We decided to do a series of 5 blog posts which explains in detail, the five most important contracts an IP lawyer must know. Here is the first article of the series. In this article, Varshita Dogra of VIPS discusses IP Licensing Agreements.

The job of an IP lawyer is to assist clients in safeguarding and protecting their interests with respect to their Intellectual Property. Part of the job would be to draft numerous agreements such as selling, licensing, assigning or transferring of said intellectual property. It is a necessary skill for working as an IP lawyer to be able to create well structured intellectual property agreements that best protect the business interests of the owners of such intellectual property.

Although, plethora of sample agreements are found on the internet, it is important to realise that these templates are to be taken as a loose guideline and not copy them verbatim. It is advisable to format the agreement in a way which makes sense for the specific interest of your client to avoid any discrepancy.

What are IP rights?

Intellectual property rights are the rights given to persons over the creations of their minds [1]. There are different kinds of intellectual property, which includes Copyright, Trademark, Patent, Industrial Design, Trade Secrets, Know-How, etc. governed by different statues in India. These laws provides different rights associated with these IPs; where some rights are specific to those with registered IPs, some are available to all owners of IP. These rights with respect to IP are, in simple terms, a way to exploit the IP in terms of its different uses, modifications, enhancements, etc.

In absence of a written agreement, IP rights remain with the creator of the IP, even if you have been paid by another party to create the IP. There is a minor exception to this in case of work for hire in copyright. In case of joint inventions where there is no agreement to cooperate, both the parties can license the IP independently.

In this article, we’ll be discussing the different contracts that an IP lawyer has to commonly draft and various clauses pertaining to these specific contracts.

IP Licensing Agreements

An IP license agreement is entered into between an owner of an IP and a third party to authorise the third party (licensee) to access, use or enjoy certain rights associated with the intellectual property, in exchange for certain consideration or co-licensing of IPs. Such an agreement outlines the ways in which the licensee may or may not use the property owned by the licensor. As an IP lawyer, you must keep in mind to ensure a balance of interests between the licensee and the licensor.

IP licensing can occur only when at least one of the parties owns valuable intellectual property. Owning an IP includes the right of owner to prevent others from using that IP for commercial purposes. Licensing is beneficial for IP owners as it allows them to generate revenue out of their property by making it available to others for a consideration without affecting their ownership over it. Licensing is also beneficial for licensees, as it helps them save resources being spent on research and development and eliminate risks associated with the same.

Specific Clauses to be kept in mind while drafting an IP licensing agreement

Apart from the general clauses of any commercial contract, certain clauses to be kept in mind while drafting an IP license agreement are as follows:

• Scope of grant of license and conditions, if any, for exercising the rights so licensed

The scope of grant of license depends on the nature of the intellectual property being licensed. It is essential to define the intellectual property which is being licensed in the agreement. A licensor can only grant rights which he himself possesses under the law. All or any of the rights that the licensor possesses, can be licensed by him. The scope of license must also be specified in terms of the field and territory of use of the license.

If grant of license includes right to ‘sublicensing’, the same must be specified in the agreement. The right to sub-license can be for all or some of the rights being licensed. For example : A license may be granted for using, copying and modifying a source code and to sell the resultant software with the right to sub-license only the right to sell the resultant software (through distribution channels). The two key definitions which must be present in every IP licensing agreement are :

‘Licensed Product’ – which defines the intellectual property being licensed

‘Use’ – which would define the scope of usage of the licensed IP by the licensee

• Nature of exclusivity or non-exclusivity

Exclusive License

An exclusive license restricts the licensor’s freedom to use the intellectual property and also to do business with other licensees. An exclusive license can be granted for a particular territory or the whole world depending upon the negotiations between the parties. When an  exclusive license is limited by field of use or territory, it is important to carefully state the extent to which the license is permitted to enforce the intellectual property rights. A territory exclusive license is usually granted by foreign companies to Indian companies in order to avoid the risk of entering into a new market themselves but at the same time exploiting it.

An exclusive license is risky for the licensor as the only commercial use of the IP would be by the licensee. In order to cover the risks associated with exclusive license, the licensor can add certain provisions to the license agreement such as a minimum royalty provision. According to the ‘minimum royalty provision’, the licensor may require the licensee to commercialise the IP within the first year or a specific time period. The licensee may also be required to reach a minimum amount of royalty within a time period. If they do not meet the royalty expectations, they could be asked to make up the difference with their own money. The agreement can also provide that if the goal is not reached, the exclusive patent license could be terminated.

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Sole License

A sole license is granted when the licensor wants to enjoy his rights with respect to the intellectual property but also licenses it to only one licensee for a particular territory or the whole world. In such a case, the licensor cannot license his intellectual property to any other licensees.

Non-Exclusive license

A non-exclusive license grants to the licensee, the right to use the intellectual property, and does not prevent the licensor from licensing his intellectual property to others. The licensor is free to exploit his own intellectual property and license it to other licensees as well. Commercial softwares are licensed on a non-exclusive basis. Where license is non-exclusive, it is likely that the licensor will prohibit sub-licensing.

• Enforcement of Rights created under the agreement

The rights created can be enforced by indicating which party would be responsible for maintenance of the registered IP, and which, for the payment of all the fees associated with the registration. Enforcement of rights can involve various contractual remedies like monetary damages, injunction and other equitable remedies, or specific method of dispute resolution (arbitration clause).

• The term for which the license has been granted

As with any type of commercial agreement, an IP license agreement must contain a clause stating the definite term of the agreement. Such a clause must also specify the provisions which will remain enforceable, even after the term of the agreement is over such as confidentiality clause. The term clause must also specify about the terms for renewal of the contract after expiration, such as by giving a notice few months prior to the expiration.

• Obligations of the parties involved

The obligations should be clear and unambiguous. The consequences of “non-fulfilment” of obligations should also be specified to ensure that termination due to the default of one party of its obligations does not lead to liability for the other party.

Positive obligations

Positive obligations are the obligations which secure effective enjoyment of rights so created. On part of the licensor, this would include obligation to disclose; assist in form of training, consulting, or technical support and on part of the licensee would include duty to report infringement; covenant to exploit

Negative obligations

Negative obligations are the obligations refraining the parties from doing an act, which would include duty not to compete with the licensor, not to disclose confidential information to unauthorised persons. It would also include duty not to modify the product in case such a right has not been granted under the license.

• Treatment of improvements, enhancements and modifications

Any further development in the usability, functionality, performance, efficiency or other characteristics of the licensed intellectual property made either by the licensor or the licensee can be said to be an improvement.

As far as their treatment goes, improvements can either be automatically included in the definition of the licensed intellectual property, made available to the licensee on payment of a specific fee, or in any other way negotiated between the parties. Usually for improvements made by the licensee, the licensor would require full disclosure and promptness. Although in cases where the licensee modifies the licensed intellectual property for its own customised usage, the parties could also agree on the licensee retaining the modified intellectual property without interference.

A proper definition for the terms ‘licensed technology’, ‘improvement’, ‘enhancement’ and ‘modification’ and who would own such improvements and all IP that vests, in the same, in order to avoid ambiguity as to their treatment under the Agreement.

• Contract Termination and effects of such termination

There are basically two types of terminations – termination for convenience and termination for cause.

A party with right to termination for convenience usually is allowed to terminate the agreement at any point of time, provided that adequate notice is given to the other party. A licensee typically would not want the licensor to have such a right as it could lead to huge losses.

The clause for termination of agreement for cause may include the following events:

1. Material breach by other party of the terms of agreement
2. Failure of other party to conduct business in the ordinary course
3. Bankruptcy or insolvency of the other party
4. Licensee can have right to terminate in case the intellectual property is found to be invalid or if he is sued by a third party for infringement, particularly, if he does not have recourse of indemnity from the licensor

The agreement must also provide for the consequences of termination of rights and obligations of each of the parties in order to avoid further disputes. Usually the consequence is that the licensor takes over the inventory of the licensee, seeks return or destruction of all confidential information and all material that contains or reflects licensed know-how. It is extremely important to specify the clauses which would survive the termination and for how long they will survive, (Example: confidential information, representation and warranties, indemnity provisions).

• Indemnity Clause

An indemnity clause is included in an agreement to prevent loss or to compensate for a loss which may occur as a result of a specified event. Generally, it is treated as a boilerplate provision, which should not be the case in an IP licensing agreement, as it can have far reaching consequences for either parties. The licensees usually insist on adding an indemnity clause requiring the licensor to indemnify the licensees against risks such as that of infringement, product liability, insurance and more, or atleast over which the licensor has control. This is because the licensor is the one providing the intellectual property and also making money from the transaction. An indemnity clause can also be used by the licensor to cover the risk of damages caused due to acts of the licensee, disclosure of confidential information to third parties or even misuse of the product. Some risks must be indemnified even after the expiry or termination of the contract, which must be provided for under the indemnity clause or the term and termination clause.

• Royalty

The licensor may require fixed or variable fee payments to be paid on a periodical basis called ‘royalties’ which provide a continuous stream of revenue to him. Although the determination of royalty depends upon negotiations between the parties, there must be some reasonable basis for determining the same. The Competition Commission of India has pronounced multiple decisions on determination of royalty rates in order to prevent abuse by licensor due to his dominant position in the market. One such decision of the CCI can be seen here.

• Transferability or Assignment of License

Generally, a licensee’s rights are not assignable unless the license agreement expressly permits assignment or the licensor otherwise consents. A licensor typically opposes free transferability of license rights by licensees as it would lead to diminished control of the licensor on who gets rights to his intellectual property and could also lead to the intellectual property ending up in the hands of his competitor. Every IP license agreement must specify that the license is not assignable at the hands of the licensee, unless otherwise agreed between the parties.

Important considerations while drafting different types of licensing agreements

1. The most common and basic mistake that some IP lawyers commit while drafting licensing agreements is the terminology that they use. While referring to the rights being licensed, the term that should be used is ‘grant of right(s)’ and not ‘assigning the right’. Such a small mistake can lead to litigation wherein the licensee could claim assignment even if the agreement was for licensing of the intellectual property. In order to avoid such a confusion, the agreement must also specifically state everywhere that it is a licensing agreement.
2. Care must be exercised by the licensor that the grant clause does not grant “all rights, title and interests in and to the intellectual property” to the licensee. Such a clause would constitute an “assignment” of the intellectual property rights making the purported licensee the new owner of these rights, even to the exclusion of the purported licensor.[2]
3. It is a common practice in a licensing agreement which includes the grant of right to sub-license, to have a provision allowing the licensor to approve the terms and conditions of the sub-license or, at the very least, to require that the sublicense be on terms and conditions that are substantially similar to those set forth in the licensing agreement. Such a right to the licensor is extremely essential when the IP being licensed includes trademarks, so that the licensor  can ensure that quality standards are imposed on products or services bearing the licensed marks.
4. For a licensing agreement granting rights to use trademark, there must be a provision for quality control to protect the distinctiveness and reputation of the trademark. Such a provision is necessary as, without it, there is possibility that the quality of two products sold under the same mark may vary. It is also important to make such a provision enforceable.
5. Where there are more than two parties involved in a licensing agreement, or especially in the case of cross-licensing, it is advised to avoid using the terms “licensee” and “licensor”, or atleast give proper definition for these terms in the definition clause to avoid any confusion.
6. In case, where there is a family or series of patents being licensed, it is advisable to make a list of all the patents being licensed and specify them in a ‘Schedule’ to the agreement to avoid confusion.

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SAMPLE IP LICENSE AGREEMENT

This License Agreement (this “Agreement” of this “License Agreement”) is made and effective as of [DATE] (the “Commencement Date”) by and between:

[LICENSOR.Company], a company organized and existing in [LICENSOR.Country], with a registered address at [LICENSOR.Address] (“Licensor”)

and

[LICENSEE.Company], a company organized and existing in [LICENSEE.Country], with a registered address at [LICENSEE.Address] (“Licensee”).

WHEREAS:

1. Wishes to obtain a license to use [DESCRIPTION OF PRODUCT] (hereinafter, the “Asset”), and
2. Licensor is willing to grant to the Licensee a non-exclusive, non-transferable License to use the Asset for the term and specific purpose set forth in this Agreement.

NOW, THEREFORE, in consideration of the foregoing, and of the mutual promises and undertakings contained herein, and other good and valuable consideration, the parties agree as follows:

1. DEFINITIONS

1.1 “Agreement” means this License Agreement including the attached Schedule.

1.2 “Confidential Information” means information that:

1. is by its nature confidential;
2. is designated in writing by Licensor as confidential;
3. the Licensee knows or reasonably ought to know is confidential;
4. Information comprised in or relating to any Intellectual Property Rights of Licensor;

1.3 “Asset” means the Asset provided by Licensor as specified in Item 6 of the Schedule in the form as stated in Item 7 of the Schedule.

1.4 “Intellectual Property Rights” means all rights in and to any copyright, trademark, trading name, design, patent, know how (trade secrets) and all other rights resulting from intellectual activity in the industrial, scientific, literary or artistic field and any application or right to apply for registration of any of these rights and any right to protect or enforce any of these rights, as further specified in clause 5.

1.5 “Party” means a person or business entity who has executed this Agreement; details of the Parties are specified in Item 2 of the Schedule.

1.6 “Term” means the term of this Agreement commencing on the Commencement Date as specified in Item 4 of the Schedule and expiring on the Expiry Date specified in Item 5 of the Schedule.

2. LICENSE GRANT

2.1 Licensor grants to the Licensee a non-exclusive, non-transferable license for the Term to use the Asset for the specific purpose specified in this Agreement, subject to the terms and conditions set out in this Agreement.

3. CHARGES

3.1 In consideration of the Licensor providing the license under clause 2 of this License Agreement, the Licensee agrees to pay Licensor the amount of the License Charge as specified in Item 9 of the Schedule.

4. LICENSEE’S OBLIGATIONS

4.1 The Licensee cannot use the Asset, for purposes other than as specified in this Agreement and in Item 8 of the Schedule.

4.2 The Licensee may permit its employees to use the Asset for the purposes described in Item 8, provided that the Licensee takes all necessary steps and imposes the necessary conditions to ensure that all employees using the Asset do not commercialize or disclose the contents of it to any third person, or use it other than in accordance with the terms of this Agreement.

4.3 The Licensee will not distribute, sell, license or sub-license, let, trade or expose for sale the Asset to a third party.

4.4 No copies of the Asset are to be made other than as expressly approved by Licensor.

4.5 No changes to the Asset or its content may be made by Licensee.

4.6 The Licensee will provide technological and security measures to ensure that the Asset which the Licensee is responsible for is physically and electronically secure from unauthorized use or access.

4.7 Licensee shall ensure that the Asset retains all Licensor copyright notices and other proprietary legends and all trademarks or service marks of Licensor.

5. INTELLECTUAL PROPERTY RIGHTS

5.1 All Intellectual Property Rights over and in respect of the Asset are owned by Licensor. The Licensee does not acquire any rights of ownership in the Asset.

6. LIMITATION OF LIABILITY

6.1 The Licensee acknowledges and agrees that neither Licensor nor its board members, officers, employees or agents, will be liable for any loss or damage arising out of or resulting from Licensor’s provision of the Asset under this Agreement, or any use of the Asset by the Licensee or its employees; and Licensee hereby releases Licensor to the fullest extent from any such liability, loss, damage or claim.

7. CONFIDENTIALITY

7.1 Neither Party may use, disclose or make available to any third party the other Party’s Confidential Information, unless such use or disclosure is done in accordance with the terms of this Agreement.

7.2 Each Party must hold the other Party’s Confidential Information secure and in confidence, except to the extent that such Confidential Information:

1. is required to be disclosed according to the requirements of any law, judicial or legislative body or government agency; or
2. was approved for release in writing by the other Party, but only to the extent of and subject to such conditions as may be imposed in such written authorization.

7.3 This clause 7 will survive termination of this Agreement.

8. DISCLAIMERS & RELEASE

8.1 To the extent permitted by law, Licensor will in no way be liable to the Licensee or any third party for any loss or damage, however caused (including through negligence) which may be directly or indirectly suffered in connection with any use of the Asset.

8.2 The Asset is provided by Licensor on an “as is” basis.

8.3 Licensor will not be held liable by the Licensee in any way, for any loss, damage or injury suffered by the Licensee or by any other person related to any use of the Asset or any part thereof.

8.4 Notwithstanding anything contained in this Agreement, in no event shall Licensor be liable for any claims, damages or loss which may arise from the modification, combination, operation or use of the Asset with Licensee computer programs.

8.5 Licensor does not warrant that the Asset will function in any environment.

8.6 The Licensee acknowledges that:

1. The  Asset has  not been prepared  to meet any specific  requirements of any party, including any requirements of Licensee; and
2. it is therefore the responsibility of the Licensee to ensure that the Asset meets its own individual requirements.

8.7 To the extent permitted by law, no express or implied warranty, term, condition or undertaking is given or assumed by Licensor, including any implied warranty of merchantability or fitness for a particular purpose.

9. INDEMNITY

9.1 The Licensee must indemnify, defend and hold harmless Licensor, its board members, officers, employees and agents from and against any and all claims (including third party claims), demands, actions, suits, expenses (including attorney’s fees) and damages (including indirect or consequential loss) resulting in any way from:

1. Licensee’s and Licensee’s employee’s use or reliance on the Asset,
2. any breach of the terms of this License Agreement by the Licensee or any Licensee employee, and
3. any other act of Licensee.

9.2 This clause 9 will survive termination of this Agreement.

10. WAIVER

10.1 Any failure or delay by either Party to exercise any right, power or privilege hereunder or to insist upon observance or performance by the other of the provisions of this License Agreement shall not operate or be construed as a waiver thereof.

11. GOVERNING LAW

11.1 This Agreement will be construed by and governed in accordance with the laws of [COUNTRY]. The Parties submit to exclusive jurisdiction of the courts of [COUNTRY].

12. TERMINATION

12.1 This Agreement and the license granted herein commences upon the Commencement Date and is granted for the Term, unless otherwise terminated by Licensor in the event of any of the following:

1. if the Licensee is in breach of any term of this License Agreement and has not corrected such breach to Licensor’s reasonable satisfaction within 7 days of Licensor’s notice of the same;
2. if the Licensee becomes insolvent, or institutes (or there is instituted against it) proceedings in bankruptcy, insolvency, reorganization or dissolution, or makes an assignment for the benefit of creditors; or
3. the Licensee is in breach of clause 5 or 7 of this Agreement.

12.2 Termination under this clause shall not affect any other rights or remedies Licensor may have.

13. LICENSE FEE

13.1 In consideration for the license grant described in this License Agreement, Licensee shall pay the yearly license fee as stated in Item 9 of the Schedule immediately upon execution of this Agreement and upon each anniversary date of this Agreement.

13.2 The license fee and any other amounts payable by the Licensee to the Licensor, under this Agreement, are exclusive of any and all foreign and domestic taxes, which if found to be applicable, will be invoiced to Licensee and paid by Licensee within 30 days of such invoice.

14. ASSIGNMENT

14.1 Licensee shall not assign any rights of this License Agreement, without the prior written consent of Licensor.

15. NOTICES

15.1 All notices required under this Agreement shall be in writing and shall be deemed given (i) when delivered personally; (ii) five (5) days after mailing, when sent certified mail, return receipt requested and postage prepaid; or (iii) one (1) business day after dispatch, when sent via a commercial overnight carrier, fees prepaid.  All notices given by either Party must be sent to the address of the other as first written above (unless otherwise changed by written notice).

16. COUNTERPARTS

16.1 This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which taken together shall constitute one instrument.

17. SEVERABILITY

17.1 The Parties recognize the uncertainty of the law with respect to certain provisions of this Agreement and expressly stipulate that this Agreement will be construed in a manner that renders its provisions valid and enforceable to the maximum extent possible under applicable law. To the extent that any provisions of this Agreement are determined by a court of competent jurisdiction to be invalid or unenforceable, such provisions will be deleted from this Agreement or modified so as to make them enforceable and the validity and enforceability of the remainder of such provisions and of this Agreement will be unaffected.

18. ENTIRE AGREEMENT

18.1 This Agreement contains the entire agreement between the Parties and supersedes any previous understanding, commitments or agreements, oral or written.  Further, this Agreement may not be modified, changed, or otherwise altered in any respect except by a written agreement signed by both Parties.

IN WITNESS WHEREOF, this Agreement, including the attached Schedule, was signed by the Parties under the hands of their duly authorized representatives and made effective as of the Commencement Date.

[LICENSOR.Company]

[LICENSOR.FirstName] [LICENSOR.LastName]

[LICENSOR.Title]

[LICENSEE.Company]

[LICENSEE.FirstName] [LICENSEE.LastName]

[LICENSEE.Title]

SCHEDULE

Item 1 – License Agreement

THE LICENSE AGREEMENT OF WHICH THIS SCHEDULE FORMS A PART IS DATED AS OF [DATE] AND IS BY AND BETWEEN THE PARTIES REFERENCED IN ITEM 2 BELOW.

Item 2 – Name and Address of Licensor and Licensee

Licensor: [LICENSOR.Company], a company organized and existing in [LICENSOR.Country], with a registered address at [LICENSOR.Address].

Licensee: [LICENSEE.Company], a company organized and existing in [LICENSEE.Country], with a registered address at [LICENSEE.Address].

Item 3 – Other License Terms

Item 4 – Commencement Date

Item 5 – Expiry Date

Item 6 – Description of Asset

Item 7 – Format of Asset

Item 8 – Approved Purpose

Item 9 – License Fee

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References

[1] Article on “What are intellectual property rights? : TRIPS” at the World Trade Organisation website.

[2] “Key Aspects of IP License Agreements” written by Donald M. Cameron and Rowena Borenstein of Ogilvy Renault