Key Terms in Ethanol Process Licensing

By Douglas L. Batey | June 05, 2007
Most ethanol plant process technology is acquired through a license from an engineering company. A license enables the plant developer to quickly acquire the detailed know-how and legal rights to build and efficiently operate the plant.

A license is a contract between the engineering company (the Licensor) and the plant developer allowing the developer to use technology that otherwise wouldn't be legally available. The license is essentially a promise not to sue for what would otherwise be an infringement of the Licensor's trade secrets and in some its cases patents. This article is a look at some of the basic terms related to ethanol process licensing:

There are four main issues that the Licensor and the developer usually focus on, plus any other points specific to the particular plant:

The rights granted to the plant owner
The license fees
The limitations on the plant owner
The obligations of the Licensor

Granting clause
The granting clause describes the rights given to the developer. A typical example would be: "Licensor grants to developer a non-exclusive, perpetual license to use the licensed patents and technical information, without the right to sublicense such rights to others, for the following purposes: construction of the plant; operation of the plant; maintenance, modification and optimization or enhancement of the plant; and selling or otherwise transferring worldwide all products of the plant."

This example only allows the owner to use the technology in a particular plant, which is typical of ethanol process licenses.

License fees
There are many ways in which license fees can be charged, such as one-time payments, milestone payments or royalties based on product sales. In most ethanol plant licenses, royalties aren't used and the license fee is a fixed amount. Sometimes it's paid in installments over the construction period, or on signing of the contract.

Limitations
Ethanol plant licenses always limit how the plant owner can use the technology. Some associated terms include:

Site license: Ethanol process licenses usually limit the license to a particular plant and prohibit expanding the plant capacity beyond specified limits.
Confidentiality: Ethanol process licenses are primarily trade secret licenses and almost always have strict non-disclosure provisions. Some Licensors desire to limit the owner's ability to disclose the technology to consultants working on the plant. Be carefuloverly strict limits on using other consultants may force the owner to use only the Licensor for future work on the plant. The confidentiality restrictions should provide for exceptions surrounding information in the public domain, legally received from third parties or independently developed by the receiving party.
Improvements: The owner shouldn't be required to provide its process improvements back to the Licensor. Since the license is usually non-exclusive, a grant of improvements back to the Licensor would allow the Licensor to then license those improvements out to other, competitive ethanol plants.
Exclusivity or non-exclusivity: Ethanol plant licenses are always non-exclusive.
Term of license: Most ethanol plant licenses are perpetual. Trade secrets can have an indefinite lifespan, and ethanol plants have long useful lives.
License termination: Licensors often want the right to terminate the license if the plant owner breaches the license and fails to cure after notice of the breach. To protect its investment, the owner should insist that the Licensor not have a termination right even if there is a breach. The Licensor would still have the right to sue for damages in the event of the owner's breach.

Licensor's obligations
The license should spell out the Licensor's deliverables, such as manuals and documentation, training, performance guarantees, and involvement in the construction and initial operation of the plant. The Licensor should be asked to defend and indemnify the owner against any third-party claims that the licensed technology infringes the third party's intellectual property.

Douglas L. Batey is a principal at Stoel Rives LLP. His practice includes mergers and acquisitions, corporate, securities and commercial law, and licensing and distribution of technology and intellectual property. Reach Batey at dlbatey@stoel.com or (206) 386-7679.