or non-exclusive licensing, valuation, and enforcement under the brand "Wolverine TechnologiesTM."
With an eye on academia, in recent years several universities have partnered with the private-sector to jump-start their own institutional technology transfer programs. The University of Maryland’s College of Computer, Mathematical, and Natural Sciences, for example, formed a partnership with the Maryland-based IP Group to form the Maryland Momentum Fund, which seeks to licenses patents and technologies from the University and leverage private-sector funding opportunities to help accelerate their commercialization.
Universities are not alone. Some of America’s largest and most successful corporations have adopted exclusive license agreements as a business strategy to facilitate joint development and commercialization of patented technology, and to sidestep costly litigation. These companies have entered into joint ventures with patent aggregators and members of patent assertion entities (PAEs) like Intellectual Ventures and Intellectual Ventures LLC, which acquire other companies’ patents, pool them, then license them to make and sell products in a particular field. This type of arrangement helps the patent aggregator monetize its portfolio while avoiding litigation for non-practicing entities like PAEs. In fact, Apple entered into such an agreement with Intellectual Ventures early in 2016 over its system for tracing cellular network data, in exchange for a partial exclusive license for certain wireless technologies used in its devices.
The issues discussed herein are also highlighted in the case of Massachusetts Institute of Technology v. Abacus Software, Inc., IP INFRNG, SAN A, 2015 U.S. Dist. LEXIS 5512, 119 U.S.P.Q.2D (BNA) 1827 (W.D. Tex. May 22, 2015). There, MIT asserted patent infringement against Abacus, Inc., and others. The Court dismissed the merits of MIT’s infringement claims, but gave MIT leave to amend its complaint to cure defects in its exclusive licensee standing. This case is an important example of the types of information which can be shared with a third party buyer or investor, while still preserving the patent owner’s standing to sue exclusively for patent infringement.
Legal Considerations and Compliance
Legal Requirements and Compliance: Exclusive License Agreements
Depending on the goods sold, services provided, or technology involved, there may be legal requirements for entering into an exclusive license under both federal and state laws. With respect to patent rights, federal antitrust laws (15 U.S.C. ยง 1 et seq), may apply particularly to exclusive license grants that extend to the licensees’ customers. Licenses of copyright can be subject to Section 110(5) of Title 17 United States Code (commonly known as "The Fairness in Music Licensing Act of 1988"). The jurisdiction for the application of the licensing agreement can impact how compensation is awarded to licensees. Because United States Patent and Trademark Office (USPTO) licenses have been held to be valid both within the United States and abroad, use of foreign patents may also be affected by whether an applicant for a license is a recognized "United States National."
Additional optional licensing methods may be available in many U.S . states including administrative and statutory licenses, and sole authorized licenses. Statutory licenses allow the licensee to use patented inventions under the terms of a government statute rather than the negotiation of a patent license agreement. Sole authorized licenses grant a license with terms and conditions set forth by a government agency. Administrative licenses are required at times by government agencies for the deployment of rights to a government-owned patent.
Foreign exclusive licensing is subject to the laws, requirements, and regulations of each foreign country in which the licensee intends to operate and/or sell a product or service under the license. Companies interested in entering into an exclusive licensing agreement for foreign patent rights may seek the assistance of federal governmental departments such as the U.S. Department of Justice, Department of Commerce, the U.S. Patent and Trademark Office, or other licensing agencies, to obtain a determination as to the availability of a license.