IP Licensing Disputes: Royalties, Scope and Termination

The short answer, expanded

A license is permission. The licensor keeps ownership of the copyright, trademark, patent or trade secret and allows the licensee to do defined things with it, in exchange for payment and conditions. Nearly every licensing dispute comes down to one of three questions: was the licensee doing something the permission did not cover, did the licensee pay what the permission cost, or did one side end the permission the way the agreement required.

Each question is answered by the agreement first and by intellectual property law second. That order matters, because the contract answer decides whether the second body of law is reached at all. A licensee acting within its license cannot infringe. A licensee acting outside it is, as to that conduct, a stranger to the licensor's property.

Scope disputes: was this use licensed?

Scope clauses define the field of use, the territory, the term, the media or platform, the number of users or units, and whether the licensee may sublicense or modify. Disputes arise when technology or the business moves past the words: software licensed for one site is deployed company-wide, a brand licensed for apparel appears on accessories, content licensed for print is published online, a licensee sells into a territory reserved for another.

Texas courts read a license like any contract, giving the words their plain meaning in context and construing the agreement as a whole. Where the clause is ambiguous, evidence of the parties' course of dealing comes in. Two drafting choices decide many of these cases: whether the grant is worded as a list of permitted uses, with everything else reserved, or as a broad grant with listed exclusions; and whether the agreement has a reservation-of-rights clause stating that everything not expressly granted is retained.

The consequence of a scope breach is doubled. The licensor can sue for breach of contract, and because the unlicensed use is unauthorized use of the property, the licensor can also sue for infringement, with the remedies that body of law provides. For a copyrighted work that means the actual damages and profits, or statutory damages where registration timing allows, described in 17 U.S.C. § 504. For a trademark, it means the infringer's profits and up to treble damages under the Lanham Act. The licensee's defense is that the use was within the license; a license is a complete defense to infringement for the conduct it covers.

Royalty disputes: underpayment and audits

Royalties are usually a percentage of net sales, a per-unit fee or a minimum annual payment, and every one of those terms can be fought over. The common arguments are the definition of net sales and which deductions it allows, whether bundled or discounted sales count at list or at actual price, whether sales by affiliates and sublicensees are included, and whether a minimum royalty is owed when the licensee stopped selling.

Well-drafted agreements give the licensor an audit right: access to the licensee's books on notice, through an independent accountant, usually once a year, with the licensee paying the audit cost if the underpayment exceeds a stated percentage. Exercising the audit right before sending a demand is usually wise, because the agreement's audit clause tends to be the only way to see the records before suit, and a claim built on the licensee's own figures is far harder to resist. A licensee that refuses an audit the agreement requires has itself breached, which often changes the negotiation.

The remedy for underpayment is the unpaid royalty plus contract interest, and attorney's fees under section 38.001 of the Texas Civil Practice and Remedies Code or the agreement's fee clause. Underreporting can also be a material breach that supports termination, which is frequently the real pressure point.

Exclusivity disputes

An exclusive license promises the licensee that no one else, sometimes including the licensor, will exploit the property in the defined field. Disputes arise when the licensor grants an overlapping license, sells directly into the licensee's territory or fails to enforce against infringers. Whether the licensor owed a duty to enforce depends on the agreement; absent a clause, courts are reluctant to imply one. An exclusive copyright licensee holds a transferred right under 17 U.S.C. § 201(d) and may itself sue infringers within its field, while a nonexclusive licensee generally may not. Exclusivity also raises the stakes of a scope breach by the licensee, since a licensor who granted exclusivity has given up the ability to replace a nonperforming licensee until it terminates.

Termination: doing it the way the agreement says

Most licenses may be terminated for material breach after written notice and a cure period, and some only for listed events. A licensor that terminates without following the procedure, or for a breach that is not material, has itself repudiated the agreement and faces a damages claim for the licensee's lost profits over the remaining term. The material-breach question is covered in material breach vs. minor breach, and the wider question of early exit in terminating a contract early without getting sued.

Three post-termination issues deserve attention before the notice goes out:

• Sell-off rights. Many agreements allow the licensee to sell existing inventory for a period after termination. Treating that inventory as infringing before the period ends is a breach.
• Continued use. Use after termination is infringement, not merely breach, which is why a licensor's first filing after a contested termination is often for an injunction.
• Survival clauses. Confidentiality, audit rights for past periods and accrued royalties typically survive. The agreement says which.

When the licensor goes bankrupt

A licensee's greatest exposure is often not the licensor's conduct but its insolvency. In bankruptcy the trustee or debtor may reject executory contracts, and a license is one. Section 365(n) of the Bankruptcy Code protects licensees of intellectual property: if the trustee rejects the license, the licensee may elect to retain its rights under the agreement, including any exclusivity, for the remaining term and any renewal it is entitled to, provided it keeps paying the royalties and waives setoff and administrative claims arising from the contract. The Code's definition of intellectual property for this purpose covers patents, copyrights, trade secrets and certain other categories but does not list trademarks. In Mission Product Holdings, Inc. v. Tempnology, LLC (2019) the Supreme Court held that rejection of a trademark license is a breach, not a rescission, so the licensee's right to use the mark survives rejection as well.

Where the case is decided

A pure contract dispute over royalties or termination belongs in state court, and in Texas it is tried as a breach of contract case, unless the parties are of diverse citizenship and the amount qualifies for federal court. A claim that the licensee's conduct infringes a copyright or patent arises under federal law and, under 28 U.S.C. § 1338(a), can be heard only in federal court. Trademark claims under the Lanham Act may be brought in either. The dividing line is whether the case requires the court to decide an infringement question or only to construe the contract; a dispute about what a scope clause means, where the only remedy sought is contract damages, usually stays in state court, while a claim for copyright remedies for use beyond the license goes to federal court with the contract claim attached. The choices are set out in where IP disputes get decided.

Many licenses also contain arbitration, forum selection and choice-of-law clauses, often pointing to the licensor's home state. Whether a Texas court will enforce a clause sending the dispute elsewhere is discussed in forum selection clauses in Texas.

Example

Suppose a Dallas software company licenses its scheduling platform to a regional clinic group for use at the group's 12 Texas clinics, with a per-clinic annual fee and an audit right. Two years in, the licensor learns the group has merged with a chain and the platform is running at 31 clinics in three states. The licensor invokes the audit clause; the group's records confirm the count. The licensor has a contract claim for 19 clinics of unpaid fees, and because use at those clinics was never licensed, a copyright infringement claim for the same use, which it can bring only in federal court. It registered the software before the license began, so statutory damages and fees are available. It sends a notice of breach with the cure period the agreement requires. The group pays the back fees, signs an amended license covering the full chain and absorbs the audit cost. The infringement claim was never filed, but it set the terms.

Evidence to preserve on both sides

• The signed agreement, every amendment, and the drafts and emails that explain disputed clauses.
• Royalty reports, payment records and the data behind them.
• Records of actual use: deployment counts, sales by territory, product lines carrying the brand.
• Notices sent and received, with proof of delivery against the agreement's notice clause.
• Communications about scope, including any approvals or acquiescence that could support waiver or estoppel.

Tina Wysk represents licensors and licensees in Dallas in contract and infringement disputes in state and federal court and in arbitration; the practice is described at intellectual property disputes.