By Charles Mottier
Leydig, Voit & Mayer
In assisting clients with licensing over many years, the same clauses have required negotiation in nearly every license agreement. I have developed best practices to address them and to facilitate an agreement. It is interesting that these often-disputed terms are not those directed to the fundamentals of the license agreement, such as the property subject to license, the scope of the license, the royalty for use of the licensed property or the term of the license.
Perhaps because those terms are central to the license agreement, there is a common understanding between the parties before they turn to drafting the written agreement. Instead, ancillary terms, but which can have real business significance, such as warranties, limitations on liability, terms of delivery and payment and assignability, are often those that are hotly contested. Agreement of these contested terms can often be quickly reached if thoughtful alternatives are presented.
Warranties, particularly for customized software, are frequently among the significant points of contention. Typically, warranties of merchantability and fitness for a specific purpose are expressly disclaimed. Nevertheless, licensees logically expect that the property they license will meet their stated needs, based on functionality presented in promotional literature and discussed during sales negotiations. To address this expectation of the licensee, licensors should consider warranting that their intellectual property will comply in all material respects with its user documentation or to an appended statement of functionality. Typically, the remedy for breach of such a warranty is the repair or replacement of the nonconforming aspect of the intellectual property. In the event that repairs or replacements are unavailing, the agreement can permit the licensee to terminate the agreement with respect to the nonconforming aspect of the intellectual property.
Indemnification provisions also attract attention and certainly every licensee wants to be reimbursed for damages that arise from the breach of a warranty. One way of addressing the scope of any indemnification is to provide a cap on damages. Highlighting the differing interests of the parties, a licensee would want no limitation of the licensor's liability, while the licensor will certainly want to eliminate indirect, incidental or special loss or damages and narrowly define any indemnified claims. But most parties recognize that the economics of the license must make business sense for both parties, otherwise the license is unlikely to be granted. For this reason, limitations of liability can often be negotiated at some multiple of the total dollar amount paid by the licensee to the licensor under the agreement.
Contention can also surround delivery and payment terms, particularly when the licensee's use of the licensed property may be delayed pending installation and implementation. With customized software, this can be a particular problem that can be met by staggering payments based upon the achievement of certain milestones. For example, software licensees can pay a percentage of the total or annual license fee upon execution of the license agreement, with the balance due upon acceptance of the software, or when it goes live. This same solution can be applied to the license of other intellectual property rights. Implementation fees can be similarly staggered.
Assignment provisions are also a source of trouble. Both the licensor and licensee usually want unrestricted rights to transfer the agreement if their business assets are sold, but each often has a reason to limit or preclude transfer by the other. The licensee is, of course, concerned that the licensor, who likely provides ongoing support services, will sell or transfer to a company that is not as capable, and the licensor wants to preclude assignment of the agreement to a competitor, who may thereby gain access to confidential intellectual property. Compromise positions include permitting assignment with the consent of the other party, which consent shall not be unreasonably withheld, delayed or conditioned. Assignment provisions can preclude transfer to a competitor or permit assignment if the assignee is a noncompetitor of the other party at the time of transfer. Any assignment provision should also address transfer by merger and operation of law.
Some terms I have learned are very difficult, if not impossible, to negotiate. Those provisions that relate to personal information present special problems and concerns. Many organizations that are concerned with the confidentiality and disclosure of personal information have often developed forms, such as business associate agreements in the case of patient health information, to ensure compliance with applicable laws and to mitigate risk. Such confidentiality and nondisclosure provisions are often adapted on an enterprisewide basis and are nonnegotiable. In these circumstances, it is best to identify such terms up front, to determine whether they constitute an impediment to agreement and to ensure that appropriate protections are in place to preclude the breach of a confidentiality or nondisclosure provision. From experience, this is more effective than attempting to change a provision that reflects the institutionalized practices of a party to comply with applicable laws.