If you own 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, such as a building, as well as intellectual property, such as patents, copyright, designs or trade marks. In this guide, we discuss what an intellectual property licensing agreement is, the benefits of licensing your intellectual property rights, and how to structure a licensing agreement.
If you are reading this because you need clarity on how intellectual property licensing agreements work, our intellectual property solicitors can help. We will advise you on drafting, reviewing, and negotiating a licensing agreement that protect your rights, generates value for your business, and minimises risk, whether you are granting or receiving rights.
Contents:
- What types of intellectual property can be licensed?
- What to include in your intellectual property licensing agreement
- Who can enforce the licensed intellectual property?
- How are royalties calculated in intellectual property licensing agreements?
- Sublicensing intellectual property rights
- Can an intellectual property licence be assigned or transferred?
- How can disputes under an intellectual property licence be resolved?
- Summary
What types 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 dealing with licensing arrangements, and ensuring your licence satisfies the applicable requirements is required.
For example, licences of standards-essential patents, common in the mobile telecommunications industry and elsewhere, 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, open-source, and Creative Commons licences, often take a radically different approach to exploiting copyright from that of traditional licensing arrangements.
Working with experienced intellectual property solicitors like ours is the safest and most efficient way of making sure that the licence you enter into meets the criteria, mirrors your agreement, and protects your position.
What to include in your intellectual property licensing agreement
Licensing deals take many forms, and what you should include in your agreement depends on the nature of the rights involved and the terms agreed by the parties. That said, there are some common themes that arise in many licensing arrangements. They include:
Type of licence
You need to decide whether the licence will 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 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.
Payment method
The parties need to decide how the licensee will pay for the right to use the intellectual property. Will they pay periodic royalties, a lump sum, or both? How often will royalties be paid? The licensor might not want to wait until an anniversary date comes around, but monthly payments might be onerous for the licensee. Licensors usually want the right to send in auditors to check that the licensee has been properly accounting to them for the royalties due, and the mechanisms of those audit rights must also be considered.
Whatever payment solution you choose, the parties must agree on the amount. Not surprisingly, the licensor often thinks the rate should be much higher than the licensee is prepared to pay. There are no rules about what would be appropriate; it will come down to what you can negotiate, which is why having experienced negotiators like our intellectual property solicitors on your side can make a real difference.
Start date and duration of the licence
Any ambiguity in the start and end date, can mean that the licensor unexpectedly loses a valuable income stream prematurely, or the licensee enjoys the rights for less time than it had anticipated.
Most intellectual property licences last for a fixed term, at the end of which the rights revert to the licensor. Where a licence is described as perpetual, there is a risk that the court will deem the arrangement to be an outright assignment, whereupon the licensor loses their rights.
Our intellectual property solicitors routinely prepare intellectual property licences, acting on both sides of the arrangement. We will ensure the document reflects what has been agreed, and that your position is fully protected.
Termination
As with most commercial agreements, your intellectual property licence should include provisions to allow the parties to terminate in specific situations. For example, the licence may provide for termination following a change of control of the licensee, on the expiry of the licensed rights, or if the licensee becomes insolvent. Some licences allow the parties to terminate simply by giving notice to the other. Whatever termination triggers you negotiate, ensuring that they are unambiguously spelt out in the agreement is needed if you want to reduce the risk of costly disputes later.
Territory
The territory of an intellectual property licence defines the precise geographical boundaries in which the licensee is permitted to exploit the intellectual property rights. Properly defining this scope is good practice if you want to ensure it matches the business strategy and complies with local laws.
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 decides not to do so, and there may be situations where the licensor sees no advantage in spending money on litigation.
To avoid issues down the line, your license should contain clauses dealing with who has the right, obligation, or standing to sue third parties for infringement.
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.
How are royalties calculated in intellectual property licensing agreements?
Licence payments can be by way of fixed fee, royalties, or both. A hybrid model is the most common structure, whereby the licensee pays an upfront fee followed by ongoing royalties.
Although the level of fixed fee and royalties will ultimately be what the parties agree on, some general principles can influence the licence’s value. They include:
- The extent of the protection there is for the licensed intellectual property rights;
- Whether any trade marks are included in the licence, and 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, and how great the barriers are 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 its likely profitability.
Sublicensing intellectual property rights
Sublicensing is only permitted if the head licence permits. The parties should consider the issue at the negotiation stage and ensure that their agreement is clearly recorded in the licence.
It might be to the licensor’s advantage to allow sub-licensing. For example, 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. On the other hand, 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.
If a sub-licence is going to be granted, you should 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 an intellectual property licence be assigned or transferred?
Whether an intellectual property licence can be assigned or transferred will depend on the terms of the agreement. In many cases, licences are personal to the licensee, meaning they cannot be transferred to another party without the licensor’s consent.
From a licensor’s perspective, this restriction is important. It allows them to retain control over who is using their intellectual property and protects their brand value and reputation. Without such controls, there is a risk that the intellectual property rights could end up in the hands of a third party who was never originally vetted or approved.
For licensees, the ability to assign or transfer a licence can be commercially important, particularly in the context of a business sale, group restructuring or investment. If the licence cannot be transferred, this could affect the value of the business or create complications during a transaction.
A well drafted agreement will address this issue clearly. It may prohibit assignment entirely, allow it with prior written consent (often not to be unreasonably withheld), or permit transfers in specific situations, such as to a group company or as part of a sale of the business.
How can disputes under an intellectual property licence be resolved?
Disputes can arise for a number of reasons, including disagreements over scope of use, payment of royalties, ownership of rights or alleged misuse of the intellectual property. A well-drafted licence agreement should set out a clear process for resolving these issues. Most agreements include a dispute resolution clause, which typically requires the parties to first attempt to resolve the issue through negotiation. This may involve escalating the matter to senior representatives within each organisation before taking further action.
If a resolution cannot be reached, the agreement may provide for the use of alternative dispute resolution methods, such as mediation or arbitration. Mediation can be a cost-effective and confidential way to resolve disputes without damaging the commercial relationship. Arbitration, while more formal, can offer a binding decision without going through the court system.
In some cases, disputes will need to be resolved through litigation. The agreement should specify which country’s laws apply and which courts have jurisdiction. This is particularly important in cross-border licensing arrangements. Clear dispute resolution provisions help reduce uncertainty, manage costs and ensure that any issues are handled in a structured and predictable way. For businesses, having this clarity in place from the outset can make a significant difference if a dispute arises.
Summary
Intellectual property licensing can be a powerful tool for unlocking the commercial value of your intellectual property, but the strength of any arrangement lies in the detail. A poorly drafted licence can leave rights holders exposed to infringement, loss of control, or unexpected competition law risk, while licensees may find themselves with fewer rights than anticipated.
Taking specialist legal advice before entering into any licensing arrangement is the most effective way to protect your interests and ensure the agreement works for your business in the long term. Our team advises both licensors and licensees across a wide range of sectors on all aspects of intellectual property commercialisation, from heads of terms through to execution and ongoing compliance.
