If you have a property that you don’t need for your own exclusive use, you can let someone else use it in return for payment. This applies to real property - (a building) or intellectual property (a patent, copyright, a design or a trade mark). One common way to make money from your intellectual property is to allow someone else to exploit it and pay you for the privilege. The legal form for an arrangement like this is an intellectual property licence.
In this guide, our intellectual property solicitors discuss what a intellectual property licensing agreement is, the benefits of licensing your intellectual property rights and how to structure a licensing agreement.
Contents:
- What is an intellectual property licensing agreement?
- Why licensing is an attractive option for intellectual property rights owners
- What type of intellectual property can be licensed?
- What to include in your intellectual property licensing agreement
- Sublicensing intellectual property rights
- Can intellectual property licensing agreements be terminated early?
- Termination of an intellectual property licence
- How are royalties calculated in intellectual property licensing agreements?
- Summary
What is an intellectual property licensing agreement?
Many different types of agreements are licences, of one form or another. Publishing agreements and recording contracts are built around licensing terms. Software is licensed to users, and software houses rely on the copyright that protects the code to earn money for them. And the music you listen to online, the websites you visit, in fact just about everything you do in the digital world, is based on licences.
Why licensing is an attractive option for intellectual property rights owners
One reason why intellectual property owners licence intellectual property, is simply that others have the skills and resources to exploit the intellectual property – and the owner can go on creating more instead of worrying about how to make money from what they have. By extension, appointing a licensee in another part of the world might be the most efficient way to get your product into that market – your licensee knows the local market, the language, and the legal requirements.
What type of intellectual property can be licensed?
Copyright, trade marks, patents, registered designs and design rights can all be licensed to others. The statutes that govern each of those rights contain provisions about licensing, although what the legislation gives you is not exactly what you want in a licensing deal so a negotiated licence agreement will usually be needed.
These include licences of standards-essential patents, common in the mobile telecommunications industry and elsewhere, where patented technology has to be used in order to comply with applicable standards, are tightly controlled and must generally be granted on fair, reasonable and non-discriminatory ('FRAND') terms; collective licences, issued by collecting societies that charge royalties on behalf of their members, who may typically be composers or authors; and open-source, copyleft and Creative Commons licences, which take a radically different approach to exploiting copyright from that of traditional licensing arrangements.
What to include in your intellectual property licensing agreement
Licensing deals take so many forms, but there are some elements that our intellectual property lawyers are likely to include in most if not all licensing agreements.
- To start with, you need to decide whether the licence will be an exclusive, non exclusive or a sole licence. A licence is sole if it prevents you from appointing another licensee in the same territory, or for the same field of use, or otherwise in conflict with your licensee’s rights, but leaves open the possibility that you will exploit the intellectual property yourself. An exclusive licence means that only the licensee will be able to use the intellectual property right in the manner set out in the agreement – you will not be able to do so. And of course, a non-exclusive licence means that you can appoint more licensees as well as using the intellectual property yourself.
- Payments - is the licensee going to pay you periodic royalties, a lump sum, or both? Whatever solution you choose, you will both have to agree on the amount. Not surprisingly, the licensor often thinks the rate should be much higher than the licensee is prepared to pay and there are no rules about what would be appropriate. it will come down to what you can negotiate in the end. How innovative or original the intellectual property is will have a bearing on the payments.
- Payment schedule – how often will royalties be due? You might not want to wait until an anniversary date comes around, but monthly payments might be onerous.
- Audit – while you would like to have implicit trust in the licensee, that’s often too much to hope for if you have just met them. Even if you have known them for years, you’ll want to be able to send in your auditors to check that the licensee has been properly accounting to you for the royalties due.
- Start date and duration of the licence – even if the licence runs from the date of signature, that should be set out in so many words, but there may be reasons for delaying the start date or even back-dating it (especially if the licence is being granted as part of a settlement following an infringement). And you don’t always want the licence to last forever: apart from anything else, the intellectual property will usually expire at some stage. During the lifetime of the intellectual property right, you might want to negotiate new terms every so often, even to switch to a new licensee.
- Termination clauses. As with most commercial agreements, there will be provisions to allow both parties to terminate for cause, if the other party is in breach.
- If you are the licensee, you might want to see a clause requiring that a transfer of the rights be subject to the licence, so that the licensee cannot transfer the intellectual property right away from under you; or create a security interest in your favour; or give you an option to purchase the intellectual property; or providing that the licence will become perpetual and royalty-free if the licensor becomes insolvent.
- In which territories can the other party use your intellectual property under the agreement? If you are licensing patents, then there may not be a patent in each territory covered by the licence. If know-how is included, that is not tied to particular territories at all. Often, the purpose of licensing technology to a business in a new country is to take advantage of their local knowledge, but it might be counter-productive to grant a licence for a territory bigger than they can handle.
- Who can enforce the licensed intellectual property? You would expect the owner of the intellectual property right to take any necessary steps to protect it. However, a licensee could be put in a difficult position if the owner decided not to do so, and there may be situations where the licensor sees no advantage in spending money on litigation (perhaps the royalties don’t justify it) but the licensee might see things differently (the profits do justify it).
If you are able to find someone who will licence your intellectual property, the terms on which they agree will be crucial. A well drafted licensing agreement will maximise the return on your investment and will reduce the likelihood of a dispute between you and the other party. For licensors, our intellectual property solicitors can draft bespoke licensing agreements on your behalf.
Alternatively, for businesses entering a licensing agreement, we can review the terms proposed by the intellectual property rights holder, giving you peace of mind that the terms you agree to are fair. If we identify clauses or terms of concern, we will alert you and can if you want us to negotiate the licensing agreement on your behalf.
Sublicensing intellectual property rights
Should the licensee itself be able to grant licences (or, strictly speaking, sub-licences)? There is no fixed answer to this, so it depends on the terms of the licence agreement. It might be to the licensor’s advantage to allow sub-licensing: in a manufacturing deal, if the licence covers the whole EU, the best arrangement might be for the licensee to grant sub-licences in individual Member States. But if the licensor wants to maintain control over the licensing arrangements it might wish to give the licensee manufacturing rights limited to its own country and find manufacturers in other countries to take licences directly.
The best approach is to deal with sub-licensing clearly and expressly. Is it allowed or not? Does the licensor have to approve of the sub-licensee (and must consent not unreasonably be withheld, or delayed)? It’s also common to deal with the parties’ rights to assign the agreement to another company. If the proposed sub-licensee or transferee is a member of the same corporate group as the original party, that’s likely to be much less of a problem for the other party.
If a sub-licence is going to be granted, it is essential to make sure that it does not purport to grant rights that the head licensee does not have. The head licence and the sub-licence must dovetail together, otherwise there will be problems.
Can intellectual property licensing agreements be terminated early?
If the terms of the licence allow early termination, before the term of the licence has expired, then it can be terminated for convenience – as well as for cause, if one of the parties is in breach. If the licence doesn’t say it can be terminated for convenience, it may be that a court would imply a term that it could be terminated by one of the parties giving reasonable notice.
It’s also important to remember that not all licences may be terminated on reasonable notice – in exceptional circumstances a judge might consider that the nature of the agreement means that it cannot be ended by one party giving notice. If you don’t want your licensee to be able to get out of the agreement, you should say so clearly.
Termination of an intellectual property licence
When should a licence terminate, apart from when one of the parties gives notice? To start with, the owner of the licensed intellectual property might want to limit the term of the licence to a certain period – so it can appoint a new licensee once the first licence has expired, and it knows it isn’t going to be stuck with the same licensee forever. In any event, you can’t have a licence that lasts for longer than the licensed intellectual property – once a patent, design or copyright expires there’s nothing to licence. Patent licences usually cover associated knowhow too, and knowhow is protected for as long as it remains secret, so the licence can continue after the patents have expired.
The norm in licence agreements is to include several reasons why the agreement would terminate – automatically, or perhaps at the option of the party that is not at fault. A breach of a term of the agreement is always going to be a reason to terminate, but it is common to allow the party that is in breach a short period in which to cure the breach.
How are royalties calculated in intellectual property licensing agreements?
The value of a licence depends on the strength of protection, the quality of the technology and the market potential. Although the level of royalties, including any initial lump sum payment, will ultimately be what the parties agree on, so there is no hard and fast rule to point to, there are some general principles to bear in mind. And the ratio of any downpayment to future royalties is also an important negotiating point – the bigger the downpayment, the less money there is to spend on exploiting the licence. There’s nothing to say there has to be a downpayment, but licensors will normally want something upfront.
To work out how much the downpayment should be you should consider:
- the extent of the protection there is for the licensed technology
- whether any trade marks are included in the licence, and if they are whether they are recognised in the licensed territory;
- the extent of the exclusivity and territory on offer;
- how much technical content there is in the product (how great are the barriers to entry without access to the licensor’s know-how);
- whether the product is already on the market or the licensee is going to have to bear the costs of developing it; and
- how attractive the product will be in the marketplace, and how profitable it will be.
Royalties are payments related to sales, usually calculated as a percentage of the ex-factory selling price excluding taxes, freight, insurance and other costs. It’s obviously important that the royalty payment is set at a rate that leaves an adequate profit for the licensee. As a rule of thumb, the licensor would look for one-third of the licensee’s net profit (but expressed as a percentage of the sales price).
Summary
Intellectual property licences are simple even if the detail can be very complicated. They cover a wide variety of situations in which someone wants to use someone else’s intellectual property, whether that is a business taking a licence to use another business’s patent a record company or publisher using someone’s copyright work, or someone using a computer program. There are many situations in which you might want to let someone use your intellectual property right, and our intellectual property lawyers will be happy to assist you with a licence agreement that meets your needs.
