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What Do the Terms Mean in My Intellectual Property License, and Does it Protect Me?

  • By: Ryen Rasmus
    Published: January 12, 2022

In the world of law, words matter.  When you’re dealing with intellectual property law, which governs things of value that you often can’t see or touch, words matter even more.  So, what do all those words in an intellectual property license mean, and how can you be sure you’re using the right ones?

What is a License?  

In the intellectual property (IP) context, a license is a legal right to use IP that someone else owns.  The person who owns the IP at issue is the “licensor,” and the person receiving the right to use that IP is the “licensee.”  Since the language of a license dictates what the licensee may and may not do with the licensor’s IP, lawyers have developed some standard terms that are used to specify the outer reaches of a licensee’s rights.

A Guide to Licensing Language

In drafting and interpreting a license, you can use this shorthand guide to determine what rights are granted.

TIMING

Is your license granted, or is there only a promise to grant a license in the future?

This is a fundamental question that comes up much more often than it should.  If it is your expectation that you are being granted a license to use the material at issue from the time you sign your agreement, your license should always use present grant language – i.e. “Licensor hereby grants Licensee a license . . .”

If the language instead states that “Licensor will grant Licensee a license . . .” then you don’t actually have a license yet, only a promise that the licensor will grant a license in the future.  Often, there is no real disconnect in the intent of the parties, just inexpert drafting on the part of the person who drew up the license, but ensuring that you receive an actual license grant in your documentation can save you the headache of uncertainty and equivocation later.

EXCLUSIVITY

Is the license exclusive, sole, or non-exclusive?

An exclusive license means that the licensee is the only person allowed to exercise the rights granted in the license; even the licensor itself is not allowed to exercise these rights.  Exclusive licenses are rare and are usually granted when the licensor doesn’t have the capacity to monetize intellectual property using its own resources.

A sole license means that the licensor wants to retain the ability to exercise the rights that are licensed but is promising that only the licensee and no other third party will have the parallel right to exercise those rights.  You might see a sole license in situations where the licensor wants to continue to market and expand upon its IP but wants to engage a licensee to actually make sales to the public.

A non-exclusive license means that the licensor is allowing the licensee to use certain rights but is reserving the right to license those same rights to others.  Non-exclusive licenses are most common and are frequently seen in the software context.

GEOGRAPHIC SCOPE

Is the license worldwide or confined to a given territory? 

A worldwide license is what it sounds like: the grant of an ability to use the rights licensed anywhere in the world.  Indeed, worldwide licenses sometimes specify that the rights licensed can be used “anywhere in the universe,” just to avoid confusion when it comes to things like satellite transmission.

A license that is limited to a given territory means that the licensee may only exercise the rights licensed in certain places.  These types of licenses are often seen in the sales context – for instance, one licensee may be limited to selling a given product in North America, while another licensee has the right to sell the product in Europe and Asia.

DURATION

Is the license perpetual or for a term?

Perpetual licenses run indefinitely.  While it may still be possible to terminate them (e.g. in the case of the licensee’s breach of contract or failure to meet sales quotas), they do not automatically expire.

Licenses for a term, however, run only for a set amount of time.  At the end of the term, the license may automatically renew, or may be extended upon either the licensor’s or bilateral agreement, but absent a renewal provision, a term-based license expires at the end of the term.

REVOCABILITY

Is the license revocable or irrevocable?

This is another simple distinction: irrevocable licenses may not be terminated by the licensor, while revocable licenses may (either at the licensor’s discretion or in the event of later-occurring conditions, like breach of contract or lapse of the license’s term).

Irrevocable licenses are less common and are usually granted when the licensor is a subcontractor to a licensee that is performing work for a third party like an end user or the government.

COSTS

Is the license paid-up or royalties-based? 

When a license is paid-up, it means that all costs associated with the license are paid at the beginning of the license term, usually by means of a one-time payment.  You may also encounter the concept of a fully paid-up license, almost always in connection with an irrevocable license, which means that once the licensing fee is paid, no other payments will come due at all with respect to the license.

A royalty-based license means that there will be ongoing payments due with respect to the license.  These payments, called “royalties,” are usually associated with the number of units sold.  For instance, a royalty-based license may call for payments to be made each time the licensee sells a copy of a licensed product to an end user.  Alternatively, royalties might be based on the profits that the licensee makes by exploiting the rights licensed – for instance, an artist might take a percentage of everything that a licensee makes by selling merchandise based on the artist’s work.

SUBLICENSING

Is the license sublicensable or non-sublicensable?

A right to sublicense is a right to flow down the rights granted to a licensee to a third party.  The right to sublicense may be unlimited (i.e. the licensee can flow down the license rights to as many third parties as they like, no matter the nature of the third parties) or limited.

When the right to sublicense is limited, conditions might only allow for a certain number of sublicensees, or only certain kinds of sublicensees – for instance, only the licensee’s contractors or affiliates, or only those located in certain geographic areas or in particular industries.  Since a license may be of limited use if a licensee is the only one who can use the licensed material, specifying whether and to what degree sublicenses may be granted is very important in most cases.

TRANSFERABILITY

Is the license transferrable?

In the eyes of the law, a license is a piece of property, just like a car or a laptop.  Therefore, when a license is freely transferrable, it can be given or sold to a third party.

A transfer is difference from a sublicense, since once a license is transferred, the original licensee loses the right to use the license unless it receives a “license back” from the transferee – which is essentially a new sublicense from the transferee to the original licensee.  Nontransferable licenses may not be given away or sold off and must remain the property of the original licensee. 

FIELD OF USE

Is the license limited to a certain field of use?

Sometimes, the licensor will specify that the material licensed may only be used in a certain way.  This specified way of using the material is call the license’s “field of use.”  For instance, a licensor might specify that the material at issue may only be used to the extent necessary to allow the licensee to perform work under a given contract.  In such a case, the licensee can use the material only for purposes of performing its contract work and not in connection with its work on any other contract.  The licensee also cannot make unrelated sales of license rights to third parties.

In other cases, a licensee’s field of use may be limited to a particular medium or industry.  For instance, an artist might license her visual work only for the purpose of creating consumer merchandise, but not for use in third-party advertising or gallery displays.  Likewise, a technology company might license new editing software for use in the television industry, but not the movie industry.

Licensors have lots of flexibility when it comes to specifying a license’s field of use, so ensuring that the applicable language captures each party’s intent is important.

PRACTICE EXAMPLE

How does this work in practice?

Let’s consider an example to see how the language of a license impacts a company’s decision making.

You are the chief contracting officer for a software company that designs user interfaces for companies looking to hire job candidates.  Your company has licensed a piece of third-party software from another company called EZ Complete that allows the interfaces your company designs to pull information from individuals’ resumes.  Your company’s license to use EZ Complete reads:

Licensor hereby grants to Licensee a non-exclusive, worldwide, paid-up, sublicensable, non-transferable license to use EZ Complete in connection with the performance of Licensee’s services for third-party private companies for a period of two years from the effective date hereof.  This license will renew automatically for successive one-year terms following its initial term but may be revoked pursuant to the terms of this Agreement.

 A sales representative from your company comes to you with two potential leads.  One is a request for proposals from the U.S. Airforce to enhance their interface for civilian job applicants.  The other is from a French company that wants you to guarantee that the interface you design will operate in the same manner for a term of at least five years.  Does the language of the EZ Complete license raise any issues with respect to either lead?

The answer is yes – based on the current wording of the license you will be limited in what you can offer to both the Air Force and the French company.

For the Air Force, your company may be able to provide services to them, but you can’t integrate EZ Complete into your build.  Why?  Because the field of use for your license covers private companies only, not governmental institutions.  EZ Complete may be willing to negotiate with your company to expand the field of use, either for this specific project or generally, buy you would need to agree on revised license terms first.  This may come at an additional cost to your company, since the government has its own rules governing IP rights, and some companies are loath to wade into a different system with unique risks.

For the French company, you can integrate EZ Complete into your build, but the term of the license may be problematic.  Since the EZ Complete license is revocable, and the term of the license, while subject to an auto-renewal, isn’t perpetual, you may not be able to promise that the interface you build will function without any changes for five years due to the potential that your EZ Complete license may be revoked.  Here, too, you can seek to adjust the terms of your license with EZ Complete – perhaps by asking them to guarantee that the sublicense granted to the French company will be honored for a term of five years – or you can seek to negotiate with the French company to see whether they are willing to carve out EZ Complete from those functions of the interface with respect to which you make your five-year guarantee.

As you can see, a single word can make the difference when it comes to interpreting and applying a license in your everyday business, so companies should take care both to ensure that their licenses include the appropriate language on the front end, and that they consult and correctly implement the terms of those licenses on the back end when dealing with customers and other third parties.

Ryen Rasmus is an Attorney with The Lipp Law Firm, PC and specializes in corporate transactions and intellectual property.  You can contact Ryen at Ryen@LippLawFirm.com.

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