Spreading the Green: An Introduction to Licensing Agreements for the Green Business Professional

             Mention a license agreement to the typical business owner (whether in a green or any other industry), and either their eyes glaze over thinking of page after page of legal gobbledygook, or else visions of dollar signs (large dollar signs) dance in their heads as they picture their lawyer billing them for every last second of time spent sifting through the gook to get to the gobble.

Actually, these agreements, and the licenses granted by them, are one of the business owner’s most powerful tools.  Indeed, licenses are the means by which people make money (often lots of money), either off of someone else’s property, or off of someone else doing all the work to market one’s own property.

A license is a grant of a right to use something.  A driver’s license is a grant by government of the right for the driver to use the roads—that is, to drive.  In a business context, a license is a grant of the right to use intellectual property, given by the owner of that property to someone else to exploit (manufacture, distribute, market), in return for a payment to that owner.

“Intellectual property” is defined under the law as patents, trademarks, industrial designs, copyrights, and trade secrets.  These are all different rights, but what they have in common is that they are all property rights.  The rights to intellectual property may be bought and sold—and licensed.

Giving someone a license to use intellectual property is like renting the property to that person for a period of time.  A license agreement, like a lease, sets forth the respective rights and obligations of the property owner (who is in effect leasing his or her property), and of the renter.  Unlike a sales agreement, ownership of the property does not pass—merely a right to use, as defined by the terms of a license agreement.

License agreements are everywhere, and indeed make up perhaps the largest number of legal contracts in the world today.  This is due primarily to the explosion of computer technology and software applications.  Recall that almost every program you install onto your personal computer is obtained by you pursuant to a license, a right to use the program that was created by, and continues to be owned by, the software developer.  Every time you click “I accept” at the end of that seemingly-interminably long “Software End User Agreement,” you are accepting a license to use someone else’s program.  Your right to use is subject to various “lease-like” terms, but the bottom line remains that you are paying rent to use someone else’s property which is loaned to you contingent upon your timely payment—and at the end of the license “lease,” the property reverts back to its owner (the software developer).

Like a lease, the actual contract conveying the license includes various standard terms and provisions.  But because intellectual property is by definition unique, rights to those properties have many unique characteristics, even within a particular industry with green businesses.  Thus, there is no “cookie-cutter” form license agreement.  Unlike leases, which may generally follow a fairly standard form, license agreements may vary tremendously, depending upon the particular property involved (perhaps technologies, processes, or manufacturer names), and the goals and objectives of the participants. 

Once the basics of the relationship are agreed upon by the owner of the property and by the user, the contract is drafted with language effecting the specific requirements of the parties and reflecting the particular transaction they have in mind.  Since each transaction will by definition be distinct, the language of each contract will be unique, and must be individually prepared for each case. 

To understand how the license agreement is a truly essential tool for the expansion of business and profits in the “Green Industry” (which should be understood to actually include all green-focused businesses within all industries), a brief overview of the key terms addressed in a license agreement will help highlight the issues that those terms reflect being resolved by negotiation between the grantor and the recipient of the property rights.

Key Terms

            Parties.  The first issue in preparing a license agreement is to identify who are the parties. Only those persons who sign the contract become a party to it and thereby gain rights and take on responsibilities.  Sometimes people enter into a contract through an entity such as a corporation or a limited liability company (“LLC”), usually for tax and liability avoidance reasons, or for organizational purposes.  The most basic issue is making certain that the party claiming to grant a license of rights in intellectual property is legally entitled to grant that license.

            The person or entity who owns the property and grants the license is the “licensor,” while the person or entity who receives the license is called the “licensee.”

            Definitions.  Most license agreements have a section at the beginning containing definitions for terms to be used throughout the contract.  The definitions section is very important.  In the definitions, the difference is clarified between the right being licensed, and the underlying intellectual property (“IP”) to which the right relates.  For example, the name of a particular green business may be trademarked.  The actual name itself is the property—while the right to use that name on products, in marketing and advertising, etc., is the right being licensed.  The IP owner-licensor grants the right to the use of its name to the licensee.  Another key definition should be the geographic area covered by the license.  That area can vary from a small territory, such as a city, to a state, to a region (New England), a country, an economic association of nations (the European Union), to the entire world.  This is another factor subject to negotiation by the parties.

            Grant of the License.  In legal terms, the grant of the license has been described as “giving permission to [a licensee] to do what would otherwise be an unlawful infringement of [the property owner’s] rights.”  The grant clause covering the license being given by the licensor to the licensee reflects the results of negotiations between the parties on a number of important business decisions.  In the geographic area within which the rights are to be exploited, is the grant exclusive (meaning the licensee shall be the only recipient of a license of those rights in that area), or nonexclusive?  Is the license one to manufacture, sell, distribute, or even to grant further licenses?  For example, may the licensee who is given a license to sell green products give a sub-license to a manufacturer to produce the products that the licensee will sell?  The actual results desired by both licensor and licensee will be reflected in the terms of the license.

            Royalties.    Recalling that a license is akin to a lease, then the royalties paid by the licensee to the licensor represents the rent paid for the use of the licensor’s IP.  Those royalties are usually expressed as a percentage of a “base” of income received by the licensee through the exploitation of the licensor’s property.  Typically, the royalty base is defined as the net sales proceeds received by the licensee from sales of the licensed product or products using the licensed property.  Net sales proceeds are typically calculated by subtracting from gross sales proceeds the costs involved in making sales, which include taxes, returns, discounts, and other costs of sales.  Even within a particular industry with fairly common invoicing trade practices, the definition of net sales proceeds is subject to negotiation between the parties.  The royalties paid by the licensee to the licensor is the agreed-upon percentage applied to the aggregate net sales proceeds received by the licensee.  Royalty rates vary from industry to industry, and also vary within industries (reflecting the different degrees of appeal from property to property); the “hotter” the property, the better the royalty rate.  Minimum royalties are often negotiated, in effect “guaranteeing” a certain financial return to the licensor.

            Accounting and Audits.  Another key provision (from the licensor’s perspective) is the requirement that the licensee keep accurate records of sales, so that if a dispute arises about the payment of royalties, the licensor can audit the books and confirm for itself whether the full royalties due under the contract have been paid.  The particular form of royalty report required of the licensee should be spelled out in the audit provision, whether that report must be formally audited, or merely certified by the licensee’s executives, or, if no report will be required, is the licensor given the right to review the licensee’s books whenever the licensor wishes.  If the licensor wants the report to contain specific information, the licensor must spell out in the agreement exactly what are those information requirements.

            Additional terms.  Beyond the scope of this article, but mentioned for completeness, there are additional terms that must be considered for inclusion in a comprehensive license agreement.  These include licensee obligations (primarily promotion obligations imposed on a licensee as a condition of receiving or keeping the license, including means of advertising), production standards (quality control, including samples of proposed products or finished goods), production volume guarantees (sufficient production capacity to satisfy demand), even human rights concerns (anti-sweatshop guarantees), and protection against infringement (in particular, who controls the decisions about, and who pays the costs of, infringement prosecution).  The term (length of time the license lasts), product liability (and insurance), and events constituting default (and justifying early termination) should also be addressed, as are issues such as what happens upon termination, whether the license is assignable (transferable), and choice of law to govern interpretation and enforcement of the agreement.

            Certainly this brief survey of the concept behind, and the purpose and structure of, Green Industry license agreements cannot substitute for a comprehensive agreement carefully drafted by one’s own attorney to incorporate the results of actual negotiations between a licensor and licensee regarding a grant of rights to use a particular intellectual property.  Nevertheless, this article will have served its purpose if it conveys an introduction to the nature and use of license agreements – and hence some indication of the benefits and requirements for a successful license relationship.

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Among other forms of license agreements viewable online, a sample license agreement containing many of the terms and concepts addressed above (this one happens to be a “green tips” content license) is viewable at http://www.eyeplay.tv/greentips/licensing.html .

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Michael G. Homeier, Esq. is a business and corporate attorney and a founding shareholder of Homeier & Law, P.C.  He can be reached at (818) 450-1550 x551 or through their website http://www.homeierlaw.com.  Copyright © 2009. All Rights Reserved.  May not be duplicated, reprinted, or distributed in any form without permission by the author.