Licencing intellectual property, things to consider

Publication September 2015

We all know that licensing of our intellectual property can be beneficial to a business.  But, in order for that to happen it is important that, that the agreement is drafted properly. Below is a checklist of some of the common issues which should be considered when concluding an intellectual property licence:  

Properly define the intellectual property right

When dealing with and negotiating an intellectual property licensing agreement, it is important to understand the nature of the intellectual property rights being licensed and to ensure that you properly define them in the agreement.

The nature of the intellectual property will naturally affect other provisions of the agreement.  This is particularly so when one is dealing with copyright. Copyright is a bundle of rights, which includes: the right to perform the work in public, to publish the work, reproduce the work, to translate the work to adapt the work i.e. convert the work into a novel or other type of work, and the right to distribute the work.  

These rights may be licensed individually or as a bundle of rights granted to a licensee.

Scope

A vital element of a licence agreement relates to the scope and extent of the rights granted to the licensee, as well as any limitations on those rights. The scope of the licence is usually informed by the intellectual property licensed and it may also depend on the type of agreement. For example, in publishing agreements where the type of intellectual property in issue is copyright, typically, the writer would grant the publisher the right to “produce, copy, and publish the book in any format including electronic”, while retaining the remainder of the copyright, which would include the right to make adaptations, serialise the book, reproduce the book in foreign language, convert the book into a movie or television series etc.

Licence types

The type of license required should be informed by the nature of the relationship being created between the parties. There are three types of licences:  

  1. Exclusive licences give the licensee the right to use the intellectual property to the exclusion of all persons including the licensor. In other words, only the exclusive licensee has the sole right to use the intellectual property rights licensed.
  2. Non-exclusive or ordinary licences give the licensee the right to use the intellectual property, but do not restrict the rights of the licensor or other parties in any way. In other words, the licensor retains the right to license the work to third parties and to simultaneously use the rights licensed itself.
  3. Sole license, gives the licensee the right to use the intellectual property to the exclusion of all persons, except the licensor. A sole licence is similar to an exclusive licence except that the licensor also retains the right to use the intellectual property rights licensed.

Tax issues

Tax issues should be considered, especially if the licence of the intellectual property is granted offshore. Issues of withholding tax come into play also when royalties are paid to a foreign company by a South African resident for use of intellectual property. In addition, exchange control requirements must not be overlooked.

Improvements

A licensor may be continually making improvements to the intellectual property, even after the effective date of the agreement. The right to any improvements should be negotiated as part of the overall license agreement.

Similarly, the agreement should cater for instances where the licensee works on the intellectual property and in the process creates new intellectual property. The ownership of the new intellectual property or improvements should be adequately dealt with.

Maintenance

Typically, the licensor takes responsibility for the prosecution and payment of annuity fees but may request to be reimbursed for the payment of annuity and maintenance costs for the intellectual property. Usually, the licensee is required to maintain a good record of accounts relating to all transactions affecting the intellectual property. This clause is especially important where the royalty payment is linked to revenue created through the use of the intellectual property.

Warranties and indemnities clause

This is a very important part of the agreement. The licensee should provide the licensor with an indemnity against any claims which may arise from his / her use of the intellectual property. Equally so, the Licensor should provide a warranty that they own the intellectual property and it does not infringe third party rights.


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