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Intellectual Property Licensing: The legal context
Growth of remains strong as the world recovers from the global economic and financial crisis while providing stability to corporate giants. Increasingly companies, whether local or multi-national, are determined to create new opportunities, maximize existing revenue streams and focus on innovation and improvement in order to maintain profitability observes Rohan Raichaudhuri. |
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Introduction
From a legal point of view, intellectual property (“IP”) encompasses softwares, patents, patent disclosures, trade marks and service marks, logos, get-up, trade names, internet domain names, rights in designs, copyright (including rights in computer software) and moral rights, database rights, semi-conductor topography rights, integrated circuit layout design rights, utility models, rights in know-how, inventions, technologies, processes, techniques, methods, designs, drawings, plans, data, specifications, research and development, all copies and tangible embodiments or descriptions of any of the above (in whatever form or medium), rights protecting trade secrets and confidential information, whether registered or unregistered, and all rights or forms of protection, rights of goodwill in or to or otherwise associated with any trade marks, service marks or brands or rights.
In this context it becomes predominantly vital for companies to recognize the true potential of licensing IP, the true value of which is realized over time. Recognizing IP to be a significant asset and the licensing of IP to be commercially viable, companies are progressively investing more costs, resources and time for its development and naturally, for its protection.
Licensing IP
License (originating from the Latin word “licḕns”, i.e. ‘to be permitted’) means the grant of a formal permission or right by a person/entity (‘licensor’) to authorize another person (‘licensee’) to engage in some activity, business or transaction, which would otherwise be unlawful (without such permission or right). Licensing is commercially useful where arrangements are made where both the licensor and the licensee are able to gain beneficially. In today’s aggressive business environment, the degree of protection and control of IP is crucial. Accordingly the overall corporate strategy and the business plan of the company assume significance. Legally, it is to be noted that licensing differs materially from an assignment or a sale as under the former arrangement, the legal ownership in the IP is not transferred to the third party. The licensor is able to retain its ownership and grant use in the manner best suited.
The shift towards licensing
The shift from tangible asset wealth to in-tangible asset wealth is occurring at a moderate rate. One of the most persuasive reasons for the grant of a license is that it provides a continuous revenue stream in the form of royalties or fees which would directly contribute to the company's net worth. This is an effective way to raise funds beyond the regular income generating assets, with scope of generating additional revenues through the provision of maintenance and support services (in relation to the licensing activity). However, the level of reliance placed on such alternative revenue stream requires careful consideration.
Some companies may not have adequate funds or ample resources to engage in business activities such as the research and development, manufacturing, logistics, distribution or even the marketing and sale of its products. Others may wish to consider an expansion of its business operations in new geographical locations, which otherwise would have been inaccessible. Through licensing, a company may enter into the local market (with or without a local partner) and perhaps gaining a significant market share over its competitors. This would help to expand the existing client base and even increase its brand name.
Further, new and far superior products may be developed through research and development with a collaborative party possessing the relevant expertise and requisite technology from the licensed IP. In some cases the IP of different companies assimilate forming a strategic alliance whereby optimal efficiency is achieved for manufacturing a product, which in turn saves significant costs for each company involved and yet, retain competitive edge. It is to be noted that while licensing may be an attractive option, there are a few setbacks as well. Sometimes companies may not receive the projected quantity of rewards. The licensee may, within a few years of operation of such an arrangement engage in similar business activities and thus become a strong competitor of the licensor. In some licensing arrangements, technical assistance, training of personnel amongst others may also be required or requested for, at which point the whole arrangement becomes unworkable.
However, licensing arrangements may seem a meaningful option to some companies as opposed to an outright assignment or sale, at which point in time all endeavours should be focused in identifying a prospective licensee or licensor (as the case may be). Sometimes companies carry out periodic audits in order to identify any un-used IP or even expose royalties that are to be collected.
Protection in licensing
There are different types of agreements which arise out of a multitude of commercial transactions. While most of the terms and conditions would be significantly different, some terms are common to every license. The fundamental aspect of any licensing agreement would be to ensure that the licensor’s title and ownership to such IP is well protected and especially its scope and terms of usage. While the IP to be licensed may already be protected under the law, it is important for the licensing arrangement to protect those rights and even to avoid such a licensing activity to constitute an infringement (cause of action against a third party).
As an illustration, we understand that for the grant of license for the manufacture of a product which uses a secret process (or commonly referred to as a trade secret), the trade secret is known only to the owner and perhaps a certain class persons in its employment or hired as consultants. Further, such information may also be confined to premises where the existing manufacturing process is carried out, including office and systems security. In such case careful restrictions should be placed upon the licensee to protect the IP of the licensor, most importantly being strict confidentiality obligations imposed on the licensee.
The licensor carves out directions and procedures that the licensee requires to comply with so as to ensure the highest product quality standards. A failure on the part of the licensee would constitute a fundamental breach of a license agreement. In this regard licensors are often empowered with frequent inspections. This is so as the licensee is expected to adhere to the high quality standards and brand image of the licensor. It would be unreasonable if manufacturers of products are not liable for their products and goods. If such products do not function at the time of purchase, the manufacturer would typically provide a refund or replacement of the product itself and in the process incur expenses. In licensing arrangements if such a situation above occurs, the licensor should not be responsible for repaying the initial sums paid by the licensee or the licensee's cost of replacing the product or the cost to the licensee of every possible consequence of the product's failure to work.
The rationale for this is that costs may rise significantly and be disproportionate to the royalty or fees it receives under the licensing arrangement and commercially acceptable that a licensor is able to place a financial cap on its liability. It is to be noted that such monetary liability is differentiated form any limited imposed under the law of different countries, most prominent of which being the liability for death or personal injury caused by the licensor's negligence. Also, if the licensor had multiple arrangements where there were a lot of licensees and the product develops a common problem, if every licensee claimed successfully this would leave the licensor with serious issues. Typically, the licensor limits its liability with respect to any special, incidental, consequential or indirect damages. The license therefore provides a general protection to the licensee by controlling the scope of the licensor's liability.
Choosing the license arrangement
There are various types of licensing arrangements depending on the nature of the business and the extent to which such licenses are to be granted. The most notable agreements, terms of which differ considerably, are software license agreements, trademark license agreements, technology license agreements, research collaboration agreements and end-user license agreements. The media, information technology and telecommunications are a few sectors for example where products and services have standard ‘terms and conditions’ for usage of its products, i.e. the grant of a license to the end-user all terms are common to all users.
Commercial transactions on the other are often negotiated on the basis of specific requirements of the business, in stark comparison to the abovementioned standard terms and conditions that cater to many customers (worldwide). Proper negotiations and the attention to detail therefore assume great significance in commercial transactions. Once a call has been taken to engage in a licensing arrangement, the appropriate licensor or the licensee has to be identified.
Negotiations for licensing
Several factors are considered at the time of negotiations that mirror each party’s requirements. The starting point would be to consider the type and scope of the license covering the usage, selling, modifications or copying, and the degree covering the length of the license and terms for exclusivity. Performance and quality targets and other material terms and conditions placing obligations on the respective parties follow depending on the very nature of grant of the license itself.
Collaboration services would deal with new IP rights generated by either party during the course of the business. Typically, each party would own IP rights it generates during the contract, and would license the use of such IP rights to the other party to the extent required by the other party to fulfill its collaboration services obligations. Each party's rights of ownership of its IP would be asserted and impose contractual restrictions on the other party's use of such rights.
Manufacture of a product will require the manufacturer (i.e. the licensee) to use the IP comprising the product. The owner will impose restrictions on the scope of the manufacturer's use of the IP such as usage solely for the purpose of manufacturing only the product during the term of the agreement.
As an illustration, if a pharmaceutical product were to be manufactured then a broad confidential provision would have to be included. This is so as there might be patents, trade secrets, trademarks and other forms of IP involved in the process. The grant of patent license should be carefully considered as a patent does not grant the patent owner the right to make anything, a patent license needs to grant the licensee protection from infringement lawsuits being brought by the licensor for the licensee's making, using or selling the patented invention. Trade secret requires extreme protective measures as a single unintentional disclosure of a trade secret can rob it of its secrecy and thereby forfeit its protection. Adaptations may also be required for entering a foreign market where labels and instructions have to be translated and modification of goods to conform to local laws and regulations.
Software licensing arrangements, which are more technical in nature, have detailed provisions on installation requirements in accordance with the client specifications. These arrangements may also include the training of personnel who would be equipped with the knowledge to perform select functions in relation to the software. In turn, support and maintenance services may also be provided by the licensor to the licensee.
There may be other considerations to be taken into account in variations of licensing arrangements, where the licensee may have to order for the products from the licensee. In such cases the forecasts, ordering of and the delivery and acceptance terms and conditions have to be carefully looked into. The delivery and supply of goods or products will have time bound restrictions as the licensor will have to provide these goods and in turn the licensee to the customers. A range of procedural requirements may be involved where in the parties have to adhere to such obligations and improper documentation may lead to financial penalties being imposed. The terms for pricing and payment of products should be clearly spelt out.
Most licensing arrangements also require precise records to be maintained especially when the revenues generated from such an arrangement are high. What follows logically is that the parties may right of inspection of these documents at the end of the particular period. An adequate set of representations and warranties also required to be secured. These would cover issues such as the right, power and authority to enter into the agreement; that the articles and memorandum of the company will not be violated; whether the rights, title and interest in the IP is valid and subsisting; there are no encumbrances in the IP; the IP does not infringe another party’s IP; there are no claims, pending or threatened in relation to the IP; appropriate licenses including governmental and statutory licenses have been procured in order to carry out the relevant business activity; no laws, regulations and rules of the country will be violated.
Conclusion
There are considerable gains in licensing IP. Whether or not this is the right approach for a company is entirely a different question, bearing in mind the pros and cons. At the end of the day, it is a distribution of risks between two parties who mutually envisage a commercial gain. |
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| ROHAN RAICHAUDHURI is a Foreign Consultant with WongPartnership LLP at its Singapore office. |
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