IP licences - contract drafting tips - DOs and DON’Ts

8 April 2015

Reviewed by Donna Short (Partner), Henry Davis York
Written by Rufina Cheung (Editor), Wolters Kluwer

The following table suggests various steps to take or avoid when drafting intellectual property (IP) licensing agreements. It does not constitute legal advice and may not be appropriate in all circumstances.

This table provides a snapshot. See ¶85-100 of CCH’s Australian Industrial & Intellectual Property service for more details, explanations of the reasoning behind the suggestions, explanations of the relevant law, and footnotes to relevant articles, presentations and cases.

The sections at the beginning of this table (and ¶85-100) include suggestions which generally apply to all IP. There are also sections towards the end which include suggestions that are specific to trade marks, patents and copyright. The last section includes suggestions on steps to take before and after the contract drafting stage, including suggestions on how to effectively negotiate IP licences.

The expanded version of these tips will also be published in CCH’s Australian Contract Law Reporter at ¶67-824. This is the seventh in the series of contract drafting tips featured in our Australian Contract Law Reporter. The first six tips covered deeds of release, dispute resolution clauses, exclusion clauses, GST clauses, liquidated damages clauses and “reasonable endeavours” clauses. All the tips can be accessed from the roadmap at ¶67-730.

You can request a free trial of the IP or contract law reporter, if you are not already a subscriber.

DO
 
DON’T
Identify the appropriate licensor and licensee

Check if the licensor has the necessary rights

  • Jointly held?
  • Lapsed?
  • Territory?
 
Check if the licensee has sufficient resources to meet its obligations  
Consider potential licensees at different levels of the value chain  
Negotiate with a number of potential licensees DON’T limit yourself to negotiating with a single potential licensee
Run an ASIC search if the licensee is an Australian licensee  
   
Consider whether to allow sub-licensing, assignment and security interests
Specify whether the licensee can sub-license, and on what terms  

Specify whether the licensee can assign the licence, and on what terms

 

  • consent
  • withholding or delaying consent
  • mergers and sale of shares
  • assignments by operation of law
  • multi-step assignments
  • identified transferees
  • specific purposes
  • conditions
  • partial assignments
 
State whether the licensor can assign the licence and/or the licensed IP  
State whether a party can grant a security interest over the licence  
If the IP can be used on goods, require that any security agreement over the goods excludes IP rights  
   
Decide on the most appropriate type of licence
Choose between non-exclusive, sole or exclusive licences DON’T use “sole and exclusive licence”
Consider higher payment, limited duration or performance metrics for exclusive licences  

Remember that exclusive licences are different for copyright and patents, especially when drafting a bundled licence

 

  • License all rights to “exploit” a patented invention
  • Remember that the rights available to an “exclusive licensee” under the Patents Act 1990 (Cth) are only available once the patent has been granted
DON’T reserve any rights when granting an exclusive licence for a patent
   
Decide on the duration of the licence
Consider the statutory lifespan of the IP rights when setting the licence period  
Consider who pays for renewal fees during the term  
Consider limited duration for exclusive licences  
   
Deal with termination
Remember that “irrevocable licences” can still be terminated  

Clearly state when a licence can be terminated, eg decide whether to

 

  • Allow termination if there’s a change in control of the licensee
  • Allow termination for assignment without consent
  • Ensure automatic termination if the licensee becomes insolvent or files for bankruptcy
  • Allow termination for an un-remedied breach
  • Allow termination for failure to achieve commercialisation milestones
  • Allow termination for failure to achieve minimum sales
  • Allow termination for breach of warranty
  • Allow termination on notice (perhaps after a specific event)
 
   
Decide whether to limit the licence
Specify the geographical territory  
Consider limiting the licence to certain goods, purposes, sectors or formats  
Consider prohibited uses  
   
Consider what licence fees to impose (if any)
Consider no fees, one-off fees, annual fees and/or royalties  
Require a perpetual licence fee to be paid upfront  
Consider minimum royalties  
Consider ramped-up royalties  
Consider whether the royalty should reduce over time  
Consider whether start-up licensees can afford hefty fees early on  
Consider charging no fees or nominal fees for inter-company licences  
Consider the impact of other IP that will be captured during the licence  
Consider who pays for renewal fees during the term  

Consider tax implications and risks

 

  • Avoid the wording “grants … under [IP rights]”
  • Consider not expressly granting patent rights in standard distribution agreements
DON’T submerge distribution agreements into IP licences
   
Other issues — IP generally

Specify the ownership of IP in improved versions or combinations — Consider a licence-back
 

Specify who is responsible for the enforcement of IP rights
 
Require the licensee to notify the licensor of any infringement  
Require cooperation in enforcement  

Allocate costs

 

  • Allocate enforcement costs, and proceeds
  • State whether the liability to pay for enforcement litigation continues after the licence expires
  • Consider who pays for renewal fees during the term
 
Consider carve-outs to indemnification by licensor  
Consider whether to qualify warranties, eg knowledge qualifiers  
Specify any services the licensor is to provide  
Require acknowledgment that the licensor retains ownership  
Beware of “short and simple” licence agreements  
Require the licensee to keep records, and allow inspection by the licensor  
Stipulate the governing law  
Include a dispute resolution clause  
Require confidentiality  
Use plain English  
Use definitions  
   
Trade mark issues
Insert a quality control clause into trade mark licences  
Require indemnification by the licensee for product liability, and a failure to comply with the quality control clause  
Consider requiring the packaging and advertisements to refer to the licence  
Consider limiting the powers of an authorised user  
Consider registering trade marks before licensing them  
Forbid the licensee from registering similar trade marks  
Require the licensee to assign-back goodwill  
   
Patent issues
Execute separate licences for Australian patents and foreign patents or other IP  

Remember that exclusive licences are different for copyright and patents, especially when drafting a bundled licence

 

  • License all rights to “exploit” a patented invention
  • Remember that the rights available to an “exclusive licensee”under the Patents Act are only available once the patent has been granted
DON’T reserve any rights when granting an exclusive licence for a patent
   
Copyright issues
Require the source code of key software to be held in escrow  
Specify the types of devices and channels of distribution DON’T just use ambiguous terms like “TV rights” or “home entertainment products”
   
Issues — before and after the contract drafting stage
Check whether the product has already proven itself in production  
Negotiate even if companies say they don’t change their form agreement  
Protect long-term relationships during negotiations DON’T waste time and goodwill in useless negotiations
Keep good records of licence agreements  
   
Donna Short

Commercial, strategic and trusted. That's what I strive to be for my clients.

Donna Short Partner

Donna specialises in intellectual property law and her practice covers both contentious and non-contentious intellectual property matters. She is recognised as a leader in her field by her clients, peers and legal directories.

Donna has over 20 years' experience advising on intellectual property issues including intellectual property identification, protection and commercialisation, as well as assisting with intellectual property disputes.

Her areas of expertise also encompass technology, privacy, domain name disputes and Australian Consumer Law issues. Donna's expertise in the privacy area includes assisting private and public sector organisations with privacy projects to update their privacy compliance procedures and policies, as well as advising on use of data and customer analytics.

Donna assists her clients with enforcing their intellectual property rights including acting in trade mark opposition proceedings before IP Australia and in Federal Court proceedings. She also carries out compliance reviews for advertising campaigns.

Donna also has significant expertise in advising clients on complex intellectual property transactions with a cross-border element.

Donna regularly presents to clients and industry on intellectual property related topics as well as privacy issues.

Her clients include financial institutions, multinational companies, State and Federal government departments and large Australian retailers.

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