What does licensing mean?
Licensing involves the owner of the IP (the licensor) giving someone else (the licensee) permission to use – but not own – their IP in exchange for payment.
Types of licences
There are three types of licences:
One person or business is given the right to commercialise your IP. You and all others are excluded from using it to make a profit. However, you can place limits on the licence, including restricting it to a:
- Particular geographical area
- Field of application
- Class of product.
This allows you to set up other licences with similar restrictions or to commercialise some aspects of the IP yourself.
One person or business is given permission to use your IP, but you can still commercialise some aspects of it.
More than one person or business has permission to use your IP, but you can still commercialise some aspects of it.
You can negotiate specific conditions in your licences, including:
An assignment is the transfer of all licensed rights from the licensee to someone else.
Typically, a licence will state that a licensee must not assign the licence without your prior written consent, but that this consent must not be unreasonably withheld.
A licence can specify whether the licensee can transfer their rights to another party. An agreement should state on what terms a licensee can assign or sub-licence use of the IP. As the owner of the IP, you can make the decision on how you'd like to approach licences.
Transfer to a third party
An 'assignment' is the transfer of all licensed rights from the licensee to someone else.
Typically, a licence will state that a licensee must not assign the licence without your prior written consent. If you don't want it to be transferrable, you can specify that the licence is ‘non-transferable’ in the agreement.
For example, you might want to:
- Know exactly who they intend to licence the IP to
- Do general due diligence on the third party.
You should ensure that the third party:
- Isn't going to breach the conditions of the licence
- Will meet the expected quality standards
- Won't cause reputational harm
- Won't breach legal requirements.
Sub-licensing to a third party
The licence might allow the licensee to sub-license its rights to a third party. If so, you might want to impose restrictions on the terms.
For example, you might want to:
- Include a provision that the licensee needs to get permission from you prior to any sub-licence
- Ensure you won't be liable for any actions of the sub-licensee.
You should ensure that:
- Sub-licences are only granted to companies that have the capability and resources to commercialise the product or service to your best advantage
- You won't be financially disadvantaged by the terms of the sub-licence.
A licence can be in force for any amount of time.
However, you need to consider how it relates to the overall timeframes of your IP:
- Trade marks can be renewed and maintained indefinitely
- Patents, designs, and plant breeder’s rights all have limited terms.
The periodic renewal fees for your IP rights must be paid throughout the licensing period, since the right will cease if it's not renewed. Either party to a licence may terminate a licence if the relevant right is no longer in force.
Therefore, you need to confirm the timeframes of all IP rights and arrangements for maintaining or renewing them when undertaking any licensing agreements.
The contract should specify if the licensee or the licensor is responsible for renewal costs.
You can set up performance targets for the licensee, between when the licence is granted and the first product is sold. These milestones are designed to indicate progress through the product development stage.
Milestones can include:
- Manufacturing a working prototype
- Manufacturing a production model
- Securing a sub-licensee with the capacity to market worldwide
- Spending a specific amount of money to develop, market or sell the IP product
- Accepting a business plan
- The first sale of a product.
If the milestones aren't met by the agreed dates, you have the right to terminate the licence and grant it to another person or company.
A common post-market entry milestone requires the licensee to achieve specific sales targets. If the targets aren't met, the licence can be terminated.
In a typical model:
- The territory is divided into markets
- Each market has a minimum sales target
- Each sales target is assessed against factors including overall market performance, a business plan and competing products
- The parties agree to a minimum sales target for each market
- If an agreed minimum sales target isn't achieved, the licence can be terminated.
You should designate conditions when you have the right to revoke, cancel or terminate a licence. For example, if the licensee breaches a term of the agreement, such as failing to meet commercialisation milestones, you'll have the right to cancel the licence.
The licence should also detail what each party must do if it's terminated. For example, the licensee must provide all relevant records or documents if the licence is terminated.
We've provided some general advice on approaches to commercialise your IP.
Due to the complexities involved, we recommend that you seek tailored advice from a commercialisation expert.