Marriages not necessarily made in Heaven
LLike marriage, licensing is a relationship of cooperation between parties, both of whom want to extract value from that relationship.
Licensing essentially involves a Licensor, usually the owner of technology, wanting to derive financial, technical or other assistance from a Licensee in return for granting that Licensee the right to use the Licensor's technology.
Like a marriage, the parties may engage in prenuptial discussions, usually under the protection of a Non-Disclosure or Confidentiality Agreement – this might be termed the "getting to know you" stage.
It is at this time that the prospective Licensor can disclose its technology to the Licensee and, in return, find out whether the Licensee is an appropriate operator that is able to take the technology and use it so that both parties benefit.
Assuming that the parties are satisfied that:
- the technology does what it is supposed to do; and
- the Licensee has the personnel, ** and expertise to use it for the proposed purpose,
it’s time to get ready for the marriage.
The marriage takes place on the day the Licence Agreement is signed because that’s when each party has to start complying with its respective obligations under the Agreement. The document can be regarded as the equivalent of a Prenuptial Agreement, setting out as it does, the terms that will guide the parties through their ongoing relationship.
What should the parties be looking for in a Licence Agreement? Like marriages that take place daily between vast ranges of disparate people, licensing relationships take place between such a wide range of entities and, such a wide range of subject matter that no one size of Licence Agreement can possibly fit all.
There are, however, a number of elements common to all licensing relationships and if the parties get these right, the balance of the agreement will generally fall into place. Essentially, the common elements that ought to be addressed in a Licence Agreement are as follows:
- Who are the contracted entities? By this time it ought to be clear just who is contracting with whom.
- Licence – is it exclusive or non-exclusive? And what is the Licence about? In other words, what will the Licensee be using the technology for? Make something? Market it? Distribute it? Sell it? Or a combination of these?
And what is the “something”? In many cases the Licensor is given the right to use technology to make "products" - it is essential that these "products" are defined.
- Improvements – if the Licensee develops any improvements to the licenced technology in the course of the licence, who owns these improvements? If it is the Licensor then the improvements should form part of the licenced technology and there may be some adjustment to the royalty payable by the Licensee. Further, the Licensee may get a share of royalties received from other users of the licensed technology if they are given the right to use the improved technology.
As a matter of principle, our view is that the licensor of technology should obtain ownership of any improvements to that technology made by any licensee.
- Term – How long will the licence last? Unlike marriages, a licence is usually for a set initial term that gives both parties a chance to see if the deal is workable and usually, there are options to extend the initial term which may be on the same or different terms and conditions as those contained in the Licence Agreement. As to what is an ideal initial term or the period of any extension will depend on individual circumstances.
- Territory – A Licensor can dictate where a Licensee can use the licenced technology for the purposes of the licence.
This can be many countries, a single country or part of a country and can be expanded or reduced during the term of the licence.
Usually, the territory will be dictated by the circumstances of the Licensor and where and how it sees its technology being exploited.
- Licence fees and royalties – For Licensors and particularly small inventors, licence fees and royalties can be the most important part of the Agreement – how much will they be getting for their hard work.
For corporate owners of technology who are giving rights to use that technology to other companies in other jurisdictions where it is inconvenient for the Licensor to trade, it is all a matter of business.
Licence fees are usually paid up front and may be regarded as a purchase price – the cost, if you like, of buying the licence.
The more unique or well known the technology, the higher in most cases will be the licence fee.
For many inventors, the licence fee is a means for recovering costs expended on developing the relevant technology.
Royalties are the ongoing fees paid by Licensees to use the licenced technology. They can be calculated in many ways with the most common being a percentage of the money received by the Licensee from sales of products manufactured using the licenced technology or a fixed sum for every unit of product sold.
Licensors seeking to guarantee a return may seek payment of a minimum royalty in each year of the initial term of the licence. This can also act as a performance incentive for the Licensee.
- Patents – The Agreement should stipulate who is responsible for prosecuting any patents that support the licensed technology.
If it is the Licensee, because the Licensor has insufficient funds, the cost of prosecuting the patents may lead to a reduction in royalties paid.
- Other Intellectual Property – If a Technology Licence also contemplates the Licensee using other intellectual Property of the Licensor such as copyright or trade marks, the Agreement must contain terms and conditions covering such use.
- Termination – Like marriages, Licence Agreements can end in tears, and if they do then, like marriages, there are certain obligations on the parties.
If these obligations are not made clear then, there can be unseemly and expensive arguments.
It is essential therefore, that a Licence Agreement clearly sets out the rights and obligations of the parties in the event of termination of the agreement. Matters such as fees payable and what happens to any stock of products made under licence that may be on hand at termination and advertising and marketing material prepared by the Licensee, need to be addressed.
The above is not an exhaustive list, but if it is properly completed, the parties will have a clear basis going forward on which to base their future relationship and that, in the end, like a good Prenuptial Agreement can lessen the likelihood of disputes and costs particularly if the relationship falls apart.
"Prevention is cheaper than cure" should thus be an adage adopted by all those entering into licensing arrangements.
If you have any questions about this article please contact Adam Ghijben on adam.ghijben@ekmlegal.com.
