Intellectual Property and Scope of Use to Check When Reviewing a License Agreement

Hello, I'm Noriaki Asato, Representative Attorney at LegalAgent.

A license agreement is concluded when intellectual property, content, know-how, or similar assets are put to use in a business. From startups to large corporations, license agreements are used in many businesses, including product development, the use of characters, and the adoption of software and AI services.

What you want to avoid in a license agreement is agreeing to a document that states only the conclusion that "use is permitted" while leaving vague what may be used, by whom, and to what extent. If you conclude an agreement with vague terms of use, then when the business later expands into advertising or overseas markets, you will be unable to determine whether those uses fall within the scope of the license. As a result, every time you move forward with an initiative, you will be busy confirming with the licensor or negotiating additional terms.

The Basic Structure of a License Agreement and Confirming the Authority to License

A license agreement is an agreement under which the legitimate right holder, or a person with authority to grant licenses, permits the other party to use, within a certain scope, the rights, technology, or know-how that it has authority to license. The subject matter is wide-ranging, covering not only intellectual property rights such as patents, trademarks, and copyrights, but also characters and brands, software and databases, and AI models and APIs. A point to note here is that, in agreements setting terms for the use of data or logs, ownership or copyright is not automatically recognized in the data itself. Understand at the outset whether the license is based on an exclusive right under law or is the establishment of usage rules by agreement between the parties.

A license agreement does not transfer the right itself to the other party; it usually permits use under predetermined conditions. Therefore, the scope of use, consideration, handling upon termination, and similar matters are specifically agreed. When reviewing the agreement, first confirm whether the licensor is the true right holder or has legitimate authority to sublicense, and then read what rights may be used and to what extent.

Specifying the Scope of Use and Delimiting Exclusivity

At the core of review practice is how the scope of use is defined. If the scope of use is too broad, the licensor bears the risk of unintended uses. Conversely, if it is too narrow, the licensee bears the risk of being unable to make the uses necessary for its business.

The criteria for review are the purpose of use, the media of use, the territory, the term, and the range of entities that may use the subject matter. On this foundation, individually specify the forms of use that tend to cause disputes in practice, such as whether reproduction and modification are allowed, whether sublicensing or disclosure to subcontractors is permitted, and whether the subject matter may be used for advertising or for AI machine learning. For image materials, for example, check whether use is limited to posting on a website or also includes social media advertising and display at trade shows. For software, check the number of permitted users, the operating environment, shared use within the corporate group, and whether making backups is permitted.

Whether the license is exclusive or non-exclusive is also a major issue. Under an exclusive license, the licensee can use the subject matter exclusively, while the licensor is restricted from granting licenses of the same scope to third parties. However, stating "exclusive" in the agreement does not by itself immediately give the licensee a right to seek an injunction against third parties. This is because, under the Patent Act, registration of the establishment of an exclusive license (senyo jisshiken) is a requirement for it to take effect, and its legal nature differs from an exclusive permission to use based solely on a contract between the parties.

With an exclusivity clause, first confirm the rights covered. Then confirm the extent to which the territory, term, and field of use are limited. Also check whether a minimum guarantee or sales targets are set, whether there is a mechanism for switching to a non-exclusive license if targets are not met, and whether the licensor itself or its group companies may continue to use the subject matter. The licensor should take care not to have its future business development constrained by excessive exclusivity, and the licensee should determine whether the scope of exclusivity it is obtaining matches its business plan.

Designing the Method of Calculating Consideration, Sales Reporting, and Audits

Consideration may be set as a fixed fee, an initial implementation fee, a running royalty linked to sales, or similar, and the method chosen changes the burden of contract management after signing.

When a running royalty is adopted, the basis of the arrangement is the formula for calculating consideration and the definition of "sales." The amount actually paid changes depending on which sales figure is used as the calculation base, which of discounts, returns, shipping costs, and similar items may be deducted, and how consumption tax, withholding income tax, and exchange rates for overseas remittances are handled.

Provisions on the frequency of sales reports and audit rights are also indispensable. For the licensor, having a mechanism to examine the books supporting the reported calculation basis is an essential element. For the licensee, on the other hand, check whether the reporting obligations are not too burdensome in practice and whether the data can be compiled without difficulty in the internal accounting system. Because the obligation to pay a minimum guarantee and whether refunds are made upon early termination directly affect the profitability of the business plan, review of the consideration provisions should involve not only legal staff but also the business and accounting departments.

Responding to Infringement and Defense Arrangements

Unless the response procedure for cases where a third party makes an infringement claim, or where a third party is using the licensed subject matter without permission, is decided in the agreement in advance, the initial response may be delayed.

For example, a licensee using a licensed trademark or software may receive an infringement warning from a third party. To prepare for such disputes, first check to what extent the licensor warrants the validity of the subject rights and that they do not infringe the intellectual property rights of third parties. Then set out the obligation to notify the other party upon receiving a warning, which party will lead the defense in negotiations or litigation, and who will bear attorneys' fees and damages and in what proportion. Also look at the obligation to provide a substitute if use is enjoined, and the interplay with limitation of liability provisions.

In addition, for the exercise of rights where a third party is misusing the brand or content, agreeing which of the licensor and licensee will take the lead in responding and bear the costs of legal action makes it easier to confirm the division of responsibilities. Whether a party has the authority to take legal action is confirmed separately from the contractual allocation.

Handling Inventory and Data upon Termination and Checking Related Documents

When an agreement ends through expiration or termination, the licensee usually stops using the subject matter promptly. In practice, however, it is not unusual for manufactured inventory, advertisements still running, and derivative data accumulated in the course of use to remain on hand.

In termination provisions, in addition to the date by which use must stop, the central issue is how much of a grace period to allow for selling off inventory (a sell-off period). Setting out the deletion of web pages and advertising materials, the return or destruction of data and materials provided, and even the submission of a report certifying the destruction makes it easier to confirm what must be done upon termination. Where sublicenses have been granted, how the sublicensees' rights will be handled upon termination of the original agreement must not be overlooked either. Also check whether confidentiality obligations continue after termination, and their scope and duration.

In agreements for AI services and data-use arrangements, attention to issues different from those of traditional software licenses is essential. Check whether the service provider may reuse data entered by users for model training or feature improvement, how ownership of rights in generated output and restrictions on commercial use are handled, and whether analytical use of access logs and metadata is permitted. Note that the scope of limitations on rights permitted under laws such as the Copyright Act and the restrictions on use agreed in the contract are evaluated separately. Whether data is sent to external services, and arrangements for data deletion and export upon cancellation, are also terms worth checking.

Read the exhibits and operating guidelines together with the body of the agreement. Where a brand manual contains terms of use, that is also subject to review. Even if the body of the agreement appears to permit use, an exhibit may prohibit modification of the logo, restrict sales channels, or set API usage limits, so review the documents that will actually apply, including the terms of use for developers.