Drafting any sort of agreement requires three skillsets. Just being a smart lawyer isn't enough. The skillsets are:

• Drafting skills—Writing a clear, concise, accurate and  comprehensive agreement
• Legal skills—Understanding all of the legal principles which go into negotiating, drafting and enforcing a license agreement—contract law, patent law, labor law and bankruptcy law and, of course, much more
• Business skills—Knowing and understanding the business area for which the agreement is being drafted and the potential business³ implications of the transaction

The major problems in agreement drafting are:

• Ambiguity
  • Such as circular definitions and redundancy— saying the same thing different ways—which create ambiguity
• Undue complexity (creating ambiguity)
• Verbosity (creating ambiguity)
• Just plain sloppy language
• Not understanding all applicable aspects of contract, labor, IP,  bankruptcy, (sometimes) international law and many other areas of the law which may apply
• Not understanding all business implications of the  agreement terms

In this paper, I will give you some tips and examples to guide you in draft ing better agreements. However, there is a lot about drafting and negotiating agreements that can only be learned by experience. I hope that this sharing of my experience will help.

I often like to start drafting with a Term Sheet, if it is a negotiated agreement (as opposed to starting with one party's form, as is sometimes unavoidable when dealing with a behemoth company). Writing a draft agreement first often loses issues in the verbiage, makes review more complex and therefore harder, and wastes time when you have to change language.

I like to include in the Term Sheet all of the definitions I want to use in the agreement. Once all definitions and basic terms are agreed in the Term Sheet, writing the first draft is more focused, much easier and much less likely to be contentious.

A Term Sheet usually is not intended to create a binding contract. Therefore, the Term Sheet should be stated to be non-binding. See A/S Apothekernes Laboratorium v. I.M.C. Chemicals, 873 F.2d 155 (7th Cir. 1989) (re letters of intent). Caveat: It is not always clear whether a document is a letter of intent or a binding contract, so it is desirable to state that "(t)his letter is a statement of our intent only and is not a binding contract."

If you need a confidentiality provision in the Term Sheet (a separate CDA is often, but not always, used), that clause—plus relevant boilerplate, like governing laws, if included—should be stated to be binding and the Term Sheet should state that. See Addendum A for a sample Term Sheet, which also addresses confidentiality. This Term Sheet will also give you some insights into how I like to draft license agreements, with clean definitions, headings for covenants, short and simple "sound bites," etc.

I like to take control of the first draft. My goal is to draft quickly a comprehensive agreement that is fair to both parties and should be acceptable with minimum negotiating and editing. When I write a first draft, I do not like to make it too one-sided. That's a rookie approach (although sometimes it is just a response to the client's demands).⁴
Too much one-sidedness invites controversy, insults the other side and is not likely to be productive. When I write the first draft, I think about the issues the other side cares about and what is reasonable to both parties under the circumstances. Assume the other side is competent and experienced; that is usually the case anyhow.

I certainly will include a few provisions that are tilted toward my client and that the other side might (perhaps will) object to; but that is OK and expected. I feel it is easier to get a few tilted provisions (in your client's favor) by the other side than if the first draft is completely one-sided. Also, it's always good to include a few "gimme's," so you have something to give away in the normal give and take of a license negotiation.

I certainly use forms—my own and others'. Forms are great as check lists, to make sure you haven't left anything out, and let you see how another drafter handled the clause you are dealing with—you can often learn from that.

Be careful about the form of agreement or clause you start with—whether in a form book, from the Internet or in a company or law firm file. Each document represents a particular point of view or a negotiated, compromised view, which may not suit your client's need.⁵

Here are a few suggestions concerning comments on the other party's draft:

• Please, don't send pdfs!
  • Courtesy requires sending a redlined Word document that shows all changes made (plus a clean copy, if you wish).
• When responding to a draft with a lot of issues, I prefer to send the other side an "issues list" (including an explanation of our position). For an example, see Addendum B.
  • I request an issues list when I send out the first draft.
  • I find that incorporating changes in a draft, when there are a lot of contentious points or ambiguities, just wastes time and obfuscates the substance.
  • Resolve the fundamental issues first, by e-mail or phone then incorporate the changes in your draft.
• Don't hesitate to use the phone or an e-mail to the other party if you're not sure of something in the draft.

• My Drafting Style. The Term Sheet of Addendum A and Option language of Addendum C are good examples of how I draft agreements. I use brief, concise definitions and break the covenants up into easily readable "sound bites," with subparagraphs and sub-subparagraphs. I also like to use headings for each paragraph and sometimes for subparagraphs. Headings make it easier to navigate the license agreement.
• Brevity. Try to be as brief as possible, while stating the covenant or definition clearly and accurately. It is often easier said than done, and I often revisit my drafting and edit it for brevity and clarity.
  • –Some lawyers think verbosity is synonymous with legal elegance; it's not—it is unclear (and potentially  troublesome) writing.
• Tip: I have—on occasion⁶—acceded to an ambiguous provision drafted by the other side, when I know that I won't be able to get the other side to re-draft the provision as I would like. It's "half a loaf is better than none." An example is an indemnity clause in a license to a large company. It is often tricky to get the indemnity limited, but if it's ambiguous, that may be acceptable.
  • I even delete "in the event that" and substitute "if"; it's pretty anal, but I find it useful. In most (but not quite all) situations, these terms have the same meaning. This may be overkill to some, but it is part of how I discipline myself to be brief.
• Using the "Enter" and "Tab" Button. Addenda  D and E show a couple of license provisions, an assignment provision and a "foundry clause,"⁷ that were originally written as non-stop, unbroken paragraphs and illustrate how they look when simply broken into subparagraphs and sub-subparagraphs, which makes them much easier to read and understand. Often, when reviewing someone else's draft of a lengthy paragraph, I start by hitting the "Enter" key to better read and understand the paragraph and then I edit the paragraph in that form, if necessary.
• Use of Personal Pronouns. It is common to see personal pronouns used in confusing ways. For example, a License Agreement states: "Licensor grants to Licensee a non-exclusive license under the Patents to make, have made…Licensed Products, including the right to sublicense its customers." Does "its" refer to Licensor or Licensee? You can make a good argument that "its" refers to Licensee, but there is no argument when you say "to Licensee's customers."
• Simplicity. Write the agreement in simple, clear 21st century language.
  • Avoid 18th century phrases like "witnesseth" and "whereas." They are archaic and add nothing to the contract.
  • Remember the ordinary meaning rule. Terms in a contract are given their ordinary meaning unless the context clearly indicates otherwise. Citadel Holding corp. v. Roven, 603 A.2d 818 (Del. 1992).
• Saying the Same Thing Twice. Sometimes an important concept is not easy to express clearly in words. An example is most favored nations (licensees) clauses. An experienced lawyer will simply slog through the mud until he or she gets it right. An inexperienced lawyer will often say the same thing two or three times in different ways,⁸ I suppose in the (mistaken) belief that this is clarifying. It isn't. It simply creates ambiguity.
• Using the Plural. Be careful when using the plural form of a noun. In one case, use of the plural word "systems" was held to license multiple plants of the licensee, not just one, as contended by the licensor. See Southwire Co. v. ITC, 629 F.2d 1332 (C.C.P.A. 1992).
• Strings. If you must use "strings," e.g. "sell, as sign, transfer and convey," "remise, release, discharge and quitclaim," "claims, demands, actions, lawsuits and causes of action," and so on, be sure you know what each word means. Beware the maxim inclusio unius est exclusio alterius.⁹
  • Strings evolved in the common law days of "searching demurrers," which are not part of our modern legal system. A suit could be thrown out of court for failure to correctly plead a common law cause of action, sometimes by simply using a wrong word or omitting a key word. So it was important to get the words right; hence, the practice of using multiple words for the same thing.
  • I don't use "sell, assign and convey" in a patent assignment. I say "hereby assign" the Patents (properly defined to include CIPs, etc.), but I include the needed extra language to include in the assignment the rights to sue and collect damages  for  past infringements.
  • The worst string I can recall was in a settlement agreement,¹⁰ in which the author used the string "actions, causes of action, suits, rights, debts, dues, sums of money, accounts, accountings, reckonings, bonds, bills, specialties, covenants,  contracts,  controversies, agreements, promises, indemnities, liabilities, variances, trespasses, damages, judgments, extents, executions, claims and demands, of every nature and description whatsoever, in law, admiralty or equity, or as a result of arbitration" in the release clause. This language is not made up; it is real. This doc was submitted by an experienced litigator in a large firm in settlement of a pretty significant case.
• Exemplary Words—"such as," "for example" and "including." It is common (and often—if not always—clarifying) in license agreements (and other contracts) to use exemplary terms, thereby creating a string.¹¹ However, in one patent license case, Lawler Mfg. Co., Inc. v Bradley Corp., 280 F.App'x 951 (Fed. Cir. 2008) (non-precedential), the court held that the phrase "such as" (used in connection with a description of the royalty base when the licensed product—a valve—was sold in combination with complementary products—"such as "an emergency shower or eyewash") was limited to the named complementary products and did not apply when the valves were sold with custom cabinets  and  piping  fixtures.¹²  Although  not  clear with respect to "including," at least one respected commentator¹³  suggests  that  "including  without limitation" may be used instead, but even that is not certain from the contrary case law.¹⁴

I like to start a license agreement draft or Term Sheet with a "Definitions" section. I find that to be the easiest and best approach, although some put the definitions in an exhibit.

• The definitions should be accurate, clear and concise.
• For ease of access, put the definitions in alphabetical order.
  • Exception. If there are only a few definitions, I may put them in order of their flow, e.g. Licensed Patents; Licensed Products; Gross Revenues; Net Sales.
• Avoid circularity between or among definitions.
  • For example, do not define Licensed Products in terms of Licensed Patents and then define Licensed Patents in terms of Licensed Products.¹⁵
• Do not put covenants in definitions. Covenants belong in the body of the contract.
  • For example, in the definition of Net Revenue, do not include a covenant to minimize returns. In Addendum D, the last phrase of the definition of Gross Revenues includes the condition "Licensee uses its commercially reasonable efforts to obtain such recoveries when they become available." I would make this an affirmative covenant in the body of the contract.
  • In the definition of Net Revenues, it is common in some industries to include a standard deduction of 10 percent of revenues to take into account returns and allowances. I usually include that in the Net Revenue definition.
• I prefer to put complete definitions in the Definitions section; not "Licensed Product has the meaning set forth in Section 7.5." I don’t like bouncing back and forth.
• Affiliates. When defining "Affiliates" (or similar-meaning terms, like "Subsidiaries"), state whether the definition includes "past, present and future" Affiliates and what happens when an "Affiliate" ceases to be an Affiliate (as in divestitures).
  See GTE Wireless v. Cellexis Int'l, Inc., 2002 U.S. Dist. LEXIS 16203 (D. Mass. Aug. 15, 2002) (definition which did not include future "Partnerships" was limited to Partnerships on the date of the license agreement); reversed and remanded to allow introduction of parol evidence, 341 F.3d 1 (1st Cir. 2003).

It goes without saying that a clearly written contract should use proper grammar and punctuation.

• The Last Antecedent Rule. The Last Antecedent Rule is a rule of construction¹⁶ used to interpret statutes and often applied by the courts to interpret contracts. The Rule states that modifying or qualifying phrases are only applied to the words or phrases immediately before them, and not to remote phrases, unless a common sense reading clearly dictates that the context or whole of the statute or contract intends it to apply more broadly.
  • An example: Employee assigns to Employer "all inventions, improvements or modifications related to employee's employment." Does "related to employee's employment" apply only to "modifications," as the last antecedent rule could suggest? See Freedom Wireless, Inc. v. Boston Communications Group, Inc., 220 F. Supp. 2d 16 (D.Mass. 2002); Pandol Bros. v. Indemnity Marine Assur. Co., 97 F.3d 1460 (9th Cir. 1996) (unpublished).
    • One approach to avoid the uncertainty is to write it this way: "each of the following, when related to Employee's employment by Employer: (a) inventions; (b) improvements and  (c) modifications."
• General Grammar. As to proper punctuation, read Eats, Shoots and Leaves by Lynn Truss.
  • Mind your present and future tenses. This can be important in areas like the definition of "Affiliates" or "Subsidiaries" to ascertain whether past or future companies are included in the license.

Understand the meaning and application of the language you use.

• Inventions. Every patent lawyer knows that an "invention"  consists  of  two  elements,¹⁷  "conception" and "reduction to practice" (which may be an actual reduction to practice or a constructive reduction to practice, i.e. filing a patent application on the invention). But in agreements which grant licenses or assign patent rights based on "inventions made in the ‘Project'," does the grant apply if the invention is only "conceived" (and not reduced to practice) in the Project? Perhaps not (or at least you might have to introduce extrinsic evidence to clarify this ambiguity in the contract). I would write the applicable phrase as "inventions conceived or reduced to practice in the Project."
• Best Efforts and Comparable Terms. One good example of potential confusion is the use of best efforts, best endeavors, reasonable efforts, commercially reasonable efforts and commercially reasonable efforts. In most U.S. courts, they have the same meaning, which is "reasonable efforts (under the circumstances)."¹⁸ So, I would use "reasonable efforts" and avoid any uncertainty.
  • But the UK language equivalent is "best endeavors" and in the UK this is interpreted to mean a higher standard of performance. Rhodia Int'l Holdings Ltd & Rhodia UK Ltd v. Huntsman Int'l LLC (2007) EWHC 292 (Comm).
  • In a British Columbia, Canada, Supreme Court decision, "best efforts" was held to impose a higher obligation than "reasonable efforts." Atmospheric Diving Systems, Inc. v. Hard Suits Inc., 89 B.C.L.R (2d) 356 (S.C. 1994).
• "Shall Grant" vs. "Hereby Grants." Another concern is the use—in Joint Development Agreements, Option Agreements and similar agreements with grants of future license rights—of a "shall grant" covenant (future tense) vs. a "hereby grants" covenant (present tense). This can be important when the licensor is in financial distress  and the Trustee wants to void the license grant. Use the present tense.
  • See Board of Trustees of the Leland Stanford Junior University v. Roche Molecular Systems, Inc., 583 F.3d 832 (Fed.Cir. 2009) ("agree to assign" is a mere promise to assign future rights). The Leland Stanford case cites IpVenture v., Inc. v. Prostar Computer, Inc., 583 F.3d 1327 (Fed. Cir. 2007) ("interpreting ‘agree to assign' as "an agreement to assign, requiring a subsequent written instrument"). In contrast, the words "do hereby assign" have been construed as a present assignment of future rights. FilmTec Corp. v. Allied Signal, Inc., 939 F.2d 1568, 1572-3 (Fed. Cir. 1991) (emphasis added). Why say "do here by assign" when "hereby assigns" will suffice?
  • As to licenses, see Imation Corp. v. Koninklijke Philips Electronics N.V., 586 F.3d 980 (Fed. Cir. 2009).

This principle is important because future events, such as breach or bankruptcy, may affect the ability of the licensor to avoid the "future" license grant.

• Representations and Warranties. Do you know the difference between "representation" and "warranty"?¹⁹  Be  sure  to  use  the  terms  correctly.  And when should reps and warranties be limited "to the  best  of  its²⁰  knowledge?"  A  "knowledge"  rep and warranty should usually be qualified "with no investigation having been made or required to be made," in order to avoid an implied obligation to make inquiry.²¹
• Indemnify or Hold Harmless. Many contracts have an obligation to "indemnify and hold harmless." Is there a difference between the two terms? Adams²² says no, and that "indemnify" alone is proper and sufficient. However, there is disagreement on this point. Adams suggests using "indemnify" only, but to couple the term with "losses and liabilities."
  • –Tip: On the subject of indemnities, if I represent the potential indemnitor, I propose that the indemnitor obtain product liability insurance acceptable to the indemnitee and then insert a clause that limits the scope of the indemnity to the insurance coverage.²³
• Guaranty. Is a "guaranty" of a sum of money a guaranty of payment or a guaranty of collection? In the first instance, the guaranty "kicks in" when payment is not made on the due date. In the second, the guaranty does not "kick in" until the debt is reduced to an uncollected judgment and the creditor has unsuccessfully attempted collection. That's a big difference. You prefer to say "guaranty of payment," because then the beneficiary of the guaranty does not have to pursue the collection remedies to exhaustion.
• Insolvent. "Insolvent" has two meanings: "insolvent in the accounting sense" (liabilities exceed assets) and "insolvent in the bankruptcy sense" (inability to pay debts as they come due). Often, "insolvency" is an event of default, giving rise to a right of termination. But which "insolvent" is it? Many companies have liabilities which exceed assets, but are still viable operating businesses. If that licensee is your client, you don't want to have to argue about which meaning of "insolvent" applies, because usually what is intended is "insolvent in the bankruptcy sense" and that is what the license should state.
• Terms of Art. My client, a CPA, wanted to use "standard cost" as a basis for purchasing licensed products in a license and manufacturing agreement. I argued that "standard cost" was subjective and subject to dispute. A year later, there was a dispute, and my client found out that I was right.
  • The same problem exists with royalties (or other revenue shares) based on "net profits." As a subjective term, it is subject to a lot of interpretation variations and game-playing.²⁴

The moral of the tale is that, no matter what the "terms of art" are, either be sure you know and understand them or rely on someone who does. And if you rely on someone else, be sure that the file reflects that,²⁵ just in case there's a problem later.

• Most Favored Nations. Most Favored Nations (MFN)²⁶  clauses  are  troublesome  because  the  financial terms of licenses are highly variable, so that the definition of "Most Favorable License Terms" (or similar designation) is crucial. Addendum F is a clause I use; it is useful in some situations, but not where the applicable financial terms are different. The clause itself is mostly procedural, dealing with notification and acceptance of the "Most Favorable License Terms."
• Right of First Refusal. "Right of first refusal" is commonly misunderstood. "Right of exclusive negotiation" is usually preferable. In a right of first refusal (see Addendum G), the patent owner must first get a written offer (to license or buy the applicable patents) from a third party and then present that offer to the party that is entitled to the right of first refusal. The third party must negotiate and enter into the applicable license or purchase agreement with the patent owner, but the third party agreement has a clause providing that the patent owner can first present the license or purchase agreement to the party with the right of first refusal, which then has thirty or sixty days to accept or reject the proposed agreement on the identical terms. Getting a third party to negotiate the agreement (with the attendant costs of patent evaluation, counsel, etc.) can be very inhibiting, because it can blow up by the exercise of the right of first refusal.Most clients do not understand what a right of first refusal is and why it can be a bad deal. Often (perhaps always), after I explain, and tell them they might prefer a six month right of exclusive negotiation (see Addendum H), that is usually what they opt to do.
• Option. There are a number of specific and defined terms that are needed to create an option. See Addendum C. It is easy to draft an option clause, but what most clients (and some lawyers) do not understand is that an option without detailed terms attached is no option, but rather an invitation to negotiate or litigate. No doubt, you can agree to an option with unresolved terms, but if you can't agree on the terms now, why will it be easier later?Sometimes, the option arises in a development agreement, as to which technology to be developed, its value and the nature and scope of applicable patent and other IP rights, is hard to predict. In that case, all you can agree to is future negotiation of the applicable license terms.²⁷

• Exclusive v. "Sole   and   Exclusive" Licenses. Know the difference between an "exclusive"  license and a "sole" license? A "sole" license is exclusive to the licensee but the licensor retains the right to practice the licensed patents. In an "exclusive license" the licensor retains no rights to practice the patented inventions. A "sole and exclusive" license is the same as an "exclusive license," and therefore "sole and" is redundant.
  • When granting an exclusive license, the grant should be "the exclusive license" under the patents, etc., not "an" exclusive license. "An" suggests that the exclusive license is somehow limited and creates ambiguity. Even if the exclusive license is limited to a field of use, it is still "the exclusive license" for the field of use.
• Future Royalty Determinations. If royalties are to be negotiated at a later date:²⁸
  • Provide that the license vests upon request of the licensee (not when the license terms are determined, which could involve litigation) and the royalty is then payable ab initio, so that—if there are delays in determining the applicable royalty— there will not be a commercial delay; and
  • To give the judge or arbitrator some guidance, specify the parameters on which the royalty is to be determined, such as:
    • financial contributions of licensor vs. licensee;
    • significance and scope of the IP;
    • industry comparables.
  • If there is a future license grant (as to inventions not yet developed, which is necessarily important in technology development agreements), use the "hereby grants" form, rather than "shall grant." See Imation Corp. v. Koninklijke Philips Electronics N.V., supra.
• Marvel Clauses. The recent Supreme Court decision in Kimble v. Marvel Entertainment, LLC, 576 U.S. __, 135 S.Ct. 2401 (2015), affirming Brulotte v. Thyss, 379 U.S. 29 (1964), holding it is patent misuse to require payment of a royalty after the patent expires. However, this principle does not apply to trade secret licenses, as to which royalties may be paid indefinitely. See Aronson v. Quik Point, 440 U.S. 257 (1979). So, in a hybrid patent and trade secret license, the royalties may be split between the patent royalty—which ends with the patent expiration—and the trade secret royalty— which can continue indefinitely. But what is an appropriate split? If the aggregate royalty is, say, five percent, can four percent be allocated to the trade secrets and one percent allocated to the patents? Is that a fair allocation, if agreed to by the parties? I cannot be certain, so to deal with this conundrum, I use the "severability clause" of Addendum J, which I call a "Marvel Clause."
• Implied Rights and Obligations. Consider rights that may be implied. For example, in an exclusive patent (or other) license, there is an implied "best efforts" obligation to exploit the licensed technology; "best efforts" means "active exploitation in good faith." Western Geophysical Company of America v. Bolt Associates Inc., 584 F.2d 1164 (2d Cir. 1978). Compare Permanence Corp. v. Kennametal Inc., 11 USPQ2d (E.D. Mich. 1989) (the implied license is negated by up-front or annual minimum payments). As to trademarks, see Wood v. Lucy, Lady Duff Gordon, 222 N.Y. 88, 118 N.E. 214 (1917). The best efforts obligation may be negated or limited. There is a plethora of "best efforts" cases among the states (often in real estate agreements), with slightly different definitions of the term, so it is best to define the term and its obligations.
• Sharing Sublicensing Revenue. I have seen many license agreements which permit sublicensing and provide that the licensor will receive X percent of Net Revenue of the licensee from sublicensees. But the licensee will be receiving a royalty of Y percent of the sublicensee's New Revenue. If X and Y are each 10 percent, the Licensor will receive one percent (10 percent x 10 percent) of the sublicensee's Net Revenue. That's not fair. A more usual formula is that licensor gets 50 percent of licensee's Net Revenue from sublicensees. The 50 percent is obviously negotiable, but it is usually 40 percent to 50 percent to the licensor.
• Apportioning Royalties. Sometimes a license agreement is entered into and there is a possibility that the licensee may need to license other patents from third parties. This often happens in the pharmaceutical industry, in which the licensee licenses compound A, but may sell products that include compound A and one or more other licensed compounds. What happens when a licensee or sublicensee licenses a technology and later licenses other technology to make the product better, faster, cheaper, etc.? It may (or may not) be appropriate to "apportion" the specified royalty rate between or among licensors of different technologies (or improvements to the same technology. Addendum I is an example of a clause I use. But remember, this is favorable to the licensee, because it limits the total royalty payable²⁹ but not to the licensor, so it is something you can do, not necessarily something you should do.
• The  Defend  Trade  Secrets  Act  ("DTSA"). On May 11, 2016, the DTSA became law. It includes a requirement that employers notify all employees and consultants with contracts entered  into  or  updated  after May 11, 2016³⁰ of his or her "whistleblower rights." If the employer does not provide the requisite notice to an employee or consultant, "the employer may not be awarded exemplary damages or attorney fees"³¹ in a lawsuit for misappropriation of trade secrets by that employee or consultant. This raises the question: "What if the misappropriated trade secrets are those of your company/ client, disclosed (to the employer) under the license  (or  other)  agreement?"  It  is  prudent³² to insert a warranty in your license agreement to the effect that "each Party has complied with 18 U.S.C. §1836(b)(A)." Of course, many agreements have generic "compliance with laws" clauses, but if you don't want a breach claim against your licensor or licensee for failing to comply, you should include this warranty in your agreement, to make clear the need for compliance with this DTSA provision; of course, the clause cuts both ways, so your client needs to comply with the DTSA as well!

The standard clauses at the end of a license agreement are often misunderstood and glossed over. Be sure that you understand and include all relevant boilerplate clauses. Some examples:

• Confidentiality Clauses. It is common to permit Confidential Information to be disclosed to "employees of and consultants to the Receiving Party that have a need-to-know in connection with the performance of the Receiving Party's obligations under this Agreement…" I will often add in that clause the right of access to Confidential Information to "entities that are engaged in due diligence studies in connection with a potential merger or acquisition of the Receiving Party or the purchase of some or all of the Licensed Patents."³³ This added language will  not  always  be  acceptable³⁴  to  your  company/client or the other side, but it should always be considered.
• Entire Agreement (Integration) Clauses. When the parties have reduced their agreement to an integrated writing (by the use of a so-called "integration" or "entire agreement" clause), evidence of prior correspondence, statements, drafts and other extrinsic evidence is not admissible to contradict or modify the terms of the agreement, except as necessary to prove fraud. Restatement (Second) of Contracts §215. See, e.g., American Bank and Trust co. of Pennsylvania v. Lied, 487 Pa. 333, 409 A.2d 377 (1979). However, the integration clause does not negate the implied best efforts obligation in an exclusive license. Havel v. Kelsey-Hayes Co., 445 N.Y.S.2d 333 (App. Div. 1981). Extrinsic evidence is admissible to clarify an intrinsic ambiguity in the contract. Mid-West Conveyor Co. v. Jervis B. Webb Co., 39 USPQ 2d 1754 (10th Cir. 1996).
• Successors and Assigns; Assignability (by  contract or operation of law) of Exclusive and Non-Exclusive License Agreements. Standard "successors and assigns" language will not allow a successor by merger or acquisition to succeed to a non-exclusive license, unless specifically permitted by the license. See Rhone-Poulenc Agro S.A. v. DeKalb Genetics Corp., 284 F.3d 1323 (Fed. Cir. 2002).
  • A non-exclusive license is a "personal" (to the licensee) right and is therefore not assignable (unless assignment is agreed to by the licensor). Hapgood v. Hewitt, 119 U.S. 226 (1886).
  • A non-exclusive license is often likened to a "covenant not to sue," except that sale of a product covered by a non-exclusive license exhausts the patent right and therefore "immunizes" the purchaser of the licensed product from infringement of the licensed patent. In the absence of contrary contract  language,³⁵  the  merger  of  a  non-exclusive licensee with a third party will terminate the license. See Ziff, The Effect of Corporate Acquisitions on the Target Company's License Rights, 57 The Business Lawyer 767 (2002); SQL Solutions, Inc. v. Oracle Corporation, 1991 U.S. Dist. Lexis 21097 (N.D. Ca. 1991). This is even true when the licensee is subject to the Bankruptcy Laws. Everex Systems Inc. v. Cadtrak Corp., 89 F.3d 673 (9th Cir. 1996).
  • As to exclusive patent licenses, the trend is toward treating exclusive patent licenses the same as non-exclusive patent licenses as to transferability by merger. See ProteoTech, Inc. v. Unicity Int'l Inc., 542 F.Supp.  1216 (W.D.Wash.  2008) and In re Hernandez, 285 B.R. 435 (Bankr.Ariz. 2002). However, good old California seems to go the other way, Superbrace, Inc. v. Tidwell, 21 Cal. Reptr. 3d 404 (Cal.Ct.App. 2004) and White v. Hitachi Ltd., 2008 WL 782565 (E.D.Tenn 2007).
  • The bottom line is to make clear in the successors and assigns clause whether the licenses or the agreement can be transferred to "successors or assigns."
    • I have seen successors and assigns clauses which permitted transfer of the rights to successors, "subject to the consent of the licensor, not unreasonably withheld." But then you get into the ambiguity of what constitutes "unreasonably withheld," so it is preferred to avoid that usage.
• Termination for "insolvency" or "financial condition." Prior to the adoption of Section 365(n), a bankruptcy trustee (for a licensor) could "reject" (terminate) an "executory" intellectual property license.³⁶  So,  Congress  adopted  11  U.S.C.  §365(n), under which a licensor in a bankruptcy proceeding may not "reject" a license agreement.
  • Also, it appears that a licensee/debtor may not assign a license agreement under "applicable federal law." 11 U.S.C. §§ 365(c)(l)(A) and (B). See Pension Benefit Guaranty Corp. v. Braniff Airways. Inc., 700 F.2d  935 (5th Cir.  1983), reh'g denied, 705 F.2d
    450 (1983).
  • Think about whether a U.S. court will enforce the punitive action of a foreign bankruptcy trustee. See Jaffé v. Samsung Electronics Co., 737 F.3d 14 (4th Cir. 2013), cert. denied 135 S.Ct. 66 (2014) (where the licensee succeeded in sustaining the license, notwithstanding its attempted termination—as permitted by German bankruptcy law—by Jaffé, who was Qimonda's German bankruptcy trustee).
  • –In addition, so-called "ipso facto" clauses are not enforceable in bankruptcy under 11 U.S.C.
    §365(e)(1).
  • For a 365(n) clause, see Addendum J.
• Governing Laws. If the contract is governed by the law of a state other than the one in which you are licensed, note that fact when advising your client. Also, obtaining venue may be important, so include a covenant agreeing to venue for lawsuits and allowing service of process by mail or pre-paid courier service, to avoid the need for personal service.
• Notice. If you do provide for delivery of notice by mail, "certified mail" (the green cards and green numbers) are for domestic mail only (mail with destinations in the United States). When sending foreign mail and you need a "return receipt" to verify receipt of the package or envelope, you will need to send the package or envelope by "registered mail." I prefer "prepaid express delivery service."
• Patent Marking. Patent marking is important to the licensor, if it ever wants to assert its patents against infringers and collect damages for past infringements. 35 U.S.C. §287. For a marking clause, see Addendum L. It is easy for a licensee to forget to use proper marking. The licensee may be in breach of the license agreement if it fails to consistently use proper marking, so when you are on the licensee side, you need to consider whether the licensee will, in fact, comply with the marking clause.

In international transactions, understand the legal consequences of the parties' rights and actions in the other jurisdiction, notwithstanding governing laws clauses.

• In Germany,³⁷ under the German Employee's Inventions Act (EIA), an employer must obtain an assignment of a patentable invention and the inventor is entitled to compensation for the commercial use of his (or her) invention, even when owned by the employer. If a licensee commercializes an invention made (or, in the case of a Research and Development Agreement, to be made) by a German employee, who pays the employee compensation? The licensor/employer or the licensee? The contract should specify this obligation and identify who pays the employee.
• In Joint Development Agreements, there can often be joint development and therefore joint ownership of patentable inventions. Joint ownership has different consequences in different countries; most countries' laws are not like the U.S. and require sharing among joint owners of each joint owner's sublicensing revenues of jointly owned patents, unless  contractually  agreed otherwise.
• In a governing laws clause, it is desirable to have the foreign company agree to jurisdiction and venue and to service of process by mail or pre-paid courier service.
• Bankruptcy clauses are subject to questions of public policy when you want to enforce rights of or against a company in reorganization or liquidation. See, for example, Jaffé v. Samsung Electronics Co., supra.

Exclusive License Term  Sheet (Abbreviated)

1. Parties.
2. Definitions.
   1. "Affiliate" means an entity that controls, is controlled by, or is under common control with Licensor or Licensee, as applicable, at any time during the term of this Agreement, before, at or after the Effective Date, but it shall be deemed an Affiliate only for the period that it meets this definition. As used herein, "control" means (i) the power to direct or cause the direction of the management and affairs of the entity, whether by direct or indirect ownership of voting stock, positions on the board of directors, contract, or otherwise; or (ii) ownership of more than fifty percent (50 percent) of the equity or other ownership interest of the entity.
   2. "Clinical IP" means all protocols, data, reports, regulatory applications and approvals and other materials used in or resulting from any pre-clinical or clinical study or trial of Licensed Products.
   3. "Confidential Information" means all business, financial and technical information, data, documents and other materials, whether in electronic or physical form or orally disclosed, provided by one party ("Discloser") to the other party ("Receiver"), but excluding any part of the Confidential Information that Receiver can demonstrate:
      1. was public knowledge at the time of disclosure to Receiver;
      2. became public knowledge without fault by Receiver;
      3. was rightfully in the possession of Receiver prior its disclosure by Discloser;
      4. was disclosed to Receiver on an unrestricted basis from a source not known to be under a duty of confidentiality to Discloser; or
      5. is required to be disclosed by law, regulation or court order or for filings with the FDA.
   4. "Licensed Product" means               products, the manufacture, use, importation or sale of which is covered by a Valid Claim.
   5. "Licensee" means                and/or its Affiliates, as the context may indicate.
   6. "Net Sales" means revenues from the sale or other disposition of Licensed Products less:
      1. payments made or credits allowed for promotional purposes;
      2. customary allowances, rebates and trade, quantity, or cash discounts, including discounts, rebates or other payments required under Medicaid, Medicare or other governmental medical assistance programs, to the extent allowed and taken;
      3. amounts repaid or credited for rejections or returns; and
      4. to the extent separately stated on invoices, taxes and other governmental charges levied on the production, sale, transportation, delivery, or use of a Licensed Product which is paid by or on behalf of Licensee or the applicable Affiliate.
   7. "Patent Rights" means: (i) EU and U.S. patent applications                  ,  entitled "          "; (ii) Joint Inventions; (iii) patent applications covering or related to improvements to Inventions covered by (i) or (ii); (iv) reissues, reexaminations, renewals, extensions, divisions, continuations, and continuations-in-part and foreign counterparts of (i), (ii), or (iv); and (v) patents which issue on (i), (ii), (iii) or (iv).
   8. "Revenues" means all license fees, milestone payments, minimum royalties, running royalty revenues and other sums received by Licensee from Sublicenses, but excluding (i) revenues to support research and development efforts and (ii) reimbursements of out-of-pocket expenses.
   9. "Sublicense" means any sublicense or other agreement of Licensee permitting the commercial exploitation of any Patent Right(s), Know-how or Clinical IP by a third party.
   10. "Valid Claim" means: (i) a claim of an issued and unexpired patent of the Patent Rights which has not been disclaimed or held invalid or unenforceable by an unappealed or unappealable decision of a court or governmental body, and (ii) one or more claims of a patent application being prosecuted in good faith, for two (2) years following the first commercial sale or use of a Licensed Product which is a Licensed Product solely as a result of the claim(s).
3. License Grant.
   1. Grant to Licensee. Exclusive, world-wide, royalty-bearing, right and license under the Patent Rights, Know-how and Clinical IP to develop, make, have made, use, sell, offer to sell, import, export and lease Licensed Products.
   2. Sublicenses. Licensee may grant Sublicenses. Each Sublicense shall require the Sublicensee to exercise reasonable diligence in developing, commercializing, marketing and selling Licensed Products.
4. Compensation.
   1. Annual Payments. Licensee shall pay to Licensors minimum annual payments of , which shall be credited against royalties due under paragraph 4(b), but only for twelve (12) months after each payment is made.
   2. Royalties. Licensee shall pay Licensors a royalty of:
      1. X percent (X percent) of Net Sales by Licensee; and
      2. Fifty percent (50 percent) of Revenues.
5. Confidential information. For three (3) years from the date hereof, each Receiver will:
   1. Use commercially reasonable efforts, but no less than the protection given to its own confidential information, to maintain in conconfidence all Confidential Information, including without limitation the financial terms of this Term Sheet; and
   2. Only disclose Confidential Information to individuals who reasonably need to know such information for Receiver to perform its obligations or otherwise conduct its activities hereunder, including Receiver’s legal, financial and business advisors.
6. Non-binding Agreement. This Term Sheet is a statement of present intent only and is not a binding agreement of the parties, except that paragraph 8 is legally binding upon the parties.
7. Governing Laws. The validity and interpretation of paragraphs 8 and 9 shall be governed by Delaware law.

1. Para. 2.5. "First Commercial Sale" is too broadly defined. Payments for material evaluation purposes or in testing situations would be royalty-bearing. This is over-reaching.
2. Para. 2.6. This definition of Licensed Product includes products covered by "one or more claims in a pending patent application." This is quite unusual and is not acceptable. A pending claim is useless until it is granted.
3. Para. 2.7. Net Sales Revenue is defined to include revenues of any Sublicensee. This is unusual. It is common for the licensor to charge the Sublicensee a royalty and the royalty gets split 50-50 or 60-40. Also, sales commissions are not allowed to be deducted in the determination of Net Sales Revenue. This is sometimes acceptable and sometimes not. Should be negotiated.
4. Para. 4.1. The requirement that Sublicense terms be "not less favorable" is unnecessarily restricting. I would delete. If they want to say "reasonable terms," that could be OK.
5. Etc.

(This example is from a Materials Testing, Evaluation and Option Agreement)

1. Definitions. As used in this Agreement:
   1. "License Agreement" means the License Agreement of Addendum X.³⁸
   2. "Licensed Materials" means Optionor's proprietary          materials   and  all improvements,  modifications and substitutions
      thereof made and offered for sale by Optionor during the Term.
   3. "Licensed Patents" means [identify specific U.S. patents, applications and provisionals] and all other United States and foreign patents and patent applications owned or licensable by Optionor during the Term and related to the Field, including without limitation provisionals, divisionals, continuations, continuations-in-part, reissues, reexaminations and extensions thereof.
   4. "Licensed Products" means                                      .
   5. "Optionor Confidential Information" means Confidential Information of Optionor, including without  limitation Know-How.
   6. "Optionor IP" means Optionor Confidential Information  and Licensed Patents.
   7. "Option Period" means the period commencing  on  the  Effective  Date and ending on                       , unless sooner terminated as provided herein.
2. Option Grant and Exercise.
   1. Option Grant. Optionor grants to Optionee the right and option, exercisable during the Option Period, to enter into the License Agreement (the "Option").
   2. Option Fee. In consideration of the Option grant, Optionee shall pay to Optionor for the Option the non-refundable sum of __ Dollars ($____), payable within ten (10) days after the Effective Date.
   3. Exercise of Option.The Option may be exercised, in whole only and not in part, at any time during the Option Period, by delivery to Optionee of written notice of exercise of option, accompanied by the non-refundable option exercise fee of     Dollars ($      ) ("Option Fee"), payable by check (subject to collection) or wire transfer.
   4. Rights upon Exercise of Option. Upon exercise of the Option and payment of the Option Fee, the parties shall execute and deliver the License Agreement and Optionee shall forthwith have all of the rights and duties set forth in the License Agreement.
   5. Relinquishment of Option. If, at any time during the Option Period, Optionee decides not to exercise the Option, it shall promptly notify Optionor accordingly in  writing.
   6. Rights and Duties upon Expiration or Relinquishment of the Option. The Option shall expire if not exercised or if relinquished during the Option Period, in which event this Agreement shall terminate forthwith; provided, however, that:
      1. Optionee shall promptly provide Optionor with:
         1. a detailed report of the results of its testing and evaluation of Licensed Materials and Licensed Products and its assessment of market opportunities, pricing and production costs for Licensed Products; and
         2. prototypes of Licensed Products, all of which shall be treated by Optionor as Confidential  Information;
      2. Optionee shall immediately return all personal property of Optionor and all tangible (electronic or other form) Confidential Information, including Licensed Materials;
      3. If requested by Optionor, Optionee shall sign and deliver the Termination Certificate attached as Addendum A; and
      4. Paragraphs                        shall survive expiration or relinquishment of the Option.
3. Activities during the Option Period.
   1. Technology Transfer. During the course of the Option Period, Optionor shall transfer and disclose to Optionee all Know-How and other Confidential Information, to the extent necessary or desirable to test and evaluate Licensed Materials and manufacture, test and evaluate Licensed Products.
   2. Technical Assistance and Training. Optionor will provide Optionee employees with technical assistance and training regarding the Optionor Confidential Information. The initial technical assistance and training shall take place at the Optionor's facility in ; further technical assistance and training, if requested, shall take place at an agreed location in the United States. The terms of the technical assistance and training are:
      1. Optionee will purchase Licensed Materials from Optionor for use during the Option Period at a discount of fifty percent (50 percent) from Optionor's established prices;
      2. Each party will pay all travel expenses, room and board of its personnel; and
      3. All payments are due within thirty (30) days after receipt of invoice.
   3. Disclosure of Licensed Patents. Promptly after execution of this Agreement, Optionor will provide Optionee's patent counsel with copies and related information regarding all Licensed Patents and license agreements granting rights to Optionor to license the Licensed Patents, for their assessment; provided, however that the financial and other confidential terms of the license agreements shall be redacted.
   4. Optionee Activities during the Option Period. During the Option Period, Optionee shall exercise reasonable diligence to test and evaluate the Licensed Materials and Licensed Products made with the Licensed Materials and review the files of the Licensed Patents for as long as Optionee deems appropriate, with the goal of determining as soon as practicable whether to exercise the Option.
   5. Evaluation License. Optionor grants to Optionee a non-exclusive license under the Optionor IP for the Option Period, to be used solely for production, testing and evaluation of Licensed Materials and Licensed Products for use in the Exclusive Field and the Non-Exclusive Field.
   6. Six Month Status Report. Six (6) months after the Effective Date, Optionee shall provide Optionor with a written report of the status and results of its production, testing and evaluation, including technical and marketing analyses and information.
4. Cooperation during the Option Period.
   1. Cooperation. The parties will cooperate in the continuing transfer of Optionor Confidential Information and the ongoing exchange of information and ideas during the Option Period. In order to facilitate that cooperation, each party shall designate a "Coordinator," by or through whom all contact between Optionor and Optionee shall be coordinated. The initial Coordinators shall be:
      For Optionee—[identify coordinator]
      For  Optionor—[identify coordinator]
   2. Scheduling. Promptly after the execution of this Agreement and at least monthly during the Option Period, the Coordinators shall meet and confer to set up and adjust suitable program schedules, personnel assignments and requirements for Licensed Materials.

In Definitions.
[The Original Clause]

"Gross Revenues" means gross revenues to Licensee derived exclusively from commercialization or sale of the Patents, including, without limitation, the Gross Revenues of all licensing and enforcement activities exclusively relating to or in connection with the Patents or the proportionate share thereof attributable to the Patents as determined by Licensee acting reasonably and in good faith. Gross Revenues (a) shall not include (i) the revenues of any equity or debt financing raised by Licensee or (ii) any revenues received as consideration for any license to any Patents or otherwise, (b) shall include only any cash or cash equivalents actually received by, or credited to, Licensee from commercialization of the Patents exclusively or exclusively derived from the sale of any Patents or the proportionate share thereof attributable to the Patents as determined by Licensee acting reasonably and in good faith, including without limitation, any royalties or other fees, payments or income receipts, damages or other compensatory payments received exclusively relating to the licensing, use or enforcement of the Patents or the proportionate share thereof attributable to the Patents as determined by Licenseeacting reasonably and in good faith, and (c) shall expressly exclude non-monetary consideration included in license agreements such as cross licenses, releases, covenants, and the like. Amounts that are withheld or are deducted by a counterparty to a transaction or any other person on account of taxes (e.g., withholding taxes) or otherwise shall be included in Gross Revenues to the extent that and at such time as Licensee or any other person directly or indirectly owning an interest in Licensee, recovers such withheld amounts through tax credits or otherwise; provided that such recoveries are legally available to Licensee and Seller and, if so, that Licensee uses its commercially reasonable efforts to obtain such recoveries when they become available.
(The same clause after using the "Enter" and "Tab" keys to segment it and make it more readable):
"Gross Revenues" means gross revenues to Licensee derived exclusively from commercialization or sale of the Patents, including, without limitation, the Gross Revenues of all licensing and enforcement activities exclusively relating to or in connection with the Patents or the proportionate share thereof attributable to the Patents as determined by Licensee acting reasonably and in good faith. Gross Revenues shall:

1. not include:
   1. the revenues of any equity or debt financing raised by Licensee; or
   2. any revenues received as consideration for any license to any Patents or otherwise;
2. include only any cash or cash equivalents actually received by, or credited to, Licensee from commercialization of the Patents exclusively or exclusively derived from the sale of any Patents or the proportionate share thereof attributable to the Patents as determined by Licensee acting reasonably and in good faith, including without limitation, any royalties or other fees, payments or income receipts, damages or other compensatory payments received exclusively relating to the licensing, use or enforcement of the Patents or the proportionate share thereof attributable to the Patents as determined by Licensee acting reasonably and in good faith; and
3. expressly exclude non-monetary consideration included in license agreements such as cross licenses, releases, covenants, and the like.

Amounts that are withheld or are deducted by a counterparty to a transaction or any other person on account of taxes (e.g., withholding taxes) or otherwise shall be included in Gross Revenues to the extent that and at such time as Licensee or any other person directly or indirectly owning an interest in Licensee, recovers such withheld amounts through tax credits or otherwise; provided that such recoveries are

In a Settlement Agreement and Release

Release by Patent Owner. Upon entry by the Court of an Order dismissing the Lawsuits pursuant to the Stipulations, Patent Owner and its parents, subsidiaries, predecessors, successors, affiliates, divisions, assigns and any person or entity claiming by or through them, in consideration of the agreements set forth herein, and intending to be legally bound, irrevocably releases and forever discharges Defendant and its present and former parents, subsidiaries, and affiliates, and their present and former directors, officers, shareholders, attorneys, and employees (solely in their capacities as such) (collectively, the "Defendant Releasees") from all actions, causes of action, suits, rights, debts, dues, sums of money, accounts, accountings, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, indemnities, liabilities, variances, trespasses, damages, judgments, extents, executions, claims and demands, of every nature and description whatsoever, in law, admiralty or equity, or as a result of arbitration, whether known or unknown, asserted or unasserted, and forgives any and all acts of alleged infringement, including any and all claims or counterclaims in the actions for patent infringement in the Lawsuits, alleging, inter alia, that services performed and/or software made, used, sold and/or offered for sale infringed the Asserted Patents, which claims were asserted or could have been asserted, against the Defendant Releasees or any of them for, upon or by reason of any matter, cause or thing whatsoever, of this from the beginning of the world to the Effective Date (collectively, the "Claims"); provided, however, this release shall only apply to Claims that are directly or indirectly related to past manufacture, distribution, sale or use of services, software and products sold under trademarks or trade names owned, used, or held prior to the Effective Date by the Defendant Releasees (as they existed on the Effective Date). (Note: This is a single sentence. Ugh!) This release: (a) is personal to the Defendant Releasees; (b) is not intended to benefit any unnamed third party in any way; (c) shall not release any claims for patent infringement that Patent Owner may have against any third person (including the remaining defendants in the Lawsuits) other than Defendant Releasees; and (d) does not apply to any of the rights and obligations set forth in this Agreement including its exhibits.

Original Confidentiality Provision

Section 6. For purpose of this Section, "Confidential Information" means (a) any business or technical nonpublic information of the Parties, (b) any other information of the Parties that is specifically designated by the disclosing Party as confidential, and (c) the terms and conditions of this Agreement. Confidential Information shall not include information that (i) was in the public domain at the time it was disclosed or becomes part of the public domain after disclosure by or through no action or omission to act of receiving Party or its representatives, (ii) was or becomes known to receiving Party prior to the time of its disclosure without breach of this Agreement or any other obligation of confidentiality to the disclosing Party as proven by the written records of the receiving Party, (iii) is independently developed by receiving Party without using the Confidential Information, (iv) is legally received by receiving Party from a third party, without any obligation to keep it confidential, and/or (v) is approved for disclosure by prior written permission of an authorized signatory of the disclosing Party. Each Party shall maintain the Confidential Information of any other Party in strict confidence. Each Party shall exercise no less than reasonable care with respect to the handling and protection of such Confidential Information. Each Party shall use the Confidential Information of the other Party only as expressly permitted herein, and shall disclose such Confidential Information only to its employees, independent contractors, agents, and counsels as is reasonably required and necessary in connection with the exercise of its rights and obligations under this Agreement (subject to binding use and disclosure obligations as protective as those set forth herein). Notwithstanding the above, the receiving Party may disclose Confidential Information of the disclosing Party pursuant to a valid order or requirement of a court or government agency, provided that the receiving Party shall first give reasonable notice to the disclosing Party to contest such order or requirement and try to obtain confidential treatment for the Confidential Information required to be disclosed. Any such disclosure by the receiving Party of the Confidential Information of the disclosing Party, shall, in no way, be deemed to change, affect or diminish the confidential status of such Confidential Information. The Parties hereby designate the nonpublic information about the Patents delivered to purchaser pursuant to Section 4.1 as Confidential Information of Purchaser, with Seller having the confidentiality obligations imposed by this Section which respect to such information.

The Same Provision, Segmented for Comprehension

Section 6. Confidential Information.

1. For purpose of this Section, "Confidential Information" means
   1. any business or technical nonpublic information of the Parties,
   2. any other information of the Parties that is specifically designated by the disclosing Party as confidential and
   3. the terms and conditions of this Agreement.
      Confidential Information shall not include information that
      1. was in the public domain at the time it was disclosed or becomes part of the public domain after disclosure by or through no action or omission to act of receiving Party or its representatives,
      2. was or becomes known to receiving Party prior to the time of its disclosure without breach of this Agreement or any other obligation of confidentiality to the disclosing Party as proven by the written records of the receiving Party,
      3. is independently developed by receiving Party without using the Confidential Information,
      4. is legally received by receiving Party from a third party, without any obligation to keep it confidential and/or
      5. is approved for disclosure by prior written permission of an authorized signatory of the disclosing Party.
2. Each Party shall maintain the Confidential Information of any other Party in strict confidence. Each Party shall exercise no less than reasonable care with respect to the handling and protection of such Confidential Information. Each Party shall use the Confidential Information of the other Party only as expressly permitted herein, and shall disclose such Confidential Information only to its employees, independent contractors, agents, and counsel as is reasonably required and necessary in connection with the exercise of its rights and obligations under this Agreement (subject to binding use and disclosure obligations as protective as those set forth herein).
3. Notwithstanding the above, the receiving Party may disclose Confidential Information of the disclosing Party pursuant to a valid order or requirement of a court or government agency, provided that the receiving Party shall first give reasonable notice to the disclosing Party to contest such order or requirement and try to obtain confidential treatment for the Confidential Information required to be disclosed. Any such disclosure by the receiving Party of the Confidential Information of the disclosing Party, shall, in no way, be deemed to change, affect or diminish the confidential status of such Confidential
   Information. The Parties hereby designate the nonpublic information about the Patents delivered to Purchaser pursuant to Section 3 as Confidential Information of Purchaser, with Seller having the confidentiality obligations imposed by this Section which respect to such information.

A Clause that is Internally Inconsistent

Consent to License

Furthermore, Licensor agrees to grant such rights directly to Sublicensee on the same, or in any case no less favorable, terms and conditions as set out in its License Agreement with Licensee, without payment of any other sums, until expiration of the last-to-expire of the patents. (Query: If the "license terms" are "the same," how could they possibly be "less favorable"?? The drafter was not very thoughtful.)

Foundry Rights. With respect to semiconductor components or products that are manufactured by Entities pursuant to foundry or contract manufacturing agreements on behalf of Persons listed on Exhibit X ("Contract Products"), none of Seller and its Affiliates, and to the best of Seller's knowledge formed after reasonable investigation and inquiry, no prior owners of any of the Assigned Patent Rights have granted foundry rights or contract manufacturing rights that extented to portions of Contract Products that are based on designs, specifications and/or requirements attributable to, originating from or supplied by a Person listed on Exhibit X, unless only to the extent such foundry or contract manufacturing agreement was in effect on or before the Effective Date. (Note: This paragraph is a single sentence.)

My Re-Draft
Foundry Rights.

1. "Foundry Rights" means rights, licenses or forbearances granted to a Person under any Assigned Patents to make, have made, use, import or sell semiconductor components or products that are based on designs or specifications provided by an Entity.
2. Seller represents and warrants that none of:
   1. Seller and its Affiliates; and
   2. To the best of Seller's knowledge, formed after reasonable investigation, any prior owners of any Assigned Patent Rights

have granted Foundry Rights to any Person listed on Exhibit X, except and then only to the extent that such Foundry Rights were granted before the Effective Date.

Applicable  Definitions.
"License Agreement" means a license agreement or covenant not to sue executed after the Effective Date between Licensor and any licensee with respect to any Licensed Patents.
"Most  Favored  Financial  Terms"³⁹  means  the  following terms of any License Agreement, considered in their entirety:

1. a per-unit-of-sales amount or a percentage-of-revenue royalty rate; and
2. any other related financial conditions and related limitations, including but not limited to upfront payments and lump sum payments which are not:
   1. royalty advances that offset future royalties payable under the applicable License Agreement; or
   2. payments in settlement of litigation or otherwise based, in whole or in part, on infringement of any Licensed Patents prior to the execution date of the License Agreement.

The Most Favored Licensee Clause

1. Licensee shall be entitled to the benefit of Most Favored  Financial Terms.
2. To enable Licensee to determine the Most Favored Financial Terms, within ten (10) business days of Licensor's entry into any License Agreement with financial terms that are or may be more favorable than the corresponding terms of this Agreement, Licensor shall:
   1. provide Licensee with an accurate and detailed summary of the Most Favored Financial Terms; and
   2. promptly permit Licensee's outside counsel⁴⁰ to review, at a mutually acceptable location, in confidence, a copy of the License Agreement, for the sole purpose of verification of the accuracy of the summary provided to Licensee.
3. Licensee shall have thirty (30) days after receipt of each Most Favored Financial Terms in which to advise Licensor in writing whether or not it chooses to accept the Most Favored Financial Terms. Upon such acceptance, the Most Favored Financial Terms will be retroactive to the date of execution of the applicable License Agreement, and this Agreement will be deemed to incorporate by reference those Most Favored  Financial Terms.
4. Failure to provide notice as specified in subparagraph
   (c) shall be deemed a rejection by Licensee of the tendered Most Favored Financial Terms.

If, at any time during the term of this Agreement, Patent Owner is about to enter into an agreement for the (i) sale of the Licensed Patents or (ii) license of the Licensed Patents outside the Field of Use (an "RFR Agreement"):

1. Each RFR Agreement shall contain a provision stating that it is subject to this right of first refusal.
2. Upon its receipt of an RFR Agreement executed by a third party, Patent Owner shall promptly provide Licensee with a copy of the RFR Agreement. This tender shall be deemed to be an offer by Patent Owner to enter into the RFR Agreement with Licensee.
3. Licensee shall have thirty (30) days from its date of receipt of the RFR Agreement to elect to enter into an agreement with Patent Owner on terms and conditions identical to those of the RFR Agreement, except (i) for the identity of Licensee and (ii) closing shall not be held for at least sixty (60) days after the date of Licensee's receipt of such tender.
4. If Licensee notifies Patent Owner, within the thirty (30) day period of paragraph (c), that Licensee wishes to enter into the RFR Agreement:
   1. Patent Owner shall execute and deliver to Patent Owner a copy of the RFR Agreement, with Licensee substituted for the RFR Party and a closing date which is at least sixty (60) days after the date of Licensee's receipt of the RFR Agreement; and
   2. Licensee shall execute and deliver to Patent Owner an executed copy the agreement within five (5) business days after its receipt.
5. Failure of Licensee to reply to the tender of paragraph (b) shall be deemed a rejection of the offer of Patent Owner to enter into the RFR Agreement with Licensee.
6. If Licensee rejects the offer to enter into the RFR Agreement, whether explicitly or pursuant to paragraph (e), Patent Owner shall be free to enter into the RFR Agreement with the RFR Party or any other party.
7. If Licensee rejects the offer to enter into the RFR Agreement and Patent Owner does not enter into the RFR Agreement with the RFR Party on the terms specified therein, Patent Owner shall repeat the procedure of this paragraph as to any other proposed RFR Agreement.

1. Prior to entry by Patent Owner into any discussion with a third party for the (i) sale of the Licensed Patents or (ii) license of the Licensed Patents outside the Field of Use (a "Transaction"), Patent Owner shall notify Licensee of its intention.
2. For the six (6) month period following the notice of paragraph (a), Patent Owner negotiate exclusively and in good faith with Licensee for entry into a Transaction.
3. Once the six (6) month period shall have expired, Patent Owner shall have no further obligation to Licensee and shall be free to negotiate and enter into Transactions with any parties on any terms and conditions.

1. Net Sales. If Licensee licenses from one or more third parties ("Third Parties") intellectual property which covers any Licensed Products or Processes, the royalty rate applied under paragraph 6(b) as to Net Sales of that Licensed Product or Process shall be (i) one (1) divided by (ii) one (1) plus the lesser of (a) the number of third parties to which royalties are payable as to that Licensed Product or Process, and (b) two (2); multiplied by (iii) [the number in 6(b)]      percent (_ percent).
2. Sublicense Revenues. If Licensee includes in any Sublicense intellectual property sublicensed from one or more third parties which covers any Licensed Product or Process, the percentage of Sublicense Revenues payable by Licensee under paragraph 6(c) as to that Licensed Product or Process will be: (i) one (1) divided by (ii) one (1) plus the lesser of
   1. the number of Third Parties to which royalties are payable as to that Products or Processes, and
   2. two (2); multiplied by (iii) [the number in 6(c)]           percent (  percent).

1. Royalty Payments. Licensee shall pay to Licensor a royalty of X (x percent) percent of Net Revenue. For purposes of paragraph 2 only, one-third (1/3) of the applicable royalty shall be attributable to the Patents and two-thirds (2/3) shall be attributable to the Trademarks, Copyrights, Trade Secrets and Domain Names.
2. Severability. If any provision of this Agreement is held to be invalid or unenforceable for any reason whatsoever, that provision shall be interpreted to have the broadest scope that would make it valid and  enforceable.

All rights and licenses granted under or pursuant to this Agreement by Licensor to Licensee are, for all purposes of paragraph 365(n) of Title 11 of the United States Code ("Title 11") or other relevant bankruptcy or insolvency law (collectively, "Law"), licenses of rights to "intellectual property" as defined in Title 11 or such other Law.

Licensee shall mark all Licensed Products with U.S. Patent No. 7,777,777, in accordance with 35 U.S.C. §287. The parties acknowledge that Licensee will have complied with this paragraph by marking all current and future Licensed Products and providing notice of U.S. Patent No. 7,777,777 on the "about page" of Licensee's principal websites from which Licensed Products are offered for sale, sold or distributed.

1. This paper was initially written for “license agreements” only. However, many of the principles applicable to license agreements are also applicable to other agreements, so I have re-written the paper accordingly. However, I have retained exemplary provisions regarding license agreements when that seemed useful. For example, an option as to a patent license has the same basis structure as an option for other rights.
2. This paper is an overview, not a scholarly analysis, and is not an exhaustive coverage of all relevant drafting concerns and considerations. That would require a book. The paper does present the principle concerns and observations I have seen and made in my fifty plus years of licensing and corporate practice. For an excellent detailed analysis of general contract drafting principles, see A Manual of Style for Contract Drafting, by Kenneth A. Adams (2013, American Bar Association, Business Law Section).
3. And, of course, different legal implications. For example, a pharmaceutical license has many business and legal differences from a semiconductor technology license. And many similarities.
4. I once walked into a patent litigation settlement meeting (my client was the plaintiff/potential licensor) with a prepared draft I had written that was based on many similar agreements I had done in the past. It really was fair and should have been acceptable with relatively few changes. The defendant/licensee sent my agreement to its Australian counsel (the suit was in Australia) and they started over and countered with a perfectly horrible draft. We agonized over that for weeks until U.S. counsel was brought in, at which time we easily resolved all open issues in a day or two.
5. In one recent situation, patent counsel (with a large general practice firm) for the other party provided a first draft of a license agreement which omitted the royalty audit clause. It had to have been sloppy cutting and pasting.
6. One situation I remember, the ambiguous clause was an indemnity clause and the licensee was a very big company. I knew I wouldn’t get that clause—from their form—changed, but it was so ambiguous that I left it alone. In that case, ambiguous was better than awful.
7. Common in semiconductor technology agreements.
8. You don’t believe it? I have seen it many times.
9. The inclusion of one (word in a string) excludes others (that are not in the string).
10. See the third paragraph in Addendum D.
11. See the previous paragraph re strings.
12. So, although a royalty was payable as to the valves, it was not payable as to the “convoyed sales” of custom cabinets and piping fixtures.
13. Adams, “A Manual of Style for Contract Drafting,” §§13.270—13.278.
14. Ibid. at §§13.277—13.278.
15. You’d be surprised how often I see that.
16. See LeClerq, “Doctrine of the Last Antecedent,” 2 Journal of the Legal Writing Institute 81 (1996).
17. Getting into what is a “conception” and what is a “reduction to practice” is beyond the scope of this paper, but they can be found in any patent law treatise.
18. See e.g.
19. A “representation” refers to a current fact and a “warranty” refers to a future fact.
20. Or “his or her.”
21. In a major deal that requires an opinion of counsel, I often will insert unacceptably broad warranties in my form, so that I can understand the sophistication of opposing counsel (and the value of his or her opinion). I call this my “smoke out” strategy (it “smokes out” competence).
22. At §§13.324—13.337.
23. I negotiated a trademark license and manufacturing agreement with a major company. My client, a small company, would manufacture the food product (this food product was bubble gum) for the big boy. We were willing to give a product liability warranty and indemnity, but limit the scope of the indemnity to a reasonable insurance policy purchased by my client. Counsel for the big company wanted unlimited indemnity. That was crazy. One mistake could have bankrupted my client. I held out on this point—it was too potentially devastating to cave in—and finally won.
24. I dealt with this issue in a movie investment deal. My client invested in a movie production company and was entitled to a share of the “Net Profits” from a very successful movie. In that case, the producers incurred costs which they charged to multiple movie projects, thus reducing the “Net Profits” and my client’s share. We needed a lawsuit and discovery to uncover the game-playing and get the client his fair rewards. In patent licensing, it is usually easier (and quite common) just to take (as licensor) a royalty based on “Gross Revenues” or “Net Revenues” (after deduction of limited, easy-to-verify costs, such as “returns and allowances”).
25. In the “standard cost” situation, I had put a CYA memo in the file and copied the client. When a problem arose two years later and the client blamed me, I pulled out the memo and covered my A.
26. Sometimes called Most Favored Licensee.
27. In that situation, I like to provide that the license vests immediately and that the applicable royalty terms are effective “ab initio.” I also like to provide some guidance to the criteria to be used to determine the applicable royalty (like development payments by the prospective licensee).
28. This is common in Joint Development Agreements, when the parties don’t know what inventions will be made in the future and their commercial value.
29. Contrast “apportionment” with “royalty stacking,” in which multiple patents apply to a product (like a smart phone) and the royalties can be cumulative.
30. 18 U.S.C. §1836(b)(A).
31. 18 U.S.C. §1836(b)(C).
32. Since each party to a license agreement can disclose trade secrets to the other, it may be prudent for each party to favor inclusion of this DTSA warranty.
33. A company licensed its patent portfolio to Microsoft as part of a settlement of a patent infringement suit in which Microsoft became a major shareholder of the company. The license agreement had a confidentiality clause which included the “terms and conditions” of the license. When we tried to sell the company’s portfolio, we needed to disclose the Microsoft license, so any prospective purchasers could understand that encumbrance. We asked Microsoft for permission to disclose and it refused. I don’t know why; the license agreement was very standard and its terms could be inferred, but inferring and knowing are very different in a patent sale environment.
34. For example, if your company/client is concerned that the potential acquirer is a competitor and could learn its confidential information that way.
35. So, the usual solution is to include language in the non-exclusive license agreement—usually in the successors and assigns clause—permitting the assignment of the license agreement “in connection with the merger of licensee or the sale of all or substantially all of the business to which the licensed patents relate.”
36. And other “executory” contracts.
37. I am advised that Japan and Korea have similar statutory obligations, and there may be other countries. I do not purport to be expert on this point, so you should check with local counsel when dealing with a company which has relevant employees in other countries.
38. Addendum X is a complete license agreement, with nothing to fill in but the date. That agreement is then signed by the parties when the option is exercised and the option payment delivered.
39. The definition could include “all terms and conditions,” but often the financial terms are what the licensee cares about and other terms may be tailored to the particular licensee and not have a direct application to another licensee.
40. Because of the confidentiality of other terms of the agreement. You could also use a redacted agreement, if the redactions are acceptable to both parties to the agreements.