Is your business thinking about selling off assets to boost the cash flow? Are you sitting on a valuable idea or asset that could be making money but for whatever reason you don’t have the ability to make the most of it?
Thinking about whether your asset can be licensed in a way that benefits you, and the person gaining the right to use your asset, may be the right step for your business.
What is a Licence?
A licence agreement is a contract where a licensor grants to a licensee a right or privilege to use something for a set purpose. For example: the rights to sell a product; the rights to use a business asset (plant or equipment); the rights to the know-how to produce a particular product; the use of an area of land or within a building; the rights to use or commercialise intellectual property (IP), including branding, get-up or trademark/s.
In exchange for the right or privilege licenced from the licensor, the licensee will negotiate and agree to a set of conditions which typically includes paying a royalty or other payment scheme for the licenced use of that right or privilege.
CGLaw’s Four Tips for Smart Licencing
To assist you in getting started with your licence arrangement, here are 4 practical tips:
- Think long term
A great practical starting point for any Licence Agreement is to think long term. Identify what motivates your desire to enter into a licence arrangement. What is in it for you, and what is in it for the other party in the long run? How much risk are you willing to assume? What level of control do you wish to hold? What obligations do you want to impose on the other party, and what are you not willing to budge on?
Remember you are forming a relationship with the other party. Both the licensor and licensee need to benefit from the licence in some way for it to work in the long run.
So, regardless of whether you are a licensee or licensor, you should adopt a long-term vision and balance your non-negotiables with a commercial mindset.
- Think types of licences
There are key types of licences: Exclusive, Non-Exclusive and Sole licences.
The type of licence appropriate for your business will depend on the purpose behind why the licence is required by the licensor or licensee. It will depend on how much control the licensor requires and the amount of risk that the licensee is prepared to assume during the licence period.
Exclusive Licence – is a licence to the exclusion of all others, including the licensor. This is the most common type of licence. It is commonly used in the commercialisation of IP, mainly because unless a licence is exclusive, in Australia, a licensee can’t take court action to enforce its licenced rights to the exclusion of others.
Non-Exclusive Licence – is a licence that is not limited to one licensee.
Sole Licence – is a licence to the exclusion of all others, except for the licensor. This type of licence is a crossover between an exclusive licence and non-exclusive licence, the difference being that the licensor is the only other party allowed to keep using the licenced subject matter.
Consideration also needs to be given to reverse licences, where certain of the subject matter of the licence (usually intellectual property) is licensed back to the licensor (for example for ongoing research purposes).
- Think about performance
a. Minimum performance obligations need to be clear
Licensors should develop a clear structure for a licensee’s performance obligations and steer clear of solely basing their licence arrangement on a royalty payment system.
Tip: Set minimum performance obligations and minimum royalty payments.
b. Default and Termination Planning
No one likes to think about the bad times, but the terms surrounding a licensee’s default and termination rights are just as important as performance obligations.
Tip: Plan for failure, but consider including provisions for default penalties instead of an automatic right to terminate.
a. Manage expectations around goals and realities
It may be an exciting time for a licensee when preparing and negotiating a licence arrangement. However, be sure to manage your expectations surrounding performance projections and reality. It is often seen that licensees struggle to meet performance obligations, which places them into a default position under the licence agreement.
Tip: Set realistic and achievable goals and targets and negotiate a fair and balanced royalty or payment system under the licence arrangement. Look for a ‘win-win’ because that is how to succeed long term. Typically increased performance leads to reduced payments to the Licensor as a reward for success.
b. Training and Assistance
The licensor may have valuable knowledge or know-how about the licenced matter. This could be beneficial for a licensee to draw upon.
Tip: Think about whether you want an ability to seek training or assistance from the licensor in respect of that knowledge.
- Think Protection
Warranties are essentially assurances provided by one party to the other. They are an effective way to ensure both parties are kept honest. Warranties can be a sticking point in licence arrangements, but they do not have to be.
It is important only to provide warranties that are factual and within your control. You may run into issues if you overstate or overpromise in warranties offered. This may result in a breach of warranty and may open you up to a claim for damages.
When you are considering what warranties should be included, you should consider the issues that are at the core of the licence arrangement. Think broadly around the licence subject matter and what assurances you need from the other party to happily meet your obligations under the licence arrangement.
Licensors should consider the licensee’s purpose for or intended use of the licence subject matter and the likely impacts of that purpose or use reasonably foresee occurring now and into the future.
Licensees should examine the licence subject matter carefully. For example: Does the licensor actually own it, is it researched correctly or scientifically proven, is it safe for use and compliant under Australia (or International) laws and regulations?
These are our 4 (and a bit) practical tips on how you can prepare for your licence arrangement. It is critical that you, as either the licensor or licensee, understand that your licence agreement is the foundation document for a long-term relationship with the other party – hopefully, a mutually beneficial one.
Licence agreements are all about balance. Both the licensee and licensor are wanting to gain a benefit from the licence arrangement, so it is about making that happen while managing responsibilities around risk, control and realistic performance.