Technology Licensing Agreements: Liquidated Damage Clauses and prejudgment interest

Liquidated damage clauses are a common feature of technology licensing agreements. These provisions specify a predetermined amount of damages to be paid in the event of a breach. They offer predictability and eliminate exposure to consequential damages.

It is well-known that liquidated damage clauses must be carefully drafted to ensure enforceability. But skilled attorneys also consider specifying interest in licensing agreements.

In the context of technology licensing agreements, liquidated damages are perhaps best-suited to protect a licensor in the event of failure of licensed technology. For example, if a complex, mission-critical piece of software fails, the licensor will want to protect itself from damages such as licensee’s data loss, lost revenue, damage to reputation, or lost market share. Often, through the liquidated damage clause, the licensor will attempt to limit its damages to actual license fees paid by the licensor.

But because the liquidated damages amounts are typically not trivial, when the agreements are negotiated, the parties should also consider prejudgment interest.

Many technology licensing agreements are governed by California law, and California Civil Code §3287 allows prejudgment interest when the amount of damages are “certain, or capable of being made certain by calculation, and the right to recover which is vested in the person upon a particular day.” Therefore, a properly-drafted liquidate damage clause may fall within this statute. Furthermore, California Civil Code §3289 states that when a contract specifies an interest rate, the plaintiff is entitled to prejudgment interest at that rate, and when the contract is silent, then prejudgment interest shall accrue at 10% per year.

It goes without saying that the party that would be obligated to pay the liquidated damages wants to protect itself by negotiating a very low prejudgment interest rate, or, ideally, specify no interest at all. On the other hand, the party receiving the damages would will want to negotiate the maximum possible, while also being wary of California’s usury laws.

Therefore, skilled attorneys should be cognizant, not only of the pitfalls that might make a liquidated damage clause unenforceable, but also of the effect of liquidated damage clauses on prejudgment interest.

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Saman Taherian

Lapin & Taherian

Attorneys At Law