Technology Transfer

Strategic Licensing for the New Economy


Licensing Agreement: Main Terms


By: D.Fernandez,  S.Stahnke, R.Sheehan and M.Chow, Fernandez & Associates LLP




Long-term vs. Short-term Agreements

In a long-term license, the up-front payment is usually relatively small, and the subsequent royalty payments form the bulk of the financial compensation. Such an agreement is usually mutually beneficial if the licensee is a small, cash-poor company.

In a short-term license, the bulk of the payment is made in a larger up-front payment. In the most extreme case, this license may consist of one lump payment to cover past infringement. Such a license is suitable with an uncooperative or infringing licensee. This type of agreement is also useful when the licensing company wishes to liquidize its assets.



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Exclusive vs. Non-Exclusive Agreements

Whenever possible, the parties should attempt to engage in a non-exclusive license. This provides benefits for both the licensor and the licensee.

Firstly, there is less risk involved for both parties; the licensor is not dependent on the success of one product, and the lower licensing fee minimizes the risk of the venture for the licensee. In addition, the licensor retains more control over the product.

Furthermore, the reduced royalty fees reduce the cost of the product, which can increase the market share. Lastly, licensing to several companies increases the likelihood that improvements on the technology will be made; these improvements can benefit the licensor and all the licensees.

If the licensee desires an exclusive license, the licensor should ensure that several criteria are met. Firstly, the licensor must consider whether an exclusive license is the best way to exploit the potential of the technology. In addition, substantial research should be conducted into both the technology and the licensee to ensure that the resulting product will be clearly superior to its competitors and will be able to garner a large market share.

Finally, the licensor must be persuaded that the licensor has the marketing and production resources to make the product successful, and that the licensor is willing to commit these resources. The licensor may also wish to consider limited period exclusivity.


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Improvements on the Technology

Both parties should carefully consider the proprietary rights of improvements made to the technology during the license term. It is beneficial to the licensor gain rights to any improvements made by the licensee. Likewise, it is beneficial to the licensee to gain rights to any improvements made by the licensor.

Furthermore, if the license is non-exclusive, the licensee may also be able to incorporate improvements made by other licensees. The rights to improvements may be included free of charge with the license, or the license agreement may stipulate a payment to be made by either party in return for intellectual property rights for the improvements.


Model Agreements


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Unless the agreement specifically states otherwise, the licensee is not allowed to sublet to other parties. The licensing party should be aware that it may lose direct control over the technology if the licensee sublicenses the intellectual property. If sublicensing is allowed, the terms and conditions should be explicitly stated in the agreement.


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