June 10, 2020 Feature

Smarter Licensing Simplified

Charles C. Valauskas

©2020. Published in Landslide, Vol. 12, No. 5, May/June 2020, by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association or the copyright holder.

A license that accomplishes a client’s business objectives seems like it should be easy to prepare. For many, it means finding or accessing a template license, adding or deleting language as needed, and then sending out the draft to the client for review and comment. That was the smart way to do licensing, I was told by a senior partner decades ago. But since receiving that first licensing assignment as a rank associate, and after working on more licensing projects, I came to appreciate that the task was far more involved, the endeavor far more nuanced. Many challenges—some more obvious than others—existed and had to be overcome just to prepare the first workable draft.

How can you make your licensing efforts smarter, so you can prepare that first workable draft despite the challenges, and ultimately have the final version ready, all within the budget and time frame set by the client? This article proposes a two-step approach, termed the “inside-out” approach, to provide the attorney with the information needed to determine whether the business transaction to be captured in the proposed license is legally viable, and to advance the preparation of the first workable draft and ultimately the final version of a license, even in the face of many challenges.

The Challenges

Attorneys, particularly those who are new to licensing, face many challenges when trying to prepare a workable draft of the license. Here are some of the less obvious ones.

The Template

The “template” refers to any generic, form, or model license, plus any actual license drafted earlier for a client. As I was told early in my career, templates offer a cost-effective and efficient solution to drafting a license. Generic, form, or model licenses are widely available in traditional analog sources, such as in sections of or entire printed books, and in a wide range of online sources. But many of these sources also carry a cautionary note in their prefaces or associated commentary that can be easily overlooked by a busy attorney. The note warns that each of these generic license forms contemplates a specific business transaction and conforms to the specific requirements of the laws applicable to that transaction, the parties, and the agreement. As a result, the form agreement is much like the final version of the license prepared for a client. It is just a snapshot of the goals, assumptions, biases, experience, and inexperience that the drafters and parties had when preparing the document.

Is it likely that the business and legal context in which an attorney is asked to draft a new license will be identical or nearly identical to that context anticipated by the template? Probably not. Industries change, technologies advance, and the business transaction that is the subject of the new license may certainly be different. Does this mean that the use of templates, forms, and copies of already executed licenses should be shunned? The answer is no. At a high level, templates provide many benefits.

Templates are good teaching tools. They provide an insight into how others chose to structure agreements directed to similar transactions. Templates also offer examples of how others crafted specific language to handle the specific details of the business transaction that is the subject of the license.

Templates also can be sources of inspiration. They come in all sizes, styles, and formats. This diversity can inspire attorneys not to mimic closely the language and approach of a model license but instead find their own voice, style, and personalized approach to licensing. Ultimately, the attorney may come to view licensing as a creative exercise and better understand the terms and conditions of agreements relative to attorneys who simply copy and make edits to documents prepared by someone else.

With all these benefits, it is easy for attorneys to place great reliance on licensing templates. The challenge for attorneys is to avoid a continued blind dependence on them. Think of templates as useful tools and sources of inspiration, not patterns for rote reproduction.

The Drafter

How can the attorney, who is asked to draft a license for a client’s business, be a challenge to accomplishing that task? The answer to this question lies in the often-quoted phrase, “The medium is the message.”1

Licenses and the licensing process communicate many messages. The client at times takes a direct hand in both developing and communicating these messages. Specifically, by entering into a license arrangement through a “handshake” agreement, the client chooses to retain full responsibility to negotiate and confirm, and thereby be the medium though which the content—that is, the details of the given business transaction—is communicated. This gives the client direct control of the transactional message of the license that the client communicates verbally.

In addition to the transactional message, the “handshake” agreement communicates other, possibly more subtle, more personal, higher-level messages. Given that a third party, such as legal counsel, plays little or no obvious role in the process, this direct method of licensing communicates the higher messages of simplicity and trust.2

But the client may choose not to be the “medium” through which the licensing messages are communicated. The client may choose a less direct method such as a written agreement. Yet such a choice still provides the client with the opportunity to communicate messages beyond simply the transactional message. For example, by choosing to license content through an open source license, the client can communicate the client’s interest in promoting collaboration and the advancement of the arts and sciences.3

In most cases, however, the client does not choose a certain type of agreement for licensing but instead chooses legal counsel. With this choice, the client places responsibility on the legal counsel to develop and negotiate a written agreement that is appropriate for the business transaction proposed by the client and is appropriate for the higher-level messaging that the client wishes its business to communicate to the public.

To provide the client-appropriate, high-level messages, the attorney must recognize that a license is a legal document and a public relations tool just like any other advertisement, post, or publication distributed by the client. To discharge fully the added responsibility placed on the attorney by the client’s choice of the attorney as the client’s licensing representative, the attorney must develop a more than superficial understanding of the client’s business, how it competes in the larger industry in which the client’s business operates, and who or what is the client’s customer base. Ideally, the license should express a message that is consistent with and supports the messages that the client expresses through its choice of business model, its corporate culture, its advertising and marketing efforts, and its dispatches to potential and actual investors. Discharging this added responsibility is not an easy task for any attorney to accomplish.

The challenge for attorneys, particularly those who have taken the above suggestion to heart and developed their own style and approach to licensing, is to adjust their style and approach to produce a license whose messages are consistent with and appropriate for the client’s business and not at odds with the client’s other messaging. Is a license that is simple to read and expresses trust appropriate for the client, the licensed subject matter, and the marketplace? Or is a license that reads like an insurance policy and conveys messages of caution and risk-aversion appropriate, given the subject matter and the industry?4

Again, by abdicating its responsibility to control directly the high-level messaging of the license, the client does not mean that the attorney should substitute some other message for the many messages that the client crafts for the public. Instead, the attorney is given the added responsibility to understand and convey the same message.

The Client

Clients provide opportunities to an attorney. Clients also present challenges to the attorney, even when the client requests the attorney to prepare a license for the client’s proposed business transaction. These challenges are not just the client’s expectations regarding the time frame and budget within which the license must be produced. Those expectations are obvious ones typically manageable by the client and attorney.

The challenges arise mainly because the only source of the information—detailing what the client expects the attorney to capture within a coherent, unambiguous, and strategic binding written document—is the client. The client is often too busy, too distracted running the business to be responsive to attorney inquiries and to review multiple drafts of agreements. And possibly exacerbating the challenge is that the client may have developed expectations regarding the business transaction to be captured within the license agreement without first seeking legal advice whether the transaction is even legally viable.

To work within such a constrained context, the attorney must prioritize what information to seek from the client, when the information is sought, and how it is used. What information should the attorney seek first as part of this triage process? The “inside-out” approach, particularly the first step, was developed to identify what information the attorney must seek and use first. The following will discuss this first step and then how the information obtained from it can be used to evaluate the client’s proposed business objectives and prepare the first draft of the license.

The “Inside-Out” Approach

As the name implies, this approach is different from other approaches to drafting licenses. For example, it does not involve working from the first page of the draft license and inserting the names of the parties to the transaction, then moving on to add language commonly found in other license agreements, then finally constructing the grants clause and the other clauses that are specific to the business transaction that the client wishes to capture in the license. This conventional approach to drafting a license can provide a workable draft in a timely fashion only if the attorney fully understands the proposed business transaction.

However, the attorney charged with drafting a license often is given some, but not all, of the details of the proposed transaction by the client. Certainly, with such a limited understanding, the attorney cannot determine whether the transaction, as initially proposed by the client, is even legally feasible and therefore whether it makes sense to begin drafting a license directed to that version of the transaction.

The inside-out approach focuses on obtaining the information that the attorney must absolutely have first in order to understand more completely the business transaction proposed by the client and determine whether the proposed business transaction is legally feasible or not. If it is, the attorney will then have the information needed to develop the most important clause of any license agreement—the grants clause—and, with that task completed, know what other language is needed in the agreement to support the “quid pro quo” of the subject business transaction largely expressed in the grants clause and to manage the risk that the client has chosen to accept with the transaction. Preparing the first draft of the license should then proceed smoothly, even if the attorney has less experience or is faced with a tight deadline and the challenge of a busy client.

Step 1: Identify Licensable Subject Matter

Identifying the subject matter to which the license will be directed sounds like a simple task to accomplish. The client in its initial communications with the attorney will certainly provide some guidance regarding what the client wishes to license and to whom. However, it is not unusual for the client to identify the proposed subject of the license as a product, a service, or some commercial opportunity. And it is not unusual for the client not to understand fully what portion of that proposed subject matter the client owns, or at least has the ability to license to another.

To develop the coherent, unambiguous, and strategic binding written document that the client expects the attorney to draft, an attorney must take the limited guidance provided by the client and conduct a first analysis. The attorney must find the answer to the question: What exactly is the subject matter that the client proposes to license? For example, if the client instructs the attorney to prepare a license for certain content, the attorney must determine whether the content is simply text, a still image, a video recording, or an aural recording. Or is the content a combination of two or more of these components, such as would appear in a film documentary? If the proposed subject matter is a technology, product, or online service, what portion of each, often multicomponent, opportunities does the client propose to license? Is client or third-party software needed to enable the subject matter to operate as intended?

Once the client has completed the first analysis and knows exactly what the subject matter is that the client proposes to license, the attorney must then determine whether the client has the right to license each of the identified components that form the larger subject matter targeted by the client for licensing. If the client does not own any of the components of the proposed subject matter, then the attorney must determine how and under what circumstances the client came to use the component. For example, did the client obtain a license to use the component? If yes, what are the terms and conditions of the license? Is it exclusive or nonexclusive with no right to sublicense? Did the client believe that one or more components were in the public domain, or labor under the assumption that the use was permissible as a fair use?

For those with more experience, the above analysis may sound familiar. Essentially, it is a “rights clearance” analysis—that is, the analysis that must be conducted to determine whether all the components targeted for use in a creative process can be used as proposed. Rights clearance requires consideration of all the components of the subject matter that are targeted for use in a creative process and the laws related to patent, copyright, trademark, privacy, defamation, and publicity. However, in the inside-out approach, the rights clearance analysis seeks to determine whether the client can “license out” the product or service that the client has already developed, rather than trying to determine whether the client can engage in the proposed creative effort and develop and commercialize a certain proposed product or service.

If any of the components of the subject matter cannot be licensed out as proposed, the transaction is not necessarily finished. The client may be able to remove a certain problematic component and replace it with a component that the client can actually license out or, if the component is subject to a license obtained by the client, renegotiate the license to permit the proposed licensing by the client.

By conducting the simple rights clearance analysis outlined above, the attorney should have a good idea whether and to what extent the client has the necessary legal entitlements to make the business transaction proposed by the client viable. If the conclusion is that it is not, both the client and the attorney will be happy that time was not spent using the conventional drafting approach to prepare portions of a draft license that will not be used.

Step 2: Develop the Grants Clause

If the proposed business transaction successfully gets past the initial analysis gauntlet described above, and the client can license out the proposed subject matter, the attorney can move on to drafting the grants clause.

The grants clause is the most critical clause of any license agreement for many reasons. It largely defines the scope of the license—that is, the “who, what, when, and where” of the business transaction that is the subject of the agreement.5 Through such definition, the owner of a licensed patent, copyright, or other intellectual property changes the contours of the owner’s monopoly in that property to specify what the licensee is permitted to do with the property and what rights and opportunities the licensor reserves for itself.6

To develop a grants clause in its most basic form, the attorney must accomplish the following tasks.

Specify Licensed Intellectual Property

In the grants clause, the attorney must specify which of the properties from the client’s larger universe of properties the client will license. The properties that are specified will be those that are needed to achieve the business objectives of the client.

To illustrate, let’s say that the client wishes to permit a licensee to manufacture and sell a lamp developed by the client that functions the same as, but does not have the same appearance as, the client’s lamp. By completing step 1, the attorney already knows that the household lamp developed by the client has certain components—an electrical circuit, a bulb, a shade, and a distinctive housing—for which the client has amassed a large universe of intellectual properties: utility patents on the bulb, the shade, and the lighting system; design patents on the shade and the housing; and copyrights and trademarks directed to features appearing on the surface of the lamp housing. From the earlier guidance provided by the client, the attorney knows that the client is interested in allowing the licensee to manufacture and sell a lamp that provides the same functionality, but does not have the same distinctiveness in the marketplace, as the client’s lamp. Accordingly, in the grants clause, the attorney will specify the utility patents issued to the client but not the client’s design patents, copyrights, or trademarks.

Define Rights to Be Exercised

Certainly, a client can simply specify one or more intellectual properties in the grants clause and allow the licensee to exercise all the rights associated with all the properties. However, such a grant of rights without any further limitation may, from the perspective of the licensor, make business sense only if the licensee is ready, willing, and able to use each of the specified properties to the fullest, and ultimately produce the value that the licensor is seeking to receive from the license, or if the licensee needs the freedom and flexibility to use the specified properties without limitation because the business and technical contexts in which the licensed properties are to be commercialized are in such a flux. However, rarely do such dynamic conditions exist that require such unlimited freedom and flexibility.

As a result, to produce the value that the client seeks to receive from the licensing arrangement, the client typically will choose which of the exclusive rights associated with each of the client’s intellectual properties it will permit the licensee to exercise. In order for the client to make a fully informed decision in this regard, the attorney must make sure that the client understands what each intellectual property protects and what are the specific exclusive rights associated with each such property.

Specifically, the client should understand that copyright protects a work that is “original”—not copied from another—as expressed in a tangible medium.7 Given this focus, copyright does not provide the copyright owner with the complete control over the owner’s work, as does a patent.8 A second work can be produced that is identical to a first work as long as the developer of the second work produced it independently and without access to the first work. The Copyright Act provides that the copyright owner can “do” or authorize another to exercise only one or more of six exclusive rights.9 Importantly, the right to “use”—which often appears in licenses involving copyright-protected subject matter—is not one of the rights statutorily granted to the owner of a copyright property. As a result, a license to “use” a copyright-protected work is, without more definition, not a meaningful, nonambiguous grant of rights.10

In contrast to copyright, a patent extends protection of novel and nonobvious functionalities—that is, “useful art” which the claims of patent delineate.11 Rather than a right “to do” as with copyright, a patent provides the owner with “the right to exclude” others from making, using, offering for sale, or selling the claim-identified invention in the United States or “importing” the invention into the United States.12 Clearly, in contrast to copyright, since the right to use is one of the exclusive rights that a patent owner obtains, the grant of the right to use with respect to patented subject matter is a meaningful grant.

Trademark law is not concerned with the protection of the “expression” of an idea provided by copyright law or the protection of the “art” provided by patent law, but instead the protection of the symbols by which the source of a product or service can be identified.13 Trademark law gives an owner the right to prevent use by others when that use is likely to cause confusion or mistake or to deceive.14 The grant of a right to use a trademark is a meaningful grant.

Each of the rights of each of the intellectual properties may be granted expressly or withheld expressly or in silence, either separately or collectively. Because each right represents an opportunity, and therefor has value, licensors typically seek to limit the grant of rights narrowly. Licensees, on the other hand, try to obtain as expansive a grant of rights as possible, thereby allowing the licensees to continue using the licensed subject matter even in the face of changing business and technical contexts.

Add Conditions

The client has the opportunity to make the definition of the “quid pro quo”—that is, the exact “who, what, when, and where”—of the proposed business transaction even more fine-grained with the addition of conditions to the grants clause. The conditions define in what circumstances and contexts the licensee is permitted to practice the specified property rights and simultaneously what property rights the licensor is retaining for itself. The conditions may be expressed as positive limitations,15 exclusions,16 restrictions,17 or prohibitions.18

Common limitations on the properties and rights granted include whether the grant is exclusive or nonexclusive,19 the territory in which the rights can be practiced,20 and the industry or market in or for which the rights can be practiced.21 Additionally, with conditional language, the date on which the grant of rights becomes effective and the date on which the grant of rights expires can be defined.

Unlike a term that must be satisfied to avoid a breach of contract claim, the failure to comply with a condition of the grant has great significance. Such failure causes the license to be nullified and the owner to have the basis on which to sue for infringement.22

Conclusion

The two steps above are intended to make the approach that an attorney takes to licensing smarter. The attorney should have a better idea of what information is needed and when, and overall make a more efficient use of the attorney’s time and the client’s time to prepare the coherent, unambiguous, and strategic binding written document that the client seeks.

Endnotes

1. Marshall McLuhan introduced this phrase in his 1964 work Understanding Media: The Extensions of Man. McLuhan opined that content and the character of the medium used to convey the content each deliver a message.

2. Ray Kroc, the founder of the McDonald’s Corporation, was famous for entering into oral contracts for licensing and other business matters and memorializing the deal with a handshake. In his 1977 book Grinding It Out. The Making of McDonald’s, Kroc described many of those business transactions and broadly stated: “I always take a man at his word unless he’s given me reason not to, and I’ve worked out many a satisfactory deal on the strength of a handshake.” Even though this choice of medium clearly may communicate messages of simplicity and trust, the details of a particular orally discussed business transaction may at times be uncertain. See Mann Bros. Logging, Inc. v. Potlatch Corp., 149 F.3d 790 (8th Cir. 1998); In re Cent. Ice Cream Co., 59 B.R. 476 (Bankr. N.D. Ill. 1986); Cent. Ice Cream Co. v. Sweetheart Cup Corp., 351 N.E.2d 396 (Ill. App. Ct. 1976); Schupack v. McDonald’s Sys., Inc., 264 N.W.2d 827 (Neb. 1978).

3. See Jacobsen v. Katzer, 535 F.3d 1373, 1378–79 (Fed. Cir. 2008).

4. Websites provide access and license content to a broad audience typically through online agreements. Rather than friendly “rules of the road” that advise what is acceptable and what is not acceptable conduct through simple language, online agreements often use a complex assemblage of thousands of words spread over many, many pages. To make these online agreements more accessible, visual tools have been developed and welcomed by the public. See, e.g., R. Sikoryak, Terms and Conditions: The Graphic Novel (2017). Despite the uncertain messaging that complex online licenses provide, web businesses that use them do not appear to be competitively disadvantaged. These licenses are arguably necessary so businesses can operate in the ever-changing online environment.

5. Kenall Mfg. Co. v. Cooper Lighting, LLC, 338 F. Supp. 3d 841, 848 (N.D. Ill. 2018).

6. See Impression Prods., Inc. v. Lexmark Int’l, Inc., 137 S. Ct. 1523, 1534 (2017).

7. 17 U.S.C. § 102(a).

8. See Sony Corp. of Am. v. Universal City Studios, Inc., 464 U.S. 417, 432–33 (1984).

9. The six copyright rights are: “(1) to reproduce the copyrighted work in copies or phonorecords; (2) to prepare derivative works based upon the copyrighted work; (3) to distribute copies or phonorecords of the copyrighted work to the public by sale or other transfer of ownership, or by rental, lease, or lending; (4) in the case of literary, musical, dramatic, and choreographic works, pantomimes, and motion pictures and other audiovisual works, to perform the copyrighted work publicly; (5) in the case of literary, musical, dramatic, and choreographic works, pantomimes, and pictorial, graphic, or sculptural works, including the individual images of a motion picture or other audiovisual work, to display the copyrighted work publicly; and (6) in the case of sound recordings, to perform the copyrighted work publicly by means of a digital audio transmission.” 17 U.S.C. § 106.

10. See 2 Melville B. Nimmer & David Nimmer, Nimmer on Copyright § 8.01[A] (Matthew Bender rev. ed.); see also Spinelli v. Nat’l Football League, 903 F.3d 185, 195–205 (2d Cir. 2018); ITOFCA, Inc. v. MegaTrans Logistics, Inc., 322 F.3d 928, 937–41 (7th Cir. 2003).

11. 1 Donald S. Chisum, Chisum on Patents § 1.01 (Matthew Bender 2020).

12. 35 U.S.C. § 101.

13. 1 J. Thomas McCarthy, McCarthy on Trademarks and Unfair Competition § 6.3 (5th ed. 2020).

14. 15 U.S.C. § 1114(1); Qualitex Co. v. Jacobson Prods. Co., 514 U.S. 159 (1995); see 1 McCarthy, supra note 13, § 6.14.

15. See Tattoo Art Inc. v. TAT Int’l LLC, 498 F. App’x 341, 346 (4th Cir. 2012).

16. See Frank Music Corp. v. Metro-Goldwyn-Mayer, Inc., 772 F.2d 505, 511 (9th Cir. 1985).

17. See Impression Prods., Inc. v. Lexmark Int’l, Inc., 137 S. Ct. 1523, 1534 (2017); Jacobsen v. Katzer, 535 F.3d 1373, 1380 (Fed. Cir. 2008).

18. See LGS Architects, Inc. v. Concordia Homes of Nev., 434 F.3d 1150, 1156 (9th Cir. 2006).

19. See ITOFCA, Inc. v. MegaTrans Logistics, Inc., 322 F.3d 928, 935–36 (7th Cir. 2003).

20. See Int’l Gamco, Inc. v. Multimedia Games, Inc., 504 F.3d 1273, 1275 (Fed. Cir. 2007).

21. See Gen. Talking Pictures Corp. v. W. Elec. Co., 305 U.S. 124, 127 (1938).

22. Kenall Mfg. Co. v. Cooper Lighting, LLC, 338 F. Supp. 3d 841, 847 (N.D. Ill. 2018) (quoting Raymond T. Nimmer & Jeff C. Dodd, Modern Licensing Law §§ 11.3, 11.4 (2017)); see also Sun Microsystems, Inc. v. Microsoft Corp., 188 F.3d 1115, 1121–23 (9th Cir. 1999); S.O.S., Inc. v. Payday, Inc., 886 F.2d 1081, 1087 (9th Cir. 1989); Gilliam v. Am. Broad. Cos., 538 F.2d 14, 20–21 (2d Cir. 1976).

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Charles C. Valauskas is a partner at Valauskas Corder LLC in Chicago, specializing in all forms of IP, and contractual and dispute resolution matters regarding the same.