Protecting your intellectual property is one thing, but being able to earn royalties through international commercialisation requires some knowledge of licensing. What do you need to know about licensing and how can you get the most from your licensing deal?
The global marketplace creates a myriad of opportunities for innovative firms to expand their operations. Licensing of intellectual property (IP) rights, such as patented technologies, copyrighted software, or trademarked brands, can be one of many attractive options for exporters seeking to leverage their business skills in international markets as a globalisation strategy. Licensing has intuitive appeal to many exporters: as an entry strategy, it can eliminate the need for capital investment or knowledge and marketing strength in overseas markets.
The word ‘license’ simply means that permission is granted by the owner of an IP right to another, called the licensee, to use the right on agreed terms and conditions, for a defined purpose, in a defined territory for an agreed period of time.
IP licensing gives the licensee the right to use, but not own, the copyright, patent, trademark, design, technology, technical know-how or specific marketing skills that are licensed. The value of these rights arises from a commercial negotiation and is based largely on the strength of the IP rights in the creation or invention. The licensee isn’t paying for a product; it is paying for access to legal exclusivity.
Each licensing situation is unique. Due diligence is a necessary first step before embarking on any kind of business transaction. This will allow the parties to assess the value of the IP and agreement can be reached on the relevant cost of the license.
“Licensees will want to know three things. First, they will want to know whether the licensor owns the IP that is offered for license. There’s no point in taking a license from someone who doesn’t own the IP,” says Rob McInnes, principal of Spruson & Ferguson Lawyers and immediate past president of the Australian Chapter of the Licensing Executives Society, a professional association devoted to IP licensing.
“Secondly, they will want to know whether the IP is legally enforceable. For example, the fact that a patent has been granted doesn’t necessarily mean that it will stand up in court, so sophisticated licensees will carry out their own analysis. Thirdly, they will want to assess whether using the licensed IP right will infringe the IP rights of anyone else. This is called ‘freedom to operate’.”
Licensing is often considered in three broad categories, namely technology licenses, publishing and entertainment licenses, and trademark and merchandising licenses. The appropriate form for a license agreement will depend very much on the goods or services being licensed.
To enter into a licensing agreement is to enter into a relationship, usually for a substantial length of time. It requires a continuing interaction where the licensor and licensee work towards realising their common goal, which is to effectively use the licensed IP for their mutual benefit.
If the relationship is successful, and therefore profitable, both the licensor and the licensee will be financially rewarded, in the licensee’s case through profits on sales of the product embodying the IP, and in the licensor’s case through royalties calculated on the basis of the success of the product in the marketplace. The licensor may also seek upfront payments or service and disclosure fees to bring forward some revenue from the licence.
When considering entering into a licensing agreement it is a good idea to identify one’s short-term and long-term strategic objectives and how entering into a licensing agreement, fits into those objectives.
Legal aspects of licensing
Whenever entering into a licence agreement, whether you are the licensor or licensee, it is always advisable to record the deal in writing.
McInnes advises his clients to work through a checklist of issues when mapping out a licensing deal: “Every licence has three main elements to it. First, what is being licensed, where and for how long? Secondly, what are the commercial terms? What must the licensee do, and how much must it pay? Thirdly, there is the all-important legal boilerplate, which is necessary to resolve differences that may occur over a possible 20-year exclusive relationship. With licensing, one document can determine every dollar you will ever make from your innovation: get it wrong and you may get nothing, and have no way out of the deal.”
Issues commonly dealt with in a licence agreement include:
- Identifying the licensed IP, and the field, territory and duration of the licence
- Whether the licence is exclusive
- Restrictions on use, transfer and sublicensing of the licensed IP
- Calculation of royalties, including reporting and auditing
- Minimum sales/other performance requirements imposed on the licensee
- What happens if the licensee fails to perform
- What if the licensed IP is challenged
- What if the licensed products infringe IP rights of others
- Who is liable if licensed products are defective
- How disputes will be resolved
IP can be hard to value, and while in some fields there are known benchmarks for royalty rates, many licensors struggle to find a basis for asking licensees to pay a particular royalty.
“While there are no hard and fast rules, a useful starting point is that for technologies fully developed by the licensor, which are ready for manufacturing by a licensee, the royalty should be roughly equivalent to one quarter of the licensee’s gross product but calculated as a percentage of sale price,” suggests McInnes. Royalties will most likely be lower if the licensee will need to carry out further research and development before the product can be mass-produced.
In the international context, successful licensing is possible only if the licensed IP right is also protected in the other country or countries of interest. If the intellectual property is not protected in the other country or countries, then it cannot be licensed and the licensor would have no legal right to put any restriction on its use by anyone else.
Australia is a member of several international intellectual property treaties that are of great benefit to licensors. They simplify the process of obtaining and maintaining registered rights in multiple countries. This allows exporters to reap the rewards of lower application costs and greater flexibility and security when protecting their intellectual property.
In some cases, licensing may be used to gain access to new markets that may otherwise be inaccessible due to barriers to entry or high start-up costs. The licensee may agree to make all the adaptations required for entering a foreign market, such as translation of labels and instructions or the modification of goods so as to conform to local laws and regulations, and adjustments in marketing. Normally, the licensee will be fully responsible for the local manufacture, localisation, logistics and distribution.
For the licensee, an agreement that gives access to technologies that are already established can make it possible for an enterprise to reach the market faster with innovative technology. It can also represent a reduction in costs for licensees, as an investment in research and development has already been carried out.
Anyone entering into licensing negotiations should engage a competent professional adviser, preferably a lawyer with licensing experience. While the legal costs associated with drafting and negotiating a licence agreement can add up, the costs are small compared with the risk of an unprofitable deal with a 20-year term, and also small compared with the benefits of getting the deal right.
—Philip Noonan is the director general of IP Australia, the Federal Government agency responsible for administering intellectual property rights, and a Dynamic Export panel expert.
Australian Institute for Commercialisation: www.ausicom.com
IP Australia: www.ipaustralia.gov.au
IP Toolbox: www.iptoolbox.gov.au
Licensing Executives Society: www.lesi.org
Licensing Executives Society Australia and New Zealand: www.lesanz.org.au
World Intellectual Property Organization: www.wipo.int