Licensing tips: which entity is the licensee?

When licensing a patent, software or other intellectual property, it’s critical for the licensee to ensure that the license covers all entities who will use the IP.  This may include the licensee’s parent company, subsidiaries, other affiliates, customers or other entities.

The license grant clause, along with the definitions of “licensee” and (if included in the license) “affiliate” will typically govern the entities who may take advantage of a license. Unless the agreement specifically calls out an entity, that entity may not be able to take advantage of the license, whether as a licensee or (depending on the nature of IP involved) as a sublicensee.

A recent court decision from the Central District of California illustrates how the definitions will typically control the scope of a license. In the case, nQueue Inc. v. Control Systems (USA) Inc., nQueue filed a patent infringement suit against Control Systems. In defense, Control Systems argued that it was covered by a license that nQueue granted to Control Systems’ ultimate parent company, Equitrac Corporation.

The license was documented in a settlement agreement dated July 19, 2012 between nQueue and Equitrac. The settlement agreement granted the license to Equitrac and its “Affiliates.” The agreement defined “Affiliate” as any entity “that controls, or is controlled by, or is under common control with that Party (either directly or indirectly) as of the Effective Date of the Agreement”  (emphasis added). The agreement also defined “Licensed Products” as those produced “by a party, or an entity acquired by a party,” to the agreement.

Control Systems argued that it was covered by the license as an Affiliate. However, since Equitrac acquired Control Systems’ parent corporation in December 2012, and the agreement’s definition of “Affiliates” was limited to those who held that status as of the Effective Date (July 19, 2012), the court rejected this argument.

Control Systems also argued that its products were “Licensed Products” because it was an entity acquired by a party to the agreement. The court agreed with this limited argument, but nonetheless held that Control Systems could not benefit from the license. Because the only licensees were Equitrac and its Affiliates, the court held that the license may have permitted Equitrac (or its Affiliates) to use Control Systems’ Licensed Products, but it did not cover actions by Control Systems itself — such as sales to third parties.

The court’s decision illustrates how definitions and license grant clauses are critical when interpreting the scope of a license agreement.  Before signing a license agreement, it’s important that the licensee review the business terms to ensure that it’s getting everything that it bargained for.  

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