Intercompany license agreement

This intercompany IP license agreement assumes that the parties:. Share a common interest in maintaining the goodwill associated with the licensed marks and the corporate group's business. Are familiar with each other's quality standards and practices. Can rely on each other to reasonably exercise rights and perform obligations relating to quality control, including that:. This clause therefore is broader and less stringent than a quality control provision unaffiliated parties typically negotiate.

For a sample quality control provision with additional protections for a trademark licensor, see Standard Document, Trademark License Agreement Pro-Licensor : Section 5. Reliance on Licensee A trademark owner may rely on a licensee to monitor its own compliance with the licensor's quality standards.

A licensor's failure to exercise quality control does not result in the licensed mark's abandonment because of uncontrolled licensing where:.

The parties have a close working relationship. The licensor is familiar with the licensee's quality control efforts. The particular circumstances of the licensing arrangement do not otherwise deceive the public about the nature and quality of the goods and services offered under the licensed mark. See Hokto , F. Include the bracketed last sentence of clause b if the circumstances of the parties' relationship may justify the licensor's reliance on the licensee to perform quality control. Approvals This intercompany IP license agreement assumes that the parties do not require a formal review and approval process for quality control purposes see Quality Control.

Include the first bracketed sentence of clause c if the agreement covers existing affiliate use of the licensed marks and there has been no change in the licensor's quality standards or the licensee's use requiring additional approvals.

Ownership and Protection of the Licensed Intellectual Property. Licensee acknowledges that Licensor owns and will retain all right, title, and interest in and to the Licensed Intellectual Property subject to the license granted in Section 1. Note: Acknowledgment of Ownership. Close Drafting Note Acknowledgment of Ownership The parties should include an express acknowledgment of the licensor's ownership of the licensed IP, as well as the goodwill associated with any marks included in the licensed IP, to:.

Forestall a later challenge to the licensor's ownership by the licensee or a third party. Support the chain of title of any patents, registrations, or applications for patenting or registration of the licensed IP filed by the licensor. For trademarks included in the licensed IP, this provision, together with the quality control provisions in Section 2. Licensor hereby grants Licensee power of attorney to execute and submit all documents on Licensor's behalf in Licensee's name and to do all other lawfully permitted acts to further the prosecution and maintenance of the Licensed Intellectual Property.

Licensee shall keep Licensor informed of the status and progress of the prosecution and maintenance of any patent, registration, or application for patenting or registration of the Licensed Intellectual Property, including the institution of or any material development in any post-grant, inter partes, interference, derivation, opposition, or other claim or proceeding challenging the ownership, patentability, registrability, validity, or enforceability of any Licensed Intellectual Property.

Note: Prosecution and Maintenance. Close Drafting Note Prosecution and Maintenance A licensor typically seeks sole control over prosecution and maintenance of licensed IP. However, the parties to an intercompany license may want to give the licensee control over these activities, for example, if the intercompany license is exclusive or if the licensor itself does not make any use of the licensed IP.

The second alternative clause contains bracketed language to give the licensee, in the licensor's name, either:. A discretionary first right to file, prosecute, and maintain the licensed patents, registrations, and applications. In this case, the parties may provide the licensor with the right to take control over prosecution or maintenance of any application, registration, or patent that the licensee chooses not to pursue or maintain.

An affirmative obligation to prosecute and maintain the licensed patents, registrations, and applications. For any applications that licensee files and prosecutes, the agreement should expressly:. Provide for a power of attorney to the licensee allowing it to execute documents and otherwise act on the licensor's behalf.

Address which party bears the costs of prosecution and maintenance, for example, filing and renewal fees. The parties should consider tax and accounting implications in determining how to allocate these costs.

This agreement requires that all applications and registrations be made in the licensor's name. If the licensed IP includes trademarks, it is generally advisable to ensure that a single entity within the corporate group is the record owner of all registrations and applications for the same or similar marks used by group members to avoid the risk of refusal of an application due to likelihood of confusion with another group member's existing registration.

Licensor has the sole right, in its discretion, to a bring any action or proceeding with respect to any such infringement; b defend any declaratory judgment action concerning any Licensed Intellectual Property; and c control the conduct of any such action or proceeding including any settlement thereof.

Licensee shall provide Licensor with all assistance that Licensor may reasonably request, at Licensor's expense, in connection with any such action or proceeding. Licensor will be entitled to retain any monetary recovery resulting from any such action or proceeding including any settlement thereof for its own account. Each Party shall promptly notify the other Party in writing of any actual, suspected, or threatened infringement, misappropriation, or other violation of any Licensed Intellectual Property by any third party of which it becomes aware.

Licensor shall join any such action or proceeding brought by Licensee if necessary for Licensee to have standing. Note: Enforcement. Close Drafting Note Enforcement This Standard Document includes two alternative clauses for allocating enforcement rights between the IP owner and the licensee concerning the licensed IP. In choosing the appropriate clause, the parties should consider standing and other legal implications, including which party may be entitled at law to lost profits damages or equitable relief depending on the circumstances see Standard Documents, Intercompany Patent License Agreement: Drafting Note: Licensee Standing and Intercompany Copyright License Agreement: Drafting Note: Licensee Standing.

The parties should use the first alternative clause giving the IP owner the sole right to take actions to enforce the licensed IP if the intercompany IP license is non-exclusive and the licensee will not have standing to enforce any licensed patents or copyrights. If the license is exclusive, counsel can tailor the second alternative clause as appropriate to give the licensee either:. Primary control over enforcement actions.

A secondary right to bring an enforcement action if the licensor fails to act within a specified time period. The second alternative clause also includes bracketed alternative language to allocate the monetary recovery from any enforcement action or settlement between the licensor and licensee.

The parties should consider tax and accounting implications in determining how to allocate these amounts. Note: Recordation of License. Although recordation is not required for licenses of patented or registered IP, the parties may choose to record either the license with confidential terms redacted or a non-confidential summary of the license to establish legal priority and create a public record of the license.

If the intercompany license agreement includes foreign patents, trademarks, or copyrights, the parties should include the bracketed language providing for recordation in the relevant countries. In some non-US jurisdictions, it may be necessary to record a license agreement to:.

Transfer royalties out of that country. Enforce the agreement against third parties. Use the agreement as evidence of infringement damages.

The corporate group should check with local counsel in the relevant jurisdiction to determine the appropriate recordation requirements. This clause includes bracketed alternative language to allocate the costs of recordation between the licensor and licensee. At the same time as payments are made under Section 6.

Licensee shall keep complete and accurate books and records of its [and its sublicensees'] sales of Licensed IP as reasonably necessary for the calculation of royalties [and other amounts] payable under Section 6. Licensee shall make such books and records available during normal business hours for inspection and audit by Licensor or its authorized representative.

Note: Payment. Close Drafting Note Payment Section 6 is optional and should be included only if the licensor requires payment from the licensee for use of the licensed IP. A typical IP license can either be fully paid up and royalty-free or require the licensee to pay any combination of:.

An up-front license fee. Periodic fixed license fees. A percentage of sublicense fees. This Standard Document includes two alternative clauses providing for payment to the licensor of either a one-time fee or an ongoing royalty see Royalty.

The corporate group should consult tax counsel to confirm that the intercompany license agreement's payment terms comply with applicable transfer pricing rules see Drafting Note, Transfer Pricing. Royalty The second alternative clause requires the licensee to pay the licensor:. A royalty calculated as a percentage of the net sales of licensed products sold by the licensee see Net Sales.

If sublicensing is permitted under Section 1. The royalty rate selected by the parties depends on several factors. For more information on earned royalties, see Standard Documents:.

Net Sales The Net Sales definition provides for deductions from the gross sales price in calculating the royalty base for certain items, including trade discounts, delivery charges, and sales taxes. While these are customary deductions, this definition is favorable to a typical licensee because it broadly defines them without limitation in scope.

A typical licensor seeks to limit Net Sales deductions, for example, only to those that are actually allowed or taken. The parties should consider their own unique tax and business situation to determine the scope of any deductions.

Royalty Statements and Records This intercompany IP license agreement imposes basic reporting and recordkeeping obligations on the licensee to substantiate amounts paid to the licensor. The corporate group should consult with tax counsel and accounting specialists to confirm that the licensee's reporting and recordkeeping practices relating to this agreement sufficiently enable the group to comply with applicable financial reporting obligations and transfer pricing rules.

Without limiting the foregoing, for purposes of this Agreement, all trade secrets and confidential information included in the Licensed Intellectual Property, including unpublished patent applications and invention disclosures, will be deemed Confidential Information of Licensor.

Note: Confidentiality. Close Drafting Note Confidentiality Although affiliated parties generally have a shared interest in protecting the confidential information of the corporate group, the licensor should include this provision to expressly protect any licensed trade secrets or other confidential information shared under the agreement.

Imposing express non-disclosure obligations on the licensee can support an argument that the licensor has taken reasonable steps to protect the secrecy of any licensed trade secrets if there is a third-party challenge to trade secret status. If the agreement provides for the licensee's payment of a royalty and sharing of sales information under Section 6 , the parties should make this provision mutual.

For more information on confidentiality provisions and the protection of confidential information generally, see Practice Note, Confidentiality and Nondisclosure Agreements. Note: Indemnification.

Close Drafting Note Indemnification This Standard Document contains a basic indemnification provision in favor of the licensor concerning third-party claims relating to the agreement.

Although a licensor is unlikely to seek indemnification in the intercompany context, it is customary to include an indemnification provision in an arm's length agreement. Include the bracketed definition of Affiliate if the term is not defined in Section 1. IP Infringement Claims This clause includes optional language in brackets to exclude third-party infringement claims from the licensee's indemnity obligation.

In IP licenses other than patent licenses between unaffiliated entities, the licensor typically has an affirmative indemnity obligation to the licensee for infringement or other claims based on the permitted use of the licensed IP or technology.

The standard risk allocation is different in patent licenses, where the licensee typically has an affirmative indemnity obligation to the licensor for all claims arising from the licensee's practice of the licensed patents, including any infringement, product liability, or other claims concerning the licensed products or methods. In the intercompany context, depending on the nature of the licensed IP as well as any applicable tax, accounting, or other considerations, the group may decide either that:.

Each party should bear its own losses associated with any infringement claims arising out of the license, in which case the bracketed language should be included to exclude these claims from the licensee's indemnity obligation. The licensee should bear all costs associated with any infringement claims, in which case the bracketed exclusion should be omitted. Indemnification Procedures Because this intercompany agreement is less formal than an agreement between unaffiliated parties, this clause does not specify the procedures for seeking indemnification and handling the defense or settlement of the indemnified claim.

For sample indemnification procedure clauses, see Standard Documents:. Disclaimer; Limitation of Liability. Note: Disclaimer. Close Drafting Note Disclaimer An intercompany license agreement typically does not include any representations and warranties concerning the licensed IP.

This agreement instead includes a mutual express disclaimer of all representations and warranties to ensure that none are implied. A licensor in an agreement with an unaffiliated licensee may be willing to provide certain representations and warranties, for example, that the licensor owns the licensed IP.

In addition, the use of intercompany transfer and license agreements from the group company to which the intellectual property rights and know-how are assigned makes it easier to provide broader licenses to other operating companies or third parties, makes it easier to attract investors and keeps the intellectual property rights out of the risk sphere e. An intercompany transfer and license agreement can also entail tax advantages.

If you would like support in drawing up and internally negotiating a workable and legally clear intercompany transfer and licence agreement, please contact us. This does not result in any further obligations for you. Do you have questions about this subject? We can help you with this. Contact us without obligation! General Information Usually, an intercompany transfer and license agreement stipulates that all intellectual property rights developed by an operating company e.

The content of an intercompany transfer and license agreement Because Dutch contract law is based on freedom of contract, parties are free to agree with each other what they want. The transfer pricing arrangements are applied to the controlled transactions and this way it operates for a couple of years. One fine day the tax authorities knock on the door to inquire about the transfer pricing arrangements and how these are documented. Pjotr Plastic tells them that there is transfer pricing documentation but there are no intercompany agreements evidencing that all associated enterprises have consented to the transfer pricing arrangements.

The tax authorities are not convinced that Pjotr Plastic is compliant with transfer pricing laws. It wants to verify i whether the allocation of risks, assets and functions on which the transfer pricing arrangements have been based is in line with the actual arrangements and ii whether the associated enterprises have consented to the transfer pricing arrangements.

Without intercompany agreements, Pjotr Plastic now has to furnish other evidence and convince the tax authorities that its transfer pricing position is indeed as it claims it is—potentially, a time consuming and costly discussion.

This could have been prevented…. Drafting an intercompany agreement is best done using a cross-discipline approach. Tax and finance professionals prepare the transfer pricing documentation but might not have the required skills to prepare legal documentation. Similarly, legal professionals are usually in the dark about transfer pricing rules. It is thus important to ensure the right people and skills are on board.

As for the content of intercompany agreements, we highlight three key principles:. The content of intercompany agreements largely depends on the nature of the controlled transaction and the jurisdictions where the controlled transaction s take s place.

Complicated controlled transactions, such as licensing of intellectual property, require detailed contracts. Contracts for straightforward controlled transactions, such as the provision of management services, can be kept simple.

Having said that, there are basic requirements that are to be included in every intercompany contract:. In our course we offer a more detailed description of these requirements. We stress again that the content of the intercompany contract should meet the three principles discussed above. Intercompany agreements can cover various controlled transactions. Below, we provide an overview of the most common ones:.

Apple US, who owns the Apple brand, grants a license to Apple Netherlands to use the brand name in the Netherlands only.

Apple Bermuda grants a loan to Apple Mexico to expand the business. Transfer pricing arrangements between associated enterprises must be formalized in intercompany agreements to make them legally binding, comply with transfer pricing laws, and ensure a proper line of defense against challenges from tax authorities.

Not doing this puts your business at serious and unnecessary risk.