In part one of our IP licensing primer series, we broached the concept of IP licensing and explained how the type of IP being licensed, ownership of the IP and other details can impact licensing agreements. In part two, we reviewed negotiable items commonly seen in licensing agreements, including provisions speaking to the grant and scope of such licences.
In this third part of our IP licensing primer series, we will cover additional provisions to consider when entering into an IP licensing agreement as a Licensor. In particular, we will discuss the term and termination of licensing agreements and raise issues that should be considered by Licensors when negotiating these provisions with Licensees and other parties.
1. Term
The term of a licensing agreement, also known as the duration, affects how long the licence lasts. This section is important to a licensing agreement because it sets expectations among the parties about the intended length of the licensing relationship.
Agreements without a set term
Setting a term for the licensing agreement is crucial because licensing agreements that are silent on duration generally expire once the underlying IP right expires, and in some cases, this can be a long time.
For example, if copyright to a song is licensed to a Licensee but the licensing agreement is silent on the duration, the licensing agreement will expire at the same time as the song's copyright (70 years following the end of the calendar year in which the author dies).
While licensing agreements without a set term can generally be terminated (discussed below), it is good practice to include set a term so that both parties have a general understanding about the length of the licensing relationship.
Autorenewal
Autorenewal clauses, also known as evergreen clauses, can be used when drafting the term section of a licensing agreement. An evergreen clause prevents expiry of the agreement for one or more renewal terms, which often range from a number of months to years.
In some cases, that automatic renewal is contingent upon the meeting of certain criteria or milestones. In other cases, the licensing agreement may indicate that renewal is automatic except where, for example, a party provides notice of non-renewal, there has been a material breach or one of the parties becomes insolvent.
To mitigate the risk that either party misses the renewal date and becomes locked into another renewal term, it is good practice to include in the licensing agreement a right for either party to notify the other, either by a certain date or by reasonable notice, of their intention not to renew. Discussed below, it is generally a good idea to have this notice in writing and signed.
2. Termination
Term and termination are closely related. The termination section of a licensing agreement outlines the circumstances under which the agreement (and therefore the underlying right to use the licensed intellectual property) can be terminated.
This section is important as it helps prevent uncertainty among the parties when the licence comes to an end. Five common rights of termination in licensing agreements are:
- By mutual agreement;
- For breach (for cause);
- For convenience (without cause);
- On insolvency or bankruptcy; and
- Upon the underlying intellectual property registration expiring or loss of licensing right.
Termination by mutual agreement
Generally, without anything to the contrary, parties to a licensing agreement may terminate by mutual agreement. It is good practice for termination by mutual agreement to be made in writing and signed by all parties.
Termination for breach (for cause)
Often, licensing agreements state that the agreement may be terminated when a material breach occurs. Termination for breach provisions are important to licensing agreements as they provide the Licensor with recourse in the event that their relationship with the Licensee sours and they need to rely on contractual obligations to retrieve their IP. These provisions can also benefit the Licensee in situations where the Licensor fails to fulfill its obligations under the agreement.
It is common for licensing agreements to include a "cure period" during which a breach can be remedied before the right to termination may be exercised. For example, the Licensee may have 30 days upon written notice of the breach given by the Licensor. Some breaches can be cured quickly, such as when a balance owing can generally be paid within a matter of hours or days, while other breaches cannot, such as in the case of unauthorized public disclosure of proprietary information.
Termination for convenience (without cause)
Termination for convenience clauses can provide one or all parties the right to terminate for a reason other than breach of the agreement. A Licensee may wish to terminate, for example, if it is downsizing its business and no longer needs to license the IP from the Licensor.
On insolvency or bankruptcy
Licensing agreements typically provide that termination can result where either the Licensor or Licensee becomes insolvent. In these circumstances, a Licensor may wish to terminate to prevent a cashless Licensee from being able to use its IP for free. Similarly, a Licensee may wish to terminate to ensure it is not obligated to pay an insolvent Licensor that can no longer afford to provide the IP under the agreement.
However, in Canada, contractual terms that provide for termination upon the Licensee's insolvency are generally unenforceable. In these cases, a Licensor would be prohibited from terminating the licence based on the Licensee's insolvency alone or failure by the Licensee to pay licence fees before the time they filed under the Companies' Creditors Arrangement Act or the Bankruptcy and Insolvency Act. Similarly, if the Licensor becomes insolvent, the Licensee may continue to use the licence so long as it complies with its obligations under the licensing agreement.
Expiry of underlying intellectual property or loss of licensing right
Licensing agreements should also contemplate situations where rights to the underlying IP expire or are otherwise lost. This could occur in situations where, for example, a trademark is expunged. While an expunged trademark may retain some goodwill, its value is significantly diminished after expungement from the trademark registry. Expiry could also occur where copyright becomes part of the public domain while the licensing agreement is still in effect.
To avoid paying for IP that has expired or has otherwise diminished in value since commencement of the licensing agreement, parties should consider drafting a provision that provides for automatic termination upon expiry of the underlying IP.
Automatic termination should also be contemplated where termination of the licensing agreement may affect any sublicences that have been issued by the Licensee to third parties. Terminating the original licensing agreement may not necessarily terminate any existing obligations to sublicensees; therefore, automatic termination of sublicences and sublicensing rights should be explicitly mentioned to ensure that all parties understand how termination may affect their business and relationships with third parties.
Other considerations
Return and destruction of confidential information
Upon termination, a Licensor may want the Licensee to return and destroy any confidential information that was shared during the licensing relationship. This obligation should be carefully drafted by the Licensor to ensure that all copies of the IP, including those stored in the Licensee's cloud-based storage systems, are included and adequately disposed of by the Licensee upon termination.
In cases where the IP transferred to the Licensee is completely intangible and cannot be returned or destroyed (such as know-how), the Licensor should make clear in the agreement that the Licensee remains obligated after termination to keep the information confidential and to cease further dissemination.
Survival
Frequently, IP licensing agreements include a "survival" section that sets out the representations and warranties of the agreement that are intended to survive the end of the contract. Generally, the provisions listed in this section continue to affect the Licensor and/or Licensee after termination of the agreement. Often, provisions speaking to confidential information, indemnities, liability and dispute resolution are included here.
The Licensor should exercise caution when drafting a survival clause, as including the wrong provisions can result in significant risks and negative consequences. For example, the survival of the grant of a licence, discussed in part two of our IP licensing primer series, may undermine the exclusivity of another licence subsequently granted by the Licensor to another Licensee. Similarly, representations and warranties that survive the agreement may bind the parties to obligations that were intended to only last for the duration of the licensing relationship.
Key takeaways
This article has briefly reviewed how the term and termination of an IP licensing agreement can impact your organization. With years of experience helping organizations develop their IP strategies, the MLT Aikins Technology, Intellectual Property and Privacy team is qualified to help your organization consider how it is currently using its IP. Contact one of our team members today.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
