This article has been written by Nikita Goel pursuing a Diploma in International Contract Negotiation, Drafting and Enforcement from LawSikho.

This article has been edited and published by Shashwat Kaushik.

Introduction

A licencing contract, also known as a licence agreement or licencing agreement, is a legal written contract where one party (the licensor) grants the other party (the licensee) the permission or right to use the brand name, trademark, patented technology, or ability to produce and sell the goods owned by the licensor. Most of the intellectual property is owned by the licensor without giving ownership rights to the licensee. In consideration of using the intellectual property, the licensee gives some kind of payment or fee known as a royalty fee.

A licencing agreement is advantageous for both the licensor and the licensee. The licensor gets to commercialise its intellectual property without having to invest in production and distribution costs. Licensees get to save time and money on research and development in order to come up with a new product. Licensees also get to enter the market more quickly and generate revenue by selling the intellectual property of the licensee. A licencing agreement is also important in a way, as without it, the licensor can sue unauthorised users for using the intellectual property of the licensor.

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The licencing agreement also sets out the rights and limitations of the licence granted to the licensee. The licensee gets the sole right to produce, sell and distribute the product in a territory without the interference of any third party. Also, the licensee cannot extend its rights to any third party.     

Key components of licencing contracts

Parties to the contract 

The licensor and licensee are parties to the licencing agreement. The licensor is the owner of the intellectual property and the licensee is the party who has been granted a licence by the licensor to produce, sell and distribute his intellectual property. This clause is added to the licencing agreement to avoid any confusion or conflict that might arise in the future relating to the identities of the parties.

Licenced property

Licenced property is the intellectual property for which a licence has been given. The licenced property should be clearly defined without any ambiguity. This helps to protect and prevent disputes that might arise over the licensor’s IP. Limitations and restrictions may also be mentioned in this section; otherwise, there can be a separate clause for them.

Grant of rights 

The grant of rights outlines the licensee’s rights and responsibilities. It is a critical element as it specifies the rights and permissions that the licensor is granting to the licensee to use the licenced IP. It should clearly outline the type and scope of the licence, geographic area, specific uses, and duration of the licence.

Territory and duration

It specifies in which territory the licenced property will be used and the purpose for which the licence has been granted will be limited to that territory. The duration specifies the period for which the licensed property will be used by the licensee.

Payments and royalties

Payments and royalties are given by the licensee to the licensor for using the intellectual property. Generally, parties use a royalty fee structure in which the licensee gives the licensor a percentage of net sales earned by selling the licenced property. In some cases, upfront payments may be beneficial for licensors who need additional capital immediately. Parties must also make clear payment terms regarding the timing, frequency and mode of payment.

Exclusive rights

This clause determines the level of control the licensor has over the intellectual property and the level of competition that the licensee will face in the marketplace.  

Types of licencing contracts

Exclusive licencing

In exclusive licencing contracts, the licensee gets exclusive rights to manufacture, sell or distribute the licensor’s property for a particular period in the agreed territory. The licensor cannot grant the same rights to any other company or individual that he has given to a licensee. Even the licensor cannot exercise any rights without reserving them first in the contract. Though the licensor can enter into an agreement with another licensee having different rights from others.

Non-exclusive licencing

In this agreement, the licensee possesses no exclusive rights, and the licensor can grant the same rights to more than one licensee. This means that the licensee’s competitors may have the same rights, which can demotivate the licensee to invest in developing the market for the licenced product.

Sole licencing

Sole licencing is similar to exclusive licencing agreements, except that the licensor can also enjoy the rights that the licensor has granted to the licensee. This also means that the licensor can grant the licence to a third person without having to waive its right to use its intellectual property.

Sub licencing

Usually, in licence agreements, the licensor has the sole right to grant a licence to his intellectual property, but in sublicense agreements, the licensor grants the right to licence his intellectual property to a third party. For instance, if a licensor does not want to negotiate the terms and conditions every time he enters into an agreement, he passes this right to the other party, who can enter into an agreement on his behalf with the third party.

Licencing contracts in different industries

Entertainment industry

Licencing agreements in the entertainment industry are often used for music, films, television shows, merchandise, video games and other forms of creative content. Contracts are important in the entertainment industry as they help protect intellectual property, which is a significant aspect of the industry. It provides a framework for resolving the disputes that are frequent in this industry. 

The parties to this agreement could include artists, producers, distributors, talent agencies and many others. The contract governs the relationship between these parties and protects their interests.

Technology industry

Licencing the technology is important in today’s time as it fosters growth and innovation across sectors such as automotive, aerospace and consumer electronics. The licencing agreement is also beneficial as it paves the way for long term partnerships, speeds up new ideas, helps companies enter new markets and helps the licensor monetize their intellectual property. But the licencing agreement should be framed carefully, as the company’s future development is dependent on it.

Pharmaceutical industry

Licencing agreements in the pharmaceutical industry are crucial for companies as they allow them access to new products, technologies, intellectual properties and an advantage to further collaborate with other companies in the industry. Licencing agreements in the pharmaceutical industry are of two types, in-licensing and out-licensing. In in-licensing the licensee acquires the right from the licensor, whereas in out-licensing the licensee is granted the right by the licensor to a product, technology or intellectual property.

Manufacturing industry

After an inventor has patented his product, he can either manufacture it himself if he has the means and resources to do so, or if he does not, he can grant the licence to another party by entering into a manufacturing licencing agreement. It is an agreement between an inventor and a manufacturer. The manufacturer is allowed to produce the patented product for payment in royalties to the inventor.

Case studies

Walt Disney and Mattel

Mattel is a global toy company, engaging customers across the world through its iconic brands, including Barbie, Hot Wheels, Thomas & Friends, UNO and other intellectual property that they own or licence in partnership with global entertainment companies. Walt Disney has gained recognition for its animated films and has a reputation for creating life-like memorable animated characters in films.

In 2022, Mattel won the licencing deal to manufacture toys based on Walt Disney’s lineup, including the popular Frozen franchise. It marks a huge triumph for Mattel after it lost to its rival Hasbro in 2016. In addition to this, both parties (Walt Disney and Mattel) struck a new licencing deal for Pixar Animation Studios’ Toy Story and Cars franchises as well as announced a global licencing deal for Lightyear.

Starbucks and PepsiCo.

Starbucks wanted to make a bottled version of Frappuccino available in homes and offices. But Starbucks didn’t have the capability to develop and mass-produce bottled or canned dairy-based coffee drinks or to distribute them through the supermarket retail channel. So, Starbucks signed a licencing agreement with PepsiCo, as PepsiCo had solid experience in product development and an extensive sales and distribution network in the retail segment. This deal also helped PepsiCo’s market expansion by bringing non carbonated soft drinks in its distribution channels. 

Apple and Intel

In the tech industry, the licencing agreement between Apple and Intel is well known. Apple wanted to transition its MAC computer from PowerPC processors to Intel processors. This agreement allowed Apple access to Intel’s advanced technology and manufacturing capabilities, resulting in faster and more powerful MAC computers. Both parties benefited from this agreement, as Apple gained access to Intel’s advanced technology and Intel received a significant boost in revenue from Apple’s large customer base.

Glenmark Pharmaceuticals

Glenmark Pharmaceuticals has a proven track record of entering into licencing deals with many big pharmaceutical companies. It has entered into an Out Licensing deal with Forest Laboratories and Teijin Pharma Ltd. in Japan and has received $35 million and $6 million, respectively. In licencing agreements, it has a collaborative agreement with Napo Pharmaceuticals for Napo’s proprietary molecule, Crofelemer, which is for four distinct disease categories. It has entered into many other licencing agreements, suffering setbacks in 2 out of three key licencing agreements. But still, Glemark’s spirits remained high and it wished to ride the success of such deals to project itself as an innovation driven global pharmaceutical player.

Advantages of licencing contracts

Licencing contracts offer numerous advantages for both the licensor and the licensee. Here are several key benefits of licencing contracts:

Revenue generation:

  • Licensors can generate revenue by granting the use of their intellectual property to other entities.
  • Licensees gain access to valuable assets without having to invest in developing them.

Market expansion:

  • Licensors can expand their reach into new markets through licensees who have established distribution networks.
  • Licensees can quickly enter new markets with a proven product or service.

Reduced development costs:

  • Licensees can save significant costs by leveraging the licensor’s existing research and development efforts.
  • Licensors can recoup their development costs by granting licences to multiple parties.

Risk sharing:

  • By sharing the risks of product failure or market uncertainty, both parties can mitigate their exposure.
  • Licensors can diversify their revenue streams, and licensees can benefit from the licensor’s expertise.

Access to expertise:

  • Licensees gain access to the licensor’s technical knowledge, patents, trademarks, or other intellectual property.
  • Licensors can leverage their expertise to create multiple licencing partnerships.

Technological advancement:

  • Licencing can promote innovation and technological advancements as licensees can adapt the licenced technology to their specific needs.
  • Cross-licensing agreements can lead to the sharing of complementary technologies.

Brand building:

  • Licensees can benefit from the licensor’s established brand reputation and recognition.
  • Licensors can extend their brand reach and increase brand awareness through licencing partnerships.

Flexibility and adaptability:

  • Licencing contracts can be structured to meet the specific needs and requirements of both parties.
  • Licence terms can be adjusted to accommodate changing market conditions or technological advancements.

 Global reach:

  • Licencing agreements can facilitate global expansion by allowing companies to access international markets with minimal investment.
  • Licensees can gain a competitive advantage by leveraging the licensor’s global presence.

Quality control:

  • Licensors can maintain control over the quality and standards of their products or services by setting licencing requirements.
  • Licensees can benefit from the licensor’s established quality assurance processes.

Disadvantages

Licencing agreements, while beneficial in several ways, also come with certain disadvantages. Some key drawbacks include:

1. Limited control:

  • The licensor has limited control over how the licensee uses the licenced property.
  • The licensor may not be able to influence the quality of products or services provided by the licensee, which can affect the reputation of the brand.

2. Potential for misuse:

  • The licensee may use the licenced property in a way that is not intended or violates the terms of the agreement.
  • This could lead to legal disputes and damage to the licensor’s reputation.

3. Dependence on the licensee:

  • The licensor’s success is tied to the licensee’s performance.
  • If the licensee fails or goes bankrupt, the licensor may lose revenue and face financial difficulties.

4. Limited profit potential:

  • The licensor typically receives a royalty fee or a fixed amount for the use of the licenced property.
  • This may limit the licensor’s profit potential compared to directly selling the product or service themselves.

5. Risk of unauthorised use:

  • The licensee may exceed the scope of the licence or engage in unauthorised use of the licenced property.
  • This can lead to legal action, financial losses, and reputational damage.

6. Complex negotiations:

  • Negotiating a licencing agreement can be complex and time-consuming.
  • It requires careful consideration of various factors, such as royalty rates, territory rights, and duration of the agreement. 

7. Potential for disputes:

  • Disagreements or conflicts may arise between the licensor and licensee regarding interpretation of the agreement, payment terms, or other issues.
  • Resolving disputes can be difficult and costly.

8. Limited flexibility:

  • Licencing agreements often involve long-term commitments.
  • Changes to the agreement or termination may be difficult or subject to penalties.

9. Potential for obsolescence:

  • The licenced property may become obsolete or outdated over time, reducing its value to the licensee.
  • The licensor may need to continuously update or innovate to maintain the relevance of the licenced property.

10. Lack of direct customer interaction:

  • The licensor typically does not have direct contact with the end customers of the licenced product or service.
  • This can make it difficult to gather feedback, build brand loyalty, and maintain customer relationships.

How to review Intellectual Property (IP) licencing agreements

Reviewing an intellectual property (IP) licencing agreement is a crucial step to protect the rights and interests of both parties involved. Here are some key considerations and steps to effectively review an IP licencing agreement:

  1. Understand the agreement type:
    • Identify the type of IP licence being granted (exclusive, non-exclusive, or sole).
    • Determine whether the agreement is a one-time transaction or an ongoing relationship.
  2. Review the grant of rights:
    • Carefully examine the scope of the IP rights being granted, including the specific patents, trademarks, copyrights, or other IP assets covered.
    • Ensure that the rights granted align with the intended use and business objectives.
  3. Consider the term and territory:
    • Pay attention to the duration of the licence agreement and the geographical territories where the IP can be used.
    • Determine if there are any restrictions or limitations on the use of the IP.
  4. Evaluate the compensation structure:
    • Review the agreed-upon compensation structure, whether it’s a fixed fee, royalties, or a combination of both.
    • Analyse the terms of royalty payments, including the calculation method and reporting requirements.
  5. Assess the warranties and representations:
    • Examine the warranties and representations made by both parties regarding the ownership, validity, and non-infringement of the IP.
    • Ensure that these warranties are comprehensive and provide adequate protection.
  6. Review confidentiality and non-disclosure provisions:
    • Evaluate the confidentiality and non-disclosure obligations imposed on both parties.
    • Determine the scope of confidential information and the measures in place to protect it.
  7. Consider termination and dispute resolution:
    • Review the termination provisions, including the grounds for termination, notice requirements, and the consequences of termination.
    • Examine the dispute resolution mechanisms specified in the agreement, such as arbitration or mediation, and their implications.
  8. Seek legal advice:
    • It is highly advisable to seek the assistance of an experienced intellectual property attorney or legal counsel.
    • An attorney can provide guidance on complex legal issues and ensure that the agreement aligns with your legal rights and obligations.
  9. Negotiate and amend:
    • Negotiate the terms of the agreement to ensure that they are fair and balanced for both parties.
    • Consider amendments or modifications to specific clauses to better reflect your objectives.
  10. Execute the agreement:
    • Once the terms are agreed upon and finalised, execute the IP licencing agreement in accordance with the legal requirements of the relevant jurisdiction.

By thoroughly reviewing and understanding the terms of an IP licencing agreement, parties can safeguard their rights, prevent disputes, and establish a strong foundation for a successful IP licencing relationship.

Future trends in licencing contracts

The advent of technology has driven industries to keep up with current market trends. With this dynamic landscape, licencing is also becoming a widely used tool by businesses in order to protect and monetize their intellectual property. The emergence of digital platforms has paved for digital licencing, which includes software licencing and online services. But these platforms pose a threat to intellectual property by getting pirated. To safeguard intellectual property, businesses can use blockchain technology, AI and automation in their licencing processes. These technologies will not only protect the intellectual property but they will also ensure that the licencing agreements are stored, verified in a tamper proof manner. 

Conclusion 

In conclusion, we can say that it does not matter which industry a person is working in, there is some form of intellectual property involved. To safeguard the intellectual property, it is important that a well drafted licencing agreement be in place. Licensing agreement provides a sense of security for the licensor against unauthorised users. By way of licencing agreement, parties are provided with a legal recourse for those whose IP rights have been violated and whose works are not infringed. 

References

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