What is a license? In a
nutshell, it is a promise not to sue. For example,
the fictitious 007 British spy had a "license to kill."
In essence, this was a promise from the British
government not to prosecute 007 for the many murders
he committed provided he continue to save civilization
from world domination by various evil-doers.
Thus, the license agreement
fundamentally involves the licensor promising not to sue
the licensee for using the licensor's intellectual
property. In return, the licensee pays the
licensor a royalty.
In the realm of intellectual property
there are several licenses of particular interest that
our firm sees with great frequency:
A patent gives the owner the right to
exclude others from making, using, selling, offering to
sell or exporting the invention claimed in the patent.
A patent license can take many forms but the most common
types are generally exclusive and non-exclusive
licenses. Owning an exclusive license to a
patented technology may be made contingent on the
company producing a predetermined amount of royalties.
Another type of exclusive license may be limited to a
particular industry or geographic territory.
Intuitively, a non-exclusive license means that multiple
parties may concurrently license the technology, even if
they are competitive with each other.
Assignment of Patent Licenses
Many clients are surprised to
discover that the type of license granted (non-exclusive
versus exclusive) may have a substantial impact in the
event the company is sold or acquired. The general
rule (unless otherwise provided) is that exclusive
licenses are transferred upon a sale but non-exclusive
licenses are not.
Furthermore, even if there is an anti-assignment clause,
the seller can still acquire the license by structuring
a reverse merger into a shell subsidiary of a larger
company. The licensee survives the merger into the shell
subsidiary and thus the licensee (and its license
agreements) survive intact.
Enforcement of Patent Rights
As a general rule, a non-exclusive
licensee cannot sue a non-licensed entity for patent
infringement. The non-exclusive licensee must
demand that the patent owner take steps to enforce the
patent rights. An exclusive licensee
generally can sue for patent infringement.
There are two main considerations
regarding trademark licensing: (1) whether the license
would be deemed "naked" and (2)
whether the trademark license would effectively become a
Quality Control in Trademark
Imagine if you could pay $1,000 to
get a trademark license to the COCA COLA trademark with
no strings attached. You would bottle your own
concoctions and then label them COCA COLA. You
would probably sell a tremendous amount of product at
first. However, consumers would soon realize that
the taste, quality and ingredients of your product are
different. Consumers would then lose faith that
the bottle of COCA COLA they purchase will taste the
same every time. Thus, if a trademark is licensed
without quality control over the end product, then the
license is deemed "naked" and such activity constitutes
grounds that the trademark has gone abandoned. As
the Ninth Circuit stated:
The licensor owes an affirmative
duty to the public to assure that in the hands of
his licensee the trademark continues to represent
that which it purports to represent. For a licensor,
through relaxation of quality control, to permit
inferior products to be presented to the public
under his licensed mark might well constitute a
misuse of the mark. Siegel v. Chicken Delight,
Inc., 448 F.2d 43, 171 U.S.P.Q. 269 (9th Cir. 1971),
cert. denied, 405 U.S. 955, 31 L. Ed. 2d 232, 92 S.
Ct. 1173, 172 U.S.P.Q. 577 (1972).
Accordingly, a trademark license must
account for periodic oversight by the licensor to
monitor the quality and consistency of the products
licensee sells under the trademark.
Is the Trademark License a
The three elements of a franchise
are: (1) initial fee in excess of $500.00; (2)
licensing of a trademark; and (3) providing substantial
assistance or control. Because the courts
have overwhelmingly required a trademark licensor to
exercise quality control over the licensee's products,
two of the three elements of a franchise are already
Virtually all trademark licenses
initially contemplate an up-front license fee in excess
of $500. Therefore, the question to ask is whether
your trademark license is, in reality, a franchise.
Our practice regularly handles both
sides of software development transactions. The
developer on one side and the customer on the other.
We frequently encounter inexperienced attorneys
demanding that the software developer indemnify the
customer for use of the software. For example, in
the event that the software was found to infringe upon a
patent, the software developer would "indemnity, hold
harmless and defend the customer."
A developer would not assume such
broad and unlimited liability unless:
The developer had
complete control over the deployment of
The developer had the
authority to shut down execution of the
application in the event a claim was made,
thereby mitigating any future damages attributed
under the provision;
The developer had a
substantial ongoing royalty stream
to pay for the indemnification overhead; and
The project was worth
at least $250,000 amortized over 24
Even with these circumstances, a
developer would need an opt-out clause in the event: (1)
the allegedly infringing product could not be modified
to avoid infringement and (2) a license could not be
secured to continue to use the product. Typically, the
developer would be able to walk away from infringement
liability by paying out either the last 6-12 months of
licensing payments, or a pro-rata share of the one-time
development costs on a 5 year product lifespan. For
example, if a project had an upfront fee of $500,000 and
the product was deemed infringing after Year 1 (and no
way to circumvent or license), then the developer would
return $400,000. If the infringement was found in Year
4, then a refund of $100,000 would be given. The window
would close at Year 5 (end of the product lifespan).
Some larger companies (Fortune 500) we work with insist
on a 7-year lifespan.
In most cases, indemnifying a custom
software project by the developer would lead to
absurd and unconscionable results. The developer would
effectively be an unpaid IP insurer of the customer’s
business activities. If a claim is made, the customer
could continue to rack up liability that the developer
would have to pay. Furthermore, the customer could
deploy the solution in a manner or in combination with
other technology that would cause an originally
non-infringing solution to become infringing. Again, the
developer would have no means to limit its liability.
How to Advise the Customer Demanding
You are producing software in
accordance with the customer’s specifications;
You will have no control over how
they deploy it, market it, or use it with other
You cannot provide development
services at the price quoted and then also retain IP
counsel to clear the technology for
At the costs quoted you cannot
allocate capital to an infringement defense fund to
adequately cover a potential infringement;
The customer is in a better
position to mitigate damages, defend allegations and
potentially license the IP asserted against it.
Intellectual property licensing
arises in various circumstances. A license may be
granted to a company seeking to manufacture a novel
product developed by an inventor. Two companies
settling a software copyright infringement litigation
may agree upon a software license so there is no
disruption in the defendant's product availability.
A trademark license may be granted to permit another
company to use a mark provided the underlying product is
of a certain quality and consistency.