Licensing

• Author: Jan Dirk Heerma
• Pages: 97-118

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Licensing

Jan Dirk Heerma

Patent and other intellectual property rights (collectively: “IP rights”) confer exclu-

sivity to their owners and allow them to gain financial profit by selling a unique

product. The investment required to make a profit through the development of a

marketable product however, can be high, and may require skills and assets that

are not accessible to the independent inventor, or even to small companies.

Indeed large companies have invested heavily to achieve such development, man-

ufacturing and marketing capabilities. This chapter considers the structure of an

IP licence; a mechanism which permits the owner of IP rights to leverage these

resources, and to avoid the full costs of further development of the invention.

The inventor could sell the IP rights outright for an agreed sum of money.

Indeed, such a sale would be a simple legal process. It is difficult, however, to

agree a purchase price when neither party has a complete picture of the market

potential for products incorporating the invention. Will the invention become a

best seller, or indeed will it ever be commercialised at all? The purchaser will hesi-

tate to pay too much for IP rights that cannot be commercially used while the

seller will be reluctant to sell the IP rights at a price that is based merely on the

probability of success. A licence is a flexible instrument that captures the needs

and fears of both the inventor and licensee.

Licence agreements are also a flexible instrument in dense technology areas, in

which overlapping patents prevent products coming to market; it may well be that

one party cannot use its IP rights without infringing those of another. In such a

case, cross-licence agreements, whereby each party grants a licence to its IP rights

to the other party, are employed to liberate the market. Such cross licences have

become increasingly important, and many technology areas are dense with a net-

work of overlapping patents. Such cross-licences help to settle and avoid expensive

litigation.

The following overview concentrates on simple licence agreements. It should be

noted, however, that a licence is often one of several elements of other agreements

establishing a co-operation, such as research agreements, development agree-

ments, joint-venture agreements and the like. The issues addressed below have to

be addressed in all these agreements.

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6.1

Licence Agreements – an Overview

6.1.1

Introduction to Licensing

The basic structure of a licence agreement is simple: the owner of IP rights (the

“licensor”) allows the other party (the “licensee”) to use its IP rights. The formal

IP rights remain with the licensor, but the licensee may utilise them to a specified

extent. The licensee’s rights are often restricted to certain territories, to specific

utilisations or to specific fields of use. For example, a licence may be restricted to

sale and production of handheld devices in Japan only. In this case, if the licensee

sells products based on the IP rights in any country other than Japan or produces

or sells any products other than handheld devices, the licensor’s IP rights are

infringed. In exchange for the permission to use the rights, the licensee commits

to pay a consideration to the licensor. Usually, at least a major part of such consid-

eration is linked to the licensee’s sales of products generated by using the IP

rights. The licensor’s share of such revenues is called “royalty”. Such flexible con-

sideration reduces the risk for the licensee, compared to an outright payment. On

the other hand, it allows the licensor to share the economic benefit if products

based on the IP rights become a best seller. In many cases, the royalty is combined

with fixed payments to be made by the licensee irrespective of sales.

Drafting and negotiating licence agreements, particularly trans-national licence

agreements, is very complex, and a specialised lawyer should always be consulted.

The following overview, therefore, is intended to introduce the core issues within

a licence agreement and to prepare the reader for discussions with business part-

ners and lawyers.

6.1.2

Subject

All IP rights can be subject to a licence: patents and utility models, trademarks,

design rights, copyrights (including software), and even personality rights.

Licences can also be granted with regards to future IP rights, provided that these

rights are clearly defined. In fact, most research and development agreements

provide for either transfers or license of future IP rights generated in the collabo-

ration.

Furthermore, although it is not a right, know-how may be the subject of a

licence. From a legal perspective, the owner of know-how is generally not able to

exclude all others from its use, subject to contractual or statutory duties of confi-

dentiality and non-use. From a practical point of view, however, the owner of

know-how may exclude all others by keeping this knowledge secret. As long as

know-how remains secret, it has an economic value. In order to facilitate develop-

ment of the invention, and to maximise the value of IP, most patent licence agree-

ments also extend to additional know-how related to the patents.

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