Scope, fees, IP, relief: Mastering the elements of good licensing

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Corporate Update

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Licensing is a very broad concept — much broader than the commonly-held view that licensing only relates to software, art, content, or other registrable intellectual property rights such as patents, trademarks, and copyright. While licensing certainly captures these concepts, any time a business permits another party to use something it owns, it is licensing that something to that other party. And while there are technical, legal differences between leases and licences that are very important when applying to physical or real property, the lines are blurry and leases grant very different rights and interests — and don’t even get us started about easements!

Licences can range from simple to complex and can be implied or explicit. Where an agreement, oral or written, contemplates one party granting another party the right to use something but doesn’t set out specific terms, the actual licence terms may be implied and are therefore open to interpretation and disagreement. 

As such, the best practice is to either have a stand-alone licence agreement or to include specific licence terms in a related master service or other commercial agreement. No matter where the licence lives, it is fundamental that both the licensor (the party granting the licence) and the licensee (the party receiving the licence) has a complete understanding of what the licence permits. This is particularly true when licensing intellectual property, personality rights and technology; business parties will often agree to a “use” without thinking carefully about all the permissions that must come along with that.

Spelling: An important preliminary issue

Is it “licence” or “license”? It depends on who you talk to. In Canada (and the UK and most commonwealth countries) “licence” is a noun and “license” is a verb. That’s how we’ve done it in this article. In the United States, on the other hand, “license” is both a noun and a verb, and US lawyers will sometimes change “licence” to “license’ throughout your agreement.

Core considerations in drafting - who, what, where, when, how, and why

A properly drafted licence will address all of these questions. Businesses need to carefully consider who should be a party to or referenced within a licence. For example, should the licence extend to the licensee’s affiliates, third-party contractors, or end users? Does the licensor own or otherwise have the right to grant the licence?

The licensed property — the subject of the licence — needs to be defined clearly and specifically so that there is no room for ambiguity. If a licensor offers various but similar products or services, for example, using excluding language can be helpful in clarifying the licence scope.

As parties can be very creative with respect to structuring licences, they tend to be heavily negotiated agreements. The following key terms are used to address these questions and have developed well-established meanings in both practice and the case law. That said, this is by no means an exhaustive list and many industries have developed unique and specific terms relevant to the licensing of their respective products and services.

Exclusive vs. sole vs. non-exclusive

Licenses are either exclusive, sole, or non-exclusive. In each type of licence the licensee gets the right to use the licensed property; the distinguishing feature is what rights, if any, the licensor has to use or license the licensed property. The key characteristics are:

Licensor

Terms of exclusivity may be further tailored to grant exclusivity in relation to any clearly defined concept such as a particular line of business, industry, or class of product. For example, a software developer may grant a university the exclusive rights to use their software in the provision of post-secondary education, while retaining the right to license other licensees in different fields. Thus, a licensor can often grant different licences with varying levels of exclusivity by carving up the usage or licensed subject matter. 

Although the terms “exclusive”, “non-exclusive” and “sole” have commonly-accepted meanings, parties should not assume that they have the same understanding of what those terms mean. Explicitly setting out the type and extent of any exclusivity can ensure everyone is on the same page, and avoid uncertainty and misunderstanding.

With an exclusive licence, the licensor cannot exploit or commercialize the licensed property. Therefore exclusive licences often have minimum royalty requirements or similar mechanisms to make sure that the licensee actually uses the licensed property to generate revenue for the licensor. The licensee can maintain exclusivity by paying the minimum amounts; failure to do so might mean that the licensee loses exclusivity, or perhaps even the entire licence.

Worldwide vs. territory limited

Licences also have be clear about geographic scope — is the licence worldwide, or limited to a specific territory? If it is not worldwide, the parties need to use very clear language to define the territory, as many place names have ambiguous meanings. For example, the parties’ idea of what constitutes “Europe” or “North America” may not align. Municipalities can be similarly confusing. When someone says “Toronto” they could mean the City of Toronto or the Greater Toronto Area. Therefore, to the extent possible, parties should use clearly defined and official place names. And, as we expand our technologies past the atmosphere of our humble planet, parties should consider whether “worldwide” is as broad as they need it to be.

Perpetual vs. term limited

Licences can be perpetual or time limited. Where the subject of the licence is copyrighted, patented or otherwise registered, a perpetual licence will generally be tied to the life of the licensor’s underlying registered rights. For example, a novelist may license their book to a television production company for the duration that copyright exists in the book.

This is not a binary choice, however. Using the book example above, the novelist could grant the production company an exclusive licence for an initial term of one year, which renews for a defined set of successive six month terms on a non-exclusive basis.

Irrevocable vs. revocable

Whether a licence is perpetual or time limited is one important issue. Another is whether the licensor may revoke the licence if certain things happen. This is especially important where a licensor is granting a perpetual licence. Are there circumstances — such as a breach of the licence terms, or perhaps the non-use of the licensed property — in which the licensor should be able to revoke the licence?  Or are damages the licensor’s only remedy for the licensee’s breach? When granting irrevocable and/or perpetual licences, licensors are necessarily tying themselves (and, if the licence bears fees or royalties, their financial fortunes) to the efforts of the licensee, and these situations should be carefully considered.

Transferrable vs. non-transferrable

Absent language to the contrary, a licence is typically transferrable. As licensors generally want to control who has a licence to their products and services, most licences will either prohibit transfer or assignment by the licensee or restrict it to very narrow circumstances.  A common consideration is whether the licensee should be able to transfer or otherwise assign the licence upon the licensee’s merger or acquisition (and licensees must also be concerned about limiting their own ability to reorganize their business or corporate structures).  And in certain circumstances, a licensor may wish to prohibit or have control over transfers to a third party that is the licensor’s competitor. When considering these issues, the parties should also consider whether a change of control of the licensee should affect the licence.

Sublicensable vs. non-sublicensable

Should the licensee be able to sub-license its licensed rights to third parties? When answering this question, the parties need to analyze for the purpose for which the licence is being granted. A licensee’s right to sublicense needs to be tailored to these specific purposes, and only rarely should the licensee have the right to sublicense its rights wholesale. For example, a video game developer needs to grant a video game publisher a right to sublicense the rights to use the game for personal use to the consumers.  This same video game developer however, would likely not want to grant the video game publisher the ability to sublicense its rights to publish the game (as granted by the licence) to another publisher, at least without careful consideration.

Similarly, a software provider may not want its customers to be able to sub-license its software to their affiliates (as opposed to having separate licences and revenue streams directly with those affiliates).

For reference, the original licence as granted from owner to primary licensee is commonly called the “head licence”, with any subsequent licences referred to as “sublicences”, “sub-sublicences” and so on. Paying attention to various sublicences becomes very important when considering royalties and licences, particularly if the sublicences are related parties or not dealing at arm’s length — if a head licensor only receives royalties based on what its head licensee receives as revenue, much of the economic profit may end up being realized by sublicensees.

Licenses fees vs. royalties

Parties have a wide latitude with which to approach a licence’s fee structure. Licences can be granted in exchange for a one-time or periodic fixed licence fee, an ongoing royalty or revenue share, or some combination of the two. Where a licence includes a royalty or revenue share, the parties will need to consider how the royalty is calculated, whether there are any minimum or maximum payments, the frequency of reporting and payment, as well as any attendant auditing rights, among others. Further, if royalties are a percentage of revenues then it’s important to be clear about how those revenues are determined, and what if any amounts can be deducted from gross revenues before royalties are calculated.  Finally, because local, regional, state, province, national and international taxation systems may treat different characterizations of monetizing licences differently, licensors and licensees are always well-advised to seek tax advice.

Paid-up vs. royalty-Free

If a licence is referred to as “paid-up” or “fully paid-up”, it means that no further payment is required from the licensee. Generally, this expression is only used in the context of a perpetual license -- if a licence is term-based there is usually a periodic fee owing for each subsequent term, and therefore the licence is not “paid-up”.  Similarly, “royalty-free” simply states that no royalty is payable in addition to the licence fee.

There is some debate whether the terms “paid-up” and “royalty-fee” are redundant or provide helpful confirmation of that which is not written.  We’ll leave this one up to you, the reader, to decide; however their use remains ubiquitous.

Modifications and improvements

If the licensee has the right to modify or improve the licensed property, then the parties should consider and address who will own those modifications or improvements. Often the licensor will own them and they will be included in the licensed property for the licensee’s continued use. But if there are different ownership arrangements they should set out clearly so that it’s clear who has rights to what.

Acceptable use, prohibited use, and reservation of rights

A licence should clearly set out both the acceptable and prohibited uses under the licence. While these provisions are very common in consumer agreements, there’s no question that all agreements benefit from clear boundaries and expectations.

As noted above, parties can specifically tailor and restrict a licence’s terms as specifically as necessary to capture their intent. This includes specifying both what the licensee is able to do and what they are prohibited from doing. While the exact uses vary greatly depending on the subject matter, some common considerations include whether the licensee is able to develop derivative works, translation of the materials, resale, modifications or alterations, reproduction, adaptation, reverse engineering, among many others. The wording will also depend on the nature of the underlying intellectual property rights being licensed, and may mirror the statutory rights. For example, a patent licence may include the right to use, make, have made, and sell licensed products, while a copyright licence may include the right to copy, publish, translate, and telecommunicate the licensed work.

The licence should also be clear about what specific rights, if any, the licensor reserves to itself. This is often accomplished by a catchall statement that the licensor reserves all rights that are not expressly granted to the licensee.

Ownership

A key aspect of a licence is that the licensor is granting rights but not ownership. Licence agreements therefore typically acknowledge that the licensor retains ownership over the licensed property.

Trademark control

If you are a licensor of brands or trademarks, you need to be careful about retaining control over how the licensed marks are used or you may lose your ability to obtain, maintain and enforce your trademark rights.  For example, Section 50 of the Trademarks Act (Canada) says if the licensor “maintains direct or indirect control” over the character or quality of the licensed goods and services, then the licensee’s use of the trademark is deemed to be use by the licensor.  It further provides that giving public notice that a trademark is being used under licence (like you may see sometimes in the small print of a commercial or advertisement), then it is presumed that the use is licensed by the owner and that the licensor controls the character and quality of the relevant goods and services. Without that control, the licensee’s use could be considered use by a third party that destroys the mark’s distinctiveness and enforceability.

Enforcing and defending rights

Parties to a licence should consider who will be responsible for bringing or defending claims that may arise, particularly infringement claims.  If a third party claims that something licensed infringes their intellectual property rights, who is responsible for responding, and who controls the proceedings and any settlement discussions?  Who pays for the defence, and who is responsible if the claim is ultimately successful?  Often licensees will push for assurances that the licensed property does not infringe third-party rights, and for the licensor to indemnify the licensee regarding third-party infringement claims.

Similarly, if a third party is infringing the licensed property, will the licensor need to bring an action or can the licensee?  What if either party fails to do properly raise or defend a litigation case?  How do any damages awarded or received, or any costs in the prosecution or defence of infringement claims, affect royalties or other payments due?

Equitable relief

In many instances, a damages award will not be sufficient to cure the possibly irreparable harm that results from a breach. Licence agreements therefore often include provisions that attempt to either encourage or discourage a court from granting equitable relief; such as an injunction. This kind of relief is often the primary and practical remedy for a breach of confidentiality or an infringement of licence terms. In opposite circumstances, a licensee may wish to limit a licensor’s ability to seek equitable relief. In the previous example of a novelist licensing their book to a television production company, the production company would not want the novelist to be able to halt the production or distribution of the program as a result of the novelist’s claim for a licence breach. That said, in Canada equitable remedies are at the court’s discretion, and an equitable relief provision will not necessarily determine how requests for equitable relief will be addressed.

Conclusion

While there is certainly a good deal that needs to be considered before putting pen to page on a licence agreement, they need not be overly complicated. By focusing on specificity and clear language, parties can create comprehensive licence agreements that will assist them well in understanding, managing, and regulating some of their most important business relationships. As you can see, it can be critical, to speak to a lawyer about the potential issues that may arise from granting or receiving a licence, and ensuring that your licence agreement addresses these issues.

This article provides only general information about legal issues and developments, and is not intended to provide specific legal advice. Please see our disclaimer for more details.