Australia: Drafting effective IP licence agreements

Intellectual property (IP) is an asset to your company as it may be utilised to accelerate business growth and revenue, while also providing your company with a competitive edge.

Whether your company is seeking to commercialise its IP or obtain third party IP or services, it is important that the licensing agreement operates effectively to ensure that your company is adequately protecting its rights or obtaining all the rights required to receive the benefit of the services or IP from a third party.

As inhouse counsel, you are uniquely positioned to closely engage with the business. This allows you to understand the company's business and commercial goals, which facilitates the framing and drafting of an effective IP licensing agreement.

This article highlights some key steps that assist with identifying and understanding important issues that arise in IP licence agreements that will help in drafting an effective IP licence agreement.

Know the IP

Determining the form of IP involved is usually the first step, but may not be as easy as one may expect. This is because the "IP" may involve trade secrets and confidential information, in addition to the other forms of IP (such as copyright, trade marks, patents and designs). IP may also be registered or unregistered in Australia or overseas, and there are different rights that are granted to different forms of IP. The rights to one form of IP will also vary in different jurisdictions.

Once the form of IP involved has been identified, then it is possible to include a clear specification and definition of the IP that will be licensed under the IP licence agreement. For example, if a grant of a licence to patents and associated technical information and know how, together with a licence to the trade marks for the licensee's use to distribute and market the resulting products is required, then the IP licence agreement will need to clearly identify and set out the licence provisions for these three forms of IP.

Accordingly, having a good understanding of the IP involved is the first step to determining the issues that will need to be addressed in the IP licence agreement. This, in turn, facilitates the framing of the appropriate scope of the licence and any restrictions that should apply and the payments and royalties that may apply.

Scope and licence restrictions

Another key question to be considered is: what is the appropriate scope of the licence? This is important because a scope that is too limited may result in the licensee not being able to undertake the intended activities without infringing the licensor's IP rights or enable it to meet its business objectives (eg, if you are obtaining third party licensed IP, then you may not receive the full benefit of such third party IP). By contrast, if the scope of the licence is too broad, then the licensor's ability to exploit or exercise its IP rights in the future may be affected. As a result, particular consideration should be given to the rights that need to be granted to the licensee and the rights that the licensor would like to retain.

In this instance, the business objectives and outcomes that are being sought by your company will help identify the appropriate scope of the IP licence. The IP licence will typically identify the express right that is being granted to the IP (such as the right to use the IP for a particular purpose), whether the licence is an exclusive or non-exclusive one, and if there any territorial restrictions. The IP licence should also clearly clarify whether the licence may be assigned or transferred, the type of licence (eg, perpetual and revocable, perpetual and irrevocable or term or subscription based), whether the licensee has the right to sub-licence the rights granted to it and whether the licensee may permit a third party to assist the licensee to exercise the licensee's rights under the licence granted to it.

There can also be some confusion around the scope of an exclusive and a sole licence. Generally, an exclusive licence confers the licensee with certain rights in relation to the IP to the exclusion of all other persons, including the licensor. On the other hand, a sole licence provides the licensee with certain rights to the exclusion of all other persons, except that the licensor reserves the right for itself to exercise the rights that are the subject of the sole licence.

When considering what kind of licence is appropriate — exclusive, non-exclusive or sole licence — it is also prudent to keep in mind that the statute applying to the relevant IP may contain its own definition of the kind of licence chosen and affect the licensor's ability to enforce its IP rights, despite any contrary terms in the IP licence agreement.

Careful attention will need to also be given to the duration of the licence and the particular obligations that attach to the licensing arrangement when dealing with an exclusive or sole licence. Clear termination rights (see further below) should also be considered to deal with failures by the licensee to meet certain performance thresholds or if the continued association with the licensee is not in the licensor's best interest.

Your business objectives may also be used to determine if there are any express limitations or restrictions that may be required. For example, if the business objective is to grant a licence to enable a licensee to apply a trade mark to goods for one or more particular market segments, then the trade mark licence will need clear and express provisions that limit licence to the particularly identified market segments, rather than a generic provision that refers to the market segment generally.

Other restrictions that may also be considered include a restriction that limits the licensee's ability to challenge the licensor's right, title and interest in and to the IP and any appropriate restrictions that limits the licensee's ability to transfer or assign the licence granted to it.

In this way, the manner in which the scope of the licence should be framed and drafted would be influenced both by your understanding of the business and the type of IP involved; noting that some statutes may operate to limit the restrictions that may be imposed.

Do your checks!

It is important to conduct some due diligence to determine whether there are any threats to your company's ability to use the IP as intended — this will also help identify the particular legal constructs in the IP licence agreement that may need focus and the assessment of the risk levels of specific legal constructs. This applies equally to your company's IP that is being licensed to a licensee and third party IP that your company wishes to licence from that third party.

Depending on the transaction and the nature of the IP involved, the checks may involve internal investigations as to your company's rights over its IP (eg, checking if your company's trade marks are registered and whether your company has kept good records to manage any future disputes) to identify if provisions in the IP licence agreement would raise any issues for your company. For example, contractual warranties relating to your company's right, title and interest in and to the IP that is being licensed may be a higher risk issue if you were dealing with IP that should have been registered, but was unregistered at the time the IP licence agreement was entered into.

While your company's ability to conduct due diligence of third party IP that is being licensed to your company may be limited, it is still appropriate to do so within the context of the transaction — this should also extend to any associated materials that are being provided or licensed to your company.

Any issues that are identified through this due diligence process can then be effectively addressed in the IP licence agreement through appropriate warranties and indemnities or through other contractual mechanisms.

For example, if your company was looking to obtain third party products, then a quick search may reveal whether there are any third party IP infringement claims that may affect those products.

In this instance, a broader indemnity from the third party licensor or manufacturer may be required to cover any losses and damages your company may suffer as a result of a third party IP infringement claim for those products. Importantly, this will also identify whether the relevant liability cap in the IP licence agreement is appropriate in this context.

On this basis, the representations, warranties, indemnities and liability limitations and exclusions in the IP licence agreement will need to be assessed and may need to be customised in light of the form of IP being licensed and the issues that arise from the checks that have been undertaken.

Control provisions

Depending on the subject matter and the nature of the proposed licensing agreement, there may be various control provisions that need to be included in the IP licence agreement. For example, a licensor will usually require the right to control the quality of the goods or services in relation to which the trade mark is permitted to be applied, as a failure by the licensor to do so may put the trade mark registration at risk.

By contrast, the trade mark control provisions are unlikely to be generally included in a copyright licence agreement. In this instance, the licensor may require a contractual right to audit the licensee's performance and use of the materials under the copyright licence agreement as a form of control over the licensee.

Termination

The events that will give rise to a right to terminate the IP licence agreement and the consequences of any such termination will need to be identified and addressed in such agreement.

Importantly, you should consider whether different events should have different periods before the other party may terminate. As termination provisions vary based on the IP and industry, careful consideration should also be given as to whether these termination provisions are appropriate in the context of the transaction and the business objectives.

For example, there may be some situations where a party should have the right to terminate the license, such as if the licensee fails to pay royalties when due after a reasonable cure period or if there is an insolvency event. On the other hand, there are other circumstances where a termination right may be more contentious, such as a right to terminate for convenience. In any event, it is important for both parties to ensure that the drafting of the termination provision is clear and that the language used to describe the event giving rise to the right to terminate is also clear.

The IP licence agreement should also contain provisions that set out what happens with the IP after termination to ensure that there is an appropriate transition period to minimise any disruptions to customers or sub-licensees.

Please do also keep in mind that the right to terminate may be qualified or broadened (despite any express terms to the contrary) by the statute governing the relevant subject matter. For example, s 145 of the Patents Act 1900 (Cth) empowers either party to terminate a licence to exploit a patented invention on the

giving of three months' notice in writing to the other party if the patent, although protected at the time of entering into the licence, has ceased to be in force.

Conclusion

IP licensing can be quite complex as IP is a bundle of complicated rights that vary between different jurisdictions and different forms of IP. However, as inhouse counsel, you understand the business objectives and outcomes that are being sought and are best placed to identify the key issues and address them in an IP licence agreement.

By identifying the form of IP involved, the appropriate scope of the licence, the relevant restrictions that may apply, conducting the appropriate checks, establishing the appropriate control structure and identifying the appropriate termination events and the consequences of termination, the appropriate legal constructs that may be required in the IP licence agreement can be effectively drafted, and the risks that arises with those legal constructs can be assessed in the context of the transaction and the business objectives and outcomes as a whole.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.