What is a Licence?

A Licence grants to a third party (the Licensee) the right to perform acts which would otherwise be in breach of the legal rights of the Licensor. The legal rights may relate to those provided by patents, registered designs, trademarks, confidentiality, copyright or design right. The discussion which follows focuses on patents.

Benefits to the Licensor

In the event that the owner of a patent does not have the facilities at his disposal to satisfy market demand for the invention covered by the patent, a Licence can be a good way of exploiting the invention whilst retaining ownership of the patent. In most cases, the Licence provides for some kind of financial remuneration for the owner of the patent (the Licensor) by way of lump sum payments and/or periodic royalty payments.

Benefits to the Licensee

The primary benefit to the Licensee is the right to exploit an invention without being sued for infringement. A Licensee may also stand to gain from the Licensor's knowledge in return for what is in most cases a fairly modest royalty payment. This may assist the Licensee to achieve increased sales and entry into new fields of technology or markets.  

Types of Licences

There are three basic types of Licence.

    (i)    In an Exclusive Licence the Licensor agrees not to exploit the licensed rights himself  or grant licences to other third parties to exploit the licensed rights

    (ii) In a Sole Licence the Licensor retains the right to exploit the licensed rights himself but agrees not to grant Licenses to other third parties to exploit the licensed rights. 

    (iii) In a Non-exclusive Licence the Licensor retains the right to exploit the licensed rights himself and to grant Licenses to other third parties to exploit the licensed rights.

It may be possible to have degrees of exclusivity within a Licence, in particular with regard to the territory and/or the licensed act. For example the Licensor could grant exclusive manufacturing rights in one territory and non-exclusive selling rights in another territory. The licensed rights could initially be exclusive before reverting to non-exclusive. The Licensee often requires the reassurance of a degree of exclusivity and an Exclusive Licence can demand a higher royalty rate than a Non-Exclusive Licence. 

The Licensor and Licensee will negotiate numerous other contractual terms of the Licence agreement including those relating to the products or processes covered, consideration, duration, quality control, confidentiality, sub-licensing, obligations regarding improvements to the invention, marking, warranties, indemnities and termination. Some of these are discussed briefly in Part II. 

The Product or Process Covered 

A Licence may be granted in respect of all products or processes covered by a patent or in terms of one or more specific products or processes.

Consideration

Consideration normally takes the form of payments made by the Licensee to the Licensor such as lump sum and/or royalty payments. Agreement needs to be reached on how and when payments are made. The Licensor may be justified in asking the Licensee for an initial lump sum payment due upon execution of the Licence, particularly where the Licensor has a proven track record in relation tot he licensed product or process or if the Licensor is offering the Licensee some form of exclusivity. The initial lump sum payment might be offset against an agreed proportion of the future royalties.

The royalty rate may be calculated as a fixed sum per licensed product sold or as a percentage of the price of the licensed product (possibly less taxes, duties or costs unrelated to the licensed product itself such as transport, insurance, discounts or trade credits). Where the Licence relates to a process, it may be necessary to calculate the royalties differently, e.g., as a fixed sum payable each time the process is used. 

The Licensor might insist on a 'minimum royalties' clause to guard against poor sales by the Licensee of the licensed product. The minimum royalties might be based on prospective annual sales.

Obligation on the Licensor and Licensee

Obligations on the Licensee might relate to the quality of the licensed product or process or  undertakings to use best efforts to market the product or process and to ensure that the licensed product is properly marked (e.g., marked 'patented' or 'patent pending'). If the Licence is exclusive, the Licensee may agree to pay renewal fees on the patent and/or pursue infringers at his own (or a share of the) cost. If any confidential information or 'know-how' is also licensed, the Licensee should agree to maintain confidentiality during and after termination of the Licence.

Obligations on the Licensor may include provision of documentation and information to allow the Licensee to commence the licensed act (e.g., the Licensor may be required to act as Consultant to the Licensee to set up a manufacturing plant). A Licensor may be asked to warrant that he is the owner of the patent, that the patent is in force, that the patent is valid and that there is no current infringement of the patent.

A Licensee may require an indemnification against any claims arising from sale of the licensed product - this should only be given where the Licensor is prepared to ensure the risk.

If improvements to the invention covered in the patent are made by one party, there may be an agreement that these are to be disclosed and possibly licensed back to the other party.

It is important to define the circumstances in which the licence should be terminated prematurely, for example non-payment of royalties, failure to meet acceptable quality standards or change of control of the Licensee. Such circumstances may give rise to a dispute and for this reason it can be helpful to include an arbitration clause in the Licence agreement whereby the parties agree to the appointment of an independent arbitrator.

Formalities 

In the case of an exclusive Licence agreement, it is primarily in the interest of the Licensee to ensure that the Licence agreement is properly registered at the Patent Office. This may prevent the Licensor from granting a subsequent inconsistent Licence to a third party and entitle the Licensee to monetary relieve in the event of a successful infringement action.  We can advise further on request. 

Other matters

Whilst in general two parties may enter voluntarily into a Licence agreement on whatever terms are agreed between them, UK and EU law places certain restrictions on which terms in a Licence agreement are enforceable. Such restrictions ensure a balance between intellectual property rights and fair competition. 

Under any circumstances, it is advisable to have a Licence agreement professionally drafted by an expert advisor. We would be happy to provide further advice and guidance. 

Costs

Costs for drafting a Licence agreement will depend on the time spent by the advisor and therefore reflect the complexity of the Licence agreement and the length of time taken to negotiate a final agreement acceptable to both parties. 

If you wish us to negotiate and draft a licence Agreement on your behalf or handle any other licence matter for you, please use the attached form to contact us or write to us