In part one of our IP licensing primer series, we discussed foundational considerations that Licensors and Licensees should bear in mind before entering an IP licensing agreement. We broadly explained how licence terms can be fine-tuned to generate revenue, strategically expand your business and protect your organization's brand.
This article, a sequel to part one, will expand on the topic of IP licensing by explaining different types of licence grants and the scope of a licence.
ONE. Elements of Licence Grants
When one party (the "Licensor") grants a licence to another party (the "Licensee"), the type of "grant" can make a difference in how the IP is monetized, used and controlled. Generally, licence grants can differ based on their duration, transferability and revocability.
a. Perpetual and time-limited licences
Perpetual licences last for an indefinite period of time. A perpetual licence is considered "paid up" because a Licensee does not need to renew their licence (for example, by paying an annual subscription fee to the Licensor). That said, a perpetual licence can also be designed to expire at the same time as the underlying IP rights it protects. For example, a perpetual licence to the copyright of a screenplay may last for as long as the copyright, which would be 70 years following the end of the calendar year of the screenplay author's death.
For a Licensor, an advantage to perpetual licensing is that they can receive a larger amount of money upfront from the Licensee. This capital can then be used to support business functions tangential to the IP, such as research and development. Perpetual licences may also attract consumers and businesses that prefer to avoid the hassle of remembering when they last renewed a subscription.
Time-limited licences are different because they expire after a certain amount of time. Once this amount of time expires, it will generally expire as well, unless the Licensor and Licensee choose to renew or extend the agreement. Time-limited licences can be advantageous to both parties because an impending expiry date triggers an opportunity to reevaluate the licence and renegotiate details in response to changing circumstances.
b. Transferrable and sub-licensable licences
A Licensor must also consider whether they want the licence grant to be transferrable or non-transferrable. Generally, transferrable licences permit the Licensee to assign or sell it to a third party in part or in full. Depending on the exclusivity of a licence (see below), a licence can sometimes be presumed to be freely transferrable by the Licensee. Therefore, regardless of whether transferability to third parties is desirable to you as a Licensor, it is recommended to include clear language about what you want so that misinterpretation becomes less likely.
Sub-licences are a type of transferrable licence. Generally, when a licence is sub-licensable, the Licensee is allowed to further license the IP to a third party. Depending on the terms set out by the original Licensor, the Licensee may be able to generate revenue by sublicensing to the third party or several other parties. Through sub-licensing, a Licensor may have access to commercial opportunities that they would not otherwise have. Licensors can earn increased profits through sub-licensing agreements and thus an expanded network of revenue. Sub-licensing can also generate increased recognition for the Licensor's product or brand.
While these advantages are attractive, there are risks to sub-licensing for a Licensor as well. A Licensor exposes their IP to third parties that they do not know. These third parties can potentially steal or otherwise misappropriate the Licensor's IP. As will be explained under Quality Control and Enforcement, contractual safeguards are necessary to reduce the likelihood of theft, misuse, and other undesirable consequences that may arise from a loss of control over IP.
c. Irrevocable and irrevocable licences
Sometimes, a Licensor may wish to revoke a licence that they have previously granted to a Licensee. Revoking it may be desirable if a Licensee breaches the licensing agreement or is otherwise misusing the licensed IP. Similarly, where a Licensee is developing a poor reputation in their industry, a Licensor may use the right to revoke to distance its brand from the Licensee.
The right to revoke can be especially important where a perpetual licence was granted and no date of expiry was set. Before granting an irrevocable licence to any Licensee, a Licensor should consider what options are available to them in the event of a breach or other undesirable circumstance.
TWO. Scope of Licence
The scope of a licence refers to boundaries set on who, what, where, why and how a Licensee may use the Licensor's IP. In many cases, this is done through terms in the licensing agreement that mention territory, field of use and exclusivity.
d. Territory
The territory of a licence refers to where the IP may be used geographically. Unless a Licensor wants to allow the Licensee to use the IP anywhere in the world, it is recommended to include terms that speak to geographical territory. For example, a Licensor may want its software to be used across Asia but may be wary of its use in select Asian countries where piracy occurs more frequently. In this situation, the Licensor should state in the licensing agreement which Asian countries are authorized territories of use and which are not.
Clearly defining the territory of a licence is also important where a location name is ambiguous and can mean several different geographic regions. For example, setting out "Washington" in the licensing agreement as an approved territory of use could mean Washington, D.C. or Washington state. Moreover, "New York" is ambiguous because it could refer to either New York City or areas in the New York state metropolitan area (such as New Jersey or Connecticut). As will be emphasized several times throughout this series, clear drafting is essential to avoiding unwanted consequences.
e. Field of use
A licensing agreement will often mention specific purposes for which the Licensee may use the IP. This range of possible uses and purposes set out in the agreement is also known as the "field of use." Generally, the field of use can be industry-specific (for example, the Licensor may allow a Licensee to use the IP, but only in the context of financial services) or application-specific (for example, a Licensee may only be allowed to use the IP for educational purposes). Setting out a field of use can allow the Licensor to control which Licensees are using their IP for which purposes. Moreover, a Licensor is able to mitigate the likelihood of their IP being used for purposes that may not align with their brand (such as online gambling or recreational drugs).
f. Exclusivity
Generally, a licence is non-exclusive, exclusive, or sole. The primary factor that distinguishes one from the other is the level of the restrictiveness on the Licensee's ability to use the Licensed IP and the Licensor's ability to license the same rights to other parties or use the Licensed IP itself concurrently.
A non-exclusive licence is the least restrictive from the perspective of a Licensor. When a Licensor grants a non-exclusive licence to a Licensee, the Licensor is allowed to subsequently grant the same rights to others and exercise those same rights themselves. This means that other parties, besides the Licensee, are likely using the Licensor's IP as well.
An exclusive licence is the most restrictive from the perspective of a Licensor. Under this type of licence, a Licensor will generally allow a Licensee to use the IP, promising that the Licensee is the only party who will be granted those rights. An exclusive licence even prohibits the Licensor from exercising the rights that they are granting to the Licensee. For these reasons, an exclusive licence will generally have a higher price tag for the Licensee.
A sole licence falls somewhere in between a non-exclusive and exclusive licence in terms of restrictiveness to the Licensor. Generally, a Licensor promises to not grant the same rights to others. However, a sole licence differs from an exclusive licence because the Licensor retains the right to exercise the rights themselves while it is in effect.
Key takeaways
The above has briefly reviewed IP licensing agreements and how the type of grant and scope of a licence can affect the nature of your licensing agreement. Stay tuned for further blogs on this topic, including part three, which will cover topics including terms and termination.
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.
