Common Pitfalls in License Negotiations and How to Avoid Them
Entering into a license negotiation can often feel like a high-stakes game. Whether you're licensing your intellectual property or acquiring new technology, the details of the agreement will have a lasting impact on your business. However, with any license negotiation, certain pitfalls can potentially impact your discussions and lead to legal challenges down the line.
At David L. Cohen, P.C., we have spent years guiding companies through these discussions. Our attorney, David L. Cohen, brings a distinct perspective to the table, combining his understanding of IP law with practical business sense to assist businesses in their local communities and across international borders.
Successful license agreements are built on clarity, foresight, and a solid legal foundation. Therefore, we strive to help you understand the common pitfalls of licensing negotiations and how to avoid them so you can protect your business interests and focus on achieving your long-term business objectives.
Pitfall #1: Failing to Define the Scope of the License
A common misstep we see in license negotiations is a lack of precision when defining the scope of the license. A vaguely worded agreement is a recipe for future conflict, so when you grant or receive a license, every parameter must be clearly spelled out. This includes the specific intellectual property being licensed, the territory in which the license is valid, and the field of use.
For instance, does the license for a software product cover all future updates and versions, or only the current one? If you are licensing a brand trademark, is it for use on a specific product line or across the licensee's entire catalog?
A successful agreement should explicitly state what the licensee can and cannot do. By detailing these terms, you can prevent misunderstandings that could lead to litigation and damage your business relationships down the line.
Pitfall #2: Overlooking Royalty Structures and Payment Terms
The financial component of a license agreement is often the most heavily debated. However, the focus is sometimes too narrow, centered only on the royalty rate percentage. A comprehensive agreement must address the entire financial picture.
For example, how will royalties be calculated? Will it be based on net sales, gross revenue, or a per-unit fee? Each method has different implications for accounting and reporting.
Apart from the royalty percentage, payment terms are very important. The agreement should specify the frequency of payments, the currency, and the process for auditing financial records. What happens if a payment is late? Are there penalties or interest charges?
We recommend building royalty structures that are fair, transparent, and easy to administer. Thinking through these details upfront protects cash flow and provides both parties with a clear understanding of their financial obligations.
Pitfall #3: Ignoring Exit Strategies and Termination Clauses
While everyone enters a licensing partnership with optimism, it is practical to plan for a possible termination of the agreement. A well-drafted agreement includes clear termination clauses that outline how and when the relationship can be dissolved. For example, what constitutes a breach of contract? How much notice is required to terminate the agreement?
An often-overlooked aspect is what happens after termination. The agreement should outline the licensee’s obligations, including ceasing all use of the IP, returning any confidential materials, and disposing of any remaining inventory. Without a clear exit plan, unwinding the partnership can become messy and contentious. We recommend creating clauses that provide a structured off-ramp, protecting their IP and business interests even if the deal does not go as planned.
Pitfall #4: Neglecting Future-Proofing the Agreement
Technology and markets change at a rapid pace. An agreement that seems perfect today could become outdated in just a few years. A common pitfall is failing to consider future developments. For example, how will the license apply to new technologies or platforms that do not yet exist? If you are licensing content, does the agreement cover distribution on future social media networks or virtual reality environments?
Through our business consulting services at Kidon IP®, we encourage our clients to build flexibility into their agreements. This can be achieved through clauses that mandate periodic review of the terms or establish a process for renegotiating specific elements in response to significant changes in market conditions.
Another strategy is to address the handling of improvements or derivative works. Clearly defining ownership and licensing rights for any new IP developed from the original licensed property is a forward-thinking step that can prevent major disputes.
New York Laws Governing Licensing
New York contract law, which plays a key role in governing license agreements, is both well-established and highly regarded. The courts are experienced in resolving complex commercial disputes, and the state offers a significant advantage for businesses in these cases. Including a "choice of law" provision in your agreements to designate New York law can add predictability and stability to your contracts.
New York's General Business Law also contains provisions related to fair trade practices and consumer protection that can sometimes intersect with licensing, particularly in franchising or distribution deals. For example, laws governing warranties or representations made about a product can have implications for both the licensor and licensee.
At David L. Cohen, P.C., we strive to help you understand how these state-specific regulations may apply to your agreements, adding another layer of protection. Contact us today to discover how our firm can assist you.
Business Consulting Attorney Serving New York and Worldwide
At David L. Cohen, P.C., our goal is to provide legal strategies that are built around your specific needs. Whether you're addressing complex licensing agreements or managing intellectual property issues, we’re here to provide straightforward guidance that protects your business and intellectual property.
Located in New York, New York, we serve clients throughout the United States and worldwide. If you're developing a license agreement or need help understanding the specifics of one, count on us to help you handle challenges, reduce legal risks, and set your business up for lasting success. Contact us today to schedule a consultation.
