Intellectual property (IP) is an asset to your company as it may be utilised to accelerate business growth and revenue, while also providing your company with a competitive edge.
Whether your company is seeking to commercialise its IP or obtain third party IP or services, it is important that the licensing agreement operates effectively to ensure that your company is adequately protecting its rights or obtaining all the rights required to receive the benefit of the services or IP from a third party.
As inhouse counsel, you are uniquely positioned to closely engage with the business. This allows you to understand the company's business and commercial goals, which facilitates the framing and drafting of an effective IP licensing agreement.
This article highlights some key steps that assist with identifying and understanding important issues that arise in IP licence agreements that will help in drafting an effective IP licence agreement.
Know the IP
Determining the form of IP involved is usually the first step, but may not be as easy as one may expect. This is because the "IP" may involve trade secrets and confidential information, in addition to the other forms of IP (such as copyright, trade marks, patents and designs). IP may also be registered or unregistered in Australia or overseas, and there are different rights that are granted to different forms of IP. The rights to one form of IP will also vary in different jurisdictions.
Once the form of IP involved has been identified, then it is possible to include a clear specification and definition of the IP that will be licensed under the IP licence agreement. For example, if a grant of a licence to patents and associated technical information and know how, together with a licence to the trade marks for the licensee's use to distribute and market the resulting products is required, then the IP licence agreement will need to clearly identify and set out the licence provisions for these three forms of IP.
Accordingly, having a good understanding of the IP involved is the first step to determining the issues that will need to be addressed in the IP licence agreement. This, in turn, facilitates the framing of the appropriate scope of the licence and any restrictions that should apply and the payments and royalties that may apply.
Scope and licence restrictions
Another key question to be considered is: what is the appropriate scope of the licence? This is important because a scope that is too limited may result in the licensee not being able to undertake the intended activities without infringing the licensor's IP rights or enable it to meet its business objectives (eg, if you are obtaining third party licensed IP, then you may not receive the full benefit of such third party IP). By contrast, if the scope of the licence is too broad, then the licensor's ability to exploit or exercise its IP rights in the future may be affected. As a result, particular consideration should be given to the rights that need to be granted to the licensee and the rights that the licensor would like to retain.
In this instance, the business objectives and outcomes that are being sought by your company will help identify the appropriate scope of the IP licence. The IP licence will typically identify the express right that is being granted to the IP (such as the right to use the IP for a particular purpose), whether the licence is an exclusive or non-exclusive one, and if there any territorial restrictions. The IP licence should also clearly clarify whether the licence may be assigned or transferred, the type of licence (eg, perpetual and revocable, perpetual and irrevocable or term or subscription based), whether the licensee has the right to sub-licence the rights granted to it and whether the licensee may permit a third party to assist the licensee to exercise the licensee's rights under the licence granted to it.
There can also be some confusion around the scope of an exclusive and a sole licence. Generally, an exclusive licence confers the licensee with certain rights in relation to the IP to the exclusion of all other persons, including the licensor. On the other hand, a sole licence provides the licensee with certain rights to the exclusion of all other persons, except that the licensor reserves the right for itself to exercise the rights that are the subject of the sole licence.
When considering what kind of licence is appropriate — exclusive, non-exclusive or sole licence — it is also prudent to keep in mind that the statute applying to the relevant IP may contain its own definition of the kind of licence chosen and affect the licensor's ability to enforce its IP rights, despite any contrary terms in the IP licence agreement.
Careful attention will need to also be given to the duration of the licence and the particular obligations that attach to the licensing arrangement when dealing with an exclusive or sole licence. Clear termination rights (see further below) should also be considered to deal with failures by the licensee to meet certain performance thresholds or if the continued association with the licensee is not in the licensor's best interest.
Your business objectives may also be used to determine if there are any express limitations or restrictions that may be required. For example, if the business objective is to grant a licence to enable a licensee to apply a trade mark to goods for one or more particular market segments, then the trade mark licence will need clear and express provisions that limit licence to the particularly identified market segments, rather than a generic provision that refers to the market segment generally.
Other restrictions that may also be considered include a restriction that limits the licensee's ability to challenge the licensor's right, title and interest in and to the IP and any appropriate restrictions that limits the licensee's ability to transfer or assign the licence granted to it.
In this way, the manner in which the scope of the licence should be framed and drafted would be influenced both by your understanding of the business and the type of IP involved; noting that some statutes may operate to limit the restrictions that may be imposed.
Do your checks!
It is important to conduct some due diligence to determine whether there are any threats to your company's ability to use the IP as intended — this will also help identify the particular legal constructs in the IP licence agreement that may need focus and the assessment of the risk levels of specific legal constructs. This applies equally to your company's IP that is being licensed to a licensee and third party IP that your company wishes to licence from that third party.
Depending on the transaction and the nature of the IP involved, the checks may involve internal investigations as to your company's rights over its IP (eg, checking if your company's trade marks are registered and whether your company has kept good records to manage any future disputes) to identify if provisions in the IP licence agreement would raise any issues for your company. For example, contractual warranties relating to your company's right, title and interest in and to the IP that is being licensed may be a higher risk issue if you were dealing with IP that should have been registered, but was unregistered at the time the IP licence agreement was entered into.
While your company's ability to conduct due diligence of third party IP that is being licensed to your company may be limited, it is still appropriate to do so within the context of the transaction — this should also extend to any associated materials that are being provided or licensed to your company.
Any issues that are identified through this due diligence process can then be effectively addressed in the IP licence agreement through appropriate warranties and indemnities or through other contractual mechanisms.
For example, if your company was looking to obtain third party products, then a quick search may reveal whether there are any third party IP infringement claims that may affect those products.
In this instance, a broader indemnity from the third party licensor or manufacturer may be required to cover any losses and damages your company may suffer as a result of a third party IP infringement claim for those products. Importantly, this will also identify whether the relevant liability cap in the IP licence agreement is appropriate in this context.
On this basis, the representations, warranties, indemnities and liability limitations and exclusions in the IP licence agreement will need to be assessed and may need to be customised in light of the form of IP being licensed and the issues that arise from the checks that have been undertaken.
Depending on the subject matter and the nature of the proposed licensing agreement, there may be various control provisions that need to be included in the IP licence agreement. For example, a licensor will usually require the right to control the quality of the goods or services in relation to which the trade mark is permitted to be applied, as a failure by the licensor to do so may put the trade mark registration at risk.
By contrast, the trade mark control provisions are unlikely to be generally included in a copyright licence agreement. In this instance, the licensor may require a contractual right to audit the licensee's performance and use of the materials under the copyright licence agreement as a form of control over the licensee.
The events that will give rise to a right to terminate the IP licence agreement and the consequences of any such termination will need to be identified and addressed in such agreement.
Importantly, you should consider whether different events should have different periods before the other party may terminate. As termination provisions vary based on the IP and industry, careful consideration should also be given as to whether these termination provisions are appropriate in the context of the transaction and the business objectives.
For example, there may be some situations where a party should have the right to terminate the license, such as if the licensee fails to pay royalties when due after a reasonable cure period or if there is an insolvency event. On the other hand, there are other circumstances where a termination right may be more contentious, such as a right to terminate for convenience. In any event, it is important for both parties to ensure that the drafting of the termination provision is clear and that the language used to describe the event giving rise to the right to terminate is also clear.
The IP licence agreement should also contain provisions that set out what happens with the IP after termination to ensure that there is an appropriate transition period to minimise any disruptions to customers or sub-licensees.
Please do also keep in mind that the right to terminate may be qualified or broadened (despite any express terms to the contrary) by the statute governing the relevant subject matter. For example, s 145 of the Patents Act 1900(Cth) empowers either party to terminate a licence to exploit a patented invention on the
giving of three months' notice in writing to the other party if the patent, although protected at the time of entering into the licence, has ceased to be in force.
IP licensing can be quite complex as IP is a bundle of complicated rights that vary between different jurisdictions and different forms of IP. However, as inhouse counsel, you understand the business objectives and outcomes that are being sought and are best placed to identify the key issues and address them in an IP licence agreement.
By identifying the form of IP involved, the appropriate scope of the licence, the relevant restrictions that may apply, conducting the appropriate checks, establishing the appropriate control structure and identifying the appropriate termination events and the consequences of termination, the appropriate legal constructs that may be required in the IP licence agreement can be effectively drafted, and the risks that arises with those legal constructs can be assessed in the context of the transaction and the business objectives and outcomes as a whole.
This article was first published in Vol 19 No 3 of Inhouse Counsel - a journal published by LexisNexis.