FOR IP PROFESSIONALS

Licence conditions

If you are thinking of commercialising your intellectual property (IP) you should be aware of the licence conditions and associated issues.

Accounts, inspection and audit

All licence agreements typically demand that:

the licensee maintains good records and accounts relating to all transactions affecting the IP's commercialisation
the licensor is permitted to inspect those accounts and records at any time
the licensor bears all costs of that inspection, unless the inspection demonstrates that there has been an under-payment of royalties or other required payments exceeding, say, 5 per cent, in which case the costs of the inspection are paid by the licensee.

Sub-licensing

Australian licensees do not always have the capacity to commercialise IP on a worldwide basis. To get around this, they often form partnerships with multinational companies to enable the IP to be commercialised globally. In such cases, the Australian licensee would grant a sub-licence to an overseas company, which then becomes the sub-licensee. Typically the licensee gains the licensor's consent, which must not be unreasonably withheld.

Informing the licensor and gaining consent ensures the licensor will be satisfied that:

the sub-licences are only being granted to companies that have the capability and resources to commercialise to best advantage
the sub-licences' financial terms, as they impact on the licensor's royalties, are within commercial parameters.

Assignment of licences

Assigning a licence is different from granting a sub-licence. An assignment involves the transfer of all the licensed rights from the licensee to the assignee.

Typically, a licence will state that:

a licensee must not assign the licence without the prior written consent of the licensor
such consent must not be unreasonably withheld.

Pre-market-entry commercialisation milestones

Pre-market-entry commercialisation milestones are performance obligations on the part of the licensee, between the time the licence is granted and the first product sale. They are major events, or indicators that the licensee is progressing the product development at a reasonable pace. Typically, commercialisation milestones are set to be accomplished by reaching specified achievements by certain dates.

For example, milestone events may be:

manufacturing a working prototype
manufacturing a production model
a patent being granted
securing a sub-licensee with the capacity to market worldwide
spending a specific amount of money to develop, market or sell the IP product
the acceptance of a business plan
the first sale of a product.

If commercialisation milestones are not achieved by the agreed dates, the licensor has the right to terminate the licence and grant it to another person or company who has better resources, capabilities or commitment to ensure the product is developed at a better rate of progress.

Post-market-entry performance targets

Once all commercialisation milestones have been achieved, a different type of performance obligation is required in a licence. If performance obligations ended at the date of the first product sale, and there were no other performance obligations, there is no assurance that a licensee will commercialise the IP to best advantage.

A general obligation to use 'best endeavours to commercialise' may be too vague to confer any right of termination if commercialisation to 'best advantage' does not occur. A typical post-market entry performance target makes provision for a licensee to achieve certain minimum sales. If the minimum sales are not achieved, the licence may be terminated.

In a typical model:

the territory is divided into markets
in each market there is a different minimum sales target each year or every six months
each sales target is assessed by reference to that particular market, a business plan, whether they are competing products, and other factors
the parties agree a minimum sales target for each market, or failing agreement, a sales target is decided by an independent expert according to commercial benchmarks
if an agreed minimum sales target is not achieved the licensor may terminate the licence.

Confidential information

Typically, a licence will require that the licensee does not disclose material relating to IP or other confidential information to outside parties.

This is important, particularly when a licence is subject to a shade of exclusivity as described in types of licence.

For example, a licensee may have an exclusive licence in a particular field of use, but should be obliged to maintain confidentiality in relation to its application in all other fields, and should be prohibited from using the intellectual property and confidential information outside the agreed field of use. This applies whether there are product, field or territorial restrictions.