Licensing Intellectual Property: Unveiling the What and Why

Intellectual property provides protection for your inventions and innovations, whether that be through patents, trademarks, copyrights or designs. Our article on the basics of protecting your intellectual property explores each of these in detail.

An Intellectual property (“IP”) license is a legally enforceable agreement by which an IP owner (the licensor) authorises another party (the licensee) to exercise some of the licensor's rights in the IP, while retaining ownership and control of the IP. 

This is different from assigning IP, which is where ownership of the IP is transferred to another party. The licensing agreement will have an expiration date whereas assignment involves transferring ownership in its entirety.

Licensing can be split into two further categories - “licensing-in” and “licensing-out”:

• “Licensing-in” is where you as a start-up want to use another company’s IP to develop your product/service or further your business. 

• “Licensing-out” refers to where you, as the IP right holder, are interested in granting licences for the use of your IP.

For example, if Disney wished to use Justin Bieber's latest song in their new movie, they would likely need a license to use it. As the song is protected by copyright, which lasts 70 years after the author’s death, Disney would need Justin Bieber’s permission to use it, which could be given in the form of a license. In this case, the licensor is the party granting the licences (IP right holder, so Justin Bieber) and the licensee refers to the party to who the licence is granted, so Disney productions.

Why consider a licensing agreement?

	Benefits	Disadvantages
Licensor	The licensor will receive payments and royalties for the licence without subjecting itself to the risks and costs associated with manufacturing, promoting, etc.	Where you have the ability to exploit or commercialise your own IP, licensing to other parties may be detrimental to your objectives.
	Licensors can expand the reach of their IP into different markets by granting licences.	Additional time and risk involved in choosing an appropriate licensee given the risk they may diminish the value of the IP, as well as the reputation of the licensor.
	Provides licensors with a simpler way of generating revenue by penetrating different markets.	Greater exposure to your IP may mean a greater risk of IP theft.
	Collaborating with other businesses may be beneficial to making the IP more available.	Potential conflicts arising from licensing i.e. licensee withholding revenue.
	The licensor will retain ultimate ownership over the IP as the licence has an expiry period.	The licensor will be relying on the licensee to properly commercialise the IP.
	Licensors can retain a degree of control over the IP and how it's used.
Licensee	The licensee can obtain the right to use the IP without the risk, costs and research of developing the product itself.	Licensors may choose to charge high royalties, restricting growth of your business.
	A business is likely to save a lot more time and money obtaining a licence than trying to reinvent the wheel themselves.	If the licensor has already licensed the IP to other parties it could mean there are other parties competing in the same marketplace.
	It may provide access to a greater level of expertise that the business might not have in-house.	Licences will have an expiration date so licensees need to consider whether it is worthwhile to spend the time, cost and effort in the promotion of a good/service which may not available at the end of the licensing period.

Other factors to consider before moving forward

Royalty, fees and tax

A licensee interested in obtaining a licence will also need to consider the fees and royalties to be paid to the licensor. A licensor can either charge a one-off fee/lump sum payment, a fee based on the use or sale of the manufactured goods i.e. a royalty (or a combination of the two), or quarterly payments decided from the outset. The licence agreement will state how late payments and such other factors are to be dealt with. 

Licensees need to consider that any payment for the licence of IP is likely to be liable for tax. Advice should be sought from your local solicitors for more information regarding this. 

Degree of exclusivity

There are three types of licences based on the degree of exclusivity granted by the licensor to make use of the IP: 

1. Exclusive licence - where no person or company, including the licensor, can exploit the licensed IP during its term;

2. Non-exclusive licence - where despite the licensee having the right granted to him, the licensor can, not only exploit the licensed IP themselves, but can grant further licences to other parties;

3. Sole licence - where the licence is exclusive with the exception of the licensor being able to exploit the licence for themselves without granting licences to other third parties.

If we use the example of Disney “licensing in” Justin Bieber's song; if an exclusive license is granted, it means no other party (not even Justin Bieber as the licensor) may exploit or use the song until the term of the license has ended.

If a non-exclusive license is granted, Disney may use the song, but Justin Bieber can do so as well, and he may also grant licenses to other interested parties. (This is the most likely in this example to happen).

A sole license would mean that although both Disney and Justin Bieber can exploit his song, Justin Bieber must not grant a license to use the song to other parties.

Warranties

Although the licensee must consider the fees and royalties, tax and the degree of exclusivity, the licensor will usually remain responsible for maintaining the licensed IP throughout the term of the IP licence. Therefore, it is common for express and implied warranties to be included in the licence agreement:

• Express warranties 

  • The licensee may seek express warranties from the licensor whereas the licensor will want to avoid giving any warranties, or ensure that any that he gives are limited in scope. The type of warranties include:

    • The licensor should be able to warrant that he owns the IP itself; 

    • Non-infringement - a warranty that the licensee’s use of the IP rights will not infringe the IP rights of any third parties;

    • Validity and subsistence - A warranty that the IP rights are valid and subsisting under the applicable law; and

    • No hidden defects - a warranty that the IP rights are free from any defects.

• Implied warranties 

  • Certain warranties may also be automatically implied into the terms of an IP licence. For example, a license will take effect by an implied term that it will commence once the license agreement has been signed by both parties.

There are many other factors to consider such as the possibility to grant a sub-license, whether confidentiality agreements are required and the specifics of license agreements in patents, trademarks and copyrighted work. Our next articles will explore each of these in detail, providing insight into the procedure for obtaining or granting a license agreement. Whether you’re a start-up wishing to license your own IP to generate revenue, or a start-up wishing to obtain a specific IP,  this topic is of great importance.

Stay tuned for the next article!

- Authors: Niccolo Guastella & Edward Bennet-Gibbon

- Authors: Niccolo Guastella & Edward Bennet-Gibbon

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DISCLAIMER

This article has been written by law students for the sole purpose of providing informative insight. The information in this article is intended for educational purposes only and does not constitute legal advice, nor should the information be used for the purpose of advising clients. You should seek independent legal advice before relying on any of the information provided in this article.

Sources

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Brandon Gaille , '14 Licensing Advantages and Disadvantages' (Bradon Gaille, 12 October 2020) <https://brandongaille.com/14-licensing-advantages-and-disadvantages/> accessed 25 May 2022

Millie Johnson, 'Intellectual Property Licensing' (Rocket Lawyer, .) <https://brandongaille.com/14-licensing-advantages-and-disadvantages/> accessed 25 May 2022

Intellectual Property office , 'Licensing Intellectual Property' (GOVUK, 12 December 2014) <https://www.gov.uk/guidance/licensing-intellectual-property#:~:text=A%20licence%20is%20an%20agreement,in%20return%20for%20a%20fee.> accessed 25 May 2022

Intellectual Property office , 'Licensing Intellectual Property IP Health Check 1' (GOVUK, 11 June 2022) <https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/320811/licensingbooklet.pdf> accessed 25 May 2022

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