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Published by Enhelion, 2021-11-09 00:51:38

Module 4

Module 4




“Today’s corporations are always on the lookout for exciting new and
innovative ideas that can be used to generate revenue. Up until recently,
this meant taking these ideas and turning them into products PR services,
which could then be sold for profit. But today, a unique new concept is
revolutionizing the way companies are getting value from ideas. Instead of
incorporating them into products or services, today’s innovations may be
bartered, licensed or sold in the idea stage for tremendous amounts of

Licensing is a fundamental mechanism in exploiting intellectual property
rights. Although with some forms of IP certain formalities apply, generally
licensing of IP can fall into the ‘too easy’ category. A question would be
asked by any layman - What is licensing? Is it just a case of giving
someone permission, a right to use your own invention? This is true to a
degree. What must be kept in mind is that a licence of IP is also a contract
– an agreement between two or more persons or enterprises. The licence
contract, therefore, establishes the expectations of those people concerning

1 Julie L Davis and Suzanne S Harrison, Edison in the Boardroom- How leading companies realize value from
their Intellectual Assets, John Wiley & Sons (2001) Front Jacket

the use of the IP. The success of the IP licence contract, like all forms of
contract, will depend on whether the parties to the deal can maintain and
fulfil that expectation.

Licensing has some stunning advantages as a means of exploiting IP. It
provides flexibility to both parties when endeavouring to maximize the
impact of IP. Enterprises licensing their IP assets to others are raking in
huge profits. This would be discussed in the course of this chapter. Other
advantages of licensing IP are:

● There is no formal registration process (as is required for the
assignment of some forms of IP).

● Stamp duty is generally not applicable. It enables ‘degrees of
separation’ between the owners and users of the IP.

● The greatest advantage for the ‘licensee’ is that he need not have to
spend money and time in the rigorous process of R&D.

● The licensed technology will make the job of the ‘licensee’ easier in
getting the finance and cash in on the opportunities of
commercializing the technology by introducing it at an appropriate

As it is said, a coin has two different sides, the same way licensing also
has a different side which is the disadvantages side. Now you will ask, is
there any disadvantage to IP Licensing which has brought in revenue to

most companies as would be seen in the later part of the chapter? The
answer is yes!

The disadvantages are:

● The greatest danger is that the owner of the license i.e. the ‘licensor’
may lose control of his technology and risks it from being exploited
by unwanted third parties, who may exploit the technology through

● For the ‘licensee’, the danger is that the licensed technology may
become superfluous in a short span, which would mean he would
have to spend more to buy a newer technology.

● Non-inclusion of risk aversion clauses in the licensing agreement
would mean that the licensee will be at great risk of losing money.

This chapter is designed to give the reader an understanding of the
principal elements of licensing of IP and the nature of issues that are
common to most licensing arrangements. It also includes a few case
studies of how major enterprises of the world are benefiting from


The simple meaning of ‘license’ is to grant permission or authority to
another person to do or acquire something. Now the question arises- who
controls the licensed IP? Of course, it is the ‘licensor’ who has licensed the
IP that controls the IP. Control is traditionally manifested by the licensor

owning the IP or having an appropriate scope of licence rights from
another person to enable the licensor to control the rights relating to the
technology. Therefore it is possible that a licensor’s control of the IP may
be the result of a series of cascading licences relating to the relevant
technology and the IP that subsists in that technology.

It is common to consider licensing in a commercialisation context as the
granting a right in the IP rights to another person. This is commonly
referred to as ‘licensing out’. It should be kept in mind that many
successful commercialisation projects also involve acquiring IP rights in
technologies that may form part of the end product or process that is to be
commercialized. This may form part of the end product or process that is
to be commercialized. This ‘acquisition’ of permission to use IP rights is
commonly referred to as ‘licensing in’.


The focus of licensing may be towards exploiting the technology
controlled by the licensor (‘licensing out’) or acquiring technology
(‘licensing in’). There are a range of reasons for a person wishing to
acquire a licence to technology:

● Establish a new business or product

● Improve the competitiveness of licensee’s existing operations or

● As part of acquitting a business

● Obtain efficiency in licensee’s research and development activities

● Save time

● Reduce the risks of further research and development

The decision to acquire a licence involves undertaking a due diligence
exercise of the desired technology, the costs involved, the legal chain of
ownership and control, the relationship that can be established with the
licensor and the resulting competitive position of the licensee. Whether
this is conducted in a formal manner or not will largely depend on the
significance of the acquisition of the licence in terms of risk, cost and time.


To successfully license a technology, it is critical to understand the
boundaries of the monopoly rights that attach to IP in that technology and
that a licence is fundamentally a contract.

A fundamental step for the parties to a licence contract is to clearly define
the technology that is the subject of the licence. It sounds simple, yet a
failure to do so can have dire consequences for both the licensor and
licensee. The technology defined in the contract should be clearly linked to
the technology that contains protected IP. The terms of a licence for IP
may vary widely having regard to the bargaining power of the parties and
the technology involved. Nevertheless, many licences for technology
would be expected to address the following parameters:


A licence should always specify whether the licensee is the only person
who has the exclusive right and permission to deal with the technology. If
the licensee is the only person who has the right to deal with the
technology even to the exclusion of the licensor, the licensee will have an
exclusive licence. If the licensee has the right to deal with the technology
to the exclusion of everyone other than the licensor, the licensee will have
a sole licence. An exclusive licensee may do all the things that the owner
of the IP rights is entitled to do subject to what the parties agree in the
licence contract. A licensor is able to limit an exclusive or sole licence to
territory, fields of use and/or term.

However in some cases it may not be optimal for a licensee to acquire an
exclusive licence. If the licensee wishes to use the licensed technology as
part of developing its own technology then a non-exclusive licence may be
sufficient because the licensee’s own commercialisation position may be
secured by the unique bundle of rights in the compiled technology. The
strategy in granting and seeking exclusive licences will therefore depend
in large part upon the nature of the technology and the view held of the
potential market for the technology.


It is common for clauses that grant a licence to specify that the licence is

The plain meaning of this phrase is that the licensee is not authorised to
permit another person to have access to the technology. It is intended to
clearly put the licensee on notice that the licence is personal to the
licensee. The legal meaning of this phrase is unclear. The rights vested by
the IP legislation are personal property. Personal property cannot be
transferred to another person without the permission of the licensor.
However, the licence contract is like any other contract. Indian law, built
upon the foundation of English cases, provides that the rights of a party
under a contact may be assigned to a third party without the consent of the
other parties to the contract. In this case, the liabilities remain with the
transferor; and also that the liabilities of a party under a contract cannot be
transferred to a third party without the consent of the other parties to the

So if a licence in IP rights was not described as being ‘non-transferable’
then, in the absence of any other contractual provision, the licensee may be
able to transfer the rights (such as reproducing copyright material or
exploiting the patented invention) but the licensee would remain liable for
any obligation under the licence contract such as payment of royalties,
although the licensee may well pass those liabilities on to the transferee in
a separate contract. If the licensor wishes to prevent this from occurring,
which it usually does, it is prudent to state that the licence is ‘non-


It is common for clauses that grant a licence to specify that the licence is
‘irrevocable’. The plain meaning of this phrase is that the licensor is not
able to cancel the licence without the consent of the licensee except, of
course, if the licensee has breached the contractual terms or the licensor
can exercise some other express right of termination. This may appear to
be curious that such a phrase is used. If it were otherwise that would be the
utility of obtaining a licence that could be withdrawn at the whim of the
licensor? Its origins lie in the traditional analysis of land licences. On one
view an exclusive licence is a grant of a proprietary interest and so is
irrevocable except in accordance with the terms expressly set out in the
licence contract.

If the licensor revokes a bare licence, then the licensee will not have a
remedy. If the licensor were to revoke a contractual licence, the licensee
will be entitled to damages (subject to the terms of the contract). 2 If the
licence is properly characterized as a proprietary right held by the licensee
then the licensee may also be able to obtain remedies of specific
performance or injunctions although this may depend in part on the court’s
interpretation of the application of those equitable remedies to the facts of
the relevant case (including the terms of the licence contract).

2 Cowell v. Rosehill Racecourse Co Ltd (1937) 56 CLR 605 and Graham H Roberts Pty Ltd. v. Maurbeth
Investments Pty Ltd [1974] 1 NSWLR 93 at 105-6


The IP legislations grant rights to the owner of the relevant IP in respect of
India. Those legislations do not, by themselves, give the owner of the IP
any monopoly rights in any other jurisdiction although there are certain
treaties to which India is a party that give the owner of the IP the same or
similar rights in other countries that have also agreed to that treaty
provided that particular formalities are fulfilled. Examples of international
mutual recognition include Berne Convention countries (Berne
Convention for the protection of Literary and Artistic Works 1886); the
Universal Copyright Convention 1952; Agreement on Trade Related
Aspect of Intellectual Property Rights 1995; International Union for the
Protection of New Varieties of Plants (UPOV) Convention 1991 and
circuit layout rights (Art 3 of the TRIPS Agreement).

The licensor of statutory based IP has control of the relevant rights where
those rights are to be exercised in India. The licence may be for all or any
part of India and, as noted above, that licence may be exclusive for one
part of India and non-exclusive for another part.

If the licensor’s IP rights are not international, then a licence entitling the
licensee to deal with the technology in other jurisdictions, such as through
the granting on a ‘worldwide licence’:

● may be of little value to the licensee if the market for the licensed
technology is small;

● may create a risk that the licensee believed the licensor represented
that the licensor had the relevant IP rights in jurisdictions outside of
India. This may be the source of a dispute;

● may constitute a restraint of trade if the licence contract restricts the
licensee form competing with the licensor or trading in particular
international territories.

The above risks may be addressed by:

• limiting the licence to India;

• including a clear statement in the licence contract that the licence
does not extend to any territory outside of India.

As India is a relatively small market for most technologies, it is common
that the IP in the technology will also have been secured in other
jurisdictions. In those circumstances, the licence may extend to those
jurisdictions. The licence should clearly specify the countries that are
within the terms of the licence and whether the licence is exclusive or not
in respect of each of those countries. If the licensor envisages that it will
eventually obtain IP rights for additional territories, then the scope of the
licence should be framed to pick up this eventuality.

Important factors that are usually considered in determining which
countries should fall within the scope of the licence include:

● Has the licensor obtained or is in the process of securing IP
registration or other protection in that country?

● What are the prospects of an application for registration of IP
succeeding in that country?

● What is likely to be the response of competitors in the relevant
country if the licensor were to make the technology available in that
country? Is it likely to cause a competitor to enter into, or increase
the level of, competition in the licensor’s established markets?

● Does the country have an adequate and cost-effective regime for
securing and protecting the IP in the country?

The licensor should consider reserving the right to terminate the licence
contract if:

● the government of the licensed territory prevents the importation of
the technology or the payment of royalties or the revenue form the
licensed territory;

● the licensee imports into the licensed territory the technology that
has been created by another licensee (whether or not the licensor
approved the creation of the technology).


This is of fundamental importance and should be addressed in any licence
whether or not any remuneration is to be paid. Setting minimum
performance obligations to be achieved by the licensee protects the
licensor. The licensee may wish to secure the licence to remove a
competitive technology rather than as a service of revenue. Circumstances
can result in changing the licensee’s attribute that originally attracted the
licensor. Those obligations may relate to revenue earned, units of
promotion expenditure or achievement of regulatory or IP registration

4.10 TERM

A licence is a contract. Theoretically, a licence may be for any period of
time agreed by the licensor and the licensee. However, the validity of a
licence, in both legal and commercial terms, depends in large part upon:

• the nature of the IP that subsists in the technology; and

• the field of use of the licence.

All IP rights that have a legislative base such as patents, copyrights, PBRs,
designs, and circuit layouts have monopoly rights attached that may expire
after a specific period of time. If a licence has the effect of continuing
beyond the life of the monopoly rights granted under the relevant
legislation then there is a risk that the licence contract may be terminated

by either party, be anti-competitive or constitute an unreasonable restraint
of trade.

Other forms of IP, such as confidential information and trademarks, that
can be renewed or maintained indefinitely will have no limits on the term
that a licence may apply for. However, the monopoly rights that attach to
that IP will only continue to be of value to the licensor and the licensee if
the IP continues to be protected throughout its life.


The scope of the monopoly rights attached to IP varies according to the
type of IP. It is open to the parties to agree to limit the licence to any one
or more of those monopoly rights. The parties may agree to limit the
licence in any other manner subject to the principles of contract law and
anti-competitive legal principles. Common examples include:

• using the technology for a particular purpose;

• dealing with the technology for or within a particular industry.

It is good practice to test the description of the field of use with persons
who have not been involved in the preparation of the licence and have the
relevant knowledge of the industry and application of the technology. This
will assist the avoidance of ambiguities in the wording used in the
description of the field of use.

A danger for any licensor is that an exclusive licence is given in relation to
a field of use that is broader than anticipated by the licensor. In relation to
biotechnology, for example, all of the functional applications of an
invention may not be known for some time (such as the cloning of a gene
and the biological function of the related protein). Ultimately this is a
function of the drafting of the licence contract and that task will be greatly
aided by persons skilled in the technical field working hand in hand with
the author of the licence contract.


As licences are generally personal to the licensee, it would not be usual for
a licence to entitle the licensee to permit others to have the same rights as
granted to it by the licensor. A licensee should therefore seek an express
permission in the licence contract to sub-license the IP rights to third
parties within the overall scope of the head licence obtained from the
licensor. Sub-licensing tends to attract greater importance for exclusive
licences where no other licences can be granted for the technology within
the scope of the licence.

The licensor’s strategic advantages in permitting sub-licensing may

• the licensee may be able to improve on the licensed technology and
so expand the opportunities for the licensor to earn income streams;

• the licensee may have the appropriate manufacturing, distribution or
marketing network through which commercial use of the licensed
technology may be maximized even though the licensee itself may
not use the technology for those purposes.

The licensor will often want some degree of satisfaction that the sub-
licence rights are being exercised and managed in a manner that is in
accordance with the terms of the main licence and that there are no issues
that could impact on other licensing arrangements that the licensor may
have in place. To this end, the licensor may require the licensee to:

• use an approved form of sub-licence

• seek the licensor’s prior approval before sub-licensing rights relating
to certain territories, fields of use or purposes of use;

• provide copies of any sub-licensing agreements;

• notify the licensor of the end of any sub-licence and the reasons for
it ending;

• notify the licensor of any dispute between the licensee and its sub-

• indemnify the licensor for actions of the sub-licensee that cause loss
to the licensor.


A licensing agreement is nothing but a partnership between an intellectual
property rights owner who is generally known as a licensor and a person
who is authorized to use such rights in exchange for some agreed payment
(which is known as royalty). The different types of licensing agreements
are broadly categorized as follows:

Licensing Agreements

Technology Joint Franchising Copyright
Venture or

Technology licensing agreement is where the licensor authorizes the
licensee to use the technology under certain agreed terms and conditions.
It is a contract freely entered into between two parties and contains terms
and conditions agreed upon.

Joint Venture Agreement is where the two parties join hands and pool in
their resources. The objective of this agreement is to implement a common
business purpose which would benefit both parties. As Prof Sople writes
“in such agreements one party will have a license for technology or
technical know-how, to which the other party may contribute financially
and implement the project. The joint venture normally includes a license

agreement between two parties to regulate the use of the IPRs and
compensation for its use.”3

Franchise Agreement: In this kind of an agreement, the franchiser
through an agreement allows the franchisee to use the expertise with which
the franchiser is associated. In this type of licensing agreement the
franchisee would bring in the financial resources to run the business while
the franchiser would ensure there is proper supply of technical and
management skills to maintain the quality and other standards to use the
trademark or service mark which would often require standardized features
like you have the Trademark Chicken Burger of McDonalds. Wherever
you go in the world, if you order a Mc Donald’s chicken burger, it would
taste the same as in any other store which may be in a different country
altogether. McDonalds, which also has a franchise model in place,
provides the equipment and expertise to the franchisee, which in turn
provides a certain amount of capital for opening up a McDonalds
restaurant. In return McDonalds gets a share of the profit from the
franchisee. The franchisee under the agreement has to use McDonald's
golden arch logo on its restaurants. As Sople writes, “it may not be wrong
to say that a trademark license agreement is a franchise agreement. This is
in view of the fact that a trademark or service mark distinguishes the goods
and services of one enterprise from that of another, thereby often
identifying the source and making an implied reference to quality and
reputation. This is how people know the McDonald's brand and its
trademark the golden arch.”4

3 Vinod V Sople, Managing Intellectual Property: The Strategic Imperative, Prentice Hall of India (2006) p. 274
4 ibid

Copyright agreement is done for literary and artistic works of
individuals. The agreement is generally for manufacturing, distribution
and marketing of their work.


Choosing a licensee can be akin to choosing a business partner,
particularly where exclusive licences are being granted. In determining
whether to grant a licence in technology the licensor must carefully
consider the persons who wish to obtain a licence for the technology. This
decision is just as critical as any other issue relating to the granting of a
licence in technology and has greater importance where the licence relates
to the establishment and penetration of technology into new markets, such
as manufacturing, distribution and marketing agreements. This aspect
should form part of the licensor's due diligence when deciding to
commercialise the IP in the technology.


Licensing is just one form of generating revenue from technology and the
IP that subsists in that technology. In determining whether licensing is the
most appropriate form of commercialisation strategy the licensor should
prepare a business plan that analyses the strengths, weaknesses,
opportunities and threats arising from licensing the technology. This
should result in the licensor clearly understanding the objectives and
material risks in pursuing a licensing strategy. Flowing from that high
level plan the licensor is able to begin the process of selecting licensees
that will be consistent with the licensor’s business strategy.

An early challenge for a licensor is to attract potential licensees. Where the
technology has clear market opportunities this may not be difficult. The
mere research and development phase may itself have created sufficient
interest in relevant sectors to result in approaches from potential licensees.
Often the circle of organizations that have an interest in the science or
application of technology will be a natural medium for seeking licensees.
In other circumstances the licensor may have no connection to the industry
or sector that is the logical fit for the new technology. The licensor has the
task of not only convincing others that the technology is sound and has a
competitive edge but also of establishing confidence in the licensor with
whom potential licenses are prepared to engage.


Following the conclusion of negotiations for a licensing arrangement the
parties commonly record their understanding in a document in simple
terms rather than seeking to reflect the arrangement in a formal contract.
Also the parties are likely to wish to undertake or continue with due
diligence enquiries of the other party and the technology concerned. The
document is usually reflected in a ‘deal memo’ or more formally in a letter
or memorandum, of understanding.

Any such document is likely to have within it a number of unresolved
issues. Some of those issues the parties will not consider important enough
to record as they are not ‘deal breakers’ or they may be ‘unseen’ and only
come to light once the process of preparing the formal contract is
undertaken. The latter consequence is usually a function of the time that
the parties have to complete the commercial deal or inadequate advice.

It is critical that the parties clearly understand the role and legal effect of
the deal memo. Even though the parties may contemplate at the time of
agreeing to the terms of the deal memo that a formal contract is still to be
concluded it is still possible that the deal memo is itself a legally
enforceable contract. Accordingly, the parties should clearly state in the
deal memo whether or not the deal memo or any part of it is intended to be
legally binding upon them before a formal contract is executed by them.

The deal memo should also specify:

● for major projects, a timeline (such as a Gantt chart) for various
milestones to be achieved;

● all commercial terms relating to the licensing arrangement such as
royalties, timing and methods of payment, performance criteria;

● the essential elements of the scope of the licence;

● an outline of the timing disclosure of confidential information (not
previously disclosed) required by the recipient to satisfy its
requirements such as evaluation of the project and any third party
approval required to be obtained;

● the date for completion of the forma contract and the consequences
of a failure to do so;

● a description of any improvements that the licensee intends to
undertake in relation to the technology and the arrangements for
those improvements to be granted back to the licensor;

● any policy or administrative issues that are non-negotiable for a
party ;

● who should maintain and protect the IP in the technology and
arrangements for action including the sharing of costs;

● the effect of he licence ending;

● the governing law.


The most distinguishing feature of licensing is that it allows flexibility to
the parties, which means, the parties are free to incorporate any clause
which they deem fit for the licensing agreement. There are a number of
clauses which are commonly found that are peculiar to licensing
agreement. To add to the general clauses found in the agreement, there are
the usual ‘boilerplate’ clauses that can be found in any contract of
substance such as:

● governing law

● waiver

● entire agreement

● notices

● variation

● dispute resolution

In addition to the boilerplate clauses, some other clauses which are
generally inserted or are specific to the licensing agreements, which the
licensor or the licensee might expect to be raise are:


The object of this clause is to entitle the proposed licensee to receive at
least the same benefits which are attached to a licence for technology, as
any other licensee would get for that same technology. The clause usually
applies to non-exclusive licences, although it may be applicable for
exclusive licences where the proposed licensee can argue similarities with
other licences for different territories or fields of use. Without a MFL
clause, the proposed licensee’s commercial position is uncertain and can
be of little value if the licensor grants licences to other licensees who may
compete with the proposed licensee.

The inclusion of a ‘MFL’ clause would only occur where the licensee has
the greater bargaining strength or is in a dominant position.

It is in the licensor’s interest to restrict the application of the MFL clause
as narrowly as possible. The licensor should also see to it that a MFL
clause excludes a ‘dispute settlement agreement’ (involving another
license or action for infringement of IP rights in the technology). This is
done because the conditions of settlement agreement usually reflect a
plethora of issues that extend beyond the normal commercial and risk
factors that apply for a new commercial deal. By having a dispute

settlement agreement would involve a lot of money and time spent by the

Now, if we look from the licensee’s angle, it is imperative to broaden the
application of the MFL clause and to include another clause that would
prevent the licensor from agreeing to a clause with other licensees that
makes it difficult for the proposed licensee to obtain access to the other
licence such as agreeing to keeping the terms of the other licence

An alternative to a MFL clause is to grant to the licensee a right of first
refusal for any subsequent licences that the licensor may propose to give.
Before deciding this course, the licensor should consider the performance
of the licensee under the first licence and any factors relating to the
subsequent licence that may make the first licensee more or less suitable
than an alternative licensee.


It is common for licence agreements to enable the licensee to further
develop the technology. We call this clause ‘Further Improving the
Licensed Technology Clause (FICTL)’. If there is any further development
of the licensed technology by the licensee, the question of who owns the
‘ownership of rights’ of this technology is asked. Therefore it is in the
interest of both the licensee and the licensor to address such issues in the
licensing agreement which involve patents, copyright, designs and
technical know-how.


A question arises, who should be responsible for obtaining approvals to
exploit the technology in the relevant market? Therefore it is necessary
and in the interest of the licensee and the licensor to have ‘Obtain
Regulatory Approval Clause (ORAC)’ in the agreement. The ingredients of
such a clause would generally be subject to the negotiations by both
parties, but in most cases it is the licensee who is required to obtain the
required approvals from the regulatory authority. Now another question
arises: Why is the licensee required to get the approval? The reason being,
that it (licensee) will be more likely to know the laws and procedure of the
licensed territory.


Generally, licensors devote a lot of time, energy and money to secure
rights for their technology including IP rights in both the domestic and
international market. When entering into a licensing agreement, the
licensor may want to partner with a licensee who may become a potential
competitor in the future for the licensor. As part of that relationship,
confidential information may be exchanged from the licensor to the
licensee concerning the technology. Therefore it is imperative to have a
clause included in the agreement which would specify that the licensee
cannot challenge the IP rights of the licensor.


Generally, a licensee will not be able to successfully challenge the validity
of a patent that is the subject of the licensed technology unless the licensee
can prove that:

● It relied upon a misrepresentation by the licensor concerning the
validity of the patent or the infringement proceedings are against the
licensee or

● The licensee claims the patent has expired; or

● The licensed technology does not fall within the terms of the patent.


One of the most important ingredients in a licensing agreement is the right
to audit. The contractual right to inspect the books and record of the other
party is of critical importance in managing the licence contract.


If the licensor is indemnifying the licensee against third party IP claims,
the licence contract would also normally reserve to the licensor the right to
manage the proceedings. This approach accords with the principle that the
licensor is the ‘insurer’ for the claim and so should be able to manage the
consequent risk.


It is appropriate for the parties to agree as to who will have the
responsibility to comply with those laws and for the relevant party to
warrant that it has and will continue to comply with such laws. Indeed, if
such approvals are critical to the operation of the licence, the contract
should state that it does not come into force until that approval has been

It is common to find warranties from the licensor that the grant of the
licence and the use of the technology in accordance with the terms of the
licence will not infringe the IP rights of a third party. The inclusion of such
a licence, like most other risk related contract provisions, depends upon
the bargaining power of the parties and the extent of due diligence
afforded by the parties. One of the most effective responses to a request
for such a warranty is that the licensee has been afforded an opportunity to
make its own enquiries concerning the technology and the licensor has
given the licensee an opportunity to make enquiries relating to the
development of the technology.

Often the delay in the processing of patent applications means that there
will be risk for a licensor to give an unqualified warranty that there is no
possible third party claim concerning the patent-based technology. A
compromise clause is for the licensor to warrant that, to the best of its
knowledge, the licensed technology does not infringe any third party’s
patent rights.

The licensor should also state that any such warranty does not apply to any
improvement or modification made to the technology of a combination of
the base technology and the improvements or modifications to the

If the licensor has licensed the use of technology the licensee will seek at
least a warranty that the licensed product will perform in accordance with
the known specifications for the licensed product. The period of such
warranty will vary according to the nature of the technology. In relation to
software, the standard warranty period in India is 90 days from the time
the software has been accepted by the licensee.


The licensee would seek an indemnity from the licensor for any claims
made by a third party or infringement of IP rights during the term of the
licensing agreement. Here are some of the ingredients of the indemnity
clause, which may be included in a licensing agreement:

● Required regulatory approvals not obtained by the licensor for the
exploitation and use of the licensed technology

● Inaccurate information provided to the licensee by the licensor in the
course of due diligence undertaken by the licensee. There are
instances when incomplete information is provided due to lack of
understanding or miscommunication.

Keeping these two points in mind it is important on part of the licensor to
take all necessary steps before licensing out the technology and it is also
the responsibility of the licensee to double check everything whatever the
licensor does with regard to the licensed technology. This must be done in
order to avoid legal hassles in the future.


The rights flowing from a termination of a licence contract should be
clearly spelt out. It has been suggested that the following questions arising
from termination of know-how licence agreements are the source of the
most licence contract litigation:5

● Must the licensee stop using the technology?

● May the licensee stop paying the licensor for any ongoing use or
disclosure or the information?

● Is the licensee entitled to complete all contracts already entered into
prior to the termination?

● Must the licensee stop disclosing the know-how information to his
or her own lawful sub-licensees?

● Is the licensee entitled to acquire ownership of the IP rights if certain
events cause the termination? Example may include insolvency and
subsequent deregistration of the licensor (being the owner of the IP

5 Arnold, White and Durkee (eds), 1988 Licensing Law Handbook, Clark Boardman Company Ltd, 1988, p 48);

The licence contract should contain a clause that the licensee has to return
or destroy any information relating to the technology (especially
confidential information). This is usually at the licensor’s option. The
licensee should cease using or in any way referring to the licensor’s

Clauses relating to indemnities, ownership of IP, confidentiality and
limitations on liability should continue after the end of the licence


Biotechnology presents new challenges to licensing of IP just as it is
challenging the boundaries of the statutory IP regimes. The scope of the
licence for biotechnology relating to purpose or field of use may attract
greater attention, particularly if the biotechnology may push the limit of
moral issues. In those cases, both parties will need to be aware of the
additional risks that flow from dealing with such material that may affect
the commercial relationship.

A licence contract for biotechnology may also need to address the

● Compliance with government regulations concerning the biological
material (particularly if it includes material that may affect

● Reproduction by the licensee or a third party of the biological

● A right of first refusal for the supply of any additional biological

● The issue of royalty payments plays a very important part in any
licensing agreement. Therefore licensing agreements, be it a
biotechnology licensing agreement or any other, should have a
clause relating to royalty payment. The clauses should be
constructed keeping in view situations which may prop up during the
term of the license. A case involving royalty payment is worth being
discussed at this stage.


Software license agreements are entered into when an owner or a
developer of software who wants to provide his product to the market
without selling it. The agreement lays down the terms and conditions of
the usage of the software and protects the rights of both the owner and the
user. There are different types of software licenses. Some are based on the
number machines on which the licensed program can run whereas others
are based on the number of users that can use the program. Most personal
computer software licenses allow you to run the program on only one
machine and to make copies of the software only for backup purposes.
Some licenses also allow you to run the program on different computers as
long as you don't use the copies simultaneously. The agreement protects

the copyrighted software from fraudulent activities and ensures that the
time and money of the developers is not wasted.


A software licensing agreement is a legal contract between the owner of
the software and its purchaser. The Agreement helps to protect the interest
of the company selling the software as well as the purchaser, acts as a full
package to the purchaser, containing details like from where, how and the
number of times it can be installed, the price of the software, restrictions
on the use of the software. Additionally, the agreement also mentions the
purchaser’s ability to copy, modify, or redistribute it.


A software developer spends his lots of time, money and hard work to
build a software in order to ensure that his hard work does not goes in vain
or wasted it must be protected. An agreement protects the copyrighted
software from various frauds and infringements. Reasons behind a
developer need to enter into licensing agreement before bringing it into the
market for sell that are:

1. Prevents Abuse of Software

2. Allows Licensing of the Software

3. Allow to Disclaim Warranties

4. Limits the Liability

5. Allows Termination of Usage
Types of Software Licenses in India


Proprietary Software Free Software Open Source
License License License

What should be included in Software License Agreement?

Software License Agreement can be divided into 4 sections and each
section covers an important aspect of the legal contract:

1. General Info

2. Parties Involved

3. Terms of his Agreement

4. Final Details

Important Clauses of Software License Agreement

• Non-Exclusivity: If the offeree entered into an exclusive agreement
and there is no clause of non-exclusivity, then it imposes a hindrance
for further licensing of the software.

• Non-Transferability: The non-transferability clause in an agreement
does not give the licensee the right to transfer the software to a new
client or customer. This makes sure that your customers are not
reduced and further that you do not have an enforceable agreement
with a third party.

• Rights: By including a clause that protects your rights even after the
execution of the agreement is important to protect the product. The
rights would ensure that no component of your product is stolen by
any user or the market.

• Modification: In case you do not want any kind of modifications to
be made to your software or product, your agreement should provide
so. The clause should define the meaning of modifications and the
restrictions imposed on such modifications.

• Breach of Contract: A breach of contract clause should be included
in the agreement. This clause specifies that if any condition or terms
of the agreement are not complied with, the licensee has the liberty
to revoke the contract.

• Limitation of Liability: This clause mentions that the licensee has
accepted the software in its current position and that there is no
warranty for the usage of the software.

• Governing Law: This clause provides the law or court that would
have jurisdiction in case any disputes arise.

The software license agreement is a necessary tool to protect the rights of
the owner as it prevents abuse of the software, allows licensing of the
software, allows to disclaim warranties limits the liabilities of the owner,
and allows termination of usage. They can be broadly classified as
proprietary software licences, free software license, and open-source
software license. Some of the important clauses that every software license
should include are non-exclusivity clause, non-transferability clause, rights
clause, modification clause, breach of the contract clause, limitation of
liability clause and governing law clause.

Computers and computer software have revolutionized the way people do
business in the 21st century. Software companies are reaping in huge
profits by licensing the software, which they develop. The licensing of
software is now quite common and certain conventions and principles
have been established in the course of its commercialisation. The form of
IP relevant to software is copyright, and in some circumstances, patents.

This short case study would look as to how Microsoft began its IP
Licensing journey with an agreement with Sun Microsystems, another
leading IT based company based in The US.

4.19.1 Microsoft And IP Licensing

Microsoft began its tryst with IP licensing in the year 2003. In December
2003, Microsoft announced it was expanding its intellectual property (IP)
policy to provide the IT industry with increased access to the company’s
growing IP portfolio, signalling to the public that the company is “open for
business when it comes to IP Licensing. The first agreement which

Microsoft had in relation to IP licensing was with Sun Microsystems. The
two companies entered into a broad technology collaboration agreement to
enable their products to work better together. The agreement provided both
companies with access to aspects of each other's server-based technology
and enabled them to use this information to develop new server software
products that would work better together. The cooperation initially centred
on Windows Server and Windows Client, but later included other
important areas, including email and database software.

Microsoft Communications Protocol Program: Sun agreed to sign a
license for the Windows desktop operating system communications
protocols under Microsoft’s Communications Protocol Program,

Microsoft Support for Java: The companies agreed that Microsoft could
continue to provide product support for the Microsoft Java Virtual
Machine that customers have deployed in Microsoft’s products.

Windows Certification for Sun Server: Sun and Microsoft announced
the Windows certification for Sun's Xeon servers.

Both companies agreed to pay royalties for use of each other’s technology,
with Microsoft making an up-front payment of $350 million. Sun agreed
to make payments when the technology is incorporated into its server
products and has done so.

It should be noted that the business model of Microsoft IP licensing is not
for revenue generation. Microsoft started IP licensing since it was not able
to handle the large IP portfolio (Patent portfolio). IBM, as mentioned

earlier, rakes in more than a billion dollars in revenue from IP licensing.
The purpose of taking Microsoft as an example is to show how a company
which was known to be a monopolist and involved in several antitrust
disputes with the government changed its strategy completely by adopting
an open approach to deal with IP, which has helped Microsoft to manage
its vast patent portfolio.

4.19.2 Contents Of A Software License Agreement

A licence for software would be expected to contain the following
elements in addition to those referred to in the earlier part of this chapter:

● Rights granted only to use the software and not sell it to third parties.

● Licenses may also have provisions relating to confinement of using
the license in a particular geographical location.

Licensors may also incorporate a technical function in the software that
causes the software to cease to function. This lock may be triggered by the
passing of time, usually on the anniversary of the commencement of the
licence. If the licensee has paid any fees due on the anniversary then the
key for the lock will be provided to the licensee to disengage the lock. The
licence should reflect this protection mechanism.

The economic life of software is usually much shorter than the period for
which it has IP protection. The licensor will usually offer to the licensee
updates and new versions of the software provided that the licensee pays a
periodic fee for those additional rights.


Merchandising is the licensing of publicly recognizable properties for use
on or in association with products or services to promote sales of those
products or services. It is traditionally used to promote and market the core
products or services of the licensor. It has become well known in the fields
of motion pictures, sport and events.

Merchandising may be undertaken in a wide variety of fields. It now
generates large income streams for licensors which may exceed the
revenue generated by the licensor’s principal business activity. It is used in
relation to an infinite range of merchandise.

Merchandising License

Tra 2. Brand 4. Promotional 5.
ditional Extension Endorsement

3. Ingredient Licensing

Traditional Merchandising: the Licensor promotes its core
products/services by licensing the IP that is incorporated in that product or
service. For e.g. sports teams apparels like caps, jerseys.

Brand Extension: the licensor promotes its core product or service by
licensing the IP that is incorporated in that product or service. Examples
include the caricatures in Disney’s ‘Lion King’, uniforms of sports teams
and associated clothing such as caps and t-shirts.

Ingredient: the licensor licenses its brand name to products and services
that are related to its core product or service. This strategy depends upon
having established a sound reputation in its core product or service. It
enables the licensor to leverage off its existing IP portfolio with minimum
investment in product development or distribution. Intel successfully
adopted this strategy back in the early 1990s. It convinced manufacturers
to place the “Intel inside” logo unit in their advertising and other
marketing material. “The advertising results were stunning. For example,
late in 1991, Intel research indicated that only 24 percent of European PC
buyers were familiar with the Intel Inside® logos. One year later that
figure had grown to nearly 80 percent, and by 1995 it had soared to 94
percent and continues at these high levels today.”6 Here it should be noted
that the core product for Intel was and is the Personal Computer (PC) and
the brand name, which it used on these PCs, was ‘Intel Inside’.

Promotional: where the licensor provides its product or service to form
part of a licensee’s product or service and as a condition of that supply the
licensee agrees to display the licensor’s mark or logo on the licensee’s
product or marketing material for the licensee’s service. Typical examples

6 Stuart Whitwell, Ingredient branding case study: Intel available at <

are short term licenses taken by fast food companies like McDonalds in
conjunction with a movie or other entertainment property.7

Endorsement: where the licensor endorses a product and agrees to
promote that product. This is a common strategy for well-known persons
such as sports persons.

Merchandising helps the licensor in two ways:

● It helps the licensor to expand the business into newer markets and
product areas.

● It helps the licensor to leverage off his existing customer base and
cross sell its core products or service.

Under Indian law, merchandising depends on monopoly rights that derive
from trademarks, which are either registered or are protectable under tort
law (Common Law), copyrights and designs.

The core elements of merchandising are to generate revenue, achieve
market penetration and maintain the integrity of the licensor’s brand. The
merchandising licence must therefore address the following points:

● A target should be set for production and for sales. The licensor must
have the power to appoint an additional or alternative licensee if the
goals are not achieved.

7 Weston Anson, Donna P. Suchy et al, Intellectual property Valuation, American Bar Association, (2006), p.

● Proper guidelines should be given to the licensee on how to use the
licensor’s brand.

● Quality standards should be put in place by the licensor on the
merchandise produced or sold by the licensee.

● The license should entitle the licensor to inspect samples and final
items of the product or service and if not satisfied, require the
samples to be remade.

● The license should establish procedures for notification of
infringements of the licensor’s brands by third parties.

● Rules should be laid down for dealing with excess stock if the
licence were to end

● The license agreement should have a provision which prohibits the
licensee from challenging the licensor’s IP rights in the brands.

● In relation to particular forms of merchandising the licensee may
expect that the licensor will undertake steps to minimize the
potential for ambush marketing and sale of counterfeit products.


The commercialisation of IP involves not only the exploitation of those
elements that subsist in the inventive technology but also the promotion of
the technology to increase the prospect of revenue relating to the licensed
product. The use of the assets of trademarks and the goodwill associated

with a developed product has become an integral part of a
commercialisation strategy. Accordingly the law relating to registered
trademarks, the Trade Marks Act, 1999 and the tort of passing off provide
the legal foundation for exploiting those assets.

The essential component of sponsorship is the use of the licensor’s name,
logo or event as a means of promoting the licensor’s own business,
products or services. It follows, therefore, that the licensor must enjoy
sufficient reputation amongst the relevant section of the public to facilitate
the endorsement. The licensee, or sponsor, will seek access to the
licensor’s name or logo to enhance the sponsor’s market position. The
sponsorship agreement must therefore address the following points:

● the scope of the sponsor’s rights to use the licensor’s IP and the
medium through which it can be used (such as the Internet);

● the period of the sponsorship including any preference given to the
sponsor to renew the sponsorship at the expiration of the initial term
of the agreement (such as through option to renew or right of first

● the licensor’s right to grant a licence to the applicable IP;

● a restriction upon the licensor from entering into sponsorship
arrangements with competitors of the sponsor, conducting other
events that may compete with the sponsored event;

● the benefits that the sponsor is entitled to receive from the licensor;

● the benefits that the licensor will receive from the sponsor including
payment (which may be money or in-kind or both);

● the leverage that the sponsor will undertake concerning the
sponsored subject matter;

● any performance criteria that may apply to the sponsorship
especially relevant to sponsorship of events where attendances and
broadcasting results are important to the effectiveness of the

● rights of the sponsor to have its own marks displayed on signage
(which would include arrangements concerning the cost of signage,
prior approval by the licensor, who provides it and where it is to be


Commercialisation of IP through franchising can take on other forms in
addition to trademarks exploitation. In recent times franchising has been
applied to business systems, not just to their marketing of particular
products. Franchising can enable patented or copyright products to be
wrapped up in a package that enables a business to be driven further.

Franchising is a form of licensing. The reason for not including this in the
previous chapter is because of the fact that Franchising in itself is a
powerful tool to commercialize an enterprise’s Intellectual Property. In
franchising the ‘Franchisor’ licenses its Intellectual Property such as

trademarks, trade dress, copyright, know how, trade secrets etc to the

4.22.1 Nature Of Franchising

Franchising is one of the most effective means of exploiting one’s
Intellectual Property. When properly structured and well run, franchising
provides benefits and satisfaction to both parties. However it is not an easy
route to take, nor is it a remedy for the ills of a sick business. It takes skill,
patience and capital to establish a franchise. The time period for
establishing a franchise system can be as long as three years. It takes
another three years before the franchisor earns profits and witnesses cash
flow into the business.

In a franchising arena, it is important for a franchisor to have a strong
trademark. This is important because the franchisor is marketing the brand
itself, so if there is no strong trademark, the ability to gain the fruits from a
franchising agreement would be minimal. “Therefore from the
Franchisor’s perspective, the trademark becomes the key advertising
component providing widespread recognition being sought by potential

One of the most important benefits in a franchising agreement is that as a
Franchisee – you are able to trade under a well-known trademark. After
obtaining a well known trademark under a franchise agreement, the
franchisee is rest assured that it would reap in huge benefits both in

8 William A. Finkelstein & James R. Sims, The intellectual property handbook: a practical guide for franchise,
business, and IP counsel, American Bar Association (2006) p.49

monetary and non monetary terms. The reason being that the public would
associate the franchisee with the trademark, which it has obtained from the
franchise agreement.

It should be noted that the “franchisee typically is granted a trademark
license, where the fee is a percentage of the gross turnover. Usually there
is also a fee for a marketing budget to promote the trademark as part of the
franchise business. As a condition for use and benefit from the franchisor’s
IP, there is a requirement imposed on the franchisee to act in accordance
with a set of rules meant to preserve the value of the IP and to deliver the
expected business results. This also has a potentially negative side, as the
franchisor could set quite strict rules under which the franchisee’s trade
and use the franchised IP, thereby stifling any of the franchisee’s own
business creativity.”9

4.22.2 Types Of Franchise

Before going into the detail about the elements of a franchising deal, it is
important for us to know the types of Franchise Agreements prevalent in
the market. Figure 1 shows the various types of Franchise:

9 WIPO – KEPSA SEMINAR ON Intellectual Property and Franchising for at
Small and Medium Sized Enterprises, Nairobi 2006 available

Processing Franchi Distribution
Franchise se Franchise


Processing Franchise10: In other words it is also known as a
manufacturing franchise. In this kind of an agreement, the franchisor
supplies a certain ingredient or a technology to the franchisee. The
franchisor would grant authorisation to the franchisee to manufacture and
sell products under the brand name and trademark of the franchisor. The
franchisee in some instances may even be licensed to use trade secret
information or patented technology held by the franchisor. The franchisee
may also get training with regard to distribution and actual running of the
service provided. This kind of franchise is mostly seen in the restaurant
and fast food Industry. Fast food giant McDonalds has applied the
processing franchise model for its growth and expansion.

Service Franchise: In this kind of a franchise, the franchisor develops a
service which is to be rendered by the franchisee under the terms of the
agreement. An example of a service franchise would be one involving the
provision of automobile tuning or repair services. Madras Rubber Factory
or MRF, as it is popularly known, has adopted the service franchise model
to open various repair service centres for tyres across India.

10 Introduction to intellectual property, World Intellectual Property Organization, Kluwer Law International
(1997) p. 289

Distribution Franchise: In a distribution franchise, the franchisor
manufactures the product and sells it to the franchisees. The franchisees
then sell the products to customers, under the franchisor’s trademark, in
their own geographical area. For example the distribution of IBM
computers from an electronic store.


Like any contractual relationship the substance of a franchising deal will
vary significantly according to the parties involved, the industries in which
they operate and the territories in which they may be found. The franchisor
will grant a right to use the trademarks that are registered in its name.
Usually the franchise agreement will detail the manner in which those
trademarks are to be used and the controls that the franchisor has in place
to ensure that the value of the mark is maintained.

The franchisor will also, depending on the nature of the business, supply
products or ingredients or parts that are sold on, or used, by the franchisee.
A franchise agreement will set out the details of the supply of those
products including arrangements for returns and ongoing support.

The network of franchisees provides an enviable financial base for
consolidating advertising and market activities. This will extend to
production of catalogues, media campaigns and related activities.
Typically the franchising arrangement will require the franchisee to
contribute towards the cost of these services.

A franchisor will also provide training and support to franchisees. The
nature of that training and support will vary considerably and much will
depend on the initiative and commitment shown by the franchisor. A
central focus for the franchise will be the procedures manual established
by the franchisor. This document will often become the bible for the
franchisee as it sets out the processes that should be implemented in
running the business and maintaining the 'look and feel' that has become
associated with the franchisor. Often this procedures manual will be
closely guarded and its confidentiality maintained. Usually this provides a
competitive edge for the franchise. Of course this need not always be the

4.22.4 McDonalds And Franchising

Mcdonald’s is one company, which has benefited immensely from
franchising. When people think about the franchising concept, McDonalds
usually comes up as an example.

Brothers Dick and Mac McDonald opened the first “McDonald's”
restaurant in 1940 on Route 66 in San Bernardino, California. Today,
McDonald’s franchise network is the world’s leading food service retailer,
with more than 30,000 franchise restaurants serving 52 million people in
more than 100 countries. Of those stores, more than 70 percent are owned
by independent operator franchisees. Its most lucrative market being China
and India.

“Raymond Kroc gets the credit as the driving force behind McDonald’s
successful franchise growth. In 1954, the McDonald’s restaurant caught

Kroc’s attention because it was using eight multimixers. Kroc went to visit
the restaurant and was amazed at the speedy business operation that served
so many people at once. The McDonald brothers had already begun to
franchise their restaurant concept and had four locations going by the time
of Kroc’s visit.”11

Kroc recognized the opportunity to sell lots of multimixers and made a
proposal to the brothers to let him franchise restaurants outside of their
home base in California. (Ray Kroc was not the only one impressed by the
McDonald’s restaurant, which was also visited by James McLamore,
founder of Burger King, and Glen Bell, founder of Taco Bell.)

In 1955, Kroc launched “McDonalds Systems, Inc.” as a legal structure to
run his franchises, and by 1958 McDonalds had sold 100 million
hamburgers. In 1961, the McDonald brothers agreed to sell all the business
rights to Kroc for $2.7 million. The company went public in 1965, and 100
shares purchased then for about $2,250 would have grown to 74,360
shares now worth over $3 million.

The first McDonald's franchise opened outside the US in British
Columbia, Canada in 1967. Since then, McDonald’s has spread all over
the world, with its largest franchise store featuring more than 700 seats
opening in Beijing, China in 1992.

One essential factor that contributes to franchise success is a consistent
commitment to standards. McDonald’s franchise restaurants became well-

11 The Marketing Genius behind McDonalds Franchise Success available at

known for the inspired and defining vision created by Kroc for his
restaurant business. “Quality, Service, Cleanliness and Value” was the
company’s motto, and customers knew that no matter where they
travelled, they could rely on those qualities at every McDonald’s they

Before Ray Kroc took hold of the McDonald's business, it was quite
common for persons interested in obtaining the permission of the original
McDonald's brothers to inspect the systems and equipment they used to
operate their successful hamburger restaurant.13

4.22.5 Considerations For Entering Into A Franchise

The franchisor and franchisee have a lot to gain or lose from their
relationship. It makes plain sense for each of them to prepare their
respective business plans and undertake appropriate forms of due diligence
before agreeing to enter into the relationship. This involves performing
appropriate risk analyses, identifying the competitive advantage which the
relationship will maintain or produce, analysing the territory in which the
franchise will operate and ultimately assessing the costs and benefits from
participating in the relationship.

In embarking on a franchising system the franchisor needs to ensure that it
has sufficient capital to undertake the task. This includes estimating
necessary cash flow to support the investment. Costs of establishing a

12 Supra Note 3
13 Love John F, McDonalds - Behind the Arches, revised edition, Bantam Books, 1995, p 24.

franchise can be significant including setting up of IT systems, marketing
programs and obtaining appropriate professional advice

Securing the IP protection is fundamental to a successful franchise system.
Protection of trademarks has already been discussed. It may be possible
for the business process itself to be patented. The franchisor should give
some consideration to getting appropriate professional advice to identify
what parts of its system can be kept secure including ensuring that it has
adequate procedures for maintaining confidentiality of the critical
elements of the system.

The franchisor needs to give careful consideration to establishing an
appropriate fee structure that is within the ballpark so far as market rates
are concerned but also provides for reasonable return of investment for the
franchisor. An important element that can be easily forgotten is that the fee
structure should also give the franchisee sufficient incentive to be
committed to the franchise operation.

The availability of quality franchisees can be an unforeseeable trap for a
franchisor because not only will the franchisor be seeking persons who
have appropriate individual qualities of trust, candour and confidence but
the nature of the franchise business may also lend itself to persons who
have particular technical skill or expertise. If those skills cannot be readily
found or acquired then a franchise may not be an appropriate vehicle for
commercialising the product or system. Given these challenges it is often
advisable for the franchisor to set up a prototype arrangement that tests
and refines the franchise operations.

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