UK: Licensing – Getting Value For Your IP Investment

Intellectual Property rights are vital assets for many businesses and licensing to others is one of the key methods used to exploit those rights.  Done properly, licensing can be of immense value as a tool for generating revenue and advancing the reputation and market reach of the licensor.  However, get it wrong, and the consequences could go far beyond a failure to capitalise on the potential of your IP – you could even jeopardise the very rights you sought to exploit.

In this article we explore some of the common pitfalls of licensing out IP rights, and provide some general advice for avoiding these risks.

Clarity is key

As with all commercial agreements, a lack of clarity in drafting creates the potential for disputes, which can be damaging to any commercial relationship and could lead to litigation.  In the context of IP licences, it is particularly important to be clear from the outset on the full scope of the licence and exactly what rights are being granted to the licensee.

Future-proofing is important here.  In the fast-paced world of technology, a failure to build in flexibility to cover future developments can create uncertainty e.g. restricting the licence to a particular field of use or distribution channel may become problematic if advances in technology blur the distinctions.  Therefore, definitions should (where possible) be phrased to allow for changing circumstances.  In many cases future-proofing merely requires careful thought and clear drafting, for example, by expressly bringing within the scope of the licence "technological advances in this area" or "similar technology not yet invented".

Be very clear about whether the licensee will be permitted to sub-license, and if so, consider how prescriptive to be about sub-licence terms.

Quality control

The impact on the reputation of a rights owner if products incorporating those rights fall below par can be dramatic.  The licensor should therefore reserve the right to check that everything produced and/or supplied by the licensee (including any packaging or promotional material which makes use of the licensor's branding) is of an acceptable quality.  An effective way to achieve this would be to include a requirement for licensor approval of all products and/or materials, reinforced by the provision of regular samples by the licensee and/or a right to inspect the licensee's activities.

Any specific requirements (e.g. compliance with a brand manual) should be incorporated into the licence, as this will help to establish the licensor's expectations of the licensee from the outset.

Royalties

Financial gain is often the primary motivation behind licensing, so great care must be taken to ensure that the licensor is protected here. 

When it comes to the calculation of royalties, parties will often propose some form of profit sharing arrangement.  However, basing the calculation of royalties on a percentage of the licensee's profit is a risky business for the licensor – profit is tricky to define with any certainty, which makes the figures inherently susceptible to manipulation by the licensee.  A clearer approach is to base the calculation on a set price per unit or net sales price. 

The clause should also address what happens where products are supplied other than by straightforward sale, for example where free samples or discounts are to be provided, or products are to be leased or hired out to customers.  Of course, the licensor cannot set minimum prices at which the licensee can sell the end product to its customers (this would fall foul of antitrust laws) but the licensor can charge the licensee a minimum royalty per unit, in order to protect its own income.

Finally, all royalty clauses should cover the timing and method of invoicing and payment, and allow the licensor to check that royalty calculations are correct by including regular reporting requirements and audit rights.

Exclusivity

Licensees are clearly very often keen to achieve exclusivity (meaning that the licensor must not use the IP itself or allow anyone else to use it, so the licensee is the only party allowed to exploit the IP). However, this should attract a premium for the licensor as it has no other route to market for the IP.

For the same reason, exclusivity demands particularly clear drafting of, for example, scope, territory and duration.  It can also raise antitrust considerations so must be commercially agreed and drafted with great care.

There are also additional financial considerations for exclusive licences, as exclusivity presents the further risk that a licensee could choose not to exploit the rights, but would be entitled to prevent others from doing so for the duration of the licence.  The licensor will therefore need to ensure that the licensee exploits the rights to their full potential.  Minimum performance targets are a good way to achieve this, for example by imposing a minimum sales figure or a minimum royalty over a set period of time.  Failure to achieve these could give the licensor the right to terminate (or just terminate exclusivity) so the licensor has the ability to get its IP to market himself or through another licensee. 

The licensor should also take great care in granting an exclusive licence to ensure that it maintains a register recording the IP licensed and the terms of the exclusivity to ensure that it does not license again or use that licensed IP within the scope of the exclusivity.

Termination

Termination rights should achieve the right balance between the licensor's ability to bring the licence to an end and security for the licensee (which may be particularly important if the arrangement requires a significant up-front investment by the licensee), and this needs to be carefully thought through.

As well as the usual rights to terminate for material or persistent breach of contract and on insolvency, further rights to terminate may be appropriate e.g. on a change of control of the licensee (this is particularly important if there is a risk that the licensee may be acquired by a competitor), or for failure to meet sales targets.  Additionally, licensors cannot prevent licensees challenging the validity of the licensed rights, but can include a right to terminate if any such challenge is brought.

Termination clauses should also address the requirements for termination (including notice periods and methods/timings of service of termination notices), as well as the consequences.  For example, should the licensee immediately cease production of products which incorporate the licensed rights? Will they be given a period of time to sell off stock, and if so what arrangements should be made in respect of royalties? Should all royalties become immediately due on termination, and should interest begin to accrue?  Does the licensee have any confidential information which should be returned to the licensor or destroyed?

Infringement

Every licence should address the procedure in the event that the licensed rights are infringed by a third party, as such infringement can be detrimental to both licensor and licensee.  It will therefore be in the interests of both parties to resolve any such disputes as quickly as possible, and confusion over who takes responsibility for this will only exacerbate the damage.

Various legislative provisions (e.g. s.30 of the Trade Marks Act 1994, and s.67(1) of the Patents Act 1977) confer rights upon licensees, allowing them to take action for infringement as if they were the rights holder where the infringement affects their interests and where the licensor has declined or failed to take action themselves. 

Given the risks of litigation, licensors should consider whether it would be more appropriate to retain full control over all proceedings.  If so, they should contract out of these provisions, and include an alternative clause reserving full discretion over when and how claims should be brought and handled.

Conclusions

It is far too easy to fall into the trap of over-reliance on standard form or existing documents based on previous situations.  By doing this you create a risk that important issues will be overlooked and an opportunity to maximise value will be missed.

No two licensing arrangements are completely alike, so the only way to ensure that you reach the best solution is to start from the beginning with each new set of circumstances – all the issues should be considered afresh in the context of the particular deal.

Helen Scott-Lawler is Head of IP at Burges Salmon.  She has been Head of Intellectual Property for 10 years and acts for a broad range of clients, in both the public and private sectors. Her work includes protection, structuring and management and exploitation of IP – as well as IP development and consortia arrangements; technology transfer; IP licensing; brand protection and exploitation;  portfolio management; IP structuring; media rights; data licensing; sponsorship and advertising.  Key clients include Nuclear Decommissioning Authority, The Carbon Trust and The Royal Botanic Gardens, Kew.  Helen can be contacted on +44 (0) 117 939 2240 or by email at helen.scott-lawler@burges-salmon.com

Hannah Court is a Solicitor at Burges Salmon.  Hannah trained at Burges Salmon and qualified into the Commercial Department in 2011, specialising in general commercial and IP/IT. Since qualification she has worked on a number of IP licensing deals, including assisting the IP team on the drafting and negotiation of a new IP Licence and Consulting Agreement for ULTra PRT – an innovative engineering company which has developed a Personal Rapid Transport system, now used at Heathrow Airport. Elsewhere, Hannah has worked with clients such as The Carbon Trust, Eurostar, Discovery Channel and the Nuclear Decommissioning Authority.  Hannah can be contacted on +44 (0) 117 939 2251 or by email at hannah.court@burges-salmon.com