The Licensing Corner


The Licensing Corner

John Pavolotsky

Intel Corporation


"It is certainly true that the main business of the lawyer is to take the imagination, the mystery, the romance, the ambiguity, out of everything that he touches."1

Licensing attorneys try to avoid ambiguity, to clearly and crisply express the intent of their clients (at least to the extent that their clients know what they really want). That said, ambiguity lives, to differing degrees, in any license agreement, and despite, and sometimes because of, attempts to clarify a party’s obligation or the meaning of a term. In this article, we will explore ambiguous terms and ways to mitigate the ambiguity.

It is well known that a license may contain a variety of purpose limitations. Some licenses may only be exercised for "internal purposes." Not infrequently, the purpose is limited to "internal business purposes," which usually adds nothing, especially if your client is a commercial entity. Of course, internal business purposes can be limited further to, e.g., using the licensed technology to improve manufacturing processes or even a specific manufacturing process. At the end, the discussion between the licensor and licensee revolves around the benefit of the bargain: what can the licensee do (or not do) with this license, and if the license is not sufficiently broad given the business needs of the client, can a broader license be negotiated (without having to pay more for it)?

In many licenses, "internal business purposes" is not defined. Consider the following license:

Licensor grants Licensee a non-exclusive, non-transferable, worldwide, royalty-free, fully paid up license under its copyrights to the Software to reproduce and distribute the Software solely for its internal business purposes.

"Internal business purposes" is a rather broad term. On one end of the spectrum, it could cover the use of customer relationship management software by an organization’s employees. More broadly, an "internal business purpose" license could cover both non-commercial and commercial use cases, like the development or improvement of products or services. In general, this limitation brings to a halt, or at least dampens, a licensee’s initiative to resell or otherwise make available the software, as these (residual) rights would remain in the rightful domain of the licensor.

Could "internal business purposes" cover service bureau operations? The term "service bureau" comes from the early days of computing and describes "[a]n organization that leases or sells computer time, manpower, or other computation support to the public."2 Under the service bureau scenario, a licensee could argue, although not convincingly, that it is using the licensed software for its own business purposes (to provide an external service for its customers). Licenses can be elastic, but probably not that elastic. In practice, an "internal use" license is viewed as incompatible with a license enabling service bureau operations, but it is not difficult to imagine discussions, and perhaps disagreement, on this point. Further, in practice, frequently an internal use license will expressly prohibit service bureau operations using the licensed software, thus removing any doubt. At any rate, a quick conversation with the counterparty’s counsel will clarify scope and avoid any unnecessary misunderstandings.

"Internal business purposes" presents other issues as well. For example, a licensee’s "internal business purposes" could at some point encroach on the licensor’s primary business and, at that point, the licensor might want to introduce additional protections to the license. Similarly, and related, even if the "internal business purposes" remain constant, the licensee’s profile could change over time, as it grows, either organically or through acquisitions. Put otherwise, and as an example, the licensor will want to carefully craft the license to cover the licensee and its affiliates as of the license agreement effective date, to enable the appropriate conversation if and when licensee acquires another entity.

In the same vein, limiting the exercise of a license to "noncommercial purposes" presents another interesting discussion opportunity. Typically, license agreements fail to define this term either, and when a definition exists, it can be somewhat recursive. Consider the Creative Commons Attribution-NonCommercial 4.0 International License3, which defines "NonCommercial" as "not primarily intended for or directed towards commercial advantage or monetary advantage"4 While this does not provide much clarity, at least it seems to provide some room for incidental commercial and monetary benefit. In addition, as defined, "NonCommercial" could include research, education, and other use cases, so long as the overarching requirement of this term has been satisfied. Of course, to avoid (perhaps unnecessary) mental gymnastics, one could use commercial (public) licenses, like the Creative Commons No Rights Reserved license (CCO) or the Creative Commons license with attribution (CC-BY), if the desired materials were available under those licenses.

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Other purpose limitations exist. As an example, a consortium agreement could give participants to a specific work package royalty-free access rights to technology solely developed, in the course of the work package, by any of the other participants for "Internal research activities" only. In turn, this term could be further defined to consist of research and development as well as teaching and educational activities.

In theory, "internal research activities" could include research and development activities aimed at commercializing products and services. Expressly prohibiting use of the licensed materials for any commercial purposes could ameliorate this (for the licensor), but, in turn, would call into question the meaning of "commercial" and spawn yet another conversation. Does "commercial" mean for financial gain or is it a broader concept? Further, "commercial" may have different meanings depending on the industries in which the licensor and licensee operate and the range of activities possible with the licensed materials.

At any rate, it is easy to see how the reasonable expectations of the participants could differ. In the example above, if a licensee had any intention to use the licensed technology for purposes other than "internal research purposes", it would need to obtain a royalty-bearing license. From the licensor’s perspective, if the licensee will in any way be deriving any monetary benefit from the licensed technology, the licensor should be compensated for its contribution to the licensee’s product or service enabled by that licensed technology. As a practical matter, if the licensed technology appears to prove helpful for a commercial product or service, the licensee could obtain a royalty-bearing (commercial) license to that technology, although once viability has been established, the licensor has all the leverage to dictate the license fee.

A license could be even narrower, limiting use to noncommercial research and educational purposes. Consider this limitation in the context of licensing large data sets and assume that none of these terms are defined in the applicable license agreement. In general, a dataset could be used to determine the viability of creating, or to create, new algorithms, to benchmark or train, existing algorithms, or, more broadly, to derive insight from the original data. In theory, a license could cover some or all of these activities, but without knowing the precise meaning of "noncommercial" and "research" as applied to the range of activities possible using the licensed datasets, some ambiguity will continue to exist. In turn, this could incentivize the licensee to identify datasets available under commercial licenses or collect the raw data itself.

More broadly, and fundamentally, it would be interesting to understand the intellectual property rights covering the licensed dataset materials. Of course, while images could be subject to copyright, and some protection exists under copyright law for compilations, there are no database rights (at least not in the United States). The Licensing Interest Group discussed this topic during a recent call and will continue to closely track this topic.

Comments, and definitions of "internal business use", "noncommercial use", and other ambiguous terms, welcomed.

The views expressed in this article are personal to the author and do not necessarily reflect the views of the author’s firm, the State Bar of California, or any colleagues, organization, or client.

© 2017 John Pavolotsky.

John Pavolotsky is Senior Counsel at Intel Corporation, focusing on technology transactions. He is Chair of the IP Section’s Licensing Interest Group.

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1. I heard this gem during a recent story on NPR, entitled "Antonin Scalia’s Less Well-Known Legacy: His Speeches." This one comes from a speech called "The Arts," given at The Juilliard School in 2005.

2. Systems Dev. Corp. v. United States, 531 F.2d 529, 531 (Ct. Cl. 1976).