Use of “Paid-Up” and “Royalty-Free” in Granting Language

Yesterday I revisited in this post use of sole and exclusive in granting language in a license agreement. Well, we’re not done, because yesterday I saw the following in a contract:

Acme hereby grants Widgetco an irrevocable, worldwide, paid up, royalty-free, exclusive license …

That caused me to wonder about paid-up (it’s a phrasal adjective, so I’d use a hyphen) and royalty-free. So of course I asked the great Mark Anderson (also known as @IPDraughts) what he thought about those terms. This is what he said:

I have always found “paid up, royalty-free” an odd one. I have assumed without knowing that the paid up bit refers to lump sum payments that are not running royalties, but never really understood why US parties thought it necessary to say it. I have to confess that over time I have become inured to it and might have sometimes used this formula, for want of thinking up a better one.

Mark is a prominent IP lawyer, so he has every incentive not to be annoying. Me, I’m under no such constraints, so I permit myself to suggest that paid-up and royalty-free serve no purpose. I say get rid of them.

Other elements in the granting-language litany are unobjectionable. But paid-up and royalty-free simply echo, or fail to echo, what’s accomplished elsewhere in the license agreement.

Regarding paid-up, if the licensee is required to pay anything up-front for the license, that would be specified in the contract, so it would be redundant to say paid-up. (Incidentally, the variant fully paid-up simply add pointless rhetorical emphasis.) If the licensee isn’t required to pay anything, it would be misleading to say paid-up, and it would be redundant to say something like no-fee—the lack of a fee speaks for itself.

Similarly, if there’s a royalty (which is different from an up-front payment), that would be specified in the license agreement. If the licensee isn’t required to pay a royalty, there’s no need to say so, just as there’s no need to say that the licensee won’t be required to face west and hum the Marseillaise on each anniversary of the date of the license agreement.

(By the way, for some general thoughts on granting language, see MSCD 3.31–43, raw materials for which can be found in this post and this post.)

About the author

Ken Adams is the leading authority on how to say clearly whatever you want to say in a contract. He’s author of A Manual of Style for Contract Drafting, and he offers online and in-person training around the world. He’s also chief content officer of LegalSifter, Inc., a company that combines artificial intelligence and expertise to assist with review of contracts.

13 thoughts on “Use of “Paid-Up” and “Royalty-Free” in Granting Language”

  1. This opens up the old debate over whether the license itself is its own being separate and apart from the contract (the contract creating it but once created it exists on its own merits).
    First, I would tend to agree that within the license grant sentence itself I cannot fathom a good reason to repeat paid-up and royalty free. And to me at least, paid-up seems jargony and thus lends itself to being subjected to interpreting that was not intended (exacerbated by the redundancy and the potential for a judge to presume that there is no redundancy and therefore paid-up and royalty free must mean two different things, leading to who knows what).
    Second, I am inclined to include the term royalty free in the license grant, as I believe there is merit to the notion that the license itself, once created by the contract, has its own existence separate from the contract. (Of course, how I might play this could depend on whether I’m the licensor or the licensee, as you’ll see that my scheme leads to the licensee having a good deal of leverage.)
    If the license grant creates an asset on its own standing (the ‘license’) apart from the contract, that means that the license would survive even in the face of a contract breach and subsequent termination of the contract. The licensee could conceivably be subject to contract remedies while the license survives untouched. That might be important, for instance, where termination of the license would cause material harm to the licensee far outweighing the reasonable remedies available to the licensor under contract law. (And, you don’t want to depend on the court deciding what’s too strong of a remedy.) (Of course, there’s nothing stopping the parties from defining in the license granting contract a set of circumstances and processes that WOULD allow the licensor to terminate an otherwise seemingly non-terminable license grant — But that should be done on its own versus being implied by magic words in the license grant, which I would believe comports with Adamsian Principles.) Further, that notion follows along with the US Bankruptcy Statute’s concepts of the survival of the license even in light of the right of the debtor/licensor to otherwise reject the contract under Bankruptcy § 365(n) (which admittedly is not all that doctrinally clear, but I think the economic result is the same).
    (Counterpoint to my point, just to toss a bone out there — Maybe one achieves the same purpose by skipping over ‘royalty free’ and simply calling the license ‘irrevocable’, which may have broader powers than simply dealing with the money issue. That could make it difficult to provide for an out clause to terminate in the event of some egregious act on the part of the licensee though, so it may provide too much power to the licensee.)

    • Ah, a Michael Fleming comment! How 2007! :-)

      Thank you for the context, but I still don’t see the need to say “Got not royalties here!” We know there are no royalties because the license agreement says nothing about royalties.

      • But to do that would require that the reader of the grant go to the contract! It would not serve my purpose, which is that the grant should stand on its own, and have no need to refer outside of itself.

        • I have some sympathy with the notion of a license as a property unto itself. But the fact is that the license is created by the license agreement; nothing else evidences it. So anyone who wants to know what the license consists of has to consult the contract.

          For that reason alone, the idea of granting language somehow having independent life doesn’t make sense.

          So says the licensing dilettante …

          • Maybe I should just double-down on this idea and ask why we bury the license grant in the contract at all? There’s plenty of precedent for the idea that we’d take the license grant and make it a self-contained statement of grant, framed in some manner as a unilateral act from licensor to licensee, requiring no reference at all to the body of the commercial terms it was sold under. Then, have that grant as an exhibit to the commercial agreement, in which the buyer agrees to pay the seller for the right to receive the grant in Exhibit X. Then, we would solely (and exclusively… ;) refer to Exhibit X to determine the rights each party has as to the described IP. Much of this confusion seems to stem from when, out of some sense of convenience or trying to shorten the contract, we try to mix one document with both commercial aspects and IP aspects and presume that it will be clear what was intended. I think it’s pretty clear that that presumption is not always well-founded. Certainly the conclusion that the parties intended regular contract remedies to apply to the ongoing existence or exercise of the grant is not at all fair to jump to.

  2. “Other elements in the granting-language litany are unobjectionable…” Well, *you* might say such a thing, but I couldn’t possibly…concur.

    Particularly in light of Michael Fleming’s remarks about “irrevocable,” and its relationship to the licensor’s remedies if the licensee breaks the contract, I think all the stock license-granting terms are fair targets for obloquy.

    One of the few places, if I recall correctly, that MSCD gives a pass to the “subject to the terms and conditions of this agreement” phrase, is in license granting clauses, where certain types of events, states of being and activities are deemed “conditions” *to* the license grant. As a licensor one wants to say that the licensee can exercise the licensed item (usually IP of one type or another) subject to the conditions, so that if a condition fails, the license does as well. Therefore, if the licensee doesn’t pay, either a license fee or a royalty, however the agreement structures it, then among the things the licensor wants is that the licensee not be able to use the licensed IP (I understand the potential fall-out in bankruptcy, but parties should think about these issues consciously and draft to them specifically). Ditto if the licensee violates the specific license restrictions, typically about modifying, decompiling, reverse-engineering, use outside the licensed field of use, and so forth. For that reason I often focus a gimlet eye on “irrevocable” and hedge it in with things like “during the term of the agreement” and “subject to the license conditions,” etc. Also, if there’s a blanket lead-in to the license grant, such as “subject to the terms of this agreement…” then it’s really not meaningful, and it could be mischievously misleading, to say that the license is irrevocable.

    For the record, I agree with you about “paid-up” and “royalty-free,” among other reasons because the drafter should be careful not to write that thoughtlessly if there really is a fee or royalty payable!

  3. I see “paid-up and royalty-free” all the time in employee invention assignment agreements. Are they redundant? Probably, as the agreement states that the employment serves as the entire consideration for the assignment. Do they also expressly cut off two avenues of attack from a disgruntled, litigious former employee? Probably. But hey, I’m also in California where courts often seem to be looking for reasons to stick it to an employer.

  4. Drop “royalty free”? I’m a commercial licensing guy not a lawyer, but there is no way I am signing a deal that is supposed to be royalty-free unless the language says so explicitly — in one way or another. Call it a case of “my [irrational] client insists” if you must. But I agree that “paid up, royalty free” makes no sense and the “paid up” should be deleted.

    • The notion is that paid-up refers to up-front payment and royalty-free refers to royalties, obviously enough. So they’re different.

      If lack of anything about royalties in a contract isn’t enough to make you comfortable that there are no royalties, to what extent is silence not enough to provide comfort on other issues?

      • Comfort on commercial issues, or comfort on legal issues? When it comes to a fundamental commercial issue that can be captured by a mere two words whose meaning is unambiguous, there’s no reason to omit them. Price is a fundamental commercial term that would appear on any non-binding term sheet when managements of two parties characterize the deal. My approach is that every such commercial term appears in the contract somewhere. If the commercial guys think it’s worth mentioning, the legal guys should think it’s worth mentioning too (unless there is a compelling reason not to). As for legal terms, no one wants a license agreement that tries to anticipate every eventuality and swells to 50-100 pages in the process. Sometimes silence is golden if not pragmatic. But basic commercial terms that the CEO, CFO, etc would expect to see in the deal when they read the contract? Such terms go in and stay in. Let’s be practical here.

  5. I’m struggling with the idea that if there were money to be paid for a license, it would be specified in the contract, and that the absence of such provisions in the contract means that no money is owed. Therefore, terms such as “paid-up” and “royalty-free” are superfluous.

    I cannot get past the risk of implied-in-fact contracts or equivalent claims where something of value is granted with the expectation of getting paid. Apart from its application in the entertainment industry, I see it all the time in transactions between hospitals and vendors and hospitals and sponsor of clinical trials.

    A vendor provides a piece of expensive equipment for use, at no cost, in evaluating the device. You can be sure that “at no cost” is clearly stated in the agreement. Clinical trials are redolent with IP issues, and if the investigator comes up with an improvement or invention in connection with the protocol, often the sponsor gets the ownership of that improvement or invention, but the hospital retains a paid-up, royalty-free license to use the invention in research, education, or patient care.

    The very last thing you want is for there to be any doubt whatsoever about economic issues associated with the license to use potentially valuable IP. I do not want to be the fellow trying to explain to my hospital client that the absence of economic terms in the agreement that contains the license means that the sponsor’s claim for “customary and reasonable” terms were not implied in the transaction and that they should fire up their expensive litigators at Gibson to go fight it out with Big Pharma merely because I decided to shorten the 34 page agreement by two hyphenated terms.

    if I am conveying to you the title to my 1965 Mustang, I would bet that would prefer/insist that we state that the transaction is for $0 if that’s our agreement.

    – Krumhorn

    • I suggest that by mixing licenses and other kinds of transactions, you’re mixing apples and oranges. But I’m about to write an article about this stuff, so your comment is timely and provides fodder for reflection.


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