Sub-Licensing Intellectual Property: Strategies and FAQs

Sub-licensing refers to the creation of a second license stemming from the head license. In practical terms, sub-licensing allows licensees (with the licensor’s prior written consent) to grant licenses for the IP forming part of the head license to third parties. 

Why sub-license?

There are various considerations as to whether a licensor should grant the right to sublicense. If a third party misuses or irresponsibly handles the IP, it could damage the value of the IP, deeming it detrimental to its future usage and exposure. In the case of trademarks, it could devalue and tarnish the reputation of both the IP and the brand. The licensor is already taking this risk by granting the head license, so granting a right to sub-license further diminishes their control over their IP. 

However, in practical terms, a rights-owner tends to avoid granting rights to inexperienced businesses, minimising the potential for irresponsible handling. Subject to proper due diligence, third parties can assist in exploiting an IP in ways the licensor may have not been able to, increasing the value of the IP. In many cases, subject to the correct considerations being agreed upon at the outset, sub-licensing allows for a more efficient means to exploit the IP.

From a licensee’s perspective, sub-licensing enables less time to be spent on R&D for the creation of the actual IP, and more time in areas such as marketing and promoting the product and brand itself. The sub-licensee may have control over factors such as the packaging and selling, which provides the opportunity to increase the value of the brand without having to spend money and effort on the development of the IP. It provides a way for startups to promote themselves without the worry of finite resources being wasted. 

Practical Steps

Section 30(4)(a) of the UK Patents Act 1977 states that a licensee may grant a sub-licence “to the extent that licence so provides”. This means that the right to sublicense subsists in so far as the head license provides for it. However, the wording of the legislation arguably leaves the door open for an implied permission to sublicense.

Sub-licences for patents or registered trademarks are registrable transactions. The parties may choose to register the sub-licence with the UK Intellectual Property Office (IPO) by submitting Patents Form 21 or Form TM50 respectively, together with the current fee (£50). 

No express statutory provisions deal with the ability to sub-license rights under copyright and design law. In relation to copyright, the court has had to draw on language in cases and statutes relating to patents and trademarks, but has taken the view that a copyright license is personal to the licensee and cannot be sub-licensed unless a specific provision is made in the head licence.

There is a statutory obligation for licensees of UK registered designs to register their licence. It is not clear whether this provision extends to sub-licensees. Therefore, it may be prudent to register the sub-licence by completing Form DF12A which carries no fee. 

It is important that the license agreement contain a right to sub-license or a restriction preventing it, rather than relying on the implied position at law. Should the licensor wish to include the right to sublicense, it’s critical that key terms regarding the sub-licensing right are decided at the outset. As a licensor, this may include a list of appropriate sub-licensees the right can be extended to, or a reasonable timescale to ensure proper investigation of the sub-licensee is carried out. 

Another important practical step is to decide on a royalty payment mechanism. Whether it involves a one-time lump sum payment to the licensor, or regular minimum payments, the critical point is that it is discussed and agreed upon at the outset. Outlining all the relevant terms at the outset is not only important in order to make clear whether a specific action is possible or not; it more importantly sets out each party’s rights at the start in the event of infringement proceedings. 

Sub-licensing FAQs 

Can a sublicense continue if the head license is terminated? 

In the absence of an express provision to the contrary, it’s reasonable to assume that the termination of a head license will render the sublicense terminated as well. It is also reasonable to assume that some licensees will be reluctant to enter into a sub-licensing agreement unless they can be sure their rights will subsist for the agreed time frame. In such scenarios, it’s important to expressly agree to this via a supplemental agreement with the licensor. 

What are the potential risks which may arise from sub-licensing? Can someone sue for infringement?

There is nothing in the Patents Act (“PA”) 1977, Registered Designs Act (“RDA”) 1949 and Copyrights Designs and Patents Act (“CDPA”) 1988 about the possibility of sub-licensees bringing infringement proceedings. In the absence of such provisions, it is unlikely they will be permitted to do so. However, with trademarks, s.28(4) of the Trade Marks Act (“TMA”) 1994 entitles the sub-licensee, in the absence of any contrary agreement, to the rights and remedies specified in s.30 & 31 of the TMA.

- Authors: Aminoor Masoom and Niccolo Guastella

- Authors: Aminoor Masoom and Niccolo Guastella

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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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Ieva Giedrimaite , 'Sublicensing considerations in software contracts' (IP KAT, 31 October) <https://ipkitten.blogspot.com/2019/10/sublicensing-considerations-in-software.html> accessed 26 July 2022

Michael J kasdan, 'Patent Licenses: Licensing Fundamentals' Lexis Practice Advisor 

Luke Kempton and Peter Koch, 'Does a sub-licence continue after its head licence terminates? A comparison of the German and UK positions' [2012] Lexology