Key Considerations for Licensing Your Intellectual Property

✍️ Opinions

Muskaan Kapoor

Jul 27, 2024 — 5 min read

Ada Shaharbanu, Senior Associate, Spice Route Legal - Key Considerations for Licensing Your Intellectual Property

This article has been contributed by Ada Shaharbanu, Senior Associate, Spice Route Legal.

Licensing intellectual property is a strategic and largely commercial play that involves a nuanced mix and match of rights and obligations. This note aims to provide an overview of considerations that businesses should assess while licensing their intellectual property to users who require such licences for their operations.

Key Considerations in Licensing Agreements

Key considerations that should be captured in suitable contractual arrangements typically arise from various factors, including the commercial intent between the parties, the bargaining power of each side, the licensee’s ability to rely on other vendors, whether the intellectual property is being licensed for a development project, general software-as-a-service (SaaS) requirements, or specific customisations, the ability to collaborate with the licensee’s competitors, whether it is a distributor or reseller arrangement, and the importance and uniqueness of the product with attached intellectual property rights, among others.

Defining the Scope of the License

While negotiating a licence clause, a licensor should closely analyse the scope of the licence that is provided to potential licensees. While intellectual property requirements and enforcement vary across jurisdictions, most jurisdictions recognise rights that are automatically vested upon intellectual property owners, usually as a result of the creation of the concerned property that the rights are associated with. Defining the scope of the licence becomes crucial, as the commercial benefits from that intellectual property will be closely linked to the defined scope.

Flexibility in Defining Licence Rights

Licensors have the flexibility to define and restrict rights to align with specific business strategies. They might limit usage to specific regions or industries to avoid conflicts with other licensing agreements or to maintain exclusivity in certain markets. These restrictions help in managing and maximising the value of their intellectual property. Geographic or industry-specific restrictions might limit a licensee’s operational flexibility. Clear language on rights will help licensees assess whether the product fits their needs and avoid potential legal issues.

Licensors should therefore expressly specify the rights available to licensees and (also) expressly specify the rights not available to them for better clarity, with a confirmation that licensees will not receive any ownership interest, where relevant. Knowing the limits will also help licensees avoid inadvertently breaching their agreement with licensors. Limiting or restricting licences may not, however, (always) be possible, especially in situations where licensees invest heavily in product or software development – they would typically insist on broad licence terms so that they have the flexibility to utilise the product across departments and applications. Unrestricted licences are typically seen for high-value deals where the licensee is willing to pay a premium.

Exclusive Licences and Strategic Decisions

Offering exclusive licenses can be a strategic decision for licensors, allowing them to charge higher fees to grant specific rights. However, this limits their ability to license the product to others, so they must ensure the exclusivity premium justifies the potential revenue loss from other possible users. Exclusive licences are particularly important for distributors seeking to dominate specific markets.

Revocability of License Terms

Licensors should also closely study the revocability of their licence terms. Granting an irrevocable licence means giving up significant control, as the licensor cannot revoke the rights even in cases of breach by the licensee. Licensors ought to weigh this against the stability it offers to licensees, and reserve irrevocable terms for high-value or long-term relationships. Licensees naturally value irrevocable licenses for the security they provide, ensuring they can continue using the product regardless of potential disputes. This is particularly crucial for mission-critical applications where continuity is essential.

Payments and Financial Considerations

Payments and taxes are another significant aspect that licensors should contemplate. Licensees are likely to insist on royalty-free licences to avoid recurring expenses and budget management. However, licensors must ensure that the payment structures adequately compensate for the lack of ongoing royalties.

Sublicensing and Transfer Rights

Licensees may generally also insist on the ability to sublicense or transfer rights to third parties, such as partners or clients. It allows them to extend the licence’s benefits throughout their supply chain or client base. Licence offerings should carefully be structured to avoid the uncontrolled proliferation of their product. Clauses to regulate sublicensing or assignment should therefore be included within contracts. Further, licensors need to contractually differentiate between transfers and sublicenses to maintain necessary control over their intellectual property. Sublicences are intended to allow for broader distribution rights while generally keeping the primary licensee accountable, while a right to transfer may allow licensees to easily transfer licences in the event of an assignment or other similar change of control events.

Preventing Unauthorised Use

Licensors should also, where possible, insist on specific terms regulating unauthorised access to their intellectual property and list out specific scenarios and examples of unauthorised use of licensees. Again, whenever possible, licensors should insist on providing their own draft agreements, as these will be tailored to accurately reflect their technology, product structure, and licensing arrangements.

Managing Copies and Modifications

Usually, licensors should consider limiting copies a licensee can make to prevent unauthorised distribution and loss of control over their product. However, large companies often negotiate for unlimited or multiple copies of the licence to facilitate broad use across teams. In such cases, licensors may offer enterprise licences, which are customer-friendly and eliminate the need to track unauthorised users.

Licensees often require the ability to modify software to tailor it to their specific needs and integrate it with other systems. Allowing modifications and the creation of derivative works can be a double-edged sword for licensors. While it can enhance the licence’s value and adaptability, it may also lead to versions that deviate from the original intent or quality standards. Licensors must balance these risks by setting clear boundaries and conditions. Clear rights to modifications would also help licensees avoid legal pitfalls and ensure seamless customisation.

Termination Clauses and Transition

Finally, licensees should prepare for the implications of termination clauses, while they seek agreements that allow sufficient time to transition away from the product and ensure that their operations are not abruptly disrupted. Ensuring that licensees cease using their products upon termination is vital for licensors to protect their IPs from continued unauthorised use. Clear termination clauses help licensors reclaim control over their products and prevent potential revenue losses from ongoing exploitation.