While the owners of IP rights may normally use those rights however they see fit, they aren’t always in a position to do so well or even at all. IP owners frequently license some (or all) of those rights to others, typically in exchange for a running or lump-sum royalty. Sometimes licenses are unavoidable when the owners’ business model requires customers and business partners to use those rights (e.g., end-user software agreements).
A license is not, by itself, a contract (or agreement). Instead, it’s a term of a contract. For example, you might license the rights to translate your novel into Polish to a publisher in exchange for a specified royalty. If so, you’ve formed a contract, but the license is just a term of the contract. It is possible to grant licenses without forming a contact, just as it’s possible to give something away as a gift (though the consequences are different). Unfortunately, the term “license” is often used synonymously with “license agreement,” which can lead to confusion.
Long-term can become stale, especially if they are unimaginatively drafted. For example, a license might permit the licensee to make copies on certain media, but over time, new media types become standard. The licensee is either limited to the legacy media, must go hat-in-hand to the owner requesting a broader license, or (worse) accidentally become an infringer.
The most important aspects of a license are exclusivity, scope and “sub-license-ability.”
If a license is exclusive, the licensee has the sole right to practice the IP rights (within scope). Even the owner cannot use those IP rights. I.e., an exclusive licensee can sue the owner for infringement! Because of this exclusivity, exclusive licensees often have standing to enforce the IP rights (though sometimes they need the owner to join the suit as a kind of silent plaintiff). Logically, you can’t grant an exclusive license to two different persons for the same thing, though that’s not an uncommon mistake. Exclusive licenses make the most sense if you (the licensor) have no immediate plans for the exploitation of the IP rights at issue, but you don’t want to assign the rights away.
Non-exclusive licenses are far more common, naturally. The licensee must be aware, of course, that its competitors can also receive the same license.
While it’s possible to license all of a particular IP right, it’s common to license only part of it. For example, you might license just the manufacture of a widget, or just its sale. Or you might license the right to adapt your novel into a movie to one person, but the right to translate it into other languages to someone else. Or you might license the right use a photograph for the first 10,000 copies of the licensee’s book (this is a common fact pattern, actually). The key is that, so long as they licensee stays inside the scope, then the licensee’s use of the licensed rights are permissible. But if the licensee strays from the license, the “licensee” is now an infringer—the line between friendly licensee and enemy infringer can be very thin, indeed. Needless to say, it’s in licensees’ interests to understand the scope of their licenses and make sure they stay within them.
It’s possible—even normal, in some industries—for licensees to sub-license their rights others. For example, an IP owner might license the right to translate the owner’s novel into foreign languages, but with the expectation that the licensee will commission others to do the actual translating. For this to work, the IP owner and licensee should make sure the licensee has the right to sub-license the translation right to others.
Sub-licensing is troublesome because it doesn’t work intuitively. It helps to remember these two basic rules of sub-licensing:
First, one cannot sub-license more than what one received in the license. If the licensee received a license to translate a novel into any language, then the licensee could sub-license to you the right to translate the novel into Polish. But what if the licensee only has the right to translate the novel into, say, German? You could end up infringing the very rights you think you were properly sub-licensed.
Second, sub-licensing is never automatic. Although the owner always has the right to license IP rights (provided they haven’t already granted an exclusive license), licensees do not automatically have the right to sub-license. That right needs to be included in the license. If it’s not, you might find out awkwardly that you don’t actually have the sub-license you thought you had and are, therefore, an accidental infringer.
A Word About Clear Drafting
In the example above about sub-licensing translation rights, a court would likely find that the sub-licensing rights were implied because otherwise the plan would not work. It is not advisable, however, to rely on what you think a court might or might not imply into an agreement because you do not know for sure until a court rules. The better practice is to make sure these rights are spelled out clearly in the agreement. This way, if there ever is a dispute, it can be resolved by simply reading the agreement—and not by calling in lawyers to guess at what it might mean or what a court might do.