By Steven J. Henry
Buying a license for a technology or product can backfire without a solid strategy and ample research. Here are five often-overlooked landmines:
#1 – Believing a term sheet will protect your interests
A term sheet a brief document outlining the terms and conditions of a business agreement. But it’s just the start.
A formal, written licensing agreement is the best way to remove any ambiguity. Most term sheets expressly state they are not binding.
A term sheet, even if it states it is binding, is usually not detailed enough to be deemed an enforceable contract, nor does it lay out all the provisions you need. Special care is needed if you want the term sheet to be binding, or binding in part, as the absence of other terms could lead to unexpected consequences. The devil is in the details.
Always consult a lawyer before signing a term sheet. Once the other party thinks you’ve agreed to certain terms, it can be difficult to change those terms without having to make concessions or getting in a dispute.
#2 – Not ensuring you can use the technology
Make sure the inventor or licensor owns all the rights and that you, the licensee, are completely free to practice the technology.
Find out before you sign a deal if a third party has dominant rights that could make your license useless.
Signing up for a license without making sure you are not walking into an infringement suit might be necessary due to time constraints, but never pay a substantial upfront payment or make a large investment in the technology without clearing the path.
#3 – Dealing with the wrong party
The licensor may have U.S. or foreign subsidiaries that hold the patents. Or the rights may be owned or encumbered by a third party that has to approve the deal, such as an investor or lender. Or, if the technology was developed elsewhere and acquired by your collaborator, the legal title might not have been transferred and properly recorded.
Sometimes there are ongoing ownership disputes or the potential for them.
A “favorite” obstacle is discovering that there is an unnamed inventor on a patent, that the unnamed inventor was under no obligation to assign his or her rights, and those rights were never assigned. If that inventor’s rights cannot be folded into the deal, one can only receive a non-exclusive license from a co-owner, and exclusivity may be the essence of what you seek.
Make sure the entity entering into the agreement is the appropriate party to the agreement, that it has the necessary rights, that you know what you are and are not getting, and that any required approvals have been obtained in writing.
A title search of government patent records is also crucial.
#4 – Believing all licensors offer the same deal
Big companies such as IBM license technology only to those who grant them freedom from suit for patent infringement.
A middle manager who enters into a license that does not contain a cross-license or covenant-not-to-sue would not like the consequences if his or her company is sued by its licensee.
You’ll hardly ever convince a large company to grant you a license without insisting on reciprocity. Granting such freedom to the licensor (which becomes a cross-licensor), however, could significantly reduce the value of your company’s intellectual property.
You might be able get a much better deal by licensing similar technology from a university or smaller company that will not insist on such a cross-license or covenant.
#5 – Non-compete agreements from the licensor’s key employees and consultants
Although key employees and consultants may not be party to the licensing deal, you need to consider the consequences should they leave.
You don’t want them to become your competitors. Requiring the licensor to obtain non-competes from all its key employees and consultants – enforceable by you – may save you considerable angst down the road.
Steven J. Henry is chair of the licensing practice at New England intellectual property law firm Wolf, Greenfield & Sacks, P.C., www.wolfgreenfield.com.
Editor’s note: This article appears in the June 2011 print edition.
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