Introduction
A licence agreement provides that the holder of an intellectual property right allows another party to use that right, without the right itself being transferred. The licensor remains the rightholder; the licensee obtains a right of use within agreed limits. The value of the agreement lies in the precise delineation: what the licensee may and may not do, in which territory, for how long and for what fee. Everything not expressly granted remains with the licensor, so that exceeding those limits readily amounts to infringement.
The structure of the agreement
The structure of a licence agreement follows the logic of the right of use it grants. First it records who the parties are and which right is concerned; then what the licensee may do and for what fee; next with whom the right remains and who maintains it; then what the licensor warrants and how the risk of infringement is allocated; and finally how the agreement ends and which court rules on it. The full structure may look as follows:
- Opening: title, parties and recitals
- Definitions and interpretation
- The licence granted: nature, territory and term
- Sub-licensing
- Royalty and fee
- Ownership and maintenance of the IP right
- Obligations of the parties
- Warranties as to the validity of the right
- Indemnity for infringement
- Confidentiality
- Liability
- Termination and consequences
- Penalty clause
- Choice of law and forum
- Schedules
Opening: title, parties and recitals
The agreement opens with the title, the parties and the recitals. The holder of the right is designated as the licensor and the user as the licensee, each with its full corporate name, registered seat and Chamber of Commerce number. The recitals record which right is concerned, for example a patent, trade mark, design, plant breeder's right or copyright in software, with a specific reference to the registration number or the work. That reference determines the scope of the licence; an overly broad description opens up discussion about what has precisely been licensed.
Example clause +
The undersigned: (1) [Licensor] ("Licensor");
and (2) [Licensee] ("Licensee");
whereas Licensor is the holder of [the patent/trade mark/copyright] with number [registration number] and Licensee wishes to use this on the following terms, have agreed as follows:
The licensor prefers to describe the right precisely and narrowly, so that any other use falls outside the licence; the licensee, by contrast, wants the recitals to record room for the intended use.
Definitions and interpretation
The definitions make the key terms unambiguous: the Licence Right, the Products or Applications for which the licence applies, the Territory, the Fee and the Net Turnover that serves as the royalty basis. In a licence in particular, a precise definition of the object is decisive, because the licensee may only do what is expressly permitted. The interpretation provision sets out the rules of construction and the order of precedence between the main text and the schedules, and guards against the argument that an earlier or broader arrangement would apply.
Example definitions +
"Licence Right" means [the patent/trade mark/work] as described in Schedule 1;
"Territory" means [the Netherlands/the Benelux/worldwide];
"Net Turnover" means the invoiced turnover from Products, less [returns, discounts and turnover tax].
A narrow definition of the Licence Right and a tightly bounded Territory work in the licensor's favour; a broad definition of both, and of the Applications, matters to the licensee.
The licence granted: nature, territory and term
This is the core of the agreement. It records whether the licence is exclusive, non-exclusive or sole, the territory for which it applies and its term. Exclusivity means that, within the agreed territory, the licensor may grant the right to no one else, and sometimes not even to itself; this justifies a commensurate fee. The term may be fixed or indefinite and may be tied to the duration of the underlying right. For a patent licence, registration in the patent register takes effect against third parties (Section 56 of the Dutch Patents Act 1995 (ROW 1995)); a trade mark licence is governed by Article 2.32 of the Benelux Convention on Intellectual Property (BVIE).
Example clause +
Licensor grants Licensee an [exclusive/non-exclusive] licence to use the Licence Right within the Territory for the Applications, for [the duration of the underlying right/five years]. Any use outside these limits is not permitted.
The licensor delineates the scope sharply and, where possible, retains a right of use of its own; the licensee, when investing in the market, wants exclusivity, a sufficiently broad territory and the right to genuine exploitation for the full term.
Sub-licensing
Sub-licensing concerns whether the licensee may pass on the right of use to third parties in whole or in part. Without an express arrangement this is generally not permitted, because the licence is a personal right of use. The agreement governs whether sub-licensing is permitted, whether prior consent is required for it, and which conditions are passed through to the sub-licensee. It also provides that the licensee remains liable for the acts of its sub-licensees and that sub-licences end when the head licence ends.
Example clause +
Licensee may not grant sub-licences without Licensor's prior written consent. Where consent is granted, Licensee passes through to the sub-licensee all obligations arising from this Agreement and remains responsible to Licensor for compliance with them.
The licensor wants sub-licensing to depend on its consent and on the passing through of the conditions; the licensee wants at least a limited power to sub-license, for example to group companies.
Royalty and fee
The fee may be a fixed amount, a periodic fee or a royalty per unit sold or on net turnover, whether or not with a guaranteed minimum. In a royalty structure a watertight definition of the basis is essential, together with a reporting and audit right so that the licensor can verify the statement. Payment terms, currency, VAT treatment and the consequence of late payment are expressly governed, so that no discussion arises afterwards about what is owed.
Example clause +
Licensee pays a royalty of [percentage]% of Net Turnover, payable quarterly within [30] days of the end of the quarter, with a guaranteed minimum of EUR [amount] per year. Licensor may have the statement audited at its own expense by a chartered accountant.
The licensor attaches importance to a guaranteed minimum, a broad royalty basis and a firm audit right; the licensee wants a narrow basis, room for deductions and certainty that royalties paid are not revised retroactively.
Ownership and maintenance of the IP right
A licence does not transfer the right: the licensor remains the rightholder, and this is expressly confirmed. Unlike the transfer of copyright, which requires a deed (Section 2 of the Dutch Copyright Act (Aw)), a licence may be granted without any prescribed form. This goes together with an arrangement on maintenance, that is, who is responsible for renewal, fees or maintenance costs and registration. Improvements or derivative works made by the licensee must be allocated: whether they remain with the licensee, pass to the licensor, or give rise to a grant-back licence. The distinction between a licence and a transfer should be kept sharp, because its scope is a common point of dispute.
Example clause +
The Licence Right and all intellectual property rights attached to it continue to rest with Licensor. Licensor is responsible for maintenance and renewal;
improvements that Licensee makes to the Licence Right accrue to Licensor, which grants Licensee a non-exclusive grant-back licence in respect of them.
The licensor wants confirmation of its status as rightholder and that improvements end up with it; the licensee wants certainty that the right is maintained and that its own further developments do not flow away without consideration.
Obligations of the parties
In addition to the core, the grant of the licence against payment of the fee, both parties bear ancillary obligations. The licensor usually supplies documentation, know-how or access to the protected material, and refrains from acts that undermine exploitation. The licensee must genuinely and carefully exploit the right, comply with quality standards, report correctly and refrain from any use outside the licence. An exploitation or best-efforts obligation matters in exclusive licences, because otherwise the licensor is stuck with an inactive licensee.
Example clause +
Licensor makes available the documentation and know-how required for the use. Licensee actively exploits the Licence Right, observes the quality standards set by Licensor and reports quarterly on the turnover achieved.
The licensor requires a firm exploitation and quality obligation, especially where there is exclusivity; the licensee prefers to keep its best-efforts obligation general and wants to secure sufficient support from the licensor.
Warranties as to the validity of the right
The licensee wants certainty that it is paying for something. The licensor therefore usually warrants that it is the rightholder, that the right exists and is valid, and that it is not aware of any third-party claims that impede the use. At the same time, the licensor is cautious about warranties as to the validity of, for example, a patent, because that may later prove to be void. A common outcome is a warranty to the best of one's knowledge, combined with a clear arrangement of the consequences if the right nonetheless lapses in whole or in part.
Example clause +
Licensor warrants that it is the holder of the Licence Right and authorised to grant this licence, and that it is not aware of any third-party claims that impede Licensee's use. Other warranties as to validity are given to the best of Licensor's knowledge.
The licensee wants broad, firm warranties as to the existence and validity of the right; the licensor limits its warranties to being the rightholder and having authority, and makes statements as to validity only to the best of its knowledge.
Indemnity for infringement
Two scenarios must be distinguished. If, according to a third party, the licensed right infringes that party's right, the indemnity provides that the licensor holds the licensee harmless and takes over the defence. If a third party infringes the licensed right, the agreement governs who may take action, who bears the costs and how any damages are divided; the patent holder and, subject to conditions, the licence holder may enforce (Section 65 ROW 1995). The indemnity is bounded by thresholds, notification duties and a ceiling, so that it does not result in unlimited liability.
Example clause +
Licensor indemnifies Licensee against third-party claims that use of the Licence Right infringes their rights, and takes on the defence at its own expense, provided that Licensee informs it in good time and enters into no settlement without consent. Claims are limited to EUR [amount].
The licensor takes on enforcement against third parties itself and bounds its indemnity with notification periods and a maximum; the licensee wants a firm indemnity against attacks by third parties and, where there is exclusivity, its own power to take action when the licensor sits idle.
Confidentiality
A licence often entails the transfer of know-how, technical documentation or source code. A confidentiality clause provides that confidential information is used only for the purpose of the agreement and not disclosed to third parties. The clause describes what is confidential, which exceptions apply, such as information already public or a statutory disclosure duty, and how long the obligation continues after the end of the agreement. Linking it to the penalty clause makes the obligation enforceable without any need to prove loss.
Example clause +
The parties use confidential information solely for the performance of this Agreement and do not provide it to third parties. This obligation applies for the term and for [three] years after the end of it.
The licensor has an interest in broad, long-lasting confidentiality coupled with a penalty, especially where know-how is shared; the licensee wants clear exceptions and a survival period limited in time.
Liability
The limitation of liability allocates the residual risk. It is customary for consequential loss, loss of profit and indirect loss to be excluded and for direct loss to be capped, often tied to the fee paid over a given period. The limitation does not apply in the case of intent or wilful recklessness. The core obligations, such as the warranty of being the rightholder and the indemnity, are deliberately placed within or outside the ceiling. An overly broad exclusion may fail when tested; a balanced, reciprocal arrangement holds up better.
Example clause +
Each Party's liability is limited to the Fee paid in the twelve months preceding the event causing the loss. Consequential loss and loss of profit are excluded. This limitation does not apply in the case of intent or wilful recklessness, nor to the indemnity obligation.
The licensor wants a low ceiling and broad exclusions, with the indemnity preferably within the cap; the licensee wants a higher ceiling and for the indemnity and the core warranties to fall outside the limitation.
Termination and consequences
The agreement governs how it ends: by expiry of the term, by termination on notice observing a notice period, or by rescission for failure to perform (Section 6:265 of the Dutch Civil Code (DCC)), usually after a notice of default (Section 6:82 DCC). The consequences are as important as the ground: on ending, the right of use lapses and all rights revert to the licensor, the licensee ceases use, returns or destroys material and documentation, and winds down any remaining stock. It is also governed which provisions, such as confidentiality, liability and choice of forum, survive termination.
Example clause +
On expiry or termination of this Agreement, Licensee's right of use ends with immediate effect. Licensee ceases all use of the Licence Right, returns or destroys all documentation and media, and confirms this in writing. The articles on [confidentiality, liability, choice of forum] remain in force after the end.
The licensor wants to be able to rescind quickly in the event of failure to perform and to ensure that all rights revert and use stops immediately; the licensee wants a reasonable notice period, an opportunity to cure a default and a wind-down arrangement for ongoing obligations and stock.
Penalty clause
A penalty clause puts pressure on compliance with the core obligations: respecting the limits of the licence, confidentiality and ceasing use after the end (Sections 6:91 to 6:94 DCC). The penalty may be a fixed amount per breach, possibly increased by an amount for each day the breach continues. The clause must clearly describe which conduct is penalised and whether the penalty replaces, or stands alongside, the actual loss and performance. A penalty that bears no relation to the breach may be reduced by the court (Section 6:94 DCC), so that a proportionate design is preferable.
Example clause +
In the event of a breach of [the limits of the licence or the confidentiality clause], the Party in breach forfeits an immediately payable penalty of EUR [amount] per breach and EUR [amount] for each day the breach continues, without prejudice to the right to performance.
The licensor wants a high penalty that stands alongside the actual loss and performance; the licensee wants a moderate, capped penalty that applies as the sole remedy and leaves the court's power to reduce intact.
Choice of law and forum
Finally, it is recorded which law applies and which court has jurisdiction. In a licence with a cross-border element, such as a foreign licensee or a territory covering several countries, an express choice of law is essential, as is the choice between the state courts and arbitration. For intellectual property matters, jurisdiction may moreover lie with a specialised court. A clear choice of forum prevents a dispute from bogging down in a discussion about the competent body.
Example clause +
This Agreement is governed by Dutch law. Disputes are submitted at first instance exclusively to the competent court in [The Hague].
For a party seeking speed and confidentiality, arbitration is attractive; for a party watching costs and not fearing a public ruling, the state courts are the obvious choice.
Schedules
The schedules make the abstract concrete: a description or register extract of the licensed right, a specification of the Products or Applications, the reporting and royalty model, any quality standards and a list of already known sub-licences or third-party claims. The agreement expressly declares the schedules to be an integral part and governs the order of precedence in the event of conflict between the main text and a schedule. Carefully drafted schedules prevent the scope of the licence from being called into question after all.
Example schedules +
Schedule 1: Description and register extract of the Licence Right · Schedule 2: Specification of the Products and Applications · Schedule 3: Reporting and royalty model · Schedule 4: Quality standards and known sub-licences.
What does this mean in a dispute?
Most disputes about licences arise over the scope of the right of use, the royalty settlement and the consequences of termination. An agreement with a narrow definition of the object, a watertight royalty basis and a clear reversion arrangement limits that risk. If it does end up in proceedings, the matter touches on the field of commercial litigation, for example in the case of failure to perform the licence obligations.