If you have 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. In fact, the way to make money from your intellectual property is often to allow someone else to exploit it and to pay you for the privilege. The legal form for an arrangement like this is an intellectual property licence.
What is an intellectual property licensing agreement?
Many different types of agreement 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 IP owners
One reason why IP owners licence others to use their IP, then, is simply that others have the skills and resources to exploit the IP – 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 right 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 IP licensing agreement
There is no universal model licensing agreement. Licensing deals take so many forms, but there are some elements that our IP licensing lawyers are likely to include in most if not all licensing agreements.
- To start with, you need to decide whether it is to be an exclusive, non exclusive or 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 IP yourself. An exclusive licence means that only the licensee will be able to use the IP 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 IP yourself.
- Payments - is the licensee going to pay you periodic royalties, or a lump sum, or both? Whichever 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 IP 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 round, 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 IP will usually expire at some stage, and you can’t expect to earn royalties for the use of, in effect, nothing, although you might introduce improvements that justify a longer licence. During the lifetime of the IP, 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. Should the breaching party have a short period in which to put things right (after all, tearing up a licence and going to find a new licensee is not something to do lightly)? Do you want to be able to terminate for convenience as well, and if so, what notice period do you want? And should the other party also be able to terminate on notice?
- 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 could not transfer the IP away from under you; or creating a security interest in your favour; or giving 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 IP 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.
- Warranties: the licensee will expect to see a warranty to the effect that the IP licensed under the agreement is currently in force – all renewal fees have been paid. A warranty about the validity of a patent is often resisted or made conditional, as there may be reasons for the IP to be invalid of which the licensor is completely unaware: however, a warranty limited to the licensor’s actual knowledge might be more reasonable.
- Indemnities are important in licensing deals, for both parties. The licensor is going to be concerned to cover the situation where the licensee goes outside the scope of the licence and infringes someone else’s rights, landing the licensor itself in trouble. This is a situation that calls for an indemnity under which the licensee agrees to cover the licensor’s liability.
- Who can enforce the licensed IP? Primarily, you’d expect the owner of the IP 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). The law as to whether a licensee can step in to protect the IP, and how, is usually set out in some detail in each country’s statutes, and this is one of the few areas where the parties tend to over-negotiate lengthy private arrangements forgetting that the rules on locus standi are not ones they can set. We can advise as to who will be able to sue for each right on a case by case basis.
As you can see there are many practical legal considerations you must be aware of. The biggest is getting someone to say yes. When he invented the twin-cyclone vacuum cleaner, James Dyson tried to interest several existing vacuum-cleaner makers in taking a licence to use his new patents. It must have seemed a better choice to him than setting up a factory, hiring a workforce, sourcing the materials and components he would need, doing all the advertising and marketing. He already had a track record as an inventor, so why not continue to play to his strengths and get an established manufacturer to exploit the new technology? But the new technology was so challenging to the vacuum-cleaner industry that no established manufacturer was interested.
If you are able to find someone who will say yes, the terms on they agree will be crucial. A well drafted licencing 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 licencing agreements on your behalf.
Alternatively, for businesses entering a licencing agreement we can review the terms proposed by the IP rights holder, giving you peace of mind that the terms you agreeing to are fair. If we identify clauses or terms of concern, we will alert you and can if you wish negotiate on your behalf.
IP licences are simple even if the detail can be very complicated – and very common. They cover a wide variety of situations in which someone wants to use someone else’s IP, 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 IP, and our intellectual property lawyers will be happy to assist you with a licence agreement that meets your needs.