The Basic Intellectual Property Principles of License Agreements

The best way to truly understand a license agreement is to start with the basics -- intellectual property rights.  And to truly understand intellectual property, the best way is to start with an understanding of property rights. So that’s where we will begin.

The Right to Exclude Others

Although we think of “property”, we usually think of real property, like a house and the land it sits on, or maybe personal property, like the computer, note pad, or smart phone you are using to read this article. Those are examples of tangible property – things that can be possessed, and that might lead one to describe a property right as the right to possess something.  And there’s some validity to that notion, but it doesn’t really extrapolate very well to intangible property – like the “money” in a bank account.  Or a patent.  Of course, one can possess a piece of paper that describes a patent, but the paper is not itself the patent. 

Instead, the fundamental characteristic of a property right (as opposed to, say, a contract right or a constitutional right) is that it gives the person who owns the right the power to exclude others.  If you own a piece of land, you have the power to exclude anyone else from being on the property.  Anyone who goes onto your land without your permission is said to trespass.  Anyone who takes our computer without your permission commits theft or at least conversion. 

Intellectual property rights work the same way.  For example, if you own the patent to an invention, you own the right to exclude anyone else from making, using, offering to sell, selling, or importing the invention. Anyone who does so without your permission is said to infringe your patent.  Similarly, if you own a trademark, you have the right to prohibit others from using the same or similar mark in commerce in a way that is likely to cause confusion (i.e., to cause a consumer to think he is buying goods made by one person when they are really made by another).  Anyone who does so without your permission is said to infringe your trademark. The other two primary types of intellectual property rights are copyrights and trade secrets. Here are some of the essential properties of the most common intellectual property rights as they exist in the United States.
  • Patent:  The owner can prohibit others from making, using, selling, offering to sell, or importing an invention.  Examples of protected assets include equipment, chemical compounds, and manufacturing processes.
  • Trademark:  The owner can prohibit others from using in commerce a mark that is identical or similar to the protected mark in a way that is likely to cause confusion.  Trademarks can be images (logos, etc.), names of products, and slogans.
  • Copyright:  The owner of a copyright can prohibit others from reproducing, distributing, displaying or performing in public, or making derivative works of an original work of authorship.  Examples include books, audio or video recordings, software, artwork, and photographs.
  • Trade secret:  The owner of a trade secret can sue others who improperly acquire seceret information or who use or disclose secret information that has been improperly acquired.  Examples include recipes, manufacturing methods, and customer lists.
Other intellectual property rights industrial design rights (in the U.S., protected by design patents) or trade dress (dealing with the overall appearance of products, etc., and similar to trademarks).

Tangible personal property often has intrinsic value – your computer is valuable to you because of what you can do with it.  However, intellectual property rights derive their entire value from their exclusivity – the right to prevent others from using the property. While a patented invention (e.g., a patented computer) may have intrinsic value, the invention itself is not an intellectual property right; the patent to the invention is the intellectual property right.  While the owner of a computer has the right to exclude others from using that particular computer, the owner of a patent has the right to exclude others from making any computers within the scope of the patent – and that right has commercial value.

Property Rights can be Transferred

Another characteristic of property rights is that they can be transferred.  When you sell a piece of land, you give up the right to prohibit others from going on to the land and transfer that right to the new owner.  Similarly, when you sell a patent, you give up the right to prohibit others from making, using, offering to sell, selling, or important the invention and transfer that right to the other person. The attribute of transferability is not unique to property rights – for example some contract rights can be transferred – it is generally considered to be an essential attribute of a property right.

Property Can be Used with the Permission of the Owner

Think about a public swimming pool that charges admission.  People who pay to swim are allowed to use the pool with the owner’s permission.  People who try to sneak in without paying do not have the owner’s permission to use the pool, and the owner has the right to exclude them, even to the point of calling law enforcement to remove them. However, people who pay to swim receive nothing but the owner’s permission to use the pool; they do not receive the right to exclude others.  Only the owner can do that.  The permission is said to be non-exclusive.

Now consider a situation in which the owner of the pool leases it to a local youth organization to use for a summer day camp.  Again, the youth organization uses the pool with the owner’s permission, but the youth organization also has the right to exclude other people from using it.  In that situation, the permission is said to be exclusive. Part of the owner’s right to exclude others has been transferred to the organization.

Licensing

Although it may not be obvious, we have just described the way that intellectual property licensing works.

Consider what happens when you “purchase” copyrighted software over the internet. The owner of the copyright gives you permission to do something with the software (e.g., to make a copy by downloading it to your computer) that would subject you to the possibility of being sued for infringement.  However, the license is nonexclusive – you will not have the right to sue someone else who does something that infringes the owner’s copyright.  How do you know that it is nonexclusive?  Read the license agreement, often called an “end user license agreement” or EULA, and you will almost certainly find the word “nonexclusive.” 

The owner of the swimming pool who charges admission to use the pool is actually granting those people a nonexclusive license, and it is closely analogous to a nonexclusive software license.  Usually, the license is for a term of one day and nontransferable, but other license terms are certainly possible.  For example, the owner might sell an annual pass – a license with a term of one year -- or a lifetime pass – a perpetual license.  If the pass allows the licensee to bring a guest, then the licensee has the right to sub-license, probably subject to conditions such as the sub-licensee be accompanied by the original licensee.  Or the owner might sell the local youth organization twenty annual passes that the organization can use for its summer day campers.  In that case, the twenty licenses are transferable.  

But what about the owner of the swimming pool that leases it to the youth organization for the entire summer?  In the language of real property, a lease is very close to an exclusive license.  The lessee has the owner’s permission to use the pool and also acquires the owner’s right to exclude others.  A possible difference is that the lessee of real property can sue a trespasser in the lessee’s own name.  In many cases, the exclusive licensee of intellectual property has standing to sue an infringer, but there are exceptions depending on the precise intellectual property right involved and the terms of the license.

License Agreements 

As explained above, a license comprises the IP owner’s permission to do something that the licensee would not ordinarily be able to do without infringing, and it may also include the transfer of some of the owner’s other IP rights, for example the right to sue an infringer. However, the licensee does not usually receive permission to do everything that would ordinarily constitute infringement, and the licensee does not receive all of the owner’s rights. 

That observation explains why license agreements can be so lengthy and so detailed.  If one wants to transfer an entire copyright to another person, the contract language is very simple, usually not much more than, “Seller hereby assigns to Purchaser the entire copyright to the Software.”  Because a license involves a limited permission to use the intellectual property and only some of the owner’s rights, the scope the licenses and the conditions that it is subject to must be written very carefully.  Those terms may include a description of the scope of activities that the licensee may undertake without infringing; the duration of the license; the extent to which the license can be transferred or sub-licensed; the conditions that must be observed to prevent voiding the license; the geographic area in which the license applies; and a host of other details.  Getting those details correct is important for both the licensee and the licensor. Although licensees of widely sold software do not usually need counsel, most other licensees and licensors of intellectual property rights are well advised to obtain legal advice before signing.