Assuming that the demand letter successfully gets the parties to negotiate a license, the parties will have to discuss terms of a license and possibly draft a license agreement. A full-blown discussion of licensing terms is obviously beyond the scope of this survey, but several considerations go into license agreements.

These considerations include:
  • Granting an exclusive or non-exclusive license
  • The scope of the agreement
  • Whether to include a cross license or improvements
  • What type of royalty and/or royalty structure should be used
  • Term of the agreement
  • Possible regulatory considerations, such as antitrust
The first consideration – whether to grant an exclusive or non-exclusive license – will often depend upon market conditions or whether the licensor is aware of other potential licensees.

The next consideration is the scope of the agreement. A license agreement can be restricted to a particular territory or to a particular aspect of the claimed technology at issue. Again, this will usually depend upon market conditions or whether the licensor has additional licensees interested in other geographies or aspects of the claimed technology at issue.

The next consideration is whether to include a cross license or improvements in the license. A cross license is a license in which each side gets to use technology that is owned by the other party. The decision to include a cross license or a provision for improvements will usually depend upon the field of the technology at issue or the particular technology itself.

The parties will also have to decide upon a royalty and royalty payment structure. The royalty may be in the form of a paid-up lump sum. The royalty may also be a percentage of sales or a fee based upon the number of licensed units. The agreement may also call for the payment of a minimum royalty or some other incentive.

The parties must also set a term for the agreement. The agreement may also include provisions allowing the parties to terminate the agreement in the event of a breach.

Finally, both parties will want to make sure that they do not violate any laws in entering the agreement. In particular, a party should be sensitive of the antitrust laws.

In some foreign countries, like Japan, India or some South American countries, a government agency must approve the license before it can become effective.