Israel: Technological Licensing Agreements – The Topic Of Ownership In Derivatives

Last Updated: 13 April 2017
Article by Tsippy Bengi

A licensing agreement is a legal contract between two parties, known as a licensor and a licensee. In a typical license agreement, the Licensor grants the Licensee the right of use and a limited license for commercializing the products in his ownership under certain conditions. On the other hand, the Licensee takes upon himself a number of conditions with regards to using the product, and agrees to make payments to the Licensor, known as royalties.

One of the main issues in technological licensing agreement relates to rights of ownership in the licensed product. When dealing with a product ready for distribution the matter is relatively simple, the Licensor reserves the exclusive ownership in the product. But when the licensed product requires additional development and/or creates derivative work, the matter of ownership rights in the "upgraded" derivative is even more important, and the answer is not unequivocal. In this article we will focus on licensing agreements of computer software and the topic of legal ownership in derivatives based on the original software, and examining the topics as stated in accordance with the Copyright Law applying to these cases.

Introduction

In most cases, due to the wide legal area they have to cover, technological licensing agreement include many varied points, such as: the scope of the agreement, the matter of exclusivity or territorial limitations; financial aspects, the rate of royalties and how they are calculated in different cases; the term of the agreement and the option to renew it; and, of course, setting the matter of rights of the Licensee and the Licensor in the licensed product.

One of the central topics up for discussion in technological licensing agreement relates to rights in the product (intellectual property). When dealing with a finished product the matter is relatively simple, the Licensor reserves the exclusive ownership in the product. But when the licensed product requires additional development and/or creates derivative work, the matter of ownership rights in the "upgraded" derivative is even more important, and the answer is not unequivocal.

Ownership Rights in a Product/ Work

As a rule, when the licensed product is not a finished product and it requires development works and adaptation to a specific use, the Licensor is expected to continue developing the product and/or develop derivative work in order to adapt it to the requirements of the Licensee (and invest significant resources in continuing the development), and alternatively, the Licensor will give his consent to the Licensee to execute the continued development.

One of the popular uses in the software development industry is use for creating a derivative. Many times, works are created based on previous works, for example: a person has developed designated software for hotels from an operational aspect ("the Creator"). Later on, the Creator contracts with another entity and grants it a license to use the product ("the Licensee"). The Licensee develops a derivative of the software and adapts is specifically to a certain client.

In the aforementioned example, can the Licensee have copyrights in the derivative?

First, we will state that computer software is considered a "literary work" protected by the Copyright Law, 5768-2007 (hereinafter: "the Law").

The Law grants the copyright owner the exclusive right to do in the work (or in a significant part thereof) the actions listed in Article 11 of the Law. One of the actions is "creating a derivative", which is defined as "creating an original work significantly based on another work, such as translation or processing". Therefore, anyone interested in creating a "derivative" based on a protected work, even if the derivative is an independent work, must obtain the consent of the copyright owner in the original work in order to be permitted to create based on it.

In addition, Article 37 of the Law states that "a contract for transferring copyright or for granting a unique license in its regard requires a written document".

If we apply the provisions of the Law on the aforementioned example, we will see, therefore, that since creating a derivative is an action within the Creator's exclusive right, and transferring ownership in the product requires a written document, inasmuch as the parties have failed to set in the agreement that the rights in the derivative pass to the Licensee, the default is that they remain in the exclusive ownership of the Creator (the Licensor). Accordingly, in order for the Licensee to have any rights whatsoever it should be expressly stated in the agreement.

Another topic up for discussion in this context is whether the Licensor, who has contracted in an agreement for granting unique unlimited license for use to another entity for the software he has developed, may continue using the original software, develop derivatives of the original software, market it to additional clients, and so on.

First, it should be examined whether the agreement between the parties expressly states that the ownership in the product is transferred to the Licensee and in fact revokes the proprietary right of the Licensor in the original software. The fact that the agreement has granted the Licensee unlimited permission to use the original software, does not have any bearing with regards to the matter of the right of ownership in the original software, which has remained, as stated, with the Licensor. Thus, inasmuch as the licensing agreement has not positively revoked the (proprietary) right of the Licensor in the original software, the Licensor may continue developing the original software and market it to his clients, and it shall not constitute breaching the Licensee's rights. On the other hand, inasmuch as the licensing agreement has indeed revoked the proprietary right of the Licensor as stated, it should be examined whether the actions made on the original software indeed constitute "development".

The stated above is also valid in a more extreme case, where the Licensor grants his consent to the Licensee to develop the original software, or to create derivatives, and even agrees that these derivatives shall constitute the Licensee's proprietary rights. In this case, so long as the right of ownership in the original software has not yet been revoked from the Licensor, he is entitled to continue performing all actions permitted by law as the copyright owner in the original software.

Summary

The Copyright Law which applies, among others, to computer software, provides various and varied protections to the work owners. However, copyrights are proprietary rights which can be commercialized, whether by selling the product and whether by granting a license to others.

As is suggested by the aforesaid, drafting a technological licensing agreement and setting all agreements between the parties in a literal manner is of crucial importance. Attention should be paid in advance to the matter of the proprietary rights of both parties to the licensing agreement, and setting them in an expressed and accurate manner in the agreement.

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.

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