While there are different types of licenses, all licence agreements are contracts where both the licensor and licensee are bound by contract laws. The two key aspects of a licence agreement are the conditions and royalties, as these set out the main obligations of the licensee. Below, we set out the important aspects you should be aware of before entering licence agreements.
Often licence agreements will contain conditions that are put in place to cover certain aspects of the licence, such as terms with regards to assignments and confidential information. These conditions define the scope of the agreement and set out where obligations lie for both licensor and licensee. There are a few key terms and conditions that a licence agreement should have to ensure that important provisions are covered, including:
- The licensee maintains good records and accounts and the ability of the licensor to inspect these;
- The licensee agrees not to disclose material/confidential information;
- Performance obligations and targets on the licensee for both pre-entry and post-entry to the market;
- Whether sublicensing is allowed (generally this will be the case if a licence is granted to a large multinational company, which will then grant a sub-licence to an overseas branch);
- The process of assigning or transferring a licence from one licensee to another;
- Clear termination rights should be included in case the licensee fails to meet certain performance thresholds or if the licensee is no longer acting in the licensor’s best interests.
The conditions of a licence agreement will depend on the purpose for which the licence is being granted. For example, if it is being granted for the purpose of securing a sub-licensee that can market worldwide, you may wish to include that as a term of the agreement.
Further restrictions can also be added to limit any potential challenges to the licensor’s rights and interest in the IP.
Licence Agreements and Royalties
In general, a licensee will have to pay licence royalties to the licensor. The royalty rate is usually calculated in percentage proportion to the sale price of the product. However, some factors can influence this, including:
- Industry type – different industries have different rates;
- Stage of development – if the product is market-ready, the royalty rate will be higher;
- Bargaining positions – the rate may be adjusted according to the strength of either the licensee or licensor’s bargaining position.
Licence royalties may also include royalties for the use of a process if a product is being manufactured using the licence. Lump-sum licence fees may also apply to be paid at the time of granting a licence; this can include either a signing fee (e.g. including reimbursement for legal fees and accountant’s fees) or milestone payments (e.g. the first sale of a product). It is prudent to ensure that the licensee has sufficiently well-kept accounts to be able to pay these royalties.
You should ensure that the licence agreement you have set out accurately reflects what rights you are handing over to the licensee and what rights you still have as the licensor. It is important to remember that even though you are licensing out the use of your IP, you still own it. As such, any violation of your IP rights by a third party can still be enforceable by you. IP licence agreements can potentially become quite complex, so it is always best to consult with an IP lawyer.