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Negotiation Considerations in IP Licenses

by | Sep 15, 2023 | Intellectual Property

Photo by The Jopwell Collection on Unsplash

Photo by The Jopwell Collection on Unsplash

An owner of intellectual property rights (IP) rights can agree to grant a license to a person or entity for use of the mark. There are many IP license agreement forms available if you want to give or receive a license to use a trademark. Some forms may have more than needed, other forms may have less than needed. Indeed, AI could produce a license agreement in short order.

Words of caution are in order, however. Just like trying on new clothes before buying, you should review a form of license to make sure it fits your situation before signing. Best practice is to have an attorney prepare and/or review the license agreement.

While some IP licenses could be considered standard, just as likely are “one-off” situations that require focused business and legal negotiations. New licensing arrangements are affected by current and projected economic, financial, and business conditions, as are license renewals. Important licenses and renewals are rarely accomplished solely by use of standard forms.

This blog article covers (1) “integration” and “entire agreement” provisions and awareness of when these provisions may not be enforced; (2) suggestions for achieving favorable terms; (3) making sure your license does not contravene the law; and (4) protecting the attorney-client privilege.

First, Be Aware

In a legal proceeding, an integration or entire agreement provision will not always prevent extrinsic evidence (also referred to as “parol evidence”) related to the license and its negotiations. Extrinsic evidence consists of documents and statements not in the license itself, yet it is likely discoverable in a court proceeding and may be admissible evidence in court. The extent of admissible evidence relating to a license and its negotiation will depend on the law governing the license, usually the law of a particular state and federal law to the extent applicable.

As a general proposition, extrinsic evidence is admissible on whether a license is void or voidable on certain grounds and whether the signed written license is a complete and accurate integration of an agreement. 4500 Suitland Road Corporation v. Ciccarello, 269 Md. 444, 450-454 (1973) (extrinsic evidence established there was no meeting of the minds and deposit returned to buyer); Chertkof v. Spector Baltimore Terminal, Inc., 263 Md. 550, 557-58 (1971) (collateral agreement admissible to show restrictive covenant in a deed was not enforceable). Federal courts follow Maryland law when it governs. See C B Structures, Inc. v. Potomac Electric Power Co., 122 F.Supp.3d 247, 251-253, n. 2 (D. Md.2015).

Even communications during a license negotiation can be admissible evidence. In Elte, Inc. v. S.S. Mullen, Inc., 469 F.2d 1127 9th Cir. 1972), the court affirmed the trial court’s admission of evidence of the negotiations preceding the execution of the agreement:

A trial court is entitled to ascertain what the intention of the parties was at the time of contracting, and evidence of the character of the subject matter, the nature of the business, antecedent offers and counteroffers, and the communications of the parties with each other in the process of negotiation is admissible for such purpose.

469 F.2d at 1131.

IP licenses are no exception; they can be contested using extrinsic evidence, despite the existence in the license of an integration or entire agreement provision. JA Apparel Corp. v. Abboud, 568 F.3d 390, 396-98 (ambiguity in scope of trademark license permits court to consider extrinsic evidence); In re AMICA, INC, Debtor, 135 B.R. 534 , 546-48 (N.D. Ill. 1992) (given ambiguous software license court resorted to testimony and other evidence) (citing Patterson-Ballagh Corporation v. Byron Jackson Co., 145 F.2d 786, 790-92 (1944) holding parol evidence is admissible in patent license suit); PBM Products, LLC v. Mead Johnson Nutrition Company, 678 F.Supp.2d 390 (E.D. Va. 2009) (settlement agreements of false advertising disputes) (court considered company executives deposition admissions that infant formula advertisements were false).

The vast majority of IP licenses are never contested. Only a very small percentage are sought in a discovery request or subject to scrutiny in a deposition or court proceeding. Yet, being aware that your license could be involved in a legal proceeding will beneficially affect how you handle the negotiations.

Three essential objectives in an IP license negotiation are: (1) achieve for the client the most favorable license terms; (2) make sure that the license and its terms do not contravene the law; and (3) protect the attorney-client privilege and work product doctrine with respect to the license and its terms.

Photo by Headway on Unsplash

Photo by Headway on Unsplash

Achieving Favorable Terms

In one-off licensing negotiations, the client (or client representative) and the attorney should work together with frequent communication. Each has important responsibilities to produce a quality license that satisfies the business objectives and provides appropriate legal protections and obligations.

The client starts the process by identifying the business objectives and, more specifically, the key terms needed in the license. If the client is an organization, a client representative should be identified, and the extent of her authority should be told to the attorney. The client representative and the attorney should discuss the objectives and the key terms during the preparations for the negotiations. These discussions should produce a strategy to use during the negotiations; they may also result in adjustments to the objectives and the terms sought by the client.

Beyond the fundamentals described above, each negotiation and related agreement-drafting has its unique circumstances. Nevertheless, here is a list of suggestions for a successful negotiation, in no particular order:

  • Attorney assures client that no decisions are final without client consent.
  • During the negotiations, the client representative keeps other key persons and stakeholders in the business informed.
  • Attorney tries to make personal contact with the attorney for the other party before the negotiations begin or, if the other party is not represented, the client representative does the same with the person that will represent the other party. The purpose is to have an initial contact, however short, that is not adversarial.
  • Your attorney prepares and presents the initial draft, if possible; if you do not present the initial draft, be gracious but also give the initial draft extra scrutiny before the negotiations begin.
  • Attorney prepares all revisions to a draft with input from the client representative, focusing on the key provisions for both sides as the negotiations continue. Use a redline/comparison program word-processing system; right now, Microsoft Word is the best.
  • Do not present a revision to the other party until it has the approval of the client representative and the attorney.
  • Make sure the revisions will not kill the deal unless the client is ready and willing to walk away.
  • Attorney constantly double-checks to make sure they are working on the most recent draft presented.
  • Use and update file names so they identify the latest draft.
  • Attorney proofreads drafts at every stage of negotiations, so words and provisions do not disappear, or suddenly appear, without Attorney and the client knowing.
  • Periodically, the client representative and attorney should assess the status and decide what provisions in the latest draft are acceptable and what provisions are unacceptable.
  • Be reasonable. Be positive. Look for language that can accommodate both parties’ objectives.
  • Attorney is creative and develops and proposes to client representative edits to unacceptable provisions that might make them acceptable (“workarounds”). Client decides what workarounds are useable and can be presented to the other party.
  • Attorney presents all revisions and edits to the license to the other party as part of a complete revised draft. Avoid piecemeal exchanges.
  • If progress is being made, the attorney and client representative are patient and keep the process going.
  • If and when only two or three items remain and you are close, then consider making a phone call to the other party representative with language suggestions that could resolve all remaining issues.
  • At the end of the day, client decisions on the license provisions and language are paramount unless the attorney advises a provision is illegal, immoral, or unethical.
  • Agree on effective date, signatures, and license execution process, such as counterparts, DocuSign, or some other method.

Make Sure the License Does Not Contravene the Law

Most IP – patents, copyrights, trademarks, trade secrets — exists under an umbrella of federal, state, and possibly international laws. A license provision that contravenes applicable law makes the entire license vulnerable to legal challenges and a judgment or declaration of invalidity. It is the attorney’s responsibility to make sure a license or license provision does not violate the law.

A common example of an IP license that would violate the law is a license to make, sell, or use a patented invention that purports to be effective beyond the expiration date of the patent. For example, the term of a utility patent on an application filed on or after June 8, 1995, is 20 years measured from the U.S. filing date. For some patents, the 20-year term may be computed from the filing date of another, earlier patent application. See 35 U.S.C. §§ 120, 121, 365, or 386.

The same is true of copyright licenses. The term of copyright protection is much longer than it is for patents. Nevertheless, a copyright holder cannot enforce a license to use a copyrighted work (e.g., book or movie) beyond the statutory period of protection. The general rule is copyright protection for works created after January 1, 1978, exists for the life of the author plus an additional 70 years.

For owners of rights to a trademark, the right to exclude others depends on use of the mark in the marketing and sale of a particular kind of goods or services. This is true for both common law trademarks and for federally registered trademarks. Under common law, lack of use for a long period of time can constitute abandonment. Maryland law allows cancellation of a state registered trademark if a court finds abandonment. Md. Code Ann., Bus. Reg., § 1-412(a)(4)(i); see also, Sunbeam Products, Inc. v. 148977 Canada, Inc., 2004 WL 3135768 (Cir. Ct. Anne Arundel Cty. 2004) (Maryland state-registered trademark held abandoned for lack of use in business). Under Lanham Act, a federal registration will be cancelled for abandonment if the owner of the registration cannot periodically demonstrate use of the trademark in commerce. Lanham Act, 15 U.S.C. § 1064(3).

Protect the Attorney-Client Privilege and Work Product

The attorney-client privilege is fundamental to the attorney-client relationship. It is an essential and valuable protection in a free society. It applies in criminal and civil contexts. In business and commercial situations, the attorney-client privilege promotes full disclosure by clients to attorneys of all facts pertaining to decisions that will affect inpiduals, families, religious institutions, governments, non-profit organizations, business and more.

There are four essential elements that must be present to invoke the attorney-client privilege: (1) an oral or written communication; (2) between a client and an attorney; (3) made and intended to be confidential; and (4) made in connection with providing, seeking, and/or obtaining legal advice or assistance. See Zook v. Pesce, 438 Md. 232, 240 (2014); see also Maryland Attorney’s Rules of Professional Conduct, Maryland Rules, 19-301.6. There are exceptions to the privilege; communications related to the commission of a crime or a fraud are not privileged or protected from disclosure.

An oral communication protected by the attorney-client privilege is usually established by statements by the client and/or the attorney. A written communication is usually established by the document itself or within the context of the communication. In a court action, it is standard that the litigating parties seek discovery of documents that include privileged written communications. Usually, the attorney reviews the documents covered by the discovery request and withholds from production attorney-client privileged communications (as well as documents protected by the attorney work product doctrine). A broadly-descriptive log of withheld documents must be provided to the other parties in the court action.

The best way to assert and establish the attorney-client privilege for written documents and communications is (1) for the attorney to label the document “CONFIDENTIAL/ATTORNEY-CLIENT PRIVILEGED COMMUNICATION,” and (2) advise the client to do the same. For work product documents, label the document “ATTORNEY WORK PRODUCT.”

By doing this, the intention that the written communication be privileged or protected is apparent from the document itself. Moreover, failing to put “CONFIDENTIAL” on a written document or communication increases the chance that it might be produced by mistake.


Photo by cytonn-photography on Unsplash

Photo by cytonn-photography on Unsplash