What is a Non-Exclusive License Agreement?
A non-exclusive license is a term used in intellectual property law to understand whether a particular license provides the right for an entity to use a specific asset without requiring permission from a licensor. The license agreement grants the licensee certain rights to engage in agreement terms. A non-exclusive license can take many legal forms and can include software license agreements, copyright licenses, patent licenses, trademark licenses, and/or general royalty-free licenses.
Generally, all rights are reserved by the issuer of a license. It enables the licensee to use the assets granted by the issuer without any interference. The licensee is not obligated to compete with other licensees. A licensor reserves the rights to grant licenses to third parties. A licensor could also use a license by themselves.
Going into details of a non-exclusive license , the term "non-exclusive" means that several parties are given the same access to a particular license. A non-exclusive license will enable the licensee to use a certain aspect of a specific license in a way that will not hinder or impact other parties or other licensees from using the asset. Although the rights provided, in general, to the licensee will not be the same as the rights held exclusively by the licensor.
A non-exclusive license differs significantly from an exclusive license. Exclusive licenses usually are not released to competing parties, except to the licensor. So, the non-exclusive license allows the licensor to gain money from several different licensees who can use their asset.
Advantages of Non-Exclusive Licensing
A non-exclusive license agreement offers a variety of benefits for all parties involved in the transaction. First and foremost, they provide flexibility. Unlike exclusive license agreements, non-exclusive licenses allow you to offer the same license to multiple entities, giving you greater control over who uses your IP and how they use it. This expanded flexibility is a primary reason many licensors favor non-exclusive IP licenses. It generally allows for greater revenues, as you can issue multiple licenses at once. The next major benefit of a non-exclusive license agreement is that it increases market awareness of your IP. When one entity uses your IP, they are usually the only one to advertise its features and benefits, other than you. However, if multiple entities use your IP and market it, you create a much greater awareness factor. This has the potential to increase the demand for your IP and your IP licenses, which in turn will increase license revenue.
Disadvantages of Non-Exclusive Licensing
A potential drawback to a non-exclusive license is that the licensee’s use of the licensed material may potentially affect the value of the material to the licensor. For example, in the case of a trademark license, the licensor may want to minimize the number of similar brands by granting non-exclusive licenses to a limited number of licensees that can avoid, to some extent, dilution of the mark. A non-exclusive agreement can also have the effect of reducing the revenue generated by the licensor. For example, suppose an author creates a new training course on leadership skills, and the author is willing to grant several licensing arrangements to other professionals that want to teach the course. If more than one licensee offers the course, the revenue to be collected for the course could be reduced, unless the licensor charges each licensee a fee.
Licensors sometimes suffer from "free riding". For example, suppose a manufacturer of toys frequently introduces new lines of toys to the market. The manufacturer has invented a toy animal that responds to verbal commands with specific movements such as rolling over or playing dead. The manufacturer considers patent protection to prevent anyone from copying the toy design, but concludes that the time and expense associated with pursuing patent protection would be prohibitive, especially if the market reaction to the new toy is less than favorable. Instead, the manufacturer may enter into a license agreement with several toy retailers, granting the retailers rights to sell the new design at a price the manufacturer sets as the suggested retail price. The toy sells well and has a long run, and after three years the manufacturer makes a decision to introduce a new model of the toy. The manufacturer provides notice to its licensees that the earlier version is now discontinued. The toy’s retailer licensees have the right to continue selling the existing toy for at least another six months. However, a competitor learns of the new toy recently developed by the manufacturer as its successor. In addition to licensing the new toy to its existing licensees, the manufacturer continues selling the older design to customers that prefer to purchase that toy. The competitor has learned of the new design and saw that it commands a higher retail price, and consequently decides to introduce an alternate version of the toy bearing the competitor’s own design. Because the manufacturer has chosen to license its design exclusively to toy retailers, the competitor is free to enter the market and offer its version of the toy to the public. The non-exclusive license agreement has resulted in free riding by a competitor and put the licensor in a disadvantageous position because the licensor must now compete with the competitor.
The licensor can minimize the risk of free riding by carefully identifying the licensee’s ability to protect against free riding both in scope and duration. The licensor can prevent the licensee from granting further licenses to competitors without the licensor’s permission. This requirement will at least minimize the number of companies that are entitled to compete with the licensor’s own sales of the item.
Crucial Clauses in Non-Exclusive License Agreements
Any contract is important – but is especially so with non-exclusive license agreements (NELA). These agreements are commonly used by software vendors, manufacturers and others to deliver value on a less than permanent basis to their customers. Yet there is no reason why even these simple agreements cannot be important.
While the list of key clauses in any commercial contract can be exhaustive, the most common key clauses of commercial contracts contain key contractual terms that define parties involved, the scope of the contract, standards for performance, acceptance policies, deliverables, payment terms, duration, jurisdiction, dispute resolution process and breach of contract.
Non-exclusive license agreements should include all of the above-mentioned clauses. The following discussion will look at each of these clauses:
· Parties – the agreement should clearly show who the seller is and who the buyer is. It is common practice to use full corporate names for the parties in the contract. These names are usually better than just using shortened versions. The full names of the parties should match those shown on registered contracts of the seller and buyer. This clause would also include the effective date of the contract, that is the signing date or execution date.
· Scope of Use – the agreement should include a description of the product that is licensed. The product may be described blanket-wide or may define certain products limited to a region or category. If applicable, the agreement should specify the quality standards for any equipment, goods, materials, systems or other deliveries contemplated under the agreement.
· Duration – a non-exclusive license agreement can be a long-term relationship between seller and buyer or short-term. A long-term relationship can have many benefits including price stability in the long-run. However, the pricing schedule under the contract may be suitable to a shorter-term relationship. The duration of the contract can sometimes be stated this way; a contract that states that its duration is "until cancelled by either party" is short-term, as opposed to a contract that states "until the expiry of two years from the date of signing" which is a long-term contract.
· Jurisdiction – people and companies do not like uncertainty in their lives. Jurisdiction means that the rules and regulations of a locality or country apply in this instance. Buyers and sellers alike prefer certainty about their jurisdiction.
· Dispute Resolution Process – the parties should stipulate how they will resolve a potential dispute in an amicable way, without too much emphasis on the legalities. For instance, mediation or other forms of alternative dispute resolution (ADR) may be included.
· Breach of Contract – this is a very straightforward clause that states clearly when a party has breached the contract. In a licensing agreement, clarity is important because many parties do not completely fulfill their obligations, such as making payment on time or providing deliverables in full.
· Payment Terms – payment terms may often include arrangements over multiple years. For a multi-year payment term, the parties will not ever have to make another deal for each subsequent year. A great many negotiations take place simply over price. Price stability is a great benefit for any contracting parties.
Non-Exclusive License Agreement vs Exclusive License Agreement
A non-exclusive license agreement allows the licensee (i.e., the agreement holder) to use the technology without the worry of infringing the patent holders rights, but also is a relatively low-cost way to get access to a particular technology if the patent holder continues to touch the market with other forms of licensing. In other words, it will be difficult for the patent owner to crack down on every single puny little entity that acquires a license from the patent owner. Rather, the patent owner will more likely only crack down on those entities who are infringing on their patent rights. For a small licensee, this is perfect, as the patent owner is unlikely to want to expend the time and resources to go after many smaller licensees.
However, for the large scale commercializer, it may not be wise to enter into a non-exclusive license. This is because, in a non-exclusive license, the patent owner is reserving their right to enter into other licensing agreements. Thus, one’s direct competitor will likely be able to tap into the benefits and technical know-how of the same patented technology . Thus, the patented technology that one licensee had in order to enter into a niche market or gain a competitive advantage over others, will not be unique because the patent owner will allow others who have more financial means to enter into a license agreement to practice the patented technology.
Exclusive license agreements can be the most valuable type of licenses, but they are more costly. In an exclusive license, the patent owner agrees not to grant licenses to any other person to practice the same patented technology. In essence, the patent owner is willing to limit their own rights in order to gain the financial benefits of selling such an exclusive license. The exclusive licensee, therefore, can stake a legal claim to not only that technology, but to access that market until either the expiration of the term of the license or their exercise of an option to buy.
Thus, when negotiating whether to agree to an exclusive or non-exclusive license agreement, one must consider whether they are willing to pay more if only they can practice a particular technology, or whether they are happy with finding a way around the patent in order to pay a lower fee.
How to Draft a Non-Exclusive License Agreement
When drafting or evaluating a non-exclusive license agreement, there are several critical factors to consider. Key elements of every agreement are the description and scope of the license granted, and the rights retained by the licensor.
Identification of the Parties
In every agreement, the identification of the parties (names of corporations, their respective business addresses, whether each party is an employee or agent of the other if applicable) must be included in the first paragraph.
Grants of Rights
The second paragraph should contain grants of rights for use of the patent claims. Essential elements of this paragraph are the specification of the patent claims or patents it refers to, the specific rights granted for use of the patent claims (e.g., manufacture, use and/or sale of licensed product), and specification of the field of use of the patent claims (if it has a field of use). Additionally, there should be a statement that it is a non-exclusive license and it is irrevocable for a certain territory. The document should indicate a limitation if it does not apply outside of a certain territory, such as the U.S. market. Consider whether the license agreement has any conflict with other agreements in which the licensor is a party. From the perspective of the person who has rights to make a patent application that may issue patent claims or has rights to a patent, if the licensee wants to have worldwide rights and the licensor is only granting rights in the U.S., then the licensee should include a provision that if the licensor gets foreign rights, then the non-exclusive license applies worldwide.
Identify and Describe the Patent Rights
In the next paragraph, the parties should state that the parties understand the licensed patent rights and describe the patent rights they are licensing. Such description typically includes the patent application filing date, the inventor, the title of the invention, and patent publication number, status of the application, and in some instances, its family members.
Identify Other Provisions or Related Agreements
If the patent rights are subject to provisions of statutes or treaties that the parties must comply with, then those should be referenced in the next paragraph. If provisions of other related agreements must be complied with (such as wrong-way rights agreements or prior licenses), then such provisions should also be referenced in the next paragraph. Reference to such provisions will alert the parties that they should review or consult with the licensor’s counsel to confirm that implementation or sale of the device will not infringe the rights of third parties with whom there are contractual relationships.
Define Payment Terms
The next paragraph should establish the terms of payment for the license income or royalties. Identify the currency for payments. If the payments are to be made in a foreign currency, then state which conversion rate will be used at which bank (e.g., the standard daily conversion rate at the New York or London Bank of England). Identify the payment schedule for the license income (e.g., quarterly) and the due date for payment. You may also want to include a provision for notice of late payments and the imposition of interest in the event of late payments. Identify the party’s address for payments to be sent to.
Finally, make sure the parties’ respective officers are listed, along with their signatures, the dates, and witness signatures, if applicable.
Examples of Non-Exclusive Licensing in the Real World
Certain industries and businesses are more likely to involve non-exclusive license agreements than others. These are typically industries where a large amount of goods or products are in play, such as the retail space. In that case, a licensing agreement might include the licensing of logos, mascots, products or services by merchants or vendors who then sell the goods through their own retail locations. The retail company would have no interest in making its branding efforts exclusive to a single merchandiser or vendor.
Other examples of where non-exclusive license agreements are often found include the high-tech space, such as software providing rights to operate software but also to sell it on a commercial basis or the consumer manufacturing sector, such as a coffee manufacturer licensing its logo to cup manufacturers who would then have the right to use its branding on popular products like K-Cups.
The use of non-exclusive license agreements is typically not found in the pharmaceutical and biotech industries as most of those companies prefer to avoid letting other entities use their protected intellectual property, such as trademarks and patents.
Conclusion and Best Practices
In conclusion, non-exclusive license agreements can represent a valuable opportunity for businesses to monetize intellectual property by granting others the right to use the IP without giving up ownership. They can be particularly useful in fast-moving or high-competition markets, where IP owners want to retain control over how their technology is used but also want to take advantage of a broader ecosystem or every avenue for monetization available. A key to the successful use of non-exclusive licenses is clear , well-drafted agreements that safeguard essential IP interests and provide a mutually beneficial framework for collaboration. Businesses should carefully consider the legal implications of such agreements and work closely with qualified legal counsel during negotiations and drafting.