Thursday, December 15, 2011

Sub-licensing, Audits and Other License Attributes - Part 10 in our IP and Patents Series

This is the tenth in a planned 20-part series of articles on intellectual property.  In future posts, we will explore licensing costs and commercialization of products.

In this posting, we will provide an overview of some additional facets of licensing agreements: including sub-licensing rights, auditing rights, early termination penalties and more.

A license is an agreement that allows the licensee to use a technology for some purpose – usually to create products based on the technology, in exchange for a license fee and/or a commission on revenues.

In other words, the licensee will take the idea and turn it into a viable product or otherwise create some kind of revenue stream off the technology.  The inventor will then see a portion of those revenues under the terms of the license.


Many licenses allow the licensee to sub-license the technology to another entity.  This can be useful in many circumstances; for example, where the licensee may want to take advantage of the use of distributorships or other means to market. 

Sub-licensing will generally only be permitted within the field(s) of use of the license and the licensor will maintain the same royalty structure as in the original license agreement.  So, if the licensor was being paid a 5% royalty on sales, the licensor will still be entitled to that royalty, despite whatever was negotiated between the licensee and sub-licensee. 


The licensor will almost always have the right to audit the licensee’s books (or have them audited by a reputable firm) to ensure that the licensee is paying the appropriate license fee. 

As part of this effort, the licensee will be required to maintain appropriate records of sales as a condition of maintaining the license. 

Early termination

There are usually clauses for early termination in the event that the licensee fails to perform or if the market doesn’t materialize as planned.  The circumstances surrounding an early termination may, or may not, require the licensee to pay an early termination fee.

Other aspects of licensing

Most license require periodic reports (quarterly, semi-annually or annually) detailing and research efforts related to the licensed technology, the marketing effort, the number and amount of sales, etc.  These reports are designed to ensure the licensee is taking all appropriate actions to maximize sales of the licensed technology.

The license may also require that the product being sold is marked with the patent number(s) and/or other identifying marks that indicate the IP behind the technology is protected.

Licenses, as one can see, can contain a number of articles unique to the situation the licensors and licensees find themselves in.   As such, it is always good practice to consult an attorney that specializes in IP protection and licensing prior to negotiating a license agreement.

Additional details on a typical license fee structures and commercialization activities will be addressed in upcoming installments.

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