Companies can build with their knowledge or they can license their knowledge to other builders, but what are the accompanying risks?
In this episode of the Contract Teardown, IP attorney Nancy Delain shares her perspective on a sample licensing agreement. The terms are often unclear and may signal trouble down the road.
- How to include enough specificity to avoid “void for vagueness” claims,
- Clear exclusivity in conveyance clauses,
- Scaling the agreement to the length of the license,
- Fair royalty terms, and
- Drafting with the eventual judge in mind.
THE GUEST: Nancy is a solo lawyer who concentrates her practice in intellectual property, business law and bankruptcy matters. She runs Delain Law Office, PLLC as a virtual law practice with a physical presence in Schenectady New York. She is admitted as an attorney in New York and as a patent attorney before the United States Patent and Trademark Office.
THE HOST: Mike Whelan is the author of Lawyer Forward: Finding Your Place in the Future of Law and host of the Lawyer Forward community. Learn more about his work for attorneys at www.lawyerforward.com.
If you are interested in being a guest on Contract Teardown, please email us at email@example.com.
Mike Whelan In this episode, IP attorney Nancy Delain brings us a license agreement that might be too simple. So let’s tear it down. Nancy Delain, welcome to the Contract Teardown Show. How are you today?
Nancy Delain I am well, Mike. Thank you for having me.
Mike Whelan I am glad to have you. We were talking about some stuff. It seems like a lot of these business lawyers are dealing with IP issues and so it seemed important that we dig into it. What we’re going to do is talk about this document I’ll share with the folks at home. This is a licensing agreement. This agreement is between Momentum Biofuels and Global Resources to companies that are licensing some stuff. And we’ll talk about what that is. But before we do, tell us about this document. When are we going to run into this kind of thing?
Nancy Delain You’re going to run into this kind of thing with any business that wants to make money with its intellectual property. The way they make money with intellectual property: Well, it’s twofold. The first thing you can do is sell it outright, which does not involve licensing at all. It’s just it’s a sale of an asset. But the other way you make money with intellectual property is to license people to use your intellectual property. And that is the context under which you would find a licensing agreement.
Mike Whelan All right. And we’ll dig into whether they’ve done this well or not. But before we do. Tell us about your background. What brings you to documents like this?
Nancy Delain I’m an intellectual property lawyer. I went to law school to become an intellectual property lawyer. I also do some business law. But my main thrust is IP. And I came late in life to the law. I was I graduated from law school in the same weekend as my 25th college reunion. And so I had had a life before I started law school. And my life before I started law school was as a writer. I was a technical writer. And I spent a lot of time working with the companies that I was my employer’s intellectual property. And it was just fascinating. So when I went to law school, I knew perfectly well that I didn’t want to handle your wills and I didn’t want to handle your divorces, and I certainly didn’t want to handle your criminal matters. So I went to law school pretty much to become an IP lawyer, and I have the technical background to have the patent ticket in my pocket. So I sat for the patent bar as well as the state bar in here I am 20 years later.
Mike Whelan Yeah, I came in to law school late as well. Did it with four small kids, intel, which I recommend to no one.
Nancy Delain I had a pre-teenage daughter.
Mike Whelan Oh, yeah. Now, maybe that’s worse. Maybe. Yeah, maybe that’s harder. My teenagers like to break down my will and my self-esteem. So getting into this document, so we’re going to talk about whether they’ve done this well or not. Right, as we always want to do on the show. But to get started, I want to back step it a little bit and get in to the preamble here because it sort of details what is this thing, what is it trying to do but might not do it well. Talk to us about what this document is doing. What’s the relationship between these two parties? And does this witnesseth section lay it out well.
Nancy Delain The relationship between these two parties. It looks like Momentum Biofuels is a license or they have some intellectual property that they want to make money with. And Global Resources wants to use the technology that provides Momentum Biofuels is providing to further their business. And they’re willing to pay Momentum Biofuels for the privilege of doing that, which is what, a license is. That’s the basis of a licensing agreement, but it is the bare basis. In the witnesseth section, it would be ideal to have the exact form of the intellectual property spelled out. This particular agreement says license or is invented in uncertain processes, techniques and formulas that combine to create a unique method of producing biofuels and derivative products. Okay, that’s great. What are you protecting here? Okay. And how are you protecting? Is there a patent involved here or a family of patents? If so, I need those patent numbers. I need those patent numbers in this agreement because otherwise it’s void for vagueness. Or are these processes and techniques and formulas trade secrets to Momentum Biofuels. If so, I need a reference to the non-disclosure agreement. I need to know that when I disclosed my trade secret to Momentum Biofuels, they’re going to treat it as a trade secret. And they’re not going to come out and say, “Oh, thank you very much, because now we can go in and take this and do what we want with it”. Didn’t disclose it to the world and your trade secrets just going to fly away because secrets are secret is only as long as you keep your mouth shut.
Mike Whelan Yeah. This sort of sounds like marketing language almost where they’re sort of vaguely, you know, the front page of the websites. They’re talking about their unique methods. But I’m not sure to your point what they’re protecting. Well, let’s talk about the conveyance of it. That is the first section. Section 1 here says that the licensor conveys to the licensee the exclusive right to use, improve, sublicense and commercialize the intellectual property described herein for a period of ten years subject to the rest of the agreement. What do you think about this conveyance clause?
Nancy Delain Well, the conveyance plus is good. The conveyance clause does what it’s supposed to do. It conveys the right from the license rights of the licensee to use and prove sublicense commercialize the intellectual property. There are a couple of things I don’t know about this conveyance clause. First of all, is this an exclusive license? Is this licensee the only licensee with the right to use this intellectual property? And I don’t necessarily need to know that here, but it is important to know that because the price that an exclusive license brings back to the licensor is usually very different from the price that a non-exclusive license brings back and an exclusive license tends to be higher priced.
Mike Whelan What do you think about the ten-year timeline? Does that change? I assume a lot of the depth of the rest of the drafting. You know, we’ve talked about this on the show often. You don’t want the contract complexity to outpace the complexity of the problem the contract aims to solve. It seems like if you’re agreeing to ten years, this better be a pretty long document, right? You’re dealing with a lot of time. What do you think about that ten-year timeline?
Nancy Delain Well, the ten-year timeline, yeah, it’s a long time and things happen. It’s a long time. And with the rest of the document, there are things that belong in this document that aren’t there because of that ten-year clause, things like a force majeure clause, things like, you know, a way out. If, you know, if somebody goes bankrupt, what happens? This document is set in Texas, that’s the governing law. And I’m suspecting that both parties probably have their domiciles in Texas. So Texas gets hit by things like hurricanes and dust storms. So it’s you know, there needs to be something in there that takes care of eventually, you know, acts of God. And no, I didn’t see a force majeure clause in this in this contract. And given the period over which this license agreement will transpire, I really would want to see one.
Mike Whelan Right, yeah. As an aside, maybe. Right. Like to your earlier point about what are we licensing exactly, if this is ten years access to, you know, we use red any time we write on a contract, you know, if it’s some like really narrow piece of information of intellectual property who, you know, even if it’s ten years, it’s not that complex a deal. But as far as we know here, this is like talent transfer and people’s ability to make friggin rocket fuel. I mean, there’s just no way to know what this is. So, yeah, you got to meet the complexity of the issue, but we just don’t know how complex this deal is.
Nancy Delain Absolutely. You can end the complexity of the issue as at this point, as you say, totally implied. We have no clue.
Mike Whelan Yeah. So let’s talk about to the royalty as consideration for the license, granted, the licensee agrees to pay license or a royalty equal to 3% of gross and collected revenue for all biodiesel and related products (apparently we’re dealing with biodiesel) produced by the licensee and 3% of the gross revenue. What do you think about the royalty section, section 2 here?
Nancy Delain Well, the royalty amount is okay. You know, that’s a negotiated amount between the parties. But boy, I can tell you probably the licensor and the licensor’s attorney are in love with that language because it calls for gross. Okay. If I were the licensee’s lawyer, I would be fighting long and hard to get that weird gross to turn into the word net. Because, you know gross revenue, that’s money you collect. That doesn’t take into account returns. It doesn’t take into account anything other than the money you collect into account. And you know that for a licensee that’s just horrible. You know, it’s great for the licensor but the licensee, I don’t think so.
Mike Whelan Yeah. I wonder what the margins are in biofuels you know because there’s so many subsidies and tax benefits. I have no idea, honestly, how much they’re having to pay for actually producing this product. Well, let’s go down to the boilerplate section. You know, you get into the stuff that we all see over and over. I should point out, this document itself has only eight sections. It’s fairly short, but we do have some boilerplate in there. We see entire agreement. We see enforceability. As you pointed out, we don’t see force majeure. What do you think about these sort of standard bits that come later in the contract?
Nancy Delain Well, you know, the entire agreement clause is good. You know, it’s a pretty standard entire agreement clause. You know, this is the four corners and it can only be changed in a writing. I’m happy with that. The question that I have is what constitutes a written instrument? I mean, does email count? Okay. You know, but it does say that the written instrument must be executed by each of the parties. So presumably, you need something; you need at least an acknowledgment of an e-mail that says, yeah, okay, we can do it that way. But, you know, it’s a pretty standard entire agreement clause. The enforceability clause, that also is pretty standard. And yeah, I would have no changes to the enforceability clause. The governance clause, that’s state of Texas, I’m in New York, I would write State of New York. But, you know, that’s because I’m in New York and it becomes a vote. Both of these parties are in Texas. So it doesn’t surprise me that this is a Texas contract. Okay. But, you know, with the governance clause, I would really like to see, you know, just because the contract is so long in term, somebody may pick up and move. So if somebody picks up and move, what happens if the laws of the state to which they move conflict with the laws of Texas. I would like to see a provision in there that deals with the conflict of laws.
Mike Whelan Well, and you also mentioned in preparation, you know we recently released an e-book about venue, about defining venue in documents and I don’t see that.
Nancy Delain I don’t see venue in here either and Texas is a big place, you know. So, if these folks are, you know, if the licensor is in Houston and the licensee is in Amarillo, they’re going to have to decide where they’re going to fight about this contract. And there’s nothing in there that says, you know, we’re going to venue this proper in Houston or venue this proper in Amarillo. And I’m picking parts of Texas that I happen to know that are far apart.
Mike Whelan They are. I’ve driven those places. They’re they’re quite far. Well, you know, in closing, I’m thinking of the big picture. Something that has come up throughout our conversation about this document is we don’t actually know if this document, if the complexity of the document matches the complexity of the situation. You mentioned in preparation for our call that when you’re writing a document like this, a lot of times you’re not just talking to the parties. It’s not just about you’re also talking to the judge who’s going to unwind this thing, right? Who’s going to unwind this thing later. So talk to us about how you don’t get over complex for the deal. Right. This might be a simple deal depending on what this thing is that they’re sharing. But this sounds like we’re talking biofuel technologies. This sounds like it could be a really complicated deal. And maybe this document isn’t matching what a judge needs to know later. Talk to us about drafting with the judge in mind.
Nancy Delain This is simply a case of audience analysis. Every time I write a contract, I have in mind the fact that I’m not writing for the parties. I’m not writing for the parties at all. Okay? I am writing for that person who’s sitting up there in that black robe who has never seen this deal before and who needs to interpret what these people are fighting about who are in front of him or her. And so this document doesn’t tell me that, okay, I don’t know enough from this document and understand that this document may have had corollary documents associated with it. I don’t know. But just on the face of this document. This doesn’t tell me this would not tell a judge nearly enough. So I would include at least references to the corollary documents in this main document. You know, I would say, you know, this document covers patent number 10,000, 10,999,999. And then I would attach a copy of the patent as an appendix or I would say, that this document covers trade secrets and here’s the non-disclosure agreement. So I would tend to bundle this a lot more than this has been bundled. Because I want that judge to have all four corners right. Right now the judge has; there’s an awful lot of room for interpretation in this document. And when I’m going in front of a judge, I don’t want that judge to have any wiggle room at all.
Mike Whelan And I feel like we’ve talked about this with contract design. Sure. Have a document that sort of lays out the broad view of what this is, because that’s what executives are going to read. They’re not going to go get into the details. But if you’re going to do that, then don’t have whereases and hereto fors and witnesseth in there, they don’t care. Right. At least give us an executive summary that looks like an executive summary. And then attached to your point, the documents that answer the questions the judge is going to have. I think that’s really useful advice. Nancy, we appreciate you bringing it to us. For people who want to reach out to you and learn more about your practice and your IP wisdom, what’s the best way to connect with you?
Nancy Delain Oh, you can do it by one of several ways. The fastest way to do it is probably by telephone, which is 518. Yeah. In the United States. So +15183714599. Or you can certainly visit my website and talk to my chatbot which is IPattorneyfirm.com. Or you can send me an email which is N as in Nancy, B as in boy, Delain at IP attorney firm dot com.
Mike Whelan That’s perfect. Will include all that information over at the blog post at lawinsider.com/resources and if you want to be a guest on the contract teardown show and beat up documents like this just email us. We are at firstname.lastname@example.org. Nancy, I thank you and we will see you all next time.
Nancy Delain Thank you, Michael. It’s been an absolute pleasure.