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Things you need to know about licensing intellectual property rights

Ownership of work product is crucial for most businesses. A business must either own or have a licence to what it uses, otherwise it could infringe someone else's intellectual property rights.

March 2014

Where the business owns the rights, this will either be because the product or service to which the rights attach has been developed in house or as a consequence of someone assigning the rights to the business. Read more about the various intellectual property rights.

In this piece, we look at some lessons from recent legal disputes about licensing intellectual property rights. We highlight some points to consider when negotiating and drafting a licence agreement.

Distinguishing a licence from an assignment

Ownership dictionary definitionBy an assignment, we mean a transfer of ownership of the intellectual property rights from the assignor to the assignee. By a licence, we mean a permission for the licensee to use the intellectual property rights, with the licensor retaining ownership. A licence can be granted in three main ways. First, the licence could be exclusive, so to the exclusion of all others being able to use the rights, including the licensor. Secondly, the licence could be a sole licence, whereby the rights can be used by both the licensor and the licensee. Finally, the licence could be a non-exclusive one i.e. the licensor is free to license the same rights to third parties.

If the intention is for the licence to be an exclusive licence, the law governing most intellectual property rights specifies that the licence should be in writing and signed.

Do you need to register the licence with the relevant IPR registry?

For certain registered forms of intellectual property rights, such as patents, trade marks and registered designs, the parties to the licence agreement should consider registering the licence with the relevant IPR registry. For example, in the case of a trade mark, until an application for registration of a licence under a registered trade mark is made, the transaction is ineffective as against a person acquiring a conflicting interest in or under the trade mark in ignorance.

Trade marks and "use" by a licensee

A trade mark can be revoked where it has not been used in the previous five years. Fortunately, use by a licensee will normally constitute use of a trade mark for these purposes. However, be prepared to show evidence of use under the licence. This issue came up recently before an Appointed Person in the UK Intellectual Property Office1. In this case, the proprietor submitted licence agreements as evidence of use. The Appointed Person found this insufficient. He commented that the licensor should have put forward details of turnover under the licences.

Careful you do not contract before you are ready – do not underestimate the importance of labelling negotiations "subject to contract"

In a case last year, the High Court found that a letter from one party in a dispute to the other, containing a proposal for settlement amounted to an offer which could be accepted2. The wording in dispute was this:

signing contract on glass table"Our client is willing to settle the entire proceedings by paying the Claimant within 14 days of accepting this offer, the sum of £601,464.98 (the "Settlement Sum") inclusive of interest by way of damages, by means of an electronic transfer into his nominated bank account, in full and final settlement of the Claim and counter-claim plus the sum of £180,000 in relation to his legal costs, such settlement to be recorded in a suitably worded agreement."

When the other party accepted the offer, there was a binding agreement. The court found that if the offering party had wanted negotiations to keep going, it should have used the words "subject to contract" on its correspondence.

Duty to negotiate your licence agreement in good faith?

Some European countries impose a duty of good faith on the parties when negotiating contracts. The UK is more relaxed perhaps than other some other European legal systems on this point. When negotiating a licence outside the UK, it is certainly worth getting local advice.

For example, in France, there is a concept of "improper termination of negotiations" or "Rupture Abusive des Pourparlers". This line of authority allows a party, under certain circumstances, to recover damages for any loss caused by another party ending negotiations abruptly when the first party was legitimately of the view that such negotiations would lead to an agreement. French law imposes an obligation of good faith, such that there can be a breach if one of the parties improperly breaks off negotiations without having a good reason for doing so.

Do not assume that termination of a head licence will automatically end any sub licence. It may be that the permission in the sublicence binds both the sublicensor and the head licensor.

A licence will often specify whether the licensee is allowed to grant a sub-licence to a third party. Where the licensee grants a sub-licence to a third party, what happens if the head licence is terminated? Can the third party continue to exercise the rights?

Until some recent guidance from the High Court3, the issue has been far from clear cut. In short, whether the sublicence does terminate can depend on a series of factors:

  • The scope of the authority given by the licensor to the licensee to sublicense. If the authority is sufficiently wide to allow the grant of a sub-licence which is capable of surviving the termination of the head licence, then the head licensor must be taken as giving the ultimate permission himself, so that the licensee has acted as the licensor's agent.
  • whether after termination of the head licence, the head licensor has continued to accept royalties from the sublicensee. If this is the case, this will usually be indicative of the sublicence surviving termination of the head licence;
  • whether the licensor and licensee are within the same corporate group, there may be some piercing of the corporate veil. Have the licensor and the licensee got the same or shared directors, with shared interests? Was the sub-licence in both of their interests at the time it was granted?
  • the wording of the sub-licence: has the licensor allowed the licensee to hold itself out as the IPR owner?
  • An obvious one, but does the head licence specifically give the licensee permission to grant licences which would survive the termination of the head licence?

When licensing an IPR to a licensee on an exclusive basis, consider the proposed licensed sector carefully. Will the licensee use the IPR to operate in an area which the licensor may want to expand into?

The importance of this was highlighted in a trade mark case last year4. The licensor was involved in the military nuclear sector. It sold off its subsidiary which had been the group's energy division. At the time of the sale, it granted an irrevocable, exclusive royalty free licence to its subsidiary, to use the trade mark BABCOCK in relation to the "business carried out by [the subsidiary] and any business of a substantially similar nature".

PowerstationSeveral years later, the licensor started to begin acquisitions in the civil nuclear field and used the BABCOCK name in relation to the work it was doing. It became necessary to characterise the ex-subsidiary's business, as it was directly before the sale to see whether the licensor was in breach of contract.

The judge construed the term "business" widely and in the ex-subsidiary's favour. The way the business was defined included every part of the business, however small as it was prior to the sale. This effectively confined the licensor to using its trade mark solely for the military services it carried on pre-sale when the licence was granted. It had exceeded the scope of that right by extending use into civil nuclear services.

Tight definitions of the licensee's licensed sector are advisable. If a tight definition cannot be agreed, consider whether the licence ought to be non-exclusive on areas of potential overlap.

Where a licensor has multiple licensees, ensure that exclusivity given does not clash

The more centralised and contained the process of granting licences, the better. Licensors regularly in the business of licensing should have a clearly written licensing policy. Agree who has authority to grant licences and who does not. The licensee should be clear about who it needs to approach to renegotiate or clarify any part of the licence agreement.

Umbro ran into problems a few years ago where it had two licensees for the same mark5. The problems stemmed from two things: (1) Umbro UK wrongly permitted one of its licensees to operate in the other licensee's field in breach of exclusive licence; and (2) an unauthorised employee of Umbro's US subsidiary purported to grant variations to one of the licensee's agreements. If the variations had been effective (which they were not because the employee did not have authority to bind Umbro UK), this would have brought Umbro UK into breach of the other exclusive licence.

The judgment underlines the need for licensees to ensure that, before they engage in any activity that could reasonably fall outside what is permitted by the licence, they have written permission to do so. This should always be signed by an executive officer of the licensor or a person who has demonstrated that they have authority to bind the licensor.

Implied duty to perform obligations under a licence agreement in good faith?

Hand shakeIn a case last year, the High Court implied some good faith obligations into a distribution and licence agreement for toiletries.6 There was an obligation not to undercut duty free prices and not to knowingly give false information. The case highlights that courts are willing to imply certain good faith obligations into a licence agreement, such as: acting honestly, cooperating, not exercising a contractual discretion arbitrarily and not acting contrary to an established industry assumption.

If you have any questions on this article please contact us.

1Appointed Person (Daniel Alexander QC) decision: Q-ZAR O/004/14

2Newbury v Sun Microsystems [2013] EWHC 2180 (QB)

3VLM Holdings v Ravensworth [2013] EWHC 228 (Ch)

4Doosan Power Systems Ltd v Babcock International Group Plc [2013] EWHC 1364 (Ch)

5Hudson Bay Apparel Brands LLC v Umbro International Ltd [2010] EWCA Civ 949, 11 August 2010

6Yam Seng PTE Ltd v International Trade Corporation Ltd [2013] EWHC 111 (QB)

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Lorna Caddy

Lorna Caddy

Lorna looks at some lessons from recent legal disputes about licensing intellectual property rights. She highlights some points to consider when negotiating and drafting a licence agreement.

"Courts are willing to imply certain good faith obligations into a licence agreement, such as: acting honestly, cooperating, not exercising a contractual discretion arbitrarily and not acting contrary to an established industry assumption."