IP OWNERSHIP pt. 2 – Licensing considerations

You have realised that there is value in your intellectual property (IP), or perhaps you have been working towards this point all along!  You are now looking to commercialise that IP.  Where do you start?

Some headline items to consider, would be that the type of licence agreement required will differ depending on the parties involved, i.e.: 

• Is the licence arrangement to be with a third party? 
• (Side-note) If so, do you have a Non-Disclosure Agreement (NDA) in place prior to entering into discussions with that third party?  Is the NDA up to the task?  Is it mutual or one-way?  What does the NDA say about improvements to the IP?

• Alternatively, is the licence between your IP holding company and your operating company?  (e.g. for the purpose of that operating company then sub-licensing the IP to third parties)

Further to the above, there are a number of other items to consider when entering into a licensing arrangement in respect of IP.

Some of the other key items to consider are as follows:

1. Exclusive or Non-Exclusive – Will the licence be an exclusive or non-exclusive arrangement?
2. While exclusive and non-exclusive licences are similar in that they both can allow for the licensor to licence their IP to the licensee in return for compensation, exclusive and non-exclusive licences differ in their degree of exclusivity that will be granted to the licensee.
3. In an exclusive licence, the parties agree that no other person/legal entity can exploit the relevant IP rights, except the licensee.
4. On the other hand, a non-exclusive licence grants to the licensee the right to use the IP rights, but on a non-exclusive basis.  This means that the licensor can still exploit the same IP rights and they can also allow other licensees to exploit the same intellectual property.
5. One crucial point of difference between exclusive and non-exclusive licences, is that exclusive licensees (and patentees) can pursue legal proceedings for patent infringement, while non-exclusive licensees do not have ‘standing’ to bring such a claim.

2. Sub-licences – Will the licensee be allowed to grant sub-licenses?  If so, will this only be with licensor consent?
3. Territory – In what territory will the licensee be able to exploit the products and/or IP?
4. Term – What will be the term of the licence?
5. Improvements – If the licensee makes any improvements to the products/IP, will they be required to keep the licensor informed of such developments, and is ownership of same to vest in the licensor?  Will the licensee be licensed to use such improvements?

6. Licence Fees - What will comprise the licence fees to be paid to the licensor in consideration for the licence? Will these be, for example:
7. A percentage of the GST exclusive price per unit of the products sold? (e.g. paid quarterly?)
8. Structured in a tiered approach? e.g. for sales below a certain threshold (e.g. $20 million), a 5% royalty, and for sales above $20 million, a 6% royalty
9. Include minimum (and/or maximum) royalties per month/quarter?
10. Include an upfront fee (e.g. a signing fee, perhaps to cover a portion of patent costs to date)?
11. Include other forms of consideration, e.g. discounts on licensor purchases from licensee, related entities etc., or will there be reciprocal/cross-licensing arrangements with licensee for the licensor’s exploitation/use of licensee products/IP?
12. Note: Royalty rates are very dependent on the particular invention, stage of development, competitors/barriers to entry, strength of IP protection, industry, market size, profit margins and risk etc., and so research into comparable licence arrangements should be undertaken, as well as seeking legal and accounting advice.

7. Maintenance/Inspection – Will the licensee be required to maintain records of manufacture and sale of products, prices at which products are sold etc.; and will the licensor be permitted to audit/inspect and verify the licensee’s records?
8. Quality Control – Will the licensee be required to meet certain quality standards, or comply with relevant laws/regulatory requirements?
9. Minimum performance levels – Will the licensee be required to meet minimum performance levels, failing which the licence may be terminated?
10. Inspection/Compliance – Will the licensee be required to allow the licensor to attend the licensee’s premises to inspect and verify that the licensee is complying with relevant standards and any directions of the licensor?
11. Warranties/Indemnities – Will the parties be required to make any warranties or indemnities to each other?
12. Termination – What events would give rise to termination? e.g. unremedied breaches, insolvency etc.  What would be the effect of termination? e.g. licensee to cease using licensor’s IP, return/destroy certain materials, equipment, tools, prototypes etc.

Should you have any questions in relation to the above, or wish to have prepared an appropriate licence agreement for your circumstances, please do not hesitate to contact Jacob Bartels at Active Law.

Disclaimer – Reliance on Content
The material distributed is general information only. The information supplied is not and is not intended to be, legal or other professional advice, nor should it be relied upon as such. You should seek legal or professional advice in relation to your specific situation.