Key Terms for an Intellectual Property Licensing Agreement
Successful technology licensing occurs only when the negotiator understands thoroughly the benefits that are available to both parties…the goal is to find a good balance of value so that the licence is a “win-win” transaction.
World Intellectual Property Organisation (WIPO), 2015.
What does “licensing” mean?
A licensing agreement is a partnership between the owner of the intellectual property rights and another party who is authorised to use these rights. Simply defined, licensing is granting rights in property without transferring ownership of it. Types of licensing agreements include technology licences, publishing and entertainment licences and trade mark and merchandising licences.
Licensing is a great way of commercialising intellectual property (IP) rights. A ‘license’ grants permission or authority to another person to use the IP rights held in trade marks, designs, patents, or copyright. An IP licence is a form of contract that concerns the exploitation of IP rights and maximisation of the commercial viability of the subject matter that is licensed.
Fundamentally, an effective licensing agreement should cover the following requirements: firstly, the licensor must have ownership of the relevant intellectual property (or control of these) because you cannot grant “licence rights” if you do not own or control these rights; secondly, these intellectual property must be protected by law; thirdly, a licensing agreement must specify what rights with respect to the intellectual property are being granted; and, fourthly, what rights, if any, are being reserved by the licensor.
Licensing allows IP rights owners to capitalise on the investment made in the development of an invention, a work of art, a trade mark and so on. Businesses and start-ups are increasingly using their IP assets as leverage in negotiation for business deals and also to attract joint research and development partnerships.
For those companies that have invested time and money, often years, in developing the technology for a patent, a trade mark, know-how, trade secret, methods and processes, IP licensing is an avenue for securing return on their investment.
IP licensing is complex and involves a wide range of legal issues. This article will introduce you to the fundamental parameters of IP licensing and the nature of the issues that are common to most licensing arrangements
What do you need in a Licensing Agreement?
Subject Matter of The Licence
A licensor of intellectual property rights needs to ask and answer this key question first and foremost: what is being licensed?
The subject matter of the licence could be, for example, a product, a formula, a software program, or new technology in an invention or a trade mark.
A licensor may wish to narrow the definition of what is being licensed, while the licensee may pursue a broad definition of the subject matter in the licensing agreement. A failure to balance the rights of the parties and properly define the subject matter can lead to a dispute between the parties.
In the case of technology or copyright licensing, it is important to determine whether the thing that is licensed is completed or fully developed. If improvements are to be made, the parties need to address how those improvements will be treated in the agreement.
Who owns the IP that underlies the licensed subject matter?
Simple question…or is it?
A licensee will ask the licensor to warrant that the intellectual property in the subject matter belongs to the licensor and that it does not infringe on a third party’s IP rights. This is to safeguard against a a third party later claiming ownership of the licensed IP and consequently IP infringement where the licensor disclaims any responsibility for liability. It is standard practice to specify in the licensing agreement who owns the IP rights attached to the licensed creation or technology, and to back that claim with a warranty.
An IP licensing agreement usually provides that the licensee obtains no ownership interest in the subject matter of the license.
Scope of the Licence
Once the subject matter is identified, parties to the licensing agreement must navigate the exact scope of the licence.
What rights does the licence offer to the licensee?
An IP licensing agreement contains a ‘bundle’ of one or more rights granted to the licensee. The parties will need to negotiate specifically what rights are being licensed out of that bundle. To answer this question, ask what can the licensee do with the IP?
This ‘bundle’ may include, but is not limited to, the following rights in relation to the subject matter being licensed:
- to reproduce;
- to use;
- to modify;
- to create derivative works;
- to sub-license or sub-contract;
- to transfer or assign;
- to distribute or sell; and
- to improve.
The licence should clearly list the rights granted and not granted to the licensee. For example, although Microsoft grants you the right to use its software when you pay the licence fee to Microsoft, this license does not necessarily allow you to resell, redistribute or sub-licence your right to use to a third-party.
Are the rights exclusive or non-exclusive?
A licence should always specify whether the licensee is the only person who has the right to deal with the licensed subject matter. The exclusivity issue is often a complex one where parties’ expectations might differ.
For a licensor, an exclusive licence is not desirable as it restricts the licensor’s freedom to contract with other interested parties. In this case, if the licensor puts all its “eggs in one basket” and the licensee fails to commercialise the IP successfully, the licensor might risk a substantial financial loss.
If exclusive rights are granted, the licensor may wish to impose minimum performance standards on the licensee to guarantee that a certain level of sales are met or other resources are devoted to the exploitation of the IP, in return for that exclusivity.
Are the rights granted worldwide or limited to a designated region?
All licensing agreements must specify in what country or region the licensed rights apply. IP licensing agreements should define the territory that falls within the terms of the licence and whether the licence is exclusive or not in respect of each of those territories. Where products are distributed on the Internet or by electronic means, the agreement may expressly allow the licensee to distribute the products in electronic form and on the Internet with no geographical boundary.
What is the term of the agreement?
A licensing agreement can last indefinitely with renewal options subject to conditions or for a definite period agreed between the parties. The commencement date, duration, renewals and extensions, conditions for renewal, procedures for providing notice of intent to renew, grounds for termination and consequences of termination should be clearly set out.
Licence Fees and Payment Terms
This is one of the most contentious and complex issues of IP licensing as parties approach the question of licence fee valuation differently. Licence fees can be negotiated in many difference ways, including: a) an advance (an initial amount paid in lump sum or in instalments); and b) royalties (payments made at regular intervals).
Method of payments and royalty formulas depend on the value of the IP in the licence taking into account all other related transactions such as manufacturing and marketing costs, expected royalties related to field, fees incurred in obtaining compulsory licences to exploit the IP, or import/export tariffs.
Warranties and Indemnities
Before executing a licensing agreement, the parties need to consider the following issues:
- Who will be responsible for third party claims resulting from a party’s negligence or direct/indirect breach of the agreement?
- Who will be responsible for a defect or error in the subject matter?
- What is the scope and operation of indemnity clauses applied to each party?
The extent to which each party warrants and indemnifies the other party is a matter of negotiation. There is no set answer to these questions. A licensor would want to limit its warranties to the licensee as much as possible whereas the licensee would aim to obtain exclude its liability to a third party as much as possible. A licence agreement usually contains warranties from each party that it has the legal capacity to enter into the agreement and that no claims have been made against it by entering into the agreement.
Because the issues related to warranties and indemnities are legally complex, you should consult an expert to assess the financial risk attached to each warranty and indemnity.
Confidentiality Agreement (IP Protection)
Setting out confidentiality obligations of both parties is particularly important to protect a business’ goodwill and IP values. A licensor would expect that the licensee, its employees and agents protect the confidential nature of the subject matter of the licence and related communications.
The confidentiality clause obliges one or both parties not to use or disclose confidential information during the term of the agreement such as technical prototypes, manuals, formulae, trade secrets, methods, specifications, designs, scripts, experimental data and other technical information. The conditions concerning confidentiality obligations are often industry-based and often survive termination of the IP licence.
Key Take Away Points
- IP ownership gives a legal right to the IP owner to include or exclude others from using that IP for commercialisation.
- The objective of a licence grant to use IP is find good balance of value so that each party benefits from the licensing arrangement.
- Understanding the basics of an IP licensing agreement is a prerequisite to undertaking any means of IP exploitation and commercialisation i.e. an understanding of the vital elements that make up the structure of a well drafted licensing agreement.
- The vital elements include the subject matter (what is being licensed?), the scope (what can you do with it?), financials (what value is it?) and improvements or upgrades (what will happen with it in the future?)
- IP licensing involves a complex set of terms. It is essential for each party to define the commercial objectives and key provisions regarding the scope of the licence, financial terms, warranties and indemnities, and confidentiality obligations.
- Successful IP licensing occurs when each party brings value to the relationship so there is a “win-win” outcome.
At W3IP Law, we specialise in licensing agreements. If you have any questions about technology law and intellectual property, please call us on 1300 776 614 for a chat about your legal requirements.
Disclaimer. The material in this post represents general information only and should not be taken to be legal advice.