Common Mistakes with Technology License Agreements

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A technology license agreement is a crucial legal document that allows one party (the licensee) to use another party's (the licensor's) intellectual property and technology under specific terms and conditions, without transferring ownership. These agreements are vital for protecting intellectual property rights, fostering innovation, and generating revenue, yet they can all too easily encounter problems as a result of common mistakes and errors, including:

A. Ambiguity and Lack of Clarity:

Vague Definitions of Licensed IP: One of the most frequent errors is failing to precisely define what technology is being licensed. Is it just a patent? Specific software code? Know-how? A trademark? All of the above? What versions or improvements are included? Ambiguity here can lead to disputes over the scope of use.
Unclear Scope of Rights Granted: The agreement must clearly specify what the licensee can do with the technology.
- Field of Use: Is the license restricted to a particular industry, product type, or application?
- Territory: Is it worldwide, country-specific, or regional?
- Exclusivity: Is the license exclusive (even as to the licensor), non-exclusive, or sole? This has huge implications for both parties' market strategies.
- Sublicensing Rights: Can the licensee grant sublicenses to others? Under what conditions?
- Transferability: Can the licensee assign or transfer the license to another entity (e.g., in a merger or acquisition)?
Undefined Performance Expectations (for Licensors): Licensors often fail to set clear minimum sales, development milestones, or royalty expectations. This can result in the technology being "tied up" by a licensee who isn't actively commercializing it, without any recourse for the licensor.
Ambiguous Payment Terms: How are royalties calculated (e.g., percentage of net sales, gross sales, per-unit fee)? When are payments due? Are there upfront fees, minimum royalties, or milestone payments? Lack of clarity can lead to disputes and cash flow problems.
Unclear Termination Clauses: What constitutes a material breach? What are the cure periods? What happens to the licensed technology, improvements, and data upon termination? Poorly drafted termination clauses can leave parties trapped or expose them to significant liabilities.

B. Failure to Address Key IP and Commercial Issues:

IP Ownership and Chain of Title:
- For Licensors: Failing to ensure they actually own the IP they are licensing, or that all necessary assignments from creators (employees, contractors) are in place.
- For Licensees: Failing to perform due diligence to confirm the licensor's ownership and the validity/enforceability of the IP.
Future Modifications and Improvements: Who owns improvements made by the licensee? Does the licensor get a "grant-back" license to those improvements? What about future developments by the licensor?
Warranties and Disclaimers:
- For Licensors: Providing overly broad warranties or failing to properly disclaim implied warranties (e.g., "as-is" clauses).
- For Licensees: Not securing adequate warranties regarding the technology's performance, non-infringement, or fitness for a particular purpose.
Indemnification: Failing to clearly define who indemnifies whom for what (e.g., IP infringement claims, product liability claims).
No Audit Rights (for Licensors): A critical mistake for licensors is not including robust audit rights to verify the licensee's sales and royalty calculations. Without this, enforcing payment obligations becomes difficult and expensive.
Neglecting Regulatory and Jurisdictional Differences: Especially in international licenses, failing to consider and comply with local laws (e.g., data protection, competition/antitrust laws, export controls).
Lack of Confidentiality Provisions: Not including strong clauses to protect trade secrets and confidential information shared during the relationship.

C. Operational and Management Pitfalls:

"Set It and Forget It" Mentality: Both licensors and licensees often treat the agreement as a one-time transaction. Ongoing monitoring of compliance, usage, and market changes is crucial.
Inadequate Record-Keeping: Failing to maintain accurate records of licensed software installations, usage, and royalty calculations. This can lead to non-compliance issues during audits.
Failure to Adapt to Technological Changes: Technology evolves rapidly. Agreements drafted without foresight can become outdated, leading to disputes when new technologies (e.g., cloud-based models for software) or business models emerge.
Ignoring User Experience and Support: For software licenses, neglecting to address user training, ongoing technical support, and the quality of customer experience can lead to poor adoption and dissatisfaction.
Not Involving Cross-Functional Teams: Legal, business, and technical teams all need to be involved in drafting and reviewing the agreement to ensure it aligns with business goals and technical realities.
Focusing Solely on Initial Cost: Licensees sometimes overlook the total cost of ownership (TCO), including ongoing maintenance, support, updates, and potential penalties for non-compliance.
"Shadow IT" Blind Spot: For licensees, the use of unlicensed software or cloud services by employees without IT department approval can create significant compliance risks.

D. Negotiation and Drafting Mistakes:

Rushed Deals or Using Generic Templates: Time pressure or using "off-the-shelf" templates without customization to the specific technology and business goals often leads to ambiguities and omissions.
Conscious Decision to Leave Language Ambiguous: Sometimes parties intentionally leave terms vague to push the deal through, but this almost always leads to disputes down the line.
Not Understanding the Other Party's Business Goals: A good license agreement should be a win-win. Failing to understand the other party's needs and motivations can lead to an unbalanced agreement that is ultimately unsustainable.
Ignoring Dispute Resolution Mechanisms: While no one expects a dispute, having clear, agreed-upon mechanisms for resolution (e.g., escalation, mediation, arbitration before litigation) can save immense time and money.
Overlooking the Impact of Competition Law: Licensing terms that are overly restrictive, create monopolies, or dictate pricing can fall foul of competition laws in various jurisdictions, leading to fines or voided contracts.

We understand how computer algoritms and technological processes intersect with the law and commercial aspects of the Internet, and working with corporate business officers, tech entrepreneurs and IT departments as they strive to realize upon the financial potential of the Net, AI and other computer-based technologies. For more information as to how our law firm can apply our knowledge of the law, technology and the Internet to your business pursuits, contact us via email at Chris@NeufeldLegal.com or 403-400-4092 / 905-616-8864.

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