An article written by Shantelle LaFayette, Lawyer, Norton Rose Fulbright
Creative and innovative industries are built on intellectual property (IP) rights. By providing creators and innovators with the certainty that they alone will be able to benefit from their original works and ideas for a defined period of time, IP rights help catalyze creativity and innovation.
However, IP rights should not be solely viewed as a passive way to defend one’s market share against potential competitors. In certain circumstances, it may be in IP owners’ best interest to allow third parties controlled access to their rights. To this end, licensing agreements are a particularly important and versatile tool that IP owners can exploit in order to create value, opportunities and new revenue streams from their IP rights.
What is an IP licensing agreement?
A licensing agreement, or licence, is a legal contract between the owner of a property (the licensor) and a third party (ie. a person with no legal claim to the property) who seeks to access or use the property for a defined period of time (the licensee). It is important to note that granting a license to use or access a property does not involve a transfer of ownership – the licensor remains the property owner.
Through an IP licensing agreement, licensors can grant one or more licensees permission to exercise some or all of their exclusive IP rights in exchange for some kind of payment – typically in the form of royalties and licensing fees. Royalties are usage-based payments that are paid to licensors on an ongoing basis. They generally correspond to a percentage of the revenue or profit that the licensees earn by exercising the IP rights that the licensors have granted them. A licensing fee, on the other hand, is a fixed amount of money that is paid in accordance with the terms and conditions of the agreement.
In industries that involve complex technology, cross-licensing agreements make up a significant share of all licensing agreements. A cross-licensing agreement is a contract between two or more parties where each party grants rights to use their IP to the other parties. Therefore, each party is both a licensor and a licensee. Cross-licensing agreements can spur post-licensing innovation by encouraging knowledge flow between the parties and by providing them with the “freedom to design” without fear of costly IP litigation.
What IP rights can be licensed?
Virtually any form of IP can be subject to a licensing agreement, including patents, copyrights and trademarks. However, licensors can only license rights that they possess under the law and that are transferable to third parties.
The Copyright Act creates two main types of rights that belong to the author and/or owner of the copyrighted work: moral rights and economic rights. The rights conferred on copyright owners are international in nature –they are valid and enforceable in any country that has signed on to the Berne Convention. These rights generally last for the duration of the authors’ lifetime and fifty years after their death.
Moral rights protect the moral interest of the author in the copyrighted work. They include the authors’ rights to the integrity of their work, to be credited for the work, and to remain anonymous. Moral rights are not transferable to third parties during the authors’ lifetime and, therefore, these rights cannot be licensed. Authors can, however, waive their moral rights in any agreements with third parties, if they so choose.
Economic rights are the rights that protect the economic value of a copyrighted work. These rights are transferrable and can be licensed to third parties – provided that the licensing agreement is in writing and signed by the IP owner. Some economic rights that copyright owners can license include, but are not limited to, the rights to reproduce the work, distribute the work, display the work, perform the work and prepare derivative works from the work.
Copyright owners are free to license any and all of their economic rights to one or more third parties. For example, the author of a book may license the rights to reproduce and distribute the book to her publisher and, separately, license the rights to any derivative works based on the book to a television or film producer.
The Patent Act grants patent owners the exclusive rights to make, have made, sell and use an invention for a period of 20 years. It is important to note that patent rights are national rights, which means that they are only valid in the jurisdiction that granted the patent. Patent owners can license any and all of these rights to one or more third parties.
The Trademarks Act provides registered trademark owners with the exclusive right to use the trademark in Canada in respect of those goods and services for which it is registered. A registered trademark is valid for a period of 10 years and, with continued use and the timely payment of the prescribed renewal fees, may be renewed in perpetuity. Owners of unregistered trademarks also have rights in their trademarks, albeit more limited, and these rights can also be held in perpetuity, subject to certain conditions.
At first glance, the licensing of a trademark may seem counterintuitive given that the function of a trademark is to indicate the source of goods or services and licensing creates multiple sources. However, the Trademarks Acts addresses this issue by permitting the licensing of a trademark, registered or unregistered, if the owner of the trademark under the license arrangement has direct or indirect control of the character or quality of the wares or services in association with which the trademark is used.
What are the different types of IP licences?
There are three main types of licences employed in IP licensing agreements: exclusive, non-exclusive and sole.
Exclusive licenses grant licensees the exclusive right to use the IP. This means that licensors are prevented from both using the IP themselves and granting third parties licenses to use the IP. Commonly, these types of licences will restrict the licensees’ exclusive use of the IP to certain types of products or to certain territories.
Non-exclusive licenses grant licensees the right to use the IP without restricting the licensors’ right to use the same IP themselves or to license the IP to other third parties. The benefit of these types of licenses for licensors is that they allow them to continue using their own IP without limitation and they have more opportunities to receive payments and to commercialize their work or idea.
Sole licenses grant licensees the right to use the IP without restricting the right of licensors to exploit the IP themselves. However, licensors are restricted from granting licenses to other third parties. Sole licenses are not commonly used in practice.
What benefits do IP licensing agreements provide?
Licensing agreements can offer several benefits to both licensors and licensees.
Licensing agreements can help licensors avoid the manufacturing, marketing, and distribution costs associated with getting their IP to the market. For licensors who are trying to get their products into new markets, including foreign markets, entering into a licensing agreement with licensees who are already well-established in the markets of interest can greatly help accelerate and simplify the market penetration process. Further, IP licensing agreements can create multiple streams of passive revenue for licensors, without affecting their ownership over the IP.
For licensees, the ability to access and use IP via licensing agreements can allow them to quickly create new products, services and/or market opportunities for themselves less expensively and with fewer risks. Additionally, licensing agreements can provide opportunities for the creation of fruitful long-term business relationships between licensors and licensees – which benefits both parties.
IP is a complex area of law, and drafting an IP licensing agreement requires the careful consideration of many different factors. A qualified intellectual property lawyer can help you figure out what needs to go into your licensing agreement in order to best protect your rights and reduce your exposure to risk.