Describing the property (Describe by reference to property not products)

If you grant a licence to make a particular product or to do a particular thing, you may inadvertently licence property that you do not own. The licence will be construed as including everything that the licensee will be doing. If you do not have the necessary rights, you will be in breach of contract, and may be sued for damages.

In some licences, which are often referred to as "turnkey" licences, this is the "deal". The licensor agrees to licence all of the property that the licensee needs. A turnkey arrangement is most suitable for inter-corporate licensing, where the licensor is already manufacturing products in the licensee's territory. It is usually unsuitable in circumstances where the licensor is not manufacturing and selling products in the territory.

In any event, there is often a risk that somebody else will own registered intellectual property that will be infringed by using the licensed property. It is possible to infringe registered rights without imitating anything. Infringement occurs if you do something that falls within the scope of the licensed rights, and do not have a licence from the owner of those rights.
If the licensee is not using the property to make or do something that could infringe registered rights, this should not be a problem, provided that you own the rights that are to be licensed. Otherwise, there will always be some risk, however remote, that the licensee will infringe.
You can reduce the risk by searching for the rights in the relevant territories. However, this can be relatively costly and time-consuming, the results cannot be guaranteed and it may not give the licensee the comfort they are looking for, as the licensee may wish to modify the end product, losing the benefit of the searches.

Know-how

Many licensors fail to describe their know-how in any detail.
This has two major drawbacks:

(1) it may be difficult to prove what was licensed, and therefore what rights are covered by the provisions of the licence agreement. So if, for example, the licence were terminated, it could be difficult to prove which rights the licensee could no longer use;
(2) the technology transfer block exemption (see below) only covers know-how that is secret and substantial.

Improvements

Licences under rights protecting improvements are often problematic, as the nature of the rights is usually unknown. As a licensor, the best policy is to postpone granting the licence until the improvements are made unless, of course, you want a cross licence of the Licensee's improvements. Not surprisingly, licensees are usually less keen to agree to this, as they want to have a licence to everything that they might need.

If they are to be licensed, improvements need to be defined. The word "improvements" has proved difficult to construe in contracts. It will usually be interpreted in the light of the surrounding circumstances, unless the licence describes the type of improvements. In particular, in patent and know-how licences, it is unlikely to include inventions that are "quite distinct" unless they are mentioned specifically.

The extent of improvement licences will often depend on the property concerned, and whether the licence is exclusive or non-exclusive. With an exclusive licence, you may well want a narrow definition, such as property that falls within the scope of the other licensed rights. However, this may not be sufficient for the licensee. A wider definition could be rights that infringe the other licensed rights, and which may only be used with those rights.
If you are granting a non-exclusive licence, and are unlikely to grant any exclusive licences in the field, you could grant much wider rights. The only constraints will be financial, as you might lose the opportunity to grant a further licence, and to receive additional payments. In these circumstances, the licences to improvements could be subject to further payments.

Dividing the property - Methods of dividing IP

The basic methods of dividing IP are:

(a) splitting the property itself;
(b) division by time;
(c) licence for one or more territories;
(d) confining to field of use;
(e) dividing by "prohibited acts";
(f) granting more than one non-exclusive licence of the same property.

So, for example, a patent may be divided by its claims, may be licensed for a limited period, and the licence may be confined to a specific territory. It may also be licensed within a specified field of use, so, for example, a medicine may be licensed separately for human and veterinary use.

Dividing by prohibited acts

Each type of intellectual property prohibits people from doing specific things with the property. These "things" are known as "prohibited acts", which differ depending on the property concerned. A general indication of the prohibited acts under English law is set out in the table below.
It is possible to confine a licence to one or more prohibited acts.
So, for example, you may licence somebody to sell but not to make.

Table

Copyright (excluding rental, lending, performance and broadcasting)
Database right Patents Design right Registered designs
Copy, adapt, issue copies to public, possess, sell on or hire infringing copies, provide means for making infringing copies Extract, re-utilise Make, sell, use, import, keep, use patented process to make them, supplying the means relating to an essential element for putting the invention into effect Make design document to enable manufacture, make, import, possess, sell or hire Make or import for sale or hire, use, sell, hire, provide means for manufacture.

Label licensing

"Label licensing" is a bit of a misnomer, as it is used to refer to restrictions imposed on the sale of patented products. When a patented article is first sold by an authorised supplier, the purchaser has an implied licence to resell the article and to repair it. The licence is unrestricted, unless the purchaser is informed of restrictions at the time of sale, often by means of a label. The type of restriction must be made clear, and the purchaser must be informed of where to find the full details of the restrictions.

Label licensing can be used to extend the scope of the intellectual property, often by tying the initial purchase to a future transaction, in which case competition laws may be infringed (see below).
There are questions concerning the future of label licensing, especially in a European context. Indeed, label licensing may not be effective in other European jurisdictions. Nonetheless, there are licensors who are still operating label licensing schemes in the hope of reaping the benefits.

Tying

Some licensors try to make the licence conditional on the licensee taking licences under other rights, or acquiring goods or services. This may be contrary to competition or similar laws, depending on the jurisdiction. Many "industrialised" nations have competition laws. Competition laws are most likely to be infringed if the licence affects trade in the relevant jurisdiction, as is the case in the European Economic Area ("EEA"). There are similar laws in the UK, relating to trade in the UK.

In the EEA, infringement of competition law may invalidate the whole or part of the licence. It may also lead to either or both of the licensor and licensee being liable to fines levied by the European Commission, or the relevant state competition authority. In addition, there may be liability in damages to people who are adversely affected by the infringement.

In the EEA and in the UK it is possible to gain exemption for an agreement that would infringe competition laws. If the effect of the agreement would be to improve production and distribution of goods or promote technical or economic progress whilst allowing consumers a fair share of the resulting benefit.
This is on the basis that there are no unnecessary restrictions and the agreement does not allow the elimination of competition in a substantial part of the market.
There is a generic exemption covering technology transfer agreements that fulfil certain specified criteria. The exemption treats tying provisions differently from most other provisions. Tying provisions that are necessary to maintain quality are exempted, but other tying provisions are subject to an "opposition procedure". In order to qualify for exemption, a copy of the agreement must be sent to the European Commission, and if the Commission does not object within four months, the exemption is granted. Many licensors avoid notification if possible.

Financial terms

It is crucial to consider the intellectual property in the context of the marketplace. You need to work out who will manufacture, and what will then happen to licensed products before they reach the ultimate consumer. If there is some other method of exploitation, you need to work out what will happen between the first act of commercialisation and the last.

It is likely that different payments will be made at different stages in the "sales" chain. If you are going to take a royalty by reference to the price at which the product changes hands at a particular stage in the sales chain, your royalty will be reduced substantially if at that stage the product will be sold extremely cheaply.
The solution to the problem will vary, depending on the market and the property concerned. It may be possible to choose a licensee who is further down the sales chain, or create further, related, intellectual property that is of interest to somebody further down the chain. There are many ways of dealing with this. For example, you may licence somebody further down the chain, who then sub-contracts up the chain, you may split the rights amongst those in the chain, or may create rights to licence further down the chain. It may also be possible to use a label licence, but see separate section on label licensing.

Net Selling Price and Bundling

If you are charging a royalty by reference to the licensee's receipts, you will need to include some anti-avoidance provisions to ensure that your royalty is not paid by reference to a "sweet heart" transaction. For instance, you may reserve the right to substitute the open market price in the territory for a selling price that is artificially low, and to insist that licensed products are sold separately so that there is no cross subsidy when products are sold as a "package". If there is no open market price in the territory you may, for example, use a formula based on the cost of manufacture plus an uplift.

Auditing

Auditing provisions may look like boring red tape, so many people are tempted to make concessions when negotiating them. If you look at the published report and accounts of certain well-known licensing companies, you will realise that a great deal of revenue can be generated through good auditing.
You need to ensure that the auditor can enter the licensee's premises and make a general inspection, instead of inspecting some selected books in a separate room. An auditor needs to be able to inspect facilities where the licensed rights are exercised. So, for example, the licensee might have created a new product line, without thinking that the new product is made under licence, and royalties need to be paid. The auditor also needs to be able to ask questions, and to copy material, so that evidence is not destroyed.
Audits can bring in substantial revenue, but they are also costly, so many licensors insist that if the licensee has underpaid royalty by a certain amount, the licensee will pay the costs of the licensor's auditor.

Most favoured licensee

If you give a licensee "most favoured licensee" status, this means that you must not licence anybody else on more favourable terms, and sometimes that the licensee will receive the most favourable terms. The idea is fine in theory, but it can be difficult to compare different licence terms, and in some fields it is difficult to conform the licence terms. It also causes problems of confidentiality. Licensees tend to view their own licences as highly confidential, but wish to see terms of licences granted to other people.

Warranties

Title

It is difficult to avoid giving some form of assurance in respect of title, although it can be done. The main purpose of licensing is to confer rights, and a term that the licensor is able to grant the licence will usually be implied, even if it is not expressly stated. Unless the licensor created the rights himself, there will usually be some sort of risk to the licensor.

Non-infringement

Many people confuse warranties of title with non-infringement warranties. A warranty of title relates to the rights that you are granting, but a non-infringement warranty relates to other peoples' rights. It is a warranty given by the licensor to the effect that the licensee will not infringe other peoples' rights whilst "using" the licensed rights.

For a licensor of registerable rights, such a warranty can present considerable risks. The licensor may not be aware of all other rights in his field, especially if he is licensing very new technology, which has yet to be commercialised. As I mentioned in the first section, searching for registered rights can be expensive and time-consuming, and may not be appropriate if the licensee has yet to choose the exact nature of the end "product". If, however, the licensor is providing an end product, such as a software package, to an ultimate consumer, it is far more reasonable to expect a warranty.
A compromise position is a warranty to the best of the licensor's knowledge. Whilst this sounds very reasonable, it can present problems for larger organisations, as it can be difficult to consult all the relevant people, and even if they are consulted, they may not necessarily associate the licensee's activities with their particular prior knowledge.

Validity

Everybody wants the comfort of knowing that their intellectual property, and the intellectual property that they use under licence, is valid. The trouble is that a substantial amount of registered intellectual property would be found to be invalid if it were the subject of litigation, but it is never litigated, so the flaws are never discovered, and it is commercialised very successfully.

In the case of many patents it would take a great deal of expensive investigation to form a view on validity, and often it is only possible to be certain after litigation in the relevant territory. Other rights may not require the same amount of investigation, but could well require litigation. Life is simply too short, and few people have the money, to investigate and litigate everything.

If you were to conduct a thorough investigation, and there was an adverse finding, this could cause problems both with licensing and future litigation. If you obtain legal advice on validity, and disclose this to a potential licensee, it may lose its "privileged" status, and you may be obliged to disclose it in the course of the litigation. You may also have to disclose the information to a patent office in any event. Furthermore, if you fail to disclose it and licence the property, a court might find that it should have been disclosed to the licensee.

There are considerable risks in warranting validity of registered rights. If the licensee is especially concerned about validity, you could disclose relevant facts and allow them to form their own view. If you have any doubts about validity there are dangers in warranting validity to the best of your knowledge and belief. Equally, if there are concrete reasons for concern, it may be necessary to tell the licensee in order to avoid a claim for misrepresentation.

Invalidity, infringement, settlement

During the course of the licence, some or all of the property could become invalid, or be infringed. The licensee could also infringe somebody else's rights and be unable to avoid infringement or obtain a licence of the rights. In each case, the licensee's exploitation may be affected.

As with improvements, it is difficult to deal with the situation in the abstract, without knowing the facts, so it is often best for the licensor to postpone decisions on how to deal with this until it happens. Many licensees do not consider this, so you may well be able to do so. That said, licensors should make all payments non-refundable, so that the licensee will not try to claim a refund with retrospective effect. Some licensors also manage to oblige licensees to pay for action against infringers and, conversely, some licensees persuade licensors to contribute.

If payments under a licence are dependent on the licensee's receipts, you may have no option but to be accommodating in these circumstances, even if there is no provision for this in the licence. You may have to reduce the royalty, deal with the infringement, or assist the licensee in doing so if the licensee is entitled to litigate.

Dealing in other jurisdictions

Licences often cover territories outside the United Kingdom. Even if the licence is subject to English law, the laws of the territories covered may still affect the agreement. Classic examples of this are competition, patent and licensing laws.
Licensing laws are, typically, found in less "industrialised" countries. They usually affect transactions between their nationals and people from other jurisdictions, so they may not affect transactions between nationals of other territories. These laws may, for example, prescribe the maximum amount that you may charge, and the length of time for which you may charge it, as well as placing prohibitions on termination and/or preventing post term use of the licensed rights.

Patent laws may overlap with competition laws in areas such as tying, and charging a royalty after the expiry of the licensed property. So if you are taking advice in another jurisdiction, make sure that you take both patent and competition law advice.