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What a Company Buys with a License and What It Does Not

A license is an authorization to use someone else's intellectual property, not a purchase of it. The licensor remains the owner of the brand, patent, software, or know-how, and the licensee receives the right to use them to the extent agreed upon by the parties. Under Czech legislation, the law describes a license as an authorization to exercise intellectual property rights in a limited or unlimited scope, usually for consideration (Section 2358 of the Civil Code). For a company, this leads to the first decision: does it want to own the asset, or just use it?

The answer to this question determines the price, accounting treatment, and what remains with the company after the cooperation ends. Anyone who merely licenses a brand or technology builds on someone else's asset. A production line, distribution network, or an entire product line may then depend on an agreement that the other party can terminate one day. Therefore, during due diligence, acquiring companies examine how long licenses last, how they can be terminated, and what happens in the event of a change of ownership.

In practice, four types of assets are licensed, and each has different rules. A trademark protects a brand for specific products and services. A patent protects a technical solution for a limited period. Software and other copyrighted works are protected by the Copyright Act together with the Civil Code. Know-how has no registry: under Czech legislation, the law protects it as a trade secret as long as the company keeps it confidential, and it is additionally protected by contract. An agreement that mixes these layers into a single sentence will not resolve a dispute over what exactly the licensee is permitted to do.

Furthermore, with software, licensing often overlaps with custom development. The difference between when a company buys a work and when it only receives a right to use it is discussed in the article on copyright protection of software and license agreements. For company management, it is essential to note that ordering development without licensing arrangements may not grant the client the rights they expected. Anyone planning to resell or modify the software needs to have this explicitly stated in the contract.

Scope of License: Exclusivity, Territory, Duration, and Sublicenses

In practice, licensing disputes revolve around the scope more often than the price. The parties agree on the remuneration but fail to agree precisely on which products, in which territory, and for how long the license applies. Yet, each of these parameters changes the value of the license for both parties. An exclusive license for the entire country is a different business deal than a non-exclusive license for a single product and region.

Exclusivity must be explicitly stated in writing in the contract; otherwise, the law does not presume it. Without an explicit agreement, it is a non-exclusive license, and the licensor may grant the same authorization to anyone else, including a direct competitor of the licensee. Conversely, an exclusive license prevents the licensor from granting the same license to a third party. Unless the contract explicitly states otherwise, the licensor themselves must also refrain from exercising the right. A license granted by the licensor to a third party without the written consent of the exclusive licensee does not come into existence. However, a previously granted non-exclusive license remains valid.

An exclusive license is a term for a situation where the licensee receives the right to use the subject of protection themselves, and the licensor undertakes not to grant the same license to anyone else. Therefore, the licensee usually pays more for exclusivity, and the licensor, in return, requests a minimum purchase or a minimum license fee. Without such a safeguard, the licensor could end up with an exclusive partner who does not use the brand or technology, while being barred from offering it to anyone else.

For copyrighted works, typically software, graphics, or manuals, the law supplements the scope with presumptions that often surprise companies. Unless otherwise implied by the purpose of the contract, the license is presumed to apply only to the Czech Republic. Furthermore, the duration customary for the given type of work is assumed, but for no longer than one year, along with the customary quantity (§ 2376 of the Civil Code). A company that ordered marketing materials for multiple markets and failed to specify the scope must then dispute with the supplier what the purpose of the contract actually was.

Sublicensing and assignment are two different things. The licensee may grant a sublicense, i.e., pass on part of their authorization, only if the contract allows it. Assigning the entire license to another company is permitted only with the written consent of the licensor. For corporate groups, this leads to a practical rule: if the parent company wants to use the license in its subsidiaries as well, the contract must explicitly allow it. For licenses to AI data and models, similar issues are addressed in the article on licensing terms for AI models and datasets.

License Fee, Audit, and Reporting

The parties can agree on remuneration as a fixed amount, a percentage of revenue, a per-unit fee, or a combination thereof. A fixed amount is easier to monitor, while a percentage of revenue shares the business risk better. If the contract lacks the amount of remuneration or the method of its determination, the contract is still valid if the parties clearly intended a paid license. The licensee then pays the remuneration customary at the time the contract was concluded (Section 2366 of the Civil Code). However, a dispute over what is customary usually cannot be resolved without an expert opinion.

Anyone receiving a percentage of revenue needs visibility into the licensee's numbers. Under Czech legislation, the law grants them the right to inspect accounting records and other documentation necessary to determine the actual remuneration. The licensee must submit regular reports at agreed intervals, and if the contract does not specify, at least once a year. For most licensors, however, an annual report is too infrequent. Therefore, the contract usually stipulates quarterly reporting, the scope and deadlines for audits, and who pays for the auditor if the audit reveals an underpayment.

In its ruling case file no. 23 Cdo 1192/2023, the Supreme Court separated two different rights to information. The right under the Copyright Act serves only against unauthorized use of the work, not to audit how the licensee performs under the license. The contract and statutory rules on auditing and reporting remuneration apply between the licensor and licensee. Therefore, information not covered by these rules, such as an overview of granted sublicenses, must be explicitly agreed upon by the licensor.

The second aspect of remuneration is the minimum. An exclusive licensor wants to ensure that the licensee actually uses the license. Under Czech legislation, the law does not impose this on the licensee unless the duration of the right itself depends on its use, as with a trademark. For copyrighted works, the author may withdraw from the contract or restrict the license if the licensee does not use the exclusive license at all, but only after a fruitless demand and no sooner than after two years. Therefore, the contract usually includes a minimum annual fee or volume and the right to convert the license to non-exclusive if the licensee fails to meet the minimum.

Brand Licensing: Quality, Use, and Registration

For a brand owner, licensing is a way to expand sales without their own investment. At the same time, however, they risk the licensee damaging the brand with inferior quality or using it outside the agreed scope. The Trademark Act addresses this with a special rule. The owner can assert trademark rights against the licensee in the same way as against an infringer. This applies if the licensee breaches the contract regarding duration, the form of the trademark, the scope of products, territory, or quality (Section 18 of the Trademark Act).

Therefore, a brand agreement must precisely describe the form of the brand, products, territory, and quality requirements. The more precise the description, the easier it is for the brand owner to intervene if the licensee exceeds the agreement. A generic phrase like "in accordance with the licensor's standards" without an attached appendix of standards is weak in a dispute. The contract should also include the right to inspect products, approve packaging and advertising, and prohibit the sale of goods that do not meet the requirements. Without these tools, the owner has no way to enforce quality.

Use of the trademark by the licensee counts as use by the owner. This is essential for the owner because a trademark that has not been properly used by anyone for five years can be revoked by the Industrial Property Office upon a third party's request. A well-functioning license thus protects the trademark from revocation. However, the owner should request ongoing proof of use in the contract so they can present it in any potential proceedings.

A license to a Czech trademark becomes effective against third parties only upon registration in the registry, and either party may apply for registration. The same generally applies to licenses for industrial property registered in a public register, and therefore, an agreement intended for registration must be in writing. For a European Union trademark, the registration of the license and its effects are governed by EU regulations. Decisions on registration and quality control depend mainly on who will defend the brand and how high the risk of confusion is. Therefore, the Czech legal team at ARROWS law firm assesses these issues individually for each brand before the agreement is signed.

Technology and Know-How Licensing

A patent license differs from a trademark license in one essential point. It must always be in writing, whether exclusive or not, and it is effective against third parties only upon registration in the patent registry (Section 14 of the Patent Act). However, with technologies, a license rarely concerns only a patent. A manufacturer usually also needs drawings, formulas, machine settings, and the experience of the people who developed the technology.

Without know-how, patented technology often cannot be put into operation. Know-how is a body of non-public technical and commercial knowledge that is valuable to a company precisely because competitors do not have it. Under Czech legislation, the law protects it as a trade secret if it meets the legal criteria, including that the owner keeps it confidential in an appropriate manner. Unlike a patent, know-how has no registry or fixed period of protection. Once it becomes generally known, statutory protection ends and the value of the license drops sharply. What happens to the remuneration then must be specified in the contract.

The provider of know-how must describe what is being transferred in the contract and bind the licensee to confidentiality. Although the law requires the licensee to keep documents and communications from the provider confidential and to return the documents upon termination of the license, this default rule is insufficient if the company transfers know-how in multiple stages or shares it with subcontractors. Therefore, the contract usually contains a list of transferred documents, the scope of persons with access, and rules for handling know-how within the licensee's own systems.

Improvements are a separate issue. The licensee often modifies and improves the technology, leading to a dispute over who owns the modification. The contract should determine whether the improvements belong to the licensee, whether the licensor receives a license to them, and under what conditions. Similar questions arise with software created using artificial intelligence, as shown in the article on who owns code developed with the help of AI. A broadly formulated obligation to transfer all improvements to the licensor can also have competition law implications.

License agreements between competitors or with territorial restrictions may run afoul of the prohibition on agreements restricting competition. Prohibited provisions are void, and if they cannot be severed from the rest, the entire agreement is void. For technology licenses, the EU block exemption is therefore also verified, specifically Commission Regulation (EU) 2026/877 from May 1, 2026. It does not apply to the licensee's obligation to transfer rights to their own improvements to the licensor or to grant them an exclusive license to them. Such an arrangement is not automatically prohibited, but is assessed individually.

Five Mistakes in License Agreements and What They Cost

The first mistake is a license without a precise description of the subject matter. The contract refers to "the provider's technology" or "group brands" without registration numbers and without an appendix containing know-how. In a dispute, no one can then tell what the licensee is allowed to do and what already constitutes a breach. Remedying this means lengthy evidence-gathering and an uncertain outcome, while business stands still in the meantime. Prevention lies in an appendix listing trademarks, patents, software, and the transferred documentation.

The second mistake is exclusivity agreed upon orally or in informal emails. An exclusive license requires a written form and is invalid without it, unless the parties subsequently cure the defect. An email can satisfy the written form if it captures the content of the agreement and identifies who is acting. However, proving exclusivity from regular correspondence is difficult. A company that invested in marketing believing it was alone in the market may then find out that the licensor sold the same license to a competitor.

The third mistake is an unclear duration: for an indefinite agreement, the law presumes a one-year notice period starting from the end of the month in which the notice was delivered. The fourth mistake is forgetting about the sale of the licensee. Upon the transfer of a business, the license transfers without the licensor's consent unless the contract explicitly reserved it (Section 2365 of the Civil Code). In a share sale, the licensee remains the same company, and the license is not transferred. Anyone who does not want their technology used by a competitor should negotiate consent for license transfer as well as a change of control clause with the right to terminate the agreement.

The fifth mistake is the lack of provisions for the termination of the license. The contract does not address what happens to stocks of branded goods, work in progress, and know-how in the minds of the licensee's employees. Selling off stock without an agreement can constitute trademark infringement. How much such mistakes cost depends on the value of the brand and how quickly the parties reach an agreement. Whether a specific provision holds up depends on the type of licensed right and the market position of the parties, which is why the Czech legal team at ARROWS law firm reviews these issues before signing.

Franchising: License as Part of a Business System

Franchising is a business model in which the franchisor provides the franchisee with an entire proven way of doing business: brand, know-how, supply system, and support. A license to the trademark and know-how is at its core, but not its only content. The Civil Code does not regulate franchising as a distinct contract type. Therefore, the parties construct it from licensing arrangements and other obligations, such as supplies, training, and marketing.

For the franchisor, the main risk is the uniformity of the network; for the franchisee, it is dependence on a single partner. The franchisor needs strict quality standards and control so that a single weak outlet does not damage the entire brand. Conversely, the franchisee invests in equipment and operations and needs assurance that the network will last long enough to yield a return on investment. Therefore, the contract must balance duration, grounds for termination, and the settlement of investments in the event of early termination.

All the rules from the previous chapters apply to franchising, supplemented by additional ones. These include mandatory purchases from the franchisor, territorial exclusivity, recommended prices, and post-term non-compete clauses. These very provisions tend to be the most sensitive from a competition perspective, and their admissibility is determined by current regulations on vertical agreements. A franchisor who dictates retail prices to franchisees, instead of merely recommending them, risks entering into a prohibited agreement.

How to Negotiate and Conclude a License Agreement

How a license is negotiated depends on who needs whom more and how easily the asset can be replaced. The owner of a strong brand or patent dictates the terms, while the owner of a unique distribution network demands exclusivity. Therefore, the Czech legal team at ARROWS law firm first analyzes the negotiating position with the client and only then proposes specific wording. The procedure below describes the usual sequence of steps, which varies depending on the situation.

The first step is to verify that the licensor actually holds the rights to the asset. For trademarks and patents, the licensee should request an extract from the registry; for software, proof of authorship or acquisition of rights. For know-how, they need a description of what is being transferred. The licensee should also verify whether there are any prior licenses or pledges on the asset. A previously granted non-exclusive license remains preserved even after an exclusive license is granted.

The second step is a term sheet with the main parameters: subject of the license, exclusivity, territory, duration, remuneration, and minimums. The business deal is decided on these points, and the legal text is meant to capture them precisely. The third step is the contract itself with appendices, such as the list of rights, quality standards, and a breakdown of the transferred know-how. The fourth step is registering the license in the registry, if the parties so desire, and transferring the documentation, which the licensor is required by law to hand over without undue delay.

The fifth step is managing the license after signing. Someone in the company must monitor reporting deadlines, quality controls, and trademark and patent renewals. The licensor must maintain their right during the term of the license if its nature so requires, typically by paying maintenance fees. If the licensee discovers that a third party is infringing on the licensed right, they must inform the licensor without undue delay, and the licensor must provide cooperation for protection.

Risks of a License Agreement for Both Licensor and Licensee

Summary for Owners and Management

A license agreement determines who can use a brand, technology, or know-how, how they can use it, and what remains with the company after the cooperation ends. This article has shown that while the law will supplement exclusivity, scope, and notice periods for the parties, its default rules often do not correspond to what a company commercially needs. A written form, precise subject matter, rules for remuneration, and the termination of the license are fundamental.

For company management, a license is an asset decision, not just a contractual formality. The licensor expands their market without their own investment but risks brand quality and know-how leakage. The licensee builds their business on someone else's asset and needs assurance that they will not lose it at the moment they have invested the most in it. Anyone who postpones these issues until after signing will end up resolving them in a dispute and from a weaker negotiating position.

Furthermore, anyone licensing multiple assets or licensing within a corporate group needs a unified structure. It must be decided which company owns the asset, who pays the license fees, and how the licenses behave when selling part of the group. These issues also have a tax dimension that needs to be assessed before the contracts are signed.

The Czech legal team at ARROWS law firm prepares and reviews license agreements for brands, technologies, software, and know-how. We negotiate them with the counterparty and assess their competition and tax implications. Write to us at consultation@arws.cz or take a look at our contracts and negotiations service.