What is licensing?
Licensing is concerned with granting rights to use commercially valuable intellectual property. The process is sometimes referred to as “technology transfer” but strictly speaking this is too narrow term. The subject matter of a licence can include the full range of intellectual property rights, including patent rights, designs, copyright, trade marks, circuit layouts, plant breeders rights and know-how. Confidential information will also typically play a critical role in the “technology transfer”.
Licensing itself is the process where the owner of one or more of these rights gives another person permission to exploit the subject matter of the rights. In other words, the person granting the licence (the “licensor”) is giving to the person receiving the licence (the “licensee”) a level of authority to carry out activities which would otherwise be an infringement of the licensor’s rights.
Licensing is one model for commercialising valuable intellectual property. It may be a suitable approach in some situations, but as with most things there are advantages and disadvantages. Licensing is generally used where the owner of the intellectual property rights does not have the resources to “take the product to market”. This could be the case for a small Australian company with a novel invention but without capital resources or distribution channels to bring the invention to the marketplace. Alternatively, the financial risk in obtaining the funds necessary to “take the product to market” may be considered too onerous. Licensing can be a viable option in these situations. Other options outside of the licensing sphere may be joint venture arrangements, strategic alliances to other commercial relationships with third parties to exploit the invention. The preferred model will depend on the particular commercial circumstances.
Issues for licensing
Licensing involves the giving up of control of intellectual property rights to another party. The extent to which control is relinquished will depend on the licence agreement. In return for giving up control, the benefit can be reduced risk of financial loss for the owner of the intellectual property rights and financial returns. By licensing to a third party there is a possibility that the owner of the intellectual property rights creates a competitor for itself in the marketplace. This is one possible disadvantage of licensing. The licensing process requires disclosures of inventions and commercially sensitive information to “strangers”. Dealing with third parties means that it is critical to consider the impact of disclosure or use on the intellectual property rights involved. In some instances involving registered rights, disclosure or use before application may undermine the validity of intellectual property rights. Accordingly, it is very important that confidentiality agreements are considered and entered into before making disclosures where the circumstances demand it.
Good “housekeeping” and finding the right partner are both important in the licensing process. As a first step, the licensor needs to ensure they own the necessary bundle of rights to enable the transfer. Secondly, the desirable attributes of potential licensees should be determined. The important attributes may include whether the licensee is competent in relation to the invention or product, its prominence in the market place, its business reputation, and whether it deals in competitive technology or products. The reward licensors will get for licensing their intellectual property rights is also a key question. There are no golden rules for licensing returns, and a lot will depend on the negotiation between the parties. Revenue models include upfront payments, lump sum payments and royalties. Royalties can be assessed on production, gross sales, net sales or some other basis. To some degree, the type of reward model will depend on the stage of development of the technology or rights being transferred and the costs for taking them to market. The team behind the negotiation of the licensing deal is important. Assembling a team that has the necessary commercial, technical and legal expertise can make the process successful.
There are very few standard licensing transactions. A lot will depend on the commercial context and the agreement used to transfer the rights should be tailored to accomplish the commercial objectives. Relevant issues will include:
- The bundle of intellectual property rights being licensed.
- What type of activities are permitted?
- Whether the grant is exclusive or non-exclusive.
- Whether sub-licensing rights are appropriate.
- Whether there should be field of use or territorial limits.
- What approach should be taken to improvements and infringement issues?
- What obligations should be placed on the licensee?
- What is the reward for the licensor?
- What obligations of confidentiality should be imposed?
- If disputes arise, how should they be resolved?
- What is the duration of the licence, and what termination rights should be imposed?
- What are the obligations post-termination?
Licensing can be a cost effective way to take an invention or product to the market place. A successful licence needs to strike a balance in the rewards for the licensor and the licensee. To a large degree, this will rely on a team with the right commercial, technical and legal expertise.