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Intellectual Property Rights: Licensing Technology

NIC Document

Summary

To gain value from your Intellectual Property (IP), it is possible to license your technology to another party who can take the idea(s) to commercial exploitation more effectively. This guide explains why you would want to license, what you can license and how to capture best practice from a licensing agreement.

In brief

  1. Patent or know-how
  2. Restrictions
  3. Income
  4. Future technology improvements
  5. Warranties
  6. Agreement

Introduction

Licensing, in general, is a better option if you are unable to exploit a particular piece of IP. In these situations, it may be possible to benefit by allowing others to use the relevant IP on appropriate terms that will form the licensing contract. You may need to use a particular process that is protected by a patent owned by someone else, or the technical details of which are a secret. Similarly, you may find that a product that you intend to sell would infringe a patent or design right, or require computer software created by someone else. In either case, the owner of the relevant IP may be prepared to license you to use it on commercial terms that make it economical to pay for this right rather than to develop your own alternative technology.

Patent or know-how

It is essential to define what IP is being licensed. If there is a patent covering a product or a process, this might appear to be obvious. However, it may be that the licensor is prepared to grant a licence, for example, under a patent for a material, but not under a separate patent for an improved method of making that material. There may also be associated confidential know-how that the licensor owns and which the licensee needs in order to make the most of the licensed patent.

Restrictions

The licensor may wish to restrict the licensed use of their IP to technical fields outside of their own, or may believe that they can maximise exploitation by licensing to a number of licensees, each of which is restricted to use in a particular field. Alternatively, it may be appropriate to divide the licensing geographically rather than, or as well as, by field of use. Because it is likely that the nature of these restrictions will be controlled by EU competition law, it is important to seek specialist advice before you finalise a licensing agreement. The consequences of failing to comply with competition law are not only that any restrictions imposed in the licence would be void, but also that both parties become liable to fines by the European Commission and to being sued by any third party who claims to have suffered as a result of any unlawful restrictions. The other key question is whether the licence should be exclusive (either in any technical field or country, or generally), sole (which means that the licensor and the licensee can both exploit the IP) or non-exclusive. Once again, the extent to which a licence can be kept exclusive and the time for which exclusivity can be maintained, are affected by EU competition law.

Income

How a licensor generates income from their IP is entirely a matter of negotiation. Royalty payments are common, based on a percentage of either revenue or profit. This also overcomes the difficulty of agreeing a suitable payment at the outset. On the other hand, the licensor may prefer a lump sum payment if they are short of cash to repay their development costs. The best solution may be to combine an initial payment with a reduced royalty, or to impose a minimum royalty payment that is payable, irrespective of the level of exploitation. It may be advisable to have the right to audit the licensee in order to confirm that the royalty income received is correct. Part of the payment can be a requirement for the licensee to pay some or all of the prosecution and maintenance costs for the licensed patents. There are many ways to structure the payments in a licence agreement and it is important to take experienced legal advice when you are structuring and implementing your agreement.

Future technology improvements

It is common practice for a technology licence to include automatic licensing of any improvements created by the licensor for no additional cost. This is clearly beneficial to the licensee and can also benefit the licensor by increasing the potential product sales and the royalties payable. The licensor might, however, prefer to exclude any improvements so that it can enjoy the advantage of restricting their exploitation to itself, or, alternatively, of licensing them separately for an additional payment. In the case of the licensee creating improvements, it is likely that they will retain ownership of the improvements, although they will probably not be able to use them without the licensed background technology. The licensor can add provision so that they can have access to and use of any of the licensee's improvements. In general, this is only acceptable if the licensor grants a reciprocal licence of its own improvements to the licensee.

Warranties

A major part of any negotiation of a technology licence involves the warranties that will be given by the licensor. The licensee will always want a warranty that the licensed technology does not infringe the rights of any third party, so that it knows that it is safe from infringement actions. However, the licensor may feel uncomfortable with this and wish to reduce this warranty to one that it is unaware of any infringement. Depending on how highly developed the technology is at the time of licensing and whether the licensee is considering a new use, it may be appropriate for the licensor to warrant that the technology will perform in a particular way, or achieve a particular end. There are many other options so it is important to take specialist legal advice first.

Agreement

The terms of the licence that you finally agree will depend on individual circumstances and may vary widely. The key point is to set out your terms unambiguously in a written agreement so that there can be no dispute as to what they are. It is also essential that the terms comply with EU competition law and are enforceable so that they do not create the potential for liability.