Licensing of IP Rights

One of the integral aspects of the IP transaction is the licensing of the acquired IP rights. A licensing agreement authorizes a third party, i.e., the licensee, to access, use, or enjoy certain IP rights in exchange for monetary consideration or co-licensing. It enables defining the rights and extent of IP rights being transferred to the licensee.

Benefits of Licensing

The benefits of having a licensing agreement are multi-fold. Licensing allows IP holders to generate revenue by licensing their IP to others for a fee without losing ownership of the IP. The licensor can utilize the benefit of the licensee’s distribution network to enter new geographical markets without (or low) capital investment. At the same time, it is beneficial to the licensees to save huge amounts being spent on research and development and other risks associated with the same. Licensing allows the holders to prevent unauthorized exploitation by third parties without consent and thereby forms an integral part of IP transactions.

Drafting a License 

Here, the drafting of licensing agreements plays a crucial role similar to applying and acquiring IP rights. The drafting of the license agreement must strike a balance between the interests of both the licensor and licensee. Firstly, the licensing agreement must comply with the basic requirements as specified under the Indian Contract Act, 1872. 

Some of the fundamental clauses to be covered while drafting the license agreement include:

• The scope of a grant of license for the effective exercise of IP rights.
• Nature of exclusivity or non-exclusivity of license.
• Conditions relating to the enforcement of IP rights, such as which party is responsible for maintenance of registered IP, the payment of associated fees and other requisites, etc.
• The period for which the license is granted.
• Specifying the obligations of the parties involved.
• Clauses relating to modifications or enhancements in the licensing agreement.
• Procedure and method for contract termination.
• Indemnification clause
• Payment of royalties; and
• The right to sub-license.

There are specific additions to the above-mentioned requirements for each type of IP. For instance, in the trademark licensing agreement, there must be a provision for quality control to protect the distinctiveness and reputation of the trademark. Similarly, in patents, if there is a series of patents being licensed, then it is preferable to make a list of all patents being licensed and specify them in a “Schedule” to the agreement to avoid any sort of confusion. 

What do the Laws say?

Section 49 of the Trademarks Act, 1999, states that both the registered proprietor and user shall jointly apply to the registrar for permitted use of the trademark. Similarly, section 30(3) of the Copyright Act, 1957, permits the copyright owner to grant any interest in the copyright by way of a license in writing signed by him or his agent. The Designs Act, 2000 makes it mandatory to register the license in writing to be registered with the Controller within 6 months from its execution or such other period as allowed by the Controller.

In PVR Pictures Limited v. Studio 18 (CS(OS) 1164/2009), the Delhi High Court observed that a TSA does not constitute a license agreement. It becomes clear that licensing agreements must not only be reduced in writing but also be in the form of a definitive and binding document. 

Under section 69 of the Patents Act, 1970, the licensee is required to get registered with the Controller of Patents in addition to the provision that the license must be reduced in writing and duly executed as per section 68. Rule 90 of the Patent Rules, 2003 states that the application for registration of title and interest in patents are to be made in Form 16. As such, documents proving transfer of a patent, affecting proprietorship, or creating interest, along with two copies of the assignment or other document certified to be true copies by the applicant or his agent, need to be submitted as per Form 16.

Conclusion

There are some other aspects that the licensors as well as licensees must be aware of before creating a licensing agreement. The licensors have to look into the possibility of losing control over IP to the licensee, the chance of depending completely on the skills and resources of the licensee to generate revenue, and the possibility of intellectual property theft by the licensee. The licensee, on the other hand, if is a small entity, has to take up the responsibilities of production, distribution, selling and other aspects, including the possibility of paying an upfront royalty or fee to the licensor.

Therefore, it is advisable to consult an attorney to seek advice on drafting the necessary terms, on any special registration requirements, the needs in case of more than one licensor or licensee, the types of IP and scope of licensing, and the difference with that of assignment.

– Shashank Raj, Sr. Associate & Ritika Reddy, Sr. Associate