Territorial licences can be a great way to get your product on the market. But it's not enough to sign off the rights and wait for the royalties to come in, as tempting as it may be. It requires a considered strategy, especially if the licensed product is regulated.

When it comes to licensing intellectual property (IP) rights, you can "slice and dice it" any way you want: you can grant a licence that is limited by duration, type of activity that the licensee can undertake, and/or technical or commercial fields in which the licensee can operate. 

You can also limit the licence geographically to a specific territory in what is known as territorial licensing. This allows the licensor to get the product developed by one licensee in return for the privilege of selling it exclusively in one territory (which may be a single country or a whole region), and then benefit from that development when granting subsequent licenses in other parts of the world. The licensor may even be able to charge higher rates for these licences, as the product is ready to market and requires less upfront investment.

Taking the first step 

From a purely commercial perspective, it's tempting to chop the world into the smallest territories possible to maximise the royalty revenues, especially if the product is continuously being developed. However, the larger the network of licensees, the more difficult it will be to manage them. 

When thinking about granting territorial licenses, the first step is to formulate a proper licensing strategy. From the outset, the licensor should think about what goals they wish to achieve and what type of licensee is most likely to help them do it. From there, the licensor can start to formulate its position in relation to the key terms of the licensing agreement. 

Below, we set out a few key points for the licensor to consider. They are also good candidates for inclusion in any licence term sheet.

Product development 

First, the licensor will need to negotiate the terms on which the intellectual property that is created by the licensee will flow back to the licensor – and licensor's other licensees. 

When preparing to negotiate the first licence agreement, the licensor should exercise their imagination and try to anticipate how the licensed product could develop. What improvements and future IP rights may arise from the development work? What access will the licensor – and subsequent licensees – have to those improvements?

Where it is envisaged that multiple licensees will be undertaking product development activities in parallel, managing improvements will be easier if licensees agree to co-ordinate their development plans, if not with each other, then at least with the licensor. The results of product development should also be shared in order to avoid duplication of work.

Although producing these results can be costly and licensees may be unwilling to share this commercially sensitive information without a financial incentive, it may be necessary to ensure that the activities of one licensee do not damage the value of the product (or its brand) for all. 

The licensor will need to decide at the outset, whether it will co-ordinate product development activities, or rely upon the licensees to do it effectively. The provisions of its licence agreements will need to reflect that decision.

Regulatory consistency

The second important consideration for licensors in the life sciences industry is ensuring regulatory consistency. If the licensed product is regulated (eg as a medicinal product or a medical device) it may not be marketed unless appropriate regulatory processes are followed first (in the EEA, application for a marketing authorisation for a medicine or a CE marking for a medical device). Such approval will need to be obtained either by the licensor or the licensee, depending on the applicable regulatory regime, and the role the licensee will play in placing the product on the relevant market. 

Since regulators communicate with one another, the licensor will want to oversee filings for marketing approval that the licensees make across the world, or take over this activity entirely, to avoid ending up with ten different authorisations.

Alternatively, the licensor may try to achieve consistency in regulatory communications by requiring the licensees to co-ordinate their responses with one another. Such a de-centralised approach may look like a good way to save licensor's management time, but it will need to be supported by robust governance provisions in case licensees disagree with one another. The parties should also ensure that confidentiality provisions appropriately deal with disclosure of information to regulators. 

The same considerations apply to the ongoing regulatory reporting obligations, which are imposed on companies dealing in medicinal products and medical devices, and may vary from jurisdiction to jurisdiction. Again, the licensor will need to decide whether the relevant safety and regulatory information will flow between the licensees or whether the licensor will act as a centralised reporting hub. 

Who will actually make it? 

The licensor will also need to decide, who will manufacture the product. The licensor could limit the licence to the right to sell the product only (meaning that the licensee will effectively be just an importer or a distributor), or include the right to manufacture it as well. 

If the licensor decides to grant manufacturing rights to licensees, ensuring consistency and quality of the product will be an important commercial consideration. This may require a degree of coordination on the part of the licensor and/or cooperation between the licensees, including through sharing of manufacturing know-how. This needs to be dealt with appropriately in the quality, confidentiality and governance provisions in the licence agreement. 

Conversely, if a licensor decides to retain manufacturing rights and supply product to the licensees, the licensor must be aware of the potential product liability risks. The licensor will also need to ensure that they have the operational capability (in-house or through an outsourcing arrangement) to supply all licensees and up-scale the production when needed. 

Finally, no renewal fees!

Granting an exclusive territorial licence comes with the relief of not having to pay for maintenance of the IP rights in the relevant territory. Typically, this obligation will be passed to the licensee, which will be an attractive proposition for owners of registered IP rights such as patents and trade marks, for which payment of renewal fees is necessary to keep them in existence. 

Licensors of those IP rights may also be tempted to relinquish control over the prosecution, maintenance, enforcement and defence of those rights. However, a well-advised licensor will maintain a level of oversight in respect of those activities. In the context of patent prosecution, worldwide coordination will be necessary to prevent licensees prosecuting corresponding patent applications in their respective jurisdictions from making inconsistent and damaging statements or amendments. Caution must also be exercised in litigation, as actions or statements of a licensee in one jurisdiction may fuel infringer's arguments in another.