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Aleck Ncube
INTERNATIONAL licensing depends upon varying national laws, including the laws of supranational organisations such as Sadc and the African Union. Various international conventions attempt to prohibit discrimination against foreign nationals and provide priority for certain foreign filings and harmonise a few substantive norms of protection.
However, the level of substantive harmonisation is low although some progress has been made under the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) Agreement. TRIPS provides minimum standards for protection of copyrights, trademarks, designations of geographic origins, industrial designs, patents, semiconductor chip designs and confidential information as well as requiring both national and most favoured nation treatment for the nationals of all member nations. Once the decision to license or transfer the technology has been made, the agreement between the parties must be carefully drafted to clearly express the intent of the parties so as to avoid or minimise any future disputes.
Defining the subject matter of the licensing agreement
Licence agreements seldom cover only one type of intellectual property and for each type of intellectual property, the licensing agreement must specify what rights in the “bundle of rights” are licensed to the licensee and what rights are reserved to the licensor. For example, in a licence to manufacture and market a new computer system, it may include patent provisions if the particular circuits in the computer are patentable. If the computer uses software, the licence may also cover copyrights in the software. If software uses trade secrets or if the process used to manufacture the computer system involves trade secrets not disclosed by the system itself, then the trade secrets will be licensed and protected. Also if the licence has a trademark, the agreement may grant the right to use the trademark to promote and market the computer systems. Thus, the nature of the rights covered by the licence must be clearly defined.
The agreement should provide whether improvements made by the licensee or during the term of the agreement are to be included within the scope of the licence grant. Also to avoid disputes, the agreement should specify in great detail what changes the licensee may and may not make in the licensed intellectual property.
Scope of Licence
The precise scope of the licence granted should be specified. Does it extend to manufacturing and/or sales, is it on an exclusive or non-exclusive basis? Is it limited to a specific territory? Granting an exclusive licence must not involve an anti-trust violation assuming that the exclusivity is not part of a cross- licence programme or IP pool arrangement under which competitors have agreed on a market division or allocation.
Royalty compensation
The licence agreement must provide for some form of royalty payments. Many agreements provide for a fixed or lump sum royalty to the licensee or which may be paid in advance or in instalments. If paid in advance it may be treated as advances against future royalties if earned. A lump sum payment is usually exacted where statutory rights have limited strength or life, or where technology can be transferred at one time and quickly absorbed by the licensee. The most common form of compensation is periodic royalties measured by standards such as sale of products, units of production or profits. Firms tend to base royalties on net sales. Royalty rates are often reduced or increased with the volume of product sold or produced. The most frequent method used to calculate royalties is based upon licensee’s net selling price of the royalty products.
Minimum royalties may be required whether they are earned or not. These are provided as a performance standard which the parties have set to reflect their expectations as to which the licensee would reasonably be expected to achieve. Failure to meet the minimum may cause the license to terminate or change the license from exclusive to non-exclusive. The agreement should also provide for periodic accounting and payments of royalties as well as right to inspect the books and records of the licensee to verify the accuracy of such statements. The agreement should provide which currency remittances are to be made. Usually they are made in the currency of the licensor and the agreement should fix the exchange rate.
Quality standards and warranties
A licensor may wish to impose quality standards upon the licensee to protect the licensor’sreputation or guard against exposure to products liability claims. This is especially important for the preservation of any trademark rights, i.e. if control is not adequately maintained, the owner faces possible abandonment of his trademark. The more control the licensor exercises over the licensee’s manufacturing process the greater the risk of liability to the licensor in the event of injury to third parties.
Infringement of Licensed Rights
In many countries the licensor may have an implied obligation to take action against infringers in certain circumstances. The agreement should provide what rights and obligations the parties have in the event of infringement. If the licensee is unable to take action against an infringer, a provision for optional termination of the agreement or reduction in royalties may be provided.
Duration and Termination
The Agreement must be designed for a term that is equivalent to the expected life of the underlying know-how or actual life of the patent. With regards to know-how the term is more complicated to arrange. Termination of the agreement is normally based upon an event of default, bankruptcy or insolvency. In addition the licensor may have the right to terminate or convert from an exclusive to a non-exclusive grant if royalties are not maintained at certain levels. The licensee may seek an option to terminate if the licensed technology is no longer useful or competing technology is readily available. The termination should not alter the rights and obligations to pay amounts due or obligations that have accrued to the date of termination. Further the licensor will want to bind the licensee to preserve the confidentiality of information that remains secret even after expiration of the agreement. This can be accomplished by covenants by the licensee to keep the confidential information secret and prohibit it from using or disclosing the same except in accordance with the agreement.
A well drafted agreement must protect the licensee by excluding from any obligation of confidentiality information which was known to the licensee prior to its transfer by the licensor, information which was independently developed by licensee, information, which has been acquired lawfully by license from a third party and information which has entered the public domain through no fault or breach by the licensee.
In conclusion, the major legal issues to be considered include a clear definition of the technology licensed, a clear delineation of the scope and extent of the rights licensed, its duration and termination, provisions to maintain quality control and any warranties and infringement provisions with respect to the licensed technology, provisions for royalties and fee payments.
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