A license agreement is a business contract often used as an alternative to franchising. Under a licensing arrangement, the owner of an intellectual property right (“Licensor”) grants to another party (“Licensee”) the right to use or sell products or services under the Licensor's intellectual property rights.
Differently from the franchising, which is governed by the Malaysia Franchise Act, licensing agreements are not regulated by any specific legislation. The concept of licensing is purely based on the terms and conditions of the contractual agreement between the Licensor and the Licensee, commonly known as Licensing Agreement.
A License Agreement is commonly used to set out the terms of the License, among which, obligations and rights of the parties and the license fee, typically calculated based on a percentage of sales or profits made by the Licensee.
There can be different type of licenses:
1. Exclusive License: An Exclusive License allows only the named Licensee to use or operate under the intellectual property rights owned by the Licensor. No one else, including the Licensor, are allowed to use the relevant intellectual property rights.
2. Non-Exclusive License: A Non-Exclusive License allows the Licensor and the named Licensee to use the licensed intellectual property rights. It allows the Licensor to grant the same right the License to other Licensees.
There are some differences between the License and the Franchising.
As already mentioned, the licensing is governed by the License Agreement while the franchising is governed by the Franchise Agreement which must be in accordance with the provisions of the Franchise Act 1998.
The most important difference between the two concepts is that the licensing grants more flexibility to a Licensee to conduct its business operations without any supervision, while the franchising is lacking such kind of business freedom. Indeed, the franchisor retains a strict degree of continuous control over the operations of the franchisee's business under a franchise business.
Another difference between the two Agreements is the requirement to register the legal document before the commencement of business operations. While there is no requirement to register a License Agreement, the Franchise Act 1998 imposes to the parties to register the Franchising Agreement.
Under the old Trademarks Act 1976, Malaysia adopts the system of registered users. Successively, the new Trademarks Act 2019 has introduced stricter formality requirements in that a license must be in writing and signed by or on behalf of the Licensor for it to be effective as per Section 69(3) of the Act.
This is a relevant modification from the old Act which stated that a license needs only be by ‘lawful contract' including therefore verbal ones. In addition, the new Act has expressly excluded trademark licenses from mandatory record with the Registry to have effect against a person acquiring a conflicting interest.
Although not mandatory, it is highly recommended to record all licenses affecting Malaysian trademark registration because once so recorded, the license shall be binding on every successor in title to the Licensor's interest. Additionally, after the recordation, the entry of the license in the Register shall be deem notice to the public.
It's however interesting to underline that for International Trademark Registrations designating Malaysia, the 2019 Act has explicitly established under Rules 20bis(6)(b) of the Common Regulations that, registration of licenses in the International Register (WIPO) has no effect in Malaysia.
In such cases, the Holder must record the license in object with the Registry of the Malaysia Intellectual Property Office (MyIPO).
In conclusion, despite the fact that the License agreement leads to some undeniable advantages, on the other hand it is purely based on the License Agreement, which can raise doubts about his effective success in the business operations.
Malaysia aimed to improve its laws with respect to trademarks and intellectual property rights. However, our opinion is that is still some legal vacuum that need to be filled to grant the business operators to truly exploit the smartness of the Licensing concept.
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