Technology Licensing Agreements: What Every Business Needs to Know

In today’s business environment, virtually every company depends on one form of technology or another. And for most businesses, much of that mission-critical technology is licensed. From licensing software to manage operations and interact with customers, to licensing patents or other forms of intellectual property to develop products, technology licenses are ubiquitous in modern commerce. Yet despite their vital importance, companies often pay insufficient attention to the actual terms of those licenses—assuming it is all “standard.” As a result, companies often find themselves with a license that does not further their business needs. Even worse, poorly drafted or ambiguous licenses can lead to protracted, expensive litigation that can destroy business relationships, drain companies’ resources, and distract companies from their actual business goals. This article addresses key considerations to keep in mind and common pitfalls to avoid when negotiating technology licenses.

Understand Your Business Goals

Companies license technology to achieve business goals. Yet they often forget those goals when negotiating and signing licensing agreements—entering into cookie-cutter contracts with “standard” provisions that can actually inhibit operations. To avoid this result, a business must have a concrete idea of its goals before entering into negotiations and communicate them to the negotiating team.

Review Agreements With Counsel in Light of Those Goals

Once the business case is set and communicated, a company should scrutinize each provision of a proposed license agreement with counsel to ensure that it furthers those goals. That includes substantive provisions like termination, maintenance, and cure provisions. It also includes what some think of as “boilerplate” contractual provisions, such as limitation of liability, choice of law, and arbitration provisions, as those provisions can truly shape the parties’ rights and responsibilities.

And most importantly, parties should be prepared to walk away from a licensing deal if the terms conflict with their business goals or would not be commercially beneficial. Don’t assume past performance will continue despite ambiguous or negative contract terms. And don’t let momentum dictate that execution of a deal is inevitable.

Be Careful About Pre-Agreement Contacts

Along with focusing on the licensing agreement itself, companies should also scrutinize the steps leading up to the final agreement. Letters of intent, memoranda of understanding, non-disclosure agreements, pre-contract emails and other written communications, and oral sales representations can all lead to protracted and expensive litigation. In some circumstances, agreements to negotiate “in good faith” are binding and enforceable, and they can prevent a party from insisting on radically different terms or from walking away from the deal without negotiating. Courts in Illinois and elsewhere have awarded parties substantial damages, including lost profits and contract expectation damages, for a party’s breach of its agreement to negotiate in good faith.