(ii) Licence elements
Geographical and market-related scope. A licence involving the sale of a patented product or a product or service under a trademark is often limited to a certain geographical area (i.e. a region, a country or part of a country), and sometimes also to a specific market segment (e.g. supermarkets, petrol stations, bars or restaurants), or a type of promotion or customer channel (e.g. general consumers, tv-broadcasting, printed magazines, or luxury brand shops). See also sections 2.4, lead-in, (a) and (b).
As regards patents, the licence should not cover geographical areas in which no patent was granted. Furthermore, a licence must be considered to be a technology licence. However, the licensee may argue that the licensor failed to deliver what was agreed: a patented invention.
Exclusivity. A licence is either ‘exclusive’ or ‘non-exclusive’. “Exclusive” means that nobody is entitled to use the licensed IP in the agreed territory, market segment and customer channel, not even the licensor. If the licence is a sole licence, the licensor may not grant a licence to another in the same territory, market segment or customer channel. Nevertheless, the licensor itself remains entitled to distribute in that area. In other words, the licensee will be the only (sole) licensee for that area, operating alongside the licensor. See also sections 2.4, lead-in, (a) and (b).
Important incompatibilities. Both an exclusive and a non-exclusive arrangement may severely restrict the freedom of the licensor in its freedom to undertake sales activities or to appoint other potential licensees who may be more successful:
- The appointment of an exclusive licence for a certain market segment in a certain territory prohibits the subsequent appointment of a (even non-exclusive) licence in the same territory for a broader market.
- The appointment of a non-exclusive licence for a certain territory prohibits the subsequent appointment of an exclusive licence in that same territory (even though the former is not de facto active in the market segment or customer channel covered by the latter). In such case, the second licence must contain a carve-out permitting the first licensee to continue its activities.
- If a licensee is appointed with an exclusivity arrangement for a term of five years and the licensee does not generate any sales, the territory and market segment for which the licensee is appointed will effectively be ‘blocked’ for alternative sales efforts during those five years.
Temporal scope. Most licences are either perpetual or have a specific term. If the licence clause includes the word “perpetual”, there is no further need to provide for a termination mechanism. A term licence would be limited by the time period of the agreement. It is uncommon to address this in the licence clause and is usually stipulated in an article on ‘term and termination’. The agreed term should enable the licensee to recover its investments made in relation to the licensed IP (and make profit).
Occasionally, a licence is granted for the duration of a project. For example, if a party agrees to provide certain services with which it makes use of proprietary technology of the customer or a supplier of the customer, the service provider would need a licence to carry out the agreed services. Similarly, if parties enter into a joint development agreement, one or both parties might need a licence to complete their part of the agreed development work. Such licence might be implied by the scope of the agreement, but an express project-licence emphasises the proprietary nature of the IP involved and might bring to light which limitations ought to apply to such project-licence.
Right to sub-license. In some cases, a right to grant sub-licences is desirable. For example, if the licensee is granted a licence in respect of a territory whilst it cannot (or will not) exploit the full capabilities of the licensed IP alone. In such case, whilst the licensee might be in a better position to obtain the maximum potential of the market, it would be appropriate to grant sub-licensing rights. In sub-licensing, the licensor usually requires the licensee to assume a larger responsibility in case of IP infringements by third parties in that territory.
More common situations in which sub-licences are necessary, relate to the use of the IP by (a) companies affiliated to the licensee, and (b) subcontractors of the licensee. An example of a clause permitting such sub-licences:
Permitted sub-licences. Subject to the limitations applicable to Licensee, Licensee is entitled to grant sub-licences to:
(a) its Affiliates, which are not also an Affiliate of a third party, with the limited right to [use] the Trademark, provided that such sub-licence terminates (i) upon termination of this Agreement, or (ii) upon such sub-licensed Affiliate ceasing to be an “Affiliate” of Licensee;
(b) its suppliers and subcontractors, with the limited right to use the Trademark for Licensee’s exclusive benefit, provided that the sub-licence shall be no more extensive than is strictly required for providing such subcontractor’s services to Licensee, and provided furthermore that such sub-licence terminates (i) upon termination of this Agreement, or (ii) upon such subcontractor ceasing to be a subcontractor of Licensee for the sub-licensed type of services. Each sub-licence as referred to in this paragraph (b) shall be subject to the prior written approval of Licensor, which approval shall not unreasonably be withheld or delayed.
Competition law restrictions. In patent and know-how licence agreements, the parties should be free to compete with their own developed products, improvements or new applications of the technology to the extent that these are independent from the licensee’s initial know-how. It is permitted to oblige the licensee to grant a non-exclusive licence to the licensor for improvements and new applications of the licensed technology. For important prohibitions, see section 5.6(b).
Irrelevant licence elements. In the core licence clause, it is generally not necessary to stipulate matters which are otherwise implied by (contract or IP) law. Such words, as they are occasionally used, include:
- Non-transferability or non-assignability of the licence: the general contract law principles for transferability of the licence agreement apply. This means that, in order to be legally effective, such a transfer requires the consent of all the parties to the licence agreement. This means that the licensor has the right to refuse and thereby prevent any transfer.
- Irrevocability of the licence: general contract law provides that contracting parties are bound by the terms of their agreement. Revocation of the licence is only possible on grounds provided by the applicable law which justify a term licensor for improvements inaction of the licence (e.g. rescission in case of material breach or termination by a receiver in bankruptcy) or grounds expressly stipulated in the licence agreement (e.g. in cases of material breach, bankruptcy or change of ownership over the licensee).
- Personal nature: this is the same as the non-transferability of the licence and a statement that the licence is personal is therefore redundant. Every contract is personal to the parties involved.