The management and licensing of intellectual property rights (patents, copyrights, trademarks, design, geographical indications and know-how, collectively referred to as "IP") is very crucial for all business organizations especially, the ones which focuses on technology sectors. In fact, the management and licensing of IP drives the profitability of businesses and consequently encourages and incentivizes innovation. "Licensing" is a legal mechanism that gives opportunities to use or re-use IP, which is already protected. This, of course would bring about the debate on factors which would help the "licensor" and "licensee" to determine why one might license and why one might not license. These factors inter alia include, sharing the risk of manufacturing/production; expenses and costs of research and development; saving time instead of re-inventing the wheel; market penetration; collaboration of new ideas and products. Therefore, every decision of taking or granting license of intellectual property should be based on an objective assessment of these factors and business needs of the parties involved.
First step towards Licensing:
As licensing agreements opens up the spectrum of opportunities to both the licensor and licensee, the first step which a licensor should necessarily do is to enter in to a confidentiality/non-disclosure agreement with the licensee before disclosing information relating to IP. A confidentiality/non-disclosure agreement is an important tool which protects the IP of the discloser by imposing obligations of care on the recipient while handling the IP. From the perspective of licensee, it is pertinent to conduct a due diligence on the ownership of the IP and also have a realistic estimate of the commercial benefits of IP prior to entering in to any IP licensing agreement.
License terms under licensing agreements:
It is pertinent to lay down the important terms and conditions of license under the relevant license agreement. Some of the important aspects which have to be understood and negotiated by the licensor and licensee include:
- Exclusive or non-exclusive license.
- Sub-licensing. If yes, any specific restrictions or commercial considerations on sub-licensing.
- Commercial terms pertaining to license such as lump sum fee; periodical fees; royalty fees on sales; escalations etc.
- Specific restrictions or limitations on use of IP. For eg. Whether license is restricted to any particular field?
- Incorporating a part or whole of the IP in to another work or combine the use of the IP with another product or work.
- Ownership to the improvements made to the IP.
- Warranty or restrictions on use of IP. For eg. IP to be used only on a particular platform.
- Duration of license, i.e. whether license to be perpetual or time-bound. For eg. a patent cannot be licensed perpetually; however a trademark can be licensed perpetually provided the same is periodically renewed by the licensor. On a general note, parties cannot agree upon the duration of license beyond what is specified under the specific statute.
- Circumstances under which license is terminated.
- Business continuity plan if licensor or licensee is not able to conduct business including terms of source code escrow etc.
- Change of control of the licensee for eg. Licensor would not be interested to continue the license if the licensee is acquired by one of Licensor's competitor.
- Rights and obligations post termination of the license especially those pertaining to confidentiality.
- Applicable governing laws.
- Mechanism for resolving disputes.
In addition to the aforesaid aspects, there should be appropriate consideration on clauses pertaining to limitation of liability; warranties; insurances; security measures and compliances of storing and using IP. A good licensing agreement would take in to account the aforesaid considerations and an ample dose of the same would go in to drafting of the license terms and conditions. However, the aforementioned pointers are only an indicative list and the parties to the licensing agreement are free to adapt these terms to their convenience within the legal framework. It is pertinent that the aforesaid terms and conditions are carefully considered and agreed upon by the licensor and licensee prior to executing a licensing agreement. This prevents any ambiguity in the understanding of the parties involved and lessens the possibilities of potential disputes.
Licensing agreements and Competition Law:
There are three main concepts which form the basis of anti-trust laws across various jurisdictions and they are: (i) Cartels and other anti-competitive agreements and practices (ii) Merger control and (iii) Abuse of a dominant position. With the enactment of Competition Act, 2002 ("Competition Act" or "Act"), the impact of these concepts are evident in Indian industry sectors as well. Of course, there would be commensurate influence of the new Competition Act on M&A activities; intra-group mergers, demergers and acquisitions; joint ventures; agreements and arrangements with competitors and agreements and arrangements with suppliers, distributors, exclusivity arrangements, agreements for sale and other commercial agreements. The Competition Act, in effect, prohibits anti-competitive agreements (section 3), abuse of dominant position (section 4) and regulates mergers, amalgamations and acquisitions (sections 5 & 6).
It is also pertinent to note that, agreements amongst enterprises or persons at different stages or levels of the production chain in different markets, including (a) tie-in arrangement; (b) exclusive supply agreement; (c) exclusive distribution agreement; (d) refusal to deal; (e) re-sale price maintenance are considered void, if they cause, or are likely to cause, an appreciable adverse effect on competition in India.
The Competition Act has clarified that 'reasonable conditions' may be imposed for protection of recognized intellectual property rights under Intellectual property laws, i.e. the Copyright Act, 1957, the Patents Act, 1970, the Trade Marks Act, 1999, the Geographical Indications of Goods (Registration and Protection) Act, 1999, the Designs Act, 2000, the Semi-conductor Integrated Circuits Layout-Design Act, 2000. It may be noted that the said Intellectual property laws do not have an 'overriding effect' over Competition Act, and the exemption provided applies only to the extent that the "intellectual property right holder" imposes reasonable conditions necessary for protecting his/her rights.
In the light of the above, it is pertinent to explore as to what is permissible under the Competition Act and what are the practices which may be construed to be abuse of IP having an adverse effect on competition. The intent of the Competition Act is very clear, the licensing agreements must not in any manner restrict or hamper competition and trade. In the event of any unreasonable restrictions which are per se anti-competitive, then such licensing agreements would raise concerns under the Competition Act. In short, though conceptually there is no conflict between the protections granted under the various intellectual property statutes in India and the Competition Act, the question is to how to balance both while entering in to a licensing agreement. As the Competition Act is at its nascent stage in India, the scrutiny of licensing agreements has, in many instances, not attracted the attention of the Competition Commission of India. Going forward, this situation may go for a dynamic change. Keeping this in mind, it would be most advisable to draft licensing agreements within legal parameters in harmonization with the Competition Act.
The stamp duty payable for licensing agreement would be as per applicable stamp act of the concerned state in India.
As licensing arrangements offer major commercial benefits to business organizations and inventors, it is essential that careful attention needs to be given to the details which goes in to the licensing agreement. Furthermore, in the light of the above, it is imperative to comply with all the applicable laws pertaining to licensing regime.
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.