Checklist: Drafting a limited intellectual property license (USA)

Introduction

This checklist will assist in-house counsel and private practice lawyers when drafting limited licenses that grant certain rights for the use of intellectual property (IP). The limited license does not convey full assignment of the IP rights; however, it does permit the licensee to use the rights associated with IP under the terms of the license. This checklist sets out the key issues and drafting considerations to be aware of. This checklist addresses the following steps:

1. Preliminary considerations
2. IP-specific contract provisions
3. General contract clauses and IP considerations

This checklist can be used in conjunction with the following How-to guides: Protecting intellectual property when drafting sales or marketing agreements and How to protect trade secrets in the employment relationship.

Step 1 – Preliminary considerations

Step 2 – IP-specific contract provisions

Step 3 – General contract clauses and IP considerations

Explanatory notes

Step 1 – Preliminary considerations

1.1 What is a limited IP license?

A limited intellectual property (IP) license transfers rights in IP from the owner of the IP (licensor) to another party (licensee) without assigning all rights to the IP which the licensor possesses. The licensor retains ownership of the IP but grants the licensee permission to undertake actions which would otherwise constitute infringement without the existence of the license.

1.2 Who are the parties to the agreement?

When drafting it is necessary to consider carefully who are the relevant parties to the license. For example, what if any of the IP belongs to someone other than the licensor or if the IP is jointly owned by the licensor and another person – does the licensor have the right to license the IP? It is important to check and conduct all necessary due diligence. Another consideration may arise where the licensee is part of a group of companies. Consider whether members of the group will also be able to use the IP under the terms of the license.

1.3 What IP is being licensed?

Consider the type of IP being licensed. Patents and copyrights are matters of federal law exclusively. Most states have trademark laws that operate in a fashion similar to federal law.

1.3.1 Patent

A patent is the right to exclude others from making, using, marketing, selling, offering for sale, or importing an invention for a specific period, granted by the federal government to the inventor if the device or process is novel, useful, and nonobvious. See, 35 USC sections 101-105. For further background, please refer to the US Patent and Trademark Office.

1.3.2 Copyright

Copyright is the right to copy; specifically, it is a property right in an original work of authorship (including literary, musical, dramatic, choreographic, pictorial, graphic, sculptural, and architectural works; motion pictures and other audiovisual works; and sound recordings) fixed in any tangible medium of expression, giving the holder the exclusive right to reproduce, adapt, distribute, perform, and display the work. Copyright law is governed by the Copyright Act of 1976. See, 17 USC sections 101 et seq. For further background, please refer to the US Copyright Office.

1.3.3 Trademark

A trademark is a word, phrase, logo, or other sensory symbol used by a manufacturer or seller to distinguish its products from those of others. The main purpose of a trademark is to designate the source of goods (ie, the commercial substitute for one’s signature). A service mark is the same as a trademark, except that it applies to identify the source or origin of services.

To receive federal protection, a trademark must:

• be distinctive rather than merely descriptive or generic;
• be affixed to a product that is actually sold in the marketplace; and
• be registered with the US Patent and Trademark Office.

For further background, please refer to the US Patent and Trademark Office.

1.3.4 Trade Secret

Trade secrets, as defined by both state and federal laws, encompass a broad spectrum of information, including formulas, patterns, compilations, programs, devices, methods, techniques, and processes. To qualify as a trade secret, information must meet two critical criteria. First, it must derive economic value from its secrecy, meaning it is not generally known or easily discoverable by others. This exclusivity grants the owner a competitive advantage, as competitors cannot readily access or replicate the information. Second, the owner must actively protect the information through reasonable measures. These protective measures are essential for maintaining the secret's legal status.

The Uniform Trade Secrets Act (UTSA), developed by the Uniform Law Commission (ULC), serves as a foundational piece of legislation defining trade secrets and outlining legal claims concerning them. It provides a standardized framework for trade secret protection. Notably, as of 2025, the UTSA has achieved widespread adoption, with 48 states (with the exception of New York and North Carolina), the District of Columbia, the US Virgin Islands, and Puerto Rico incorporating it into their legal systems.

Step 2 – IP-specific contract provisions

2.1 What is the purpose of the license?

2.1.1 Licensor’s purpose

The licensor may grant an IP license to generate additional income, to tap into additional local markets, and to create new business opportunities.

2.1.2 Licensee’s purpose

The licensee, using the IP license, may open itself to new business opportunities, obtain competitive advantage by getting business to market more quickly and create other revenue streams.

2.2 Have other licenses for the same or related IP been granted?

An IP license may be either exclusive or non-exclusive. A non-exclusive license may authorize different parties to use the same IP for similar or different purposes. For example, the owner of a copyright to a musical composition may license the composition for use in a television commercial and for a movie soundtrack. As another example, an exclusive agreement may look like a company with a patent for a new product granting the exclusive license to another company for production and distribution of that new product.

2.2.1 Potential infringement disputes

The most common infringement disputes involve copyrights, trademarks, and patents. Licensing infringement is the act of using another person’s protected intellectual property without permission.

While legal ownership is typically associated with the right to sue for trade secret misappropriation, licensees or lawful possessors may also have standing to bring such actions, see Advanced Fluid Systems Inc v Huber, No 19-1722 (3d Cir 2020) and DTM Research, LLC v AT & T Corp, 245 F 3d 327, 330-33 (4th Cir 2001). However, trade secret owners may have valid reasons for not wanting licensees to initiate lawsuits. Concerns include the risk of an adverse ruling that invalidates the trade secret, unwanted involvement as a third party in litigation, or the potential disruption of important business relationships with the alleged infringer. Furthermore, the legal landscape varies by jurisdiction. Companies must consider state-specific laws, such as those in Pennsylvania, Maryland, and California, which permit lawsuits without strict legal ownership, versus those like Colorado, which require it.

A license to use IP may be drafted to ‘forgive’ or waive claims for pre-license acts of infringement by the licensee. If this is to form part of the licensing agreement, it needs to be made explicit in the agreement. See below at section 2.10.

2.3 What is the duration of the license?

IP licenses are usually for a fixed term not to exceed the life of the IP being licensed, unless the IP has an indefinite life span, such as trademarks and trade secrets. Rights of renewal of the IP license are common as well (see section 2.9.2).

The terms agreed by the licensor and licensee will govern how the licensee may utilize the IP being licensed. The license terms may also limit the number of times the IP may be used and may place restrictions on any further use by related parties (eg, prohibiting use by subcontractors or franchisees).

2.4 What is the geographic scope of the license?

IP licenses must be clear about the geographic scope (ie, which state or local jurisdictions and/or countries are covered under the terms of the licensing agreement). For instance, if the IP license only applies to the United States, then that must be set out expressly under the terms of the license.

2.5 What uses are permitted?

An IP license generally covers rights such as distribution, reproduction, modification, publication, or display.

The license should also set out any rights to derivative works. ‘Derivative work’ refers to a copyrighted work that comes from another copyrighted work (eg, a translation or a sequel). The copyright of a derivative work is separate from the copyright to the original work. If the copyright holder gives an entity or individual a license to create a derivative work, the licensor retains the copyright to the original work. The drafting should expressly clarify (if agreed between the parties) that only the derivative rights are being licensed. See section 2.11 below.

2.6 What uses are restricted?

The parties should also consider the purpose of the license restriction – for example, whether the license is only to use the IP for commercial purposes or only for academic or research purposes, and whether the rights granted are exclusive (licensor may not use the IP), non-exclusive (licensor may use the IP and grant other licenses) or sole (licensor may use the IP but will not grant other licenses aside from the licensee).

2.7 Is sublicensing or assignment allowed?

2.7.1 Sublicensing

An IP sublicense is an agreement where the licensee grants a third-party right to any of the licensed IP. Sublicensing generally requires the licensor’s consent evidenced by prior written approval, which at times may be impractical depending on the industry or technology. As a safety net, the licensor and licensee often agree that sublicensing approval will not be unreasonably withheld.

2.7.2 Assignment

An assignment transfers all the rights to the IP license to a third party (assignee). This is an important point to clarify, as the IP license may restrict or prevent assignment, and if so, any assignment could carry a risk of being in breach of the license terms.

2.8 Are ownership rights being transferred?

Ownership rights are not being transferred when parties enter into an IP licensing agreement, unless the license states otherwise. It is best practice to include language making it explicit that ownership rights are not transferred. This will eliminate potential confusion later, particularly when the license has a longer term, or when the licensee retains the right to sublicense the rights (see above at section 2.7.1).

2.9 Are there any warranties regarding the IP?

2.9.1 Warranties

Licensees will often insist on a warranty of ownership. In such a warranty, the licensor warrants or confirms that they own the IP described in the IP license and there have been no claims challenging such ownership.

IP warranties may also indicate that the IP does not infringe upon any rights of third parties. Licensees will seek such a warranty to protect themselves from infringement claims based on the licensor’s infringement. The parties may also include drafting to consider who is responsible for pursuing any infringers, and who is responsible for bearing the costs of this process.

2.9.2 Renewals

If the limited license is for an extended period, consideration should be given to renewal of the registration of the IP. The license should set out the responsibility for paying any renewal fees and whether the renewed license will include the same rights as the original agreement.

Note that a utility patent (covering inventions) lasts for 20 years from the date of issue, while a design patent (covering the appearance of a product) lasts for 15 years. A trademark will last indefinitely, as long as it is used in commerce, but a statement of use must be filed between the fifth and sixth year after registration, between the ninth and tenth year after registration, and every ten years thereafter. Copyrights for works created after January 1, 1978 last for 70 years after the death of the author (ie, the creator of a work); for works ‘made for hire,’ such as a screenplay for a movie written by a studio employee, copyright lasts for 95 years from the year of its first publication or a term of 120 years from the year of its creation, whichever expires first. A copyright may not be renewed.

2.10 Are prior infringements or misuses waived or released?

License agreements are often entered into as a part of a settlement of an infringement claim. Such licensing agreements will often include a provision stating that the licensee waives or forgives prior infringements. Such a waiver or forgiveness must be made explicit to be effective. Similarly, if there is no such waiver or forgiveness, it is best practice to include language making explicit the terms of the non-waiver clause.

2.11 Who has the right to derivative or new uses?

2.11.1 Derivative uses

Derivative uses are often (but not invariably) the property of the licensee who creates them. A licensor may, however, wish to retain control over derivative works. This is especially important if the subject of the license has the potential to bring in revenue over an extended period (eg, a popular movie franchise that licenses characters or logos for toys or other products). A licensor may also want to retain control to preserve the integrity of the subject of the property (eg, the licensor of rights to a popular movie franchise may wish to control fan fiction to avoid undesirable uses of the IP).

2.11.2 New uses

Rights to new uses of a product are matters of contract and depend on the new use and how it affects the parties to the IP licensing agreement. For example, cordless electric drills may be repurposed for use as outboard motors for small boats. Many patent holders will allow licensees to retain the rights to new uses provided the new use is reported to the patent holder thus using the licensees as ‘de facto’ product testers.

Step 3 – General contract clauses and IP considerations

3.1 What is the fee for the license?

There is no uniform, or even common, rule for assessing the fee for a license. The calculation of the fee will depend on the nature of the licensed property and the potential uses of it.

3.1.1 Flat fee

Flat fees state that the licensee agrees to pay a certain sum for the rights set out in the license. Flat fees are often referred to as ‘royalty free,’ as the licensee is not obliged to pay anything after the original purchase of the rights, no matter how often the property is used.

3.1.2 Royalty payments

IP royalties are payments made by the licensee to the licensor in exchange for the use of the licensor’s IP. Generally, royalties are a percentage of the net or gross revenue made by the IP on a regular basis. If royalties are called for, the licensor should retain the right to audit the records of the licensee’s use, in case of a dispute.

Royalties can be affected by:

• strength of the IP protection – if the IP has strong protection, such as an incontestable trademark, a licensee may be required to pay more for the right to use the mark;
• what stage of development a product or service is in – the holder of a patent for a new product may be willing to agree to a lower royalty to encourage licensees and their customers to act as unofficial beta testers, to determine how well the product works in real-world conditions, and also to investigate possible new uses;
• how unique an invention is – the holder of a patent for a one-of-a-kind item may be able to demand a higher royalty for licensing;
• market size;
• level of competition in the market; and
• exclusivity of the licensing agreement.

3.2 Is either party indemnified against infringement claims?

Indemnity is a duty to make good any loss, damage, or liability incurred by another. Licensees are often required to indemnify the licensor against any liability for infringement by the licensee including indemnities against third-party claims resulting from the licensee’s act or omission.

3.3 Is maintenance or technical support part of the license?

Maintenance or technical support obligations will be specified in the IP licensing agreement. For example, a software licensing agreement may include a provision that stipulates the licensor will provide updates to the software and fix any bugs that may arise.

3.4 Which governing law and jurisdiction apply?

Although most of the law relating to the ‘mechanics’ of intellectual property – its creation, protection, and infringement – is federal law, the license itself is a contract and so usually is governed by state law, just as any other commercial contract would be. A license agreement may specify the jurisdiction whose law governs. That jurisdiction is usually the jurisdiction in which the licensor is located.

Courts will give effect to a choice of law provision if the jurisdiction selected has some relationship to the transaction. An IP license agreement may be governed by the law of the licensor’s principal place of business, or less frequently, by the law of the licensee’s place of business or the jurisdiction in which the IP will be used.

3.5 What are the remedies for breach?

License agreements will often specify some of the remedies for a breach. These are usually presented as a non-exclusive list of remedies either party may invoke.

3.5.1 Termination of license

A licensor may include a provision stating that the license is terminated upon discovery of a breach. It is worthwhile thinking about triggers for termination more generally too. For example, may the licensor terminate if there is a change in the ownership of the licensee or change in control of the licensor? What will happen upon expiry or termination of the license? Do any provisions of the license endure after the termination of the agreement (eg, confidentiality)?

3.5.2 Liquidated damages

A liquidated damages clause sets out the damages one party may recover for the other’s breach. Liquidated damages clauses are used when the measure of damages for a breach cannot be determined at the time the contract was entered into. For example, the breach of a license agreement to use a stock photograph for personal use may result in substantial damages claim if the licensee is able to earn money from the photo. In the alternative, the damages from such a breach could be minimal, like in a situation when the licensee lets a friend use the picture.

Additional resources

American Intellectual Property Law Association – Licensing Intellectual Property 101:What Every Entrepreneur and Business Owner Should Know
World Intellectual Property Organization – WIPO Lex – for access to worldwide legal information on intellectual property law.

Related Lexology Pro content

How-to guides:

Protecting intellectual property when drafting sales or marketing agreements
How to protect trade secrets in the employment relationship

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