CONTRACT REVIEW CHECKLIST
LICENSE AGREEMENT
I have gone through the Agreement. In this review, I have made my comments regarding Sections that raise concerns in the Agreement. Accordingly, I outlined my observations in numbered format. I have summarily interpreted the Section and made recommendations.
- EXCLUSIVE LICENCE
In licensing deals, one of the biggest concerns is whether it will be exclusive or non-exclusive license. Each category has its advantages and disadvantages.
An exclusive license grants the licensee singular permission to exploit the intellectual property in question. No other entity, including the party granting the license (the licensor), is allowed to use the intellectual property covered by the license.
On the other hand, a Non-exclusive license grants the licensee rights in the intellectual property but also allow the licensor rights to exploit the intellectual property in question – including granting licenses to other entities. In general, non-exclusive licensees face competition from other licensees.
In your agreement, you have provided CASL an exclusive license over your patent. Accordingly, it is CASL only that shall develop your patent, and no other company/business. You should also note that exclusive licenses allow licensees to sublicense their rights to other companies/businesses. Therefore, be aware that CASL may sublicense their rights to your patent for further development by other companies.
I have also noted that you have granted CASL a non-exclusive right over your trademarks, name, logo… This means that it is not only CASL that may use your trademarks, name, and logo, you may as well give such rights to CASL’s competitors.
Accordingly, I find no issue with the “EXCLUSIVE LICENSE” section of the Agreement.
- PRODUCT COMPENSATION
There are so many factors that go into negotiating a royalty rate and estimating royalty revenue.
It is ordinarily acceptable for a licensee to deduct from gross sales any amounts paid for taxes, credits, returns, and discounts made at the time of sale. You should note that deductions are as important as the royalty rate in determining how much money ultimately comes your way. For example, a royalty rate of 2% of net sales with no deductions may earn you more than you would receive from a 5% royalty rate from which various licensee expenses are deducted. Therefore, it is wise to avoid unnecessary deductions that would reduce your amount of royalties. Examples of unnecessary deductions to look for include: sales commissions; fees, bad debts and uncollected amounts, and promotion/marketing costs.
In your agreement, on page 2 in the last paragraph, CASL includes (other allowances) as deductibles from the gross sales. It is not clear what they mean by other allowances, they may mean sales commissions (a salesperson is paid a commission for each sale of the licensed product) or fees (a vague term that includes a wide range of licensee costs and business expenses), which should not be included as deductions. Remember, we are trying as much as possible to limit the amount of deductions, so you have higher amount of royalties. Therefore, I recommend you as CASL what they mean by “other allowances” as one of the deductibles of the gross income. Please also note that if it is difficult to negotiate individual deductions with CASL, consider setting a fixed percentage for deductions, say 10%.
I would also like to give you an idea… if CASL is especially excited about your patents and wants a long-term license, you may want to consider negotiating for a guaranteed minimum annual royalty payment (“GMAR”). With a GMAR, CASL promises to pay you a specific amount, usually at the beginning of every year/quarterly, regardless of how well the merchandise sells during the period. At the end of that period, if the earned royalties exceed the GMAR, you would be paid the difference. If the GMAR exceeds the earned royalties (you were paid more than the product earned), CASL would take a loss (unless CASL negotiates to apply the difference to future GMARs).
- TERMINATION
There is a slight typo on the Termination Clause. It states “thirty (90) days”. Please ask CASL to clarify.
I find all the other Sections satisfactory.
Regards!
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