What to Know About the Exclusivity Clause in a Technology License Agreement

When a company seeks to develop a service or product that is based on the intellectual property which is invented or owned by another, a licensing agreement must be obtained. In seeking a license, a common question that companies have to ask themselves is what level of exclusivity they should seek from the property owner.

Unbeknownst to many companies, the devil is in the details when it comes to the benefits and pitfalls of exclusivity. For the most part, companies tend to believe that they need exclusivity on the intellectual property in order to thrive and be a successful business but this is not always the case. Understanding the pros and cons of exclusive and non-exclusive technology licensing agreements is key.

What to Know About the Exclusivity Clause in a Technology License Agreement

The Differences Between Exclusive and Non-Exclusive Licenses

When receiving or granting a license under intellectual property rights, the parties entering into an agreement must consider the degree of exclusivity they will seek. Generally, there are three types of license agreements that are used to transfer rights from the licensor to the licensee.

  1. Exclusive Patent Licenses are licenses where no other company or person other than the licensee is able to exploit the relevant intellectual property rights. In these types of licenses, even the licensor is unable to make use of the intellectual property. For the most part, exclusive license agreements cover a license that is subject to limitations to specific fields, markets, lengths of time, or even context. These agreements could cover the application, geographical area, method of production, and specific products.
  2. Non-Exclusive Licenses are licenses that grant the right to use the intellectual property, however, unlike exclusive patent licenses, these licenses allow the licensor to continue exploiting the same property. Non-exclusive licenses also allow for the creation of other licenses to use the same property.
  3. Partially Exclusive Licenses are agreements that set limits on the exclusivity to a particular term or territory. For instance, a partially exclusive agreement may allow the licensee to use the product to create a medical device, but will not allow the product to be used for telecommunication. In some cases you may have a non-exclusive license that provides the other party with a limited period where they would be the exclusive licensee; while in other situations you may grant the party limited exclusivity perhaps in a specific territory (market segment or geography) where that exclusivity is based upon a maintaining a certain dollar value, or volume of sales, or like measure of performance.

The following clauses should be considered in all licensing agreements:

  • Definitions,
  • Summary of use,
  • Subject matter,
  • Permitted uses,
  • The rights retained by the license,
  • The background or purpose for the license, and
  • The course of action when copyright is infringed
  • Ongoing support and enhancements for the associated IP

Advantages of Obtaining an Exclusive License

Concerning exclusivity on technology license agreements, there are several advantages to obtaining this over owning the patent. Some of these advantages include, but are not limited to:

  • Aligned incentives between both parties,
  • The licensee is incentivized to obtain the patent,
  • Unforeseeable patent costs may be eliminated,
  • Exclusivity may provide operational flexibility for businesses,
  • License agreements are sometimes transferable, and
  • An exclusive license offers control over an asset without high upfront costs. 
  • An exclusive license may justify the investment necessary to effectively promote the associated work

Whenever a company has a licensing agreement, the company can be immune from potential lawsuits since the property is owned by an outside party. Having a technology licensing agreement can make the company less attractive to plaintiffs who seek to sue the company in hopes of winning the patent.

Why a Non-Exclusive License May Be the Better Choice

Non-exclusive technology licenses grant the licensee rights over the property in question, but these licenses also allow the property owner the right to continue using the property – including granting the license to other parties. When it comes to non-exclusive licenses, the licensee can expect market competition from other licensees.

Although exclusive licenses can grant a licensee more rights than a non-exclusive license, a non-exclusive license can sometimes be a more lucrative choice for the licensee in the long run. For instance, non-exclusive licenses require the applicant to submit a well-formed commercialization plan but these requirements are far less stringent than the requirements usually required for exclusive licenses. Further, a non-exclusive licensing agreement may be a better fit for a company because of the premiums usually attached to exclusive licenses. Grants for exclusive licensing agreements will often include execution fees, royalty rates, along with other financial expectations. In acknowledging the licensee’s ability to accept possible competitors, the non-exclusive license tends to cost far less to not only obtain but also to maintain.

A non-exclusive license may induce the developer to continue to refine and enhance the IP, and if that is included in the license, that could very much work to the licensee’s benefit. In the same way a non-exclusive license might be more inclined to provide dedicated ongoing support for the work, in an exclusive license relationship you often must develop that skill in-house.

Ultimately, the decision to enter into an exclusive or non-exclusive technology license depends on each individual business and whether the business can benefit from the perceived advantages. To ensure the best decision is made, it is important to obtain the support of a qualified attorney who can help determine which licensing deal is the best for the unique business.

Choose the Best Licensing Agreement for Your Business With the Support of a Skilled Technology Licensing Attorney

A technology licensing agreement is by far one of the most important decisions that can be made concerning a business. A major factor that should be considered when entering into an agreement is whether the licensing deal should be exclusive or non-exclusive and while each option has its pros and cons, the decision made in the end should be tailored to the nature of the business, the market, and the intellectual property.

All in all, there is no such thing as a one-size-fits-all when it comes to licensing exclusivity. Every business has to determine whether exclusivity is worth the cost and in order to make the right decision, it is important to consider seeking the support of a skilled technology licensing attorney who has extensive experience in drafting and executing these types of contracts.

If you are seeking to obtain a technology licensing agreement, consider obtaining the support of Technology Attorney John P. O’Brien who has the skills and experience necessary to handle these intricate contracts.

Attorney O’Brien has decades of legal experience managing technology licensing agreements and is committed to ensuring that all clients obtain the best licensing deal that is the best fit for their unique company. Before entering into an intellectual property agreement, consider allowing Attorney O’Brien to preserve your company’s best interests. Call Attorney John P. O’Brien at (732) 219-6641 today to schedule a no-obligation consultation.