In today’s business environment, virtually every company depends on one form of technology or another. And for most businesses, much of that mission-critical technology is licensed. From licensing software to manage operations and interact with customers, to licensing patents or other forms of intellectual property to develop products, technology licenses are ubiquitous in modern commerce. Yet despite their vital importance, companies often pay insufficient attention to the actual terms of those licenses—assuming it is all “standard.” As a result, companies often find themselves with a license that does not further their business needs. Even worse, poorly drafted or ambiguous licenses can lead to protracted, expensive litigation that can destroy business relationships, drain companies’ resources, and distract companies from their actual business goals. This article addresses key considerations to keep in mind and common pitfalls to avoid when negotiating technology licenses.
Companies license technology to achieve business goals. Yet they often forget those goals when negotiating and signing licensing agreements—entering into cookie-cutter contracts with “standard” provisions that can actually inhibit operations. To avoid this result, a business must have a concrete idea of its goals before entering into negotiations and communicate them to the negotiating team.
Once the business case is set and communicated, a company should scrutinize each provision of a proposed license agreement with counsel to ensure that it furthers those goals. That includes substantive provisions like termination, maintenance, and cure provisions. It also includes what some think of as “boilerplate” contractual provisions, such as limitation of liability, choice of law, and arbitration provisions, as those provisions can truly shape the parties’ rights and responsibilities.
And most importantly, parties should be prepared to walk away from a licensing deal if the terms conflict with their business goals or would not be commercially beneficial. Don’t assume past performance will continue despite ambiguous or negative contract terms. And don’t let momentum dictate that execution of a deal is inevitable.
Along with focusing on the licensing agreement itself, companies should also scrutinize the steps leading up to the final agreement. Letters of intent, memoranda of understanding, non-disclosure agreements, pre-contract emails and other written communications, and oral sales representations can all lead to protracted and expensive litigation. In some circumstances, agreements to negotiate “in good faith” are binding and enforceable, and they can prevent a party from insisting on radically different terms or from walking away from the deal without negotiating. Courts in Illinois and elsewhere have awarded parties substantial damages, including lost profits and contract expectation damages, for a party’s breach of its agreement to negotiate in good faith.
While companies should carefully review all aspects of a licensing agreement, certain provisions have proven especially likely to give rise to disputes between the parties. Parties should pay particular attention to these provisions when analyzing licensing agreements:
Licensing agreements dictate the terms of critical components of most companies’ operations. For that reason, companies should carefully review and analyze all licensing agreements with counsel before entering into them. Engaging experienced counsel on licensing issues before signing the agreement can save substantial time, expense, and headaches after the agreement is signed.
This content (©2022 McDonald Hopkins LLC All Rights Reserved) is designed to provide current information regarding important legal developments. The foregoing discussion is general information rather than specific legal advice. Because it is necessary to apply legal principles to specific facts, always consult your legal advisor before using this discussion as a basis for a specific action. This material is not intended to create, and your receipt of it does not constitute, an attorney-client relationship with MH.
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