What is a licence?
A licence is a limited permission for another person to use your IP rights. It is a contract between the rights holder and the licensee whereby the rights holder consents for the licensee to do certain acts in exchange for some form of remuneration.
Licensing is a very flexible way of exploiting IP because the parties to a contract are generally free to agree the terms they choose, depending on their commercial objectives. It is prudent to have these terms in writing so that both parties can be certain of the rights and obligations that they accrue.
They can be limited in terms of scope (you can dictate how you want your rights to be exploited), time (the length of time that someone can use your rights for) and territory (you can give permission for certain countries, i.e. UK only, EU, US, worldwide etc).
Other key terms include termination and quality control clauses. A termination clause will state the circumstances (other than expiration of the agreed term) that allow either party to terminate the agreement e.g. where one party commits a material breach of the agreement or goes into administration. The licensee will undertake that the products it creates under license will be of a high standard, manufactured in accordance with the product description. The licensee may also be required to provide the rights holder with a reasonable number of samples for him to inspect.
The rights holder will also require some provision to check that the correct amounts are paid (e.g. by having a right to inspect the licensee’s records and accounts). See below for more information on payments to the rights holder.
There are three main types of licence:
An exclusive licence is an agreement where you permit someone else to use the IP for the agreed purposes to the exclusion of all other persons i.e. you promise that you will not grant any other licences to third parties or exploit the IP yourself.
A sole licence is an agreement where you promise not to grant the same permission to any third party but you retain the right to exploit the IP yourself.
A non-exclusive licence gives someone else the right to use your work for specified circumstances but you retain the right to grant further licences on similar terms to third parties.
What can be licensed?
Any IP right can be licensed. Firstly, it must be determined who owns the IP. In general, if you created the work yourself then you will own the IP and can license the use of that IP. However, there are exceptions to the rule. Things become slightly more problematic where work was created in the course of employment or in pursuance of a commission. The rules on ownership vary depending on the IP right in question. For further information on the necessary criteria and rules on ownership.
Remember, IP will not protect an idea, but only a particular expression of an idea. For example, you cannot protect the idea for a dress, but once drawn or painted, it is the drawing or painting of the dress, as an expression of that idea, that is protected. Hence, you cannot license the right to exploit an idea as ideas do not qualify for IP protection. You can prevent others from exploiting ideas if you can show that the information was confidential and was disclosed in confidence. The law of confidence can be used to protect things in the early stages of development that are not yet in the public domain. Again, certain criteria must be met for the law of confidence to apply.
Payments to the rights holder
Where a licence of IP is granted in the normal course of business, the rights holder’s main commercial motivation is likely to be that the licence will generate income. Perhaps the most common means of remuneration is the receipt of royalties. These will be calculated on whatever basis the parties choose. A royalty allows the rights holder to share in the licensee’s commercial success. Alternatively, the rights holder may charge a flat fee, irrespective of the licensee’s commercial success, to be payable at agreed intervals (e.g. annually) and/or as a one-off lump sum. It is also possible to combine fee and royalty payments. Some examples are below. The designer of a piece of jewellery grants an exclusive licence to a manufacturer. The manufacturer pays a fixed amount per thousand units made (irrespective of sales) plus an up-front licence fee (which the rights holder justifies as the price of his promise not to license any other manufacturer on similar terms or manufacture the product himself). The publisher of a novel agrees to pay the author a percentage of the price of each copy sold. The author receives a lump sum payment up-front. This could be deemed an “advance” of royalties i.e. the author receives nothing more until the amount of accrued royalties exceeds the amount of the advance. The licence should address practical issues such as how the royalties are calculated, when payments become due and how payments are to be made (e.g. into a stated bank a/c).
Image: Kenikie Palmer: www.kenikie.com