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.
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.
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.
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.
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.
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.
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.
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.
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.
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:
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).
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.
About our expert
Jill is a Partner and Head of Intellectual Property at Harper James and has specialised in intellectual property protection, dispute resolution, brand and reputation management for over 20 years, having qualified as a intellectual property solicitor in 1994. Prior to joining Harper James she was a Partner with Blake Morgan who she joined in 1999.
