The Terms “Revocable” and “Irrevocable” in License Agreements: Tips and Pitfalls

By Sidley Austin LLP

Feb 21, 2013

Technology Transactions Practice Note

This Practice Note was created to offer insight and perspective into some of the difficult issues our clients face on a daily basis. We hope you find these notes to be of interest.

Intellectual property license grants usually contain a long list of adjectives, including some that are, in our experience, frequently misunderstood. “Revocable” and “irrevocable” are two examples. The parties to a license often include or omit these words without understanding how doing so may affect the license and the overall contract. Because the law is somewhat murky on the subject, we offer this practice note to explain and offer some recommendations on how to use these terms.

Revocable and Irrevocable Defined

When used in an very simple intellectual property license, the terms “revocable” and “irrevocable” have the meanings you would expect. A “revocable” license may be terminated by the licensor at any time during the term of the license agreement, with or without cause. An “irrevocable” license, on the other hand, cannot be terminated, although there is some divergence in authority regarding whether this means that the license cannot be terminated for any reason or only that the license cannot be terminated for convenience, but still may be terminated for breach. Despite the fairly clear meanings of these terms, how a license including either of these terms is interpreted depends on how the term interplays with the other provisions in the relevant contract, including the termination provisions.

Default Rule When Silent on Revocability

Most courts hold that simple, non-exclusive licenses with unspecified durations that are silent on revocability are revocable at will. This means that the licensor may terminate the license at any time, with or without cause. Conversely, courts typically hold that simple non-exclusive licenses that are silent on revocability but specify a set duration are non-terminable during the set duration. Results, however, may vary based on applicable state contract law and federal law preemption principles. We find that many people are unaware of these default rules. Because of the lack of absolute clarity on the default rules themselves and the impact other provisions in a license agreement may have on their application, we believe it is important not to remain silent on revocability in a license.

Interplay of Revocability with other Contract Terms

Intellectual property license agreements are rarely one sentence license grants, and therefore the term “irrevocable” or “revocable” in a license grant must be interpreted in the overall context of the contract in which the license is granted. General rules of contract interpretation and other contract terms, especially express terms regarding termination, remedies and survival of termination, will impact whether a license grant is considered non-terminable in all situations, terminable only in certain situations, or terminable at will. For example, the following might come into play in making such determinations for any given license agreement:

Whether the contract has a term (i.e., whether it is perpetual or has a set duration).
The general presumption that contracts are terminable due to a party’s material breach, even absent termination provisions.
Whether the contract has express termination provisions, and whether those termination provisions are meant to be the sole reasons a party may terminate or a non-exclusive list.
Exclusive remedy provisions.
Whether various provisions are conditions or covenants to the license grant.
The economic realities of the agreement, including how critical to the licensee it would be for the license to remain in effect.

Recommendations

Taking into account that the law is not always clear and that various parts of a license agreement can impact how it will be interpreted, we offer a few best practices:

Always include either “revocable” or “irrevocable” within the license grant.
If you want the license to be revocable at will, state so clearly (i.e., “revocable (at will)” or “revocable, with or without cause”).
If you want a license that can only be terminated for the reasons specified in the termination provisions, state that the license is “irrevocable (except as set forth in the termination provisions)” or “revocable (only as set forth in the termination provisions).”
If you want a truly irrevocable license, state that the licensor cannot terminate the license, and that the licensor’s exclusive remedies for breach are damages and equitable relief. Consider also providing explanatory text as to why the parties intend for the license to be non-terminable.
If certain provisions of your contract are meant to terminate separately from the license grant, make this clear in the license grant or the termination provisions. For example, if there are express termination provisions meant to terminate other provisions in the contract (such as supply terms), state in the license grant or the “effect of termination” provision that the license grant survives termination of the contract.
Avoid designating other contract provisions as conditions to the license grant unless this is truly the desired result. For example, we often see license grants that are “subject to” or “conditioned upon” the licensee’s compliance with all other provisions of the contract, even though the parties do not intend for the license to extinguish if the licensee fails to comply with certain non-material provisions in the contract (such as the notice provision).

We hope this practice note helps you understand the potential consequences of including (or failing to include) express provisions regarding revocability and terminability (and the interplay between the two concepts) in your licenses and how best to use these terms to achieve the results you desire.

If you have any questions regarding this update, please contact the Sidley lawyer with whom you usually work. If you would like to receive the full version of this alert with footnotes, please contact:

Jeffrey Rothstein

jrothstein@sidley.com Glenn Nash

gnash@sidley.comStephen Fronk

sfronk@sidley.com Technology Transactions Practice of Sidley Austin LLP

The lawyers in our Technology Transactions practice build long term relationships with clients through an intimate understanding of their business and industry needs. We work with our clients to prioritize their business strategies around intellectual property and technology, and we help devise practical solutions to accomplish their goals. Lawyers in this practice combine extensive industry experience in intellectual property and commercial matters with interdisciplinary legal and academic backgrounds to structure, draft and negotiate a wide variety of transactions involving technology, related intellectual property rights and complex commercial matters.

Sidley Austin provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship.

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