Licensing Inventions to earn royalties
An over- simplification of licensing is monetizing the intellectual property of your invention by allowing third parties such as companies to license the intellectual property for various purposes that involve manufacturing, marketing and selling. A patent, trademark, copyright, trade secret, a tech algorithm, or techniques or procedures or know-how are all examples of intellectual property. Subject to the provisions of the licensing agreement, when an invention is given for licensing to a licensee, the organization is empowered with the ability to manufacture; market and sell the invention. The process of Licensing of the technology is completed upon execution of Technology License Agreement (TLA) between the Licensor and licensee whilst the inventor is given royalties by the licensee as a consideration for the said agreement.
It is of paramount importance that the terms and conditions of License Agreement are explicitly agreed by both parties and is in a written form.
Why license an innovation to a company?
The fundamental reason that inventors license their patents for royalties is so that they can focus exclusively on attempting to create rather than managing to manufacture, monetize, or distribute each of their inventions. Inventors can create intellectual property and then license the rights to another company to bring the product to market through a patent license agreement. For many innovators who may not have the resources to bring their invention to market on their own, this serves as a viable option.
Licensing inventions for royalties can also help inventors access new markets and expand the reach of the invented product. If an inventor intends to expand into a market where he has limited experience or in an industry across the borders or want to endorse a licensee who has similar products in the market and where the invention could be optimally used in, the inventors decide to license their patent.
Structure of a License Agreement
Licensee: Selecting an appropriate licensee to meet the requirements is one of the first crucial steps in licensing an intellectual property for royalties.
Scope: The scope of the license is determined by the licensor (inventor) which clarifies specifications of the intellectual property. The questions involved are whether the licensee is allowed to access the IP rights as a whole, or will the licensee only be allowed to use the patent for a precise task, for instance, manufacturing or distribution worldwide or in specific jurisdiction. The valid duration of such intellectual property license along with restrictions on geographical locations and various markets is important to be negotiated.
There are no specific requirements of the license to either be exclusive or non-exclusive. It solely depends upon choice of the parties. The license may contain a prohibition on the parties competing in the jurisdictions in which they operate; the contents of the contract will factor in the determination.
In order to receive protection against similar inventions or otherwise, a patent must be compulsorily registered or filed for priority protection, and the patent license must be in writing and registered under section 68 of the Patents Act 1970.
Validity of License Agreements
A license agreement, as previously said, should be in writing with all pertinent terms fully outlined. Would just a term-sheet, to the contrary, suffice as a legitimate license agreement? PVR Pictures Limited vs. Studio 18[1], the Delhi High Court delved at this issue. The parties had agreed in this matter to enter into a term-sheet agreement (TSA) under which PVR would be the exclusive licensee for distribution rights in respect of selected cinematic pictures for which written agreements would be executed. PVR accused Studio 18 for infringement, claiming that by refusing to enter into an agreement with PVR on the film, Studio 18 was infringing on PVR’s rights. PVR asked for ad interim relief against the defendant. The issue was whether PVR is Studio 18’s licensee for the film Short Kut, and if so, whether it is entitled to an ad-interim injunction. The courts held that the TSA does not signify a license agreement because the parties did not intend for the TSA to become a binding contract and a license as defined by the Copyright Act; and because PVR failed to develop any legal right or copyright for the grounds of suit, PVR cannot seek specific performance or an ad interim injunction.
Hence, the license terms must not only be in writing but should also be in the form of a binding definitive document for a valid License Agreement.
Terms of a License Agreement
A license agreement must be extensively drafted to provide for specific details of the rights and the limitations imposed on the licensee in the exercise of such right. The definition of licensed property, the geographical features for which licenses are granted, the right given to the licensee to further sublicense the property, clauses regarding revocation of the license, royalty or consideration for the grant of license, dispute resolution, cessation, all of which are inherent areas of the agreement.
To ensure that the licensee cannot claim that the IP has been transferred to it, the license agreement must be carefully drafted, and certain license constraints must be included. There have been certain cases where the licensor has executed an exclusive license and the licensee claims that the IP has been assigned. Indian courts have looked at the essence of the contract, notably the royalty payment clauses, to assess whether a transfer should be interpreted as an assignment or an exclusive license in a number of cases.
In Deshmukh and Co. (Publishers) Pvt. Ltd. vs. Avinash Vishnu Khandekar and Ors[2], the Court looked at the difference between assignment and licensing of Copyright. It was iterated that the essence of a document, not the manner of words used, must be considered when determining whether it is an assignment or just provides a license. The question usually arises in the context of whether the right in question has been partially assigned or licensed exclusively; the distinction is subtle but significant.
The copyright is not conveyed if the consideration is in the form of royalties or a portion of profits rather than a direct payment. It would be a publishing and selling license. In this situation, the payment of royalty rather than substantial money intended to be a sale, stands against partial assignment.
Consequently, the licensing provisions must unambiguously declare that it is a license (whether exclusive or non-exclusive) and clarify the contractual terms. More significantly, the royalty payment clause should be formulated carefully that it does not imply that any direct payment is made in exchange for Intellectual property assignment.
Improvements, enhancements, and revisions to IP are the responsibility of the IP owner.
Licensee can design and develop an enhancement to an existing technology or a component that improves the technology’s use or functionality. The new innovation could be the result of modifying the licensed IP to make any improvements, or it could be the outcome of an innovation related to the use of the licensed IP. These improvements signify advancement in the licensed technological field that improves the initial IP’s usage, functionality, efficiency, productivity, or other attributes. A license agreement must indicate what designates an improvement, and the ownership of such improvement and all property created as a result of it.
Mandated registration of License Agreement
When a license agreement is intended to be performed, the issue of whether the registration of the agreement is mandatory arises. If required by law, what are the consequences of non-registration? The Patents Act, the Trademarks Act, and the Designs Act all require license agreements to be registered, although the Copyright Act does not. The Indian Stamp Act, 1899 (the “Indian Stamp Act”) governs the transfer of intellectual property rights in the form of licenses, assignments, and sales, among other things.
Quantification of Royalty
As previously mentioned, when an inventor licenses his invention to a third party, the two parties engage into a license agreement in which the licensee acquires the patent rights and the licensor receives a fixed sum of money each time the product is sold.
The royalty is a fixed sum paid to the licensor or inventor as consideration, and the licensing royalty rate is a percentage of the net or gross profit selected to constitute the royalty. The quantification of royalties may heavily depend on the negotiations between the parties and merchantability of the invention. The Licensor may be in violation of The Competition Act, 2002 (the “Competition Act”) if it attempts to set extortionate prices as a result of its dominating market position. The test of accuracy of the royalty is reasonability.
The accuracy of the royalty base would determine the reasonableness of a royalty. The royalties is calculated on an individual basis. The Competition Commission of India (“CCI”) has adjudged on numerous cases regarding royalty rates assessment. It has been iterated that offering different licensing prices to different users for the same technology is in violation of FRAND requirements. Further, the CCI determined that Ericsson imposed unjustified royalties because no alternative technology for its patents 2G, 3G, and 4G standards was available.[3]
Even-though, licensing an invention comes with certain limitations and risks, the license agreement allows parties to expand the inventions to various jurisdictions and markets which aligns with the primary visions of licensor and reach larger targeted audience.
By Vinita R. Gaud, Pravin Gandhi College of Law
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[1] PVR Pictures Limited vs. Studio 18 2009 SCC OnLine Del 1878
[2] Deshmukh and Co. (Publishers) Pvt. Ltd. Vs. Avinash Vishnu Khandekar and Ors 2006 (2) BomCR 321
[3] Telefonaktiebolaget LM Ericsson (PUBL) v. Competition Commission of India, 2016 SCC OnLine Del 1951
