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This article is written by Yogeetha Sai from IFIM LAW SCHOOL, Bangalore.


A patent license agreement usually gives a licensee, subject to certain restrictions, exclusive rights to produce, sell, and use a proprietary invention. The amount of royalty due by the licensee to the licensor would also be specified by a patent licence agreement.

Patent Licensing is an act of the third party having given, by way of selling and using the patented patent, rights to extricate its benefits. The owner of the patent authorises a third party to use, sell and take advantage of its patented invention for a price previously negotiated as royalties.

An owner of a patent can transmit or pass the third person’s interests in a patent. For a while over a mutual agreement, the Licensor grants his or her control over invented intellectual property. The licensee will take advantage and have a right of interest in the patent during this time. It will use the approved design to make money within the time approved.

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Under the terms of a patent licence agreement the rights transferred by the patent holder to the party who wishes to use the patented invention (licensee) are specified. Usually, the patent arrangement contains the royalty or accepted-upon charge that the licensee would send to the licensor in order for the licenced invention to be used.

A patent licence contract is a legally binding contract, where both the licensee and the licensee have obligations that the patent licence deal needs to satisfy.

Types of patent licensing 

  1. Exclusive Licensing

The transition of rights by the patent holder takes place under an exclusive licence. The identity is the only asset the owner has. It is like joining and taking on all of the liability of the proprietor of the patent. The only thing the licensee cannot do is that it is not possible for someone else to licence the patent. It is given only to him and nobody else will licence it further. By issuing an exclusive licence, even the owners of the patent may not sell the products in the jurisdiction in which the licensee has obtained an exclusive licence. With this form of licencing, the risk of fraud is smaller because it is not exploited because the licensee will have a monopoly on the market, meaning that the quality of the goods will be greater than the normal price and the sales will therefore be greater. So, this would mean that the Licensor who assigned the licence gets the higher royalty charge.

An individual, for instance, gets a patent for a new medication that prevents a disease, and no other medicine can do so. But he doesn’t have enough capital and infrastructure to manufacture, produce and market the drug on a mass scale. Thus, the owner of the patent offers an exclusive licence to a pharmaceutical firm that manufactures, distributes and sells the specific medication. All rights shall remain with the licensee except for the title of the patent. This will lead to high sales generation and high royalty payments.

  1. Non-exclusive Licensing

It allows more than one licensee the same freedom. This means that one licensee may use the technology, but all licensees may be entitled to fair utilisation along with him for the same commodity. The proprietary product can be abused by more than one person / entity. However, the commodity is of such a kind that you must licence it to as many companies as possible to produce more profits.

For example, a business concerned with vehicle steering technologies has come up with a patented innovation. Instead of granting only one car producer a licence to produce and use it, if various automakers will produce and use for that region in various car factories, it would obtain more royalties from businesses.

Clauses under a patent licensing agreement

  1. Identification of the Parties
  2. Recital Clause
  3. Definition clause
  4. License clause
  5. Payment clause
  6. Indemnification clause
  7. Termination clause
  8. Representations and warranties of licensor
  9. Representations and warranties of licensee
  10. Relationship of parties
  11. Assignment
  12. Dispute resolution clause
  13. Other Common Clauses

1. Identification of the Parties: The person with the power to grant the permit, and the person carrying out the permit, should make an arrangement. The identity section of a licencing agreement includes the identifying information of both parties involved in the contract. When the licensee is a company, the registered name of the company is given. The name and address of the household shall be indicated if the licensor / licensee is a person.

2. Recital Clause: The recital clause is a useful method to describe the purpose and history of the licence. The recital clause also aids with the reading of the Arrangement. The recital clause describes the purpose or principle underlying the agreement. The recital clause should, for example, set out clearly the sequence leading to a contract if the licensee demanded the licensee to retain the licensee ‘s patented technologies production rights. For example, “if the licensee is involved in (including details) the automotive industry and the licensee is subject to a patent (including detail)”

Whereas the licensee and the licensee agree to cooperate (including details)’ for the purposes of the manufacture, distribution and marketing of such products.

3. Definition Clause: The definition clause serves as the Agreement’s dictionary. There should be specifically defined essential words guiding the transaction. It should be taken into account that if a term or words in the Agreement are specified, the specified definition takes priority over all other common sense. The products / materials approved should be specifically specified, since the whole transaction is focused on the same.

4. License clause: It sets out the scope and degree and any limits on the privileges bestowed upon the licensee. What the licensee is allowed to do by using plain and valid language of the grant must be explicitly determined. This provision can have carried out certain limits on licences. For instance, the sub-licensing constraint modifies the basic character when the job is permitted, etc. This is better illustrated by an explanation of a grant provision:

Subject to and based on the payment by the licensee of consideration and the complete and timely compliance by the licensee of the terms and conditions of this Arrangement, the licensor hereby grants the licensee a non-transferable license to:

Create the goods that have been licenced;

Regulated goods produce (here may be other provisions of grant)

5. Payment clause: the payment clause talks about running royalties, accrual, payment, accounting statements, interest, books and records and audits, confidentially. For the right of perpetual use of that asset, a royalty is a provision paid from one party to another that owns a specific asset.

  1. Running royalties means the compensation paid to the licensee or franchisor on the basis of the amount of units sold or generated in place of a lump sum paid.
  2. Accrual means Accruals are sales received or costs accrued that impair the operating profits of a business on the income statement, although the transaction-related cash has not actually changed hands. Accruals also control the balance sheet, as non-cash assets and liabilities are involved.
  3. Confidentiality includes a series of rules or a commitment typically enforced by confidentiality agreements that limit access to certain forms of information or impose limits on it.

6. Indemnification clause: Indemnity is a safeguard against possible damage or loss, particularly the promise of a payment, or of the money that is paid when such damage or loss occurs. This clause mentions the licensee and licensors indemnifications under the agreement. Under this clause the claim for indemnity or reimbursement is provided when a defendant (indemnifier) vows to avoid any harm, losses, losses or negligence incurred by the actions of the indemnifier or any third party from any such kind of legal repercussions. At the outset, the underlying value of the compensation provision is the change in entirety or in part of the obligation from one party to another.

7. Termination clause: The termination clause Defines the conditions in which the arrangement will be concluded. Cancelation can take place until the contractual duties are fulfilled. termination clauses can still be customised, but common clauses are used in almost all deals. The termination provision details the conditions in which the parties can terminate their legal relationship and terminate their contractual obligations. Under common law, for material or fundamental violation of the agreement, the parties may terminate the agreement.

8. Representations and warranties of licensor: this clause defines the Representations and warranties of licensor.

A statement of truth that causes a party to enter into the contract is a representation. The declaration made before or at the time of the contract being made refers to a historical fact or current condition relevant to the contract that affects the party to the contract.

A warranty is an obligation or a condition that a fact is, or will be as claimed or promised in relation to the subject of a contract and that the arrangement prevents the receiver against damages if the fact is or appears untrue (i.e. an implicit compensation).

9. Representations and warranties of licensee: this clause defines the Representations and warranties of licensee.

A statement of truth that causes a party to enter into the contract is a representation. The declaration made before or at the time of the contract being made refers to a historical fact or current condition relevant to the contract that affects the party to the contract.

A warranty is an obligation or a condition that a fact is, or will be as claimed or promised in relation to the subject of a contract and that the arrangement prevents the receiver against damages if the fact is or appears untrue (i.e. an implicit compensation).

10. Relationship of parties’ clause: As a consequence of the arrangement, a Partnership between Parties clause defines the relationship between the parties. Or, most generally, it makes it clear that there is no particular arrangement between the parties (for example, no agreement or employee / employer arrangement. This is sometimes referred to as a No Agreement clause or an Independent Contractor clause. The provision would also indicate that no party has the authority to act on behalf of the other party or to tie the other party legally.

11. Assignment clause: The assignment clause defines which statutory duties, privileges and duties can be shifted from one of the parties to another party. The assignment may be in full or in part, and the provision further sets out the terms under which the party may delegate those also mentions the binding of successors

In other words, the assignment clause is all about the allocation of a duty or merit object from one entity to the next. While anyone may use assignment clauses, it is important to remember that all interested parties can unanimously agree on the move.

In general, a contract assignment clause is inserted such that, when such conditions occur, a party will have the option of transferring its portion of the contract to another party. More frequently than not, assignment clauses exist between a successor’s business owner or a subsidiary’s corporation.

12. Dispute resolution clause: This clause gives the process by which the parties agree to remedy conflicts arising out of their arrangement. It can cover both contractual conflicts (e.g. differences of opinion as to the purpose and effect of a given contract clause) and non-contractual conflicts (e.g. where party A alleges that party B has been deficient in its execution of the contract). Different types of conflict resolution exist, one or more of which may be laid out in a clause for dispute resolution. Ensuring that the dispute resolution clause is simple, succinct and workable is crucial.

13. Other common clauses: Some other clauses can also be added to make the Arrangement more effective, such as Force Majeure, Separability, Survival etc. These clauses are explained below:

    1. Force Majeure: Under the event that such performance is obstructed, delayed or impractical by storm, burning, war or riot, or any other cause beyond the fair control of both parties, the implementation of any component of such agreement by both parties can be excused. The party whose performance is affected shall, upon the occurrence of any such event, notify the other party of such occurrence.
    2. Severability: If a court of qualified competence determine any clause of this Convention as invalid or non-enforceable, the invalidity shall not affect the legitimacy or execution of any other clause and shall be considered to be distinct from the agreement.
    3. Survival: It is a clause that determines the conditions or provisions of a contract, if any, will remain in place until the complete execution of the contract and the terms of the contract have been fulfilled.
    4. Computation of time: this clause includes the particular presumptive definitions of the term’s “year”, “day” and “at least” that refer to the period measurement, unless the words selected by the parties suggest that they wish to take on any other sense

Appropriate precaution should be taken to ensure that provisions are not used in patent licence arrangements that are deemed unconstitutional. Moreover, reasonable action must be taken to ensure the validity and enforceability of the agreement until the agreement is reached.

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