The apparatus to expand a business will often arise from the commercialisation of intellectual property (IP) developed and protected.  In doing so, a business may choose to do one or a combination of the following acts:

 1.    assign (sell) the IP or part of it;
 2.    license the IP; or 
 3.    exploit the IP itself.

In this article, we provide a brief overview of some issues that are relevant to the licensing of IP, in particular patents and designs.  We explore why licensing may be an attractive option and what IP owners may wish to consider before entering into a licensing arrangement.

 

Why intellectual property owners should consider licensing?

A licence is simply one person authorising another to do an act which would otherwise be prohibited.  Usually, a licence is in writing and encompasses various terms surrounding the authorisation to use the IP.  Licenses are typically granted in exchange for payment of a fee or royalty.

 

For owners of IP, licensing can be a particularly attractive option.  Some of the factors why an IP owner may wish to consider licensing its IP include:

¨ The IP owner doesn't have the resources or capacity to exploit the IP itself and requires a partner to assist with commercialising a product.

¨ The IP owner is looking for a low-risk and relatively fast method of commercialising the IP without expending further costs.

¨ The IP owner is exploiting the IP itself, but recognises potential for the IP to be used for an alternative application.

¨ The IP owner wishes to commercialise the IP overseas, but requires the assistance of a foreign partner.

Whatever the reason, if a decision has been made to licence the IP and a suitable licensing partner identified, it is advisable that a formal licensing agreement documenting the terms of the licence be entered into.


The Licence Agreement

Licence agreements can be complex as they may contemplate many different scenarios and possibilities.

This article does not discuss the licensing of trade marks, copyright or plant breeders’ rights (PBR), as these can raise issues which are different to those discussed below. 

 From our experience, the following issues are generally relevant:

Query if the IP is protected or still pending.  An application for a patent may take several years before it is granted, if at all.  Infringement rights in a patent only exist once the patent is granted.  For registered designs, infringement rights exist only once the design has been examined and certified.  If IP is being licensed prior to the provision of a grant or certification, it could be in the interests of the IP owner to bind the prospective licensee to its obligations pre grant or certification.  A licensee, on the other hand, may want any agreement terminable should the grant or certification not be provided.

A licence may be exclusive, non-exclusive or sole.  Where an exclusive licence is provided, the IP owner is contractually excluded from exploiting the rights itself.  A non-exclusive licence permits the IP owner to grant further licences, and use the IP itself.  Alternatively, a sole licence means the IP owner may not grant further licences of the IP, but may exploit the IP itself.  Importantly, a patent licensee may only sue potential infringers if the licensee is an ‘exclusive licensee’ as defined in the Patents Act 1990 (Cth).  It is therefore important that the licence agreement be precise as to what type of licence is being granted.

A patent may comprise of a number of separate rights, not all of which may be intended to be licensed.  As such, identification of what rights are being licensed is key.  Consideration should be placed in ensuring and identifying exactly which steps or processes are intended to be licensed, particularly when granting an exclusive licence.  In addition, the agreement should specify if training, documentation and support is to be provided with the licence.

The IP owner may want to retain as much control over the IP as is reasonably possible.  As such, the licence agreement should address whether or not the licensee is restricted in how it may apply or brand the IP in question.

Most licence agreements provide sales targets or minimum royalty payments.  This would be particularly important where an exclusive licence is provided.   

If, in exploiting the IP, a licensee modifies or improves the IP, the licence agreement should contemplate which party the improvements will belong to and how the improvements may be used by the parties.  As modification and improvement clauses may raise technical issues pertaining to the IP, particular care should be taken when drafting these clauses.

It is worth noting that there may be asset protection benefits in establishing a separate entity from the IP holding entity to enter into the licensing arrangements.  This way, if the licensee entity incurs a liability, then the IP holding entity may still be insulated from any damages claims.

Conclusion

The above discussion provides an introduction on how licensing may assist in commercialising IP. 

If licensing is being considered, attention should be paid to the terms of the licensing arrangement. Further, your legal and financial advisors may be able to assist with a licensing strategy that could maximise the benefits from the IP in your business, so it is often advisable to involve them at an early stage.

Ben Hamilton                                                  Ryan Ratilal
Partner , Hall & Wilcox                                   Lawyer, Hall & Wilcox 
+61 3 9603 3586                                             +61 3 9603 3563

Disclaimer: This article is for general information purposes only and does not constitute advice.  You should seek advice in respect of your particular circumstances.