4.4 - Licensing IP

What is a licence?

• An agreement under which the rights to use IP are granted by one party (the Licensor) to another (the Licensee) for the purpose of internal use (defined in the Framework as Use) and/or commercialisation (including marketing and selling products or services, defined in the Framework as Commercialisation)
• The key elements of a licence are:
  • What is being licensed – examples include: registered IP rights (IPR) like patents, rights to designs, copyright materials, plant breeder's rights, software
  • The nature of the licence – whether it is non-exclusive (others can take a licence) or exclusive (only the Licensee can exploit the licensed IP)
  • The field of use e.g., the specific business field or application that the licence covers, and the territories (countries) the licence operates in
  • Payment terms – whether the licence is royalty-free or royalty-bearing, and if payments are due, how those are structured (up-front fee / signature fee, milestone payments and/or royalties on sales)
  • Diligence – the steps the Licensee commits to take in order to maximise the demand for products or services enabled by the licensed IP
  • Warranties and Liabilities – provisions that cover assurance regarding ownership and other rights to the IP rights being licensed, and who is responsible for what risks that may arise as the products and/or services are commercialised

When is a licence needed?

Companies very often access IP from research organisations through licensing. This is the most common route for IP developed by research organisations to get to market.

Typical situations where a licence is negotiated by companies with a research organisation include:

1. Accessing IP independently developed by the research organisation which the company wants to access to develop new products or services
2. Accessing IP owned by the research organisation that has been developed jointly by the company and the research organisation through a collaborative research project
3. Licensing IP to a spin-out company formed by the research organisation

All forms of IP can be licensed, including registered IP rights (e.g., patents) and unregistered IP rights (e.g., confidential know-how or proprietary tangible materials).

Before drafting a licence, it is recommended that the parties agree a term sheet. This sets out in simple language the key terms of the licence by discussing and agreeing each of the key considerations outlined below.

It is also common for companies to first sign an option agreement with the research organisation. This gives the company rights to negotiate a licence in the future. An option may be included within a research collaboration agreement or may be a standalone agreement. During the option period the company is able to work with the research organisation to further evaluate the technology, to decide if they want to take a licence.

Valuing IP in a licence

Agreeing a fair value for a licence is not straightforward and requires the parties to negotiate terms based on their respective contributions and expectations. Reaching a common position requires openness and trust. A licence agreement should be a win-win, with both parties benefiting.

Two general approaches can be used to identify a reasonable way to share value in a licence agreement:

• Accepted wisdom in the industry sector – companies in sectors where there is a history of in-licensing technology often have an empirical viewpoint on what constitutes a fair and reasonable value sharing arrangement
• Third party examples – searches of public domain information or licensing databases can be used to identify similar deals and use these as comparators

Revenue sharing terms (upfronts, milestones, royalties etc.) are also influenced by the following factors:

1. The scope of rights – a Licensor would expect to receive a higher share of value in an exclusive licence (compared with a non-exclusive licence)
2. The Technology Readiness Level (TRL) of the licensed IP – the higher the TRL, the higher the share of value for the Licensor
3. Warranties & Indemnities – if the Licensor is granting additional warranties for the IP and/or giving an indemnity for IP infringement, the Licensor can expect a higher share of the value under the licence

Which licence agreement to use?

The Framework provides two non-exclusive licence templates and one exclusive licence template. All exclusive commercialisation licences should use the Standard Exclusive Licence template. Only the Accelerated Licence Agreement contemplates licences that do not include commercialisation. Non-commercial licences would not normally be granted on an exclusive basis and therefore no template is provided for an exclusive non-commercialisation licence.

The university and the industry partner should consider the following factors to decide whether to use the Standard or Accelerated track licences. Independent advice or further information from the other party may be needed to make an informed judgement.

The Accelerated template is intended for lower risk transactions, including transactions that include 'low risk' commercialisation, and is designed to be used with minimal customisation or negotiation. The Standard templates are limited to licences involving commercialisation.  They are more complex, higher risk situations and provides greater flexibility to cater for different scenarios. If you cannot agree on which agreement is appropriate for a commercialisation venture, the Standard licence agreements are recommended.

• Will the licence be for exclusive commercialisation?  If the licence will be exclusive, in any territory or application, then the Licence Agreement (Exclusive Commercialisation) must be used
• Will the licence be for uses that do not involve commercialisation? If the licence is for internal use only, then the Accelerated Licence Agreement must be used
• Are indemnity or warranty provisions needed? If one or both parties require indemnity and/or warranty provisions, then it is recommended that a Standard Licence Agreement is used, as these include standard warranty and indemnity provisions that can be customised as required
• Are the Fees payable expected to be less than $100,000? For many lower value agreements, the Accelerated Licence Agreement will be appropriate, and will streamline the process of negotiating and finalising an agreement, which can otherwise be costly and time consuming for both parties. Each form of agreement allows for flexibility in how the parties set the Fees - including for royalty payments. However, if the risks in the agreement are high and/or specific risks are identified, the Standard Licence Agreement will be more suitable, for example if:
  • one party is a foreign entity
  • the licence structure or fees are complex
  • the proposed intellectual property arrangements are complex (for example, multiple types of intellectual property being licensed with different licensing approaches)
  • there are existing arrangements in place between the parties (for example, joint venture arrangements)

• What has the internal risk assessment returned? Before starting a commercialisation project, each party should carry out their own risk assessment. Factors to consider include:
  • what is the potential legal exposure that the activity may create?
  • could this activity lead to a breach of intellectual property rights, including patent or copyrights?
  • will this activity involve significant physical or environmental risks?

If the internal assessment indicates a low to medium risk, then the Accelerated Licence Agreement would be appropriate (only low risk transactions are recommended for commercialisation using this template). This risk assessment may also be used to determine an appropriate liability cap for the agreement, based on the assessed level of risk. For the Accelerated Licence Agreement, the liability cap would generally not exceed $100,000. If the proposed liability cap is higher than $100,000, the Standard Licence Agreements may be more appropriate.

• Are additional arbitration or mediation systems needed? While the parties can always agree to refer their dispute to mediation, there is no mandated mediation or arbitration in the Accelerated Licence Agreement. If this is required, the Standard Licence Agreements are recommended, and may be amended if the arbitration approach used in the Standard Licence Agreements is not preferred or (for overseas entities) enforceable with the industry partner
• Will the licensee be paying a royalty? Either the Accelerated Licence Agreement or the Standard Licence Agreements can be used with a royalty model. The method for calculating the royalty must be agreed by the parties. If the method is complex, the Standard Licence Agreements are preferred, as these provide more guidance on audit rights and a template that can be adapted for calculation of royalty amounts. In each case parties should obtain independent financial and taxation advice
• Is sublicensing allowed? In most commercialisation arrangements, a licensee may need to sublicense the licensed IP rights to enable commercial exploitation. For example, the licensee may wish to outsource some aspects of manufacturing, service provision or sales. While this is consistent with options in both the Accelerated Licence Agreement and the Standard Licence Agreements, it indicates a higher level of complexity and risk. If sublicensing is allowed for these types of activities, then the Standard Licence Agreements are recommended, as they include template provisions regulating sublicensing, such as provisions which must be included in the sublicence, whether the sublicence must be approved, and management of the risks associated with sublicensing
• Other factors to consider are: whether the agreement is required to address the ownership and/or licensing of any improvements back to the licensor, and whether there are any product safety requirements that need to be addressed. In general, these factors increase risk and make the Standard Licence Agreement more appropriate

When to use a Variation Agreement?

• Many licence agreements are re-negotiated after signature, for example, because of changes in the commercial development timelines, or to reflect changes in the commercial environment. The changes should be agreed and recorded in a Variation Agreement that is signed by the parties. This ensures that everyone knows what has changed and has given their written consent
• A Variation Agreement should not be used to change the form of the agreement – for example, to include new research activities or technical (consulting) services. A separate, additional agreement using the appropriate template will be needed

Key Considerations

The following table is provided as a guide to help the parties appreciate the key considerations that each party will have when negotiating a licence agreement. This assumes that the Licensor is a university, and the Licensee is an industry partner. In the templates provided under the Framework, either the university or the industry partner can be the Licensor.

Discussing and understanding each party’s needs and concerns up front will help you reach a licence agreement more quickly and will help you apply the templates to reach a fair agreement.

For organisations, particularly SMEs, that do not have any experience of licensing IPR, this table will help you understand what the key provisions of a licence are and what you need to think about before you start discussions with the other party.

Further information on how to complete each of the licence templates is provided with the respective guides and template agreements. Additional plain English guidance on the meaning of key clauses is provided in a separate annotated version of each template. 

Resources

• Accelerated Non-Exclusive Licence template and accompanying plain English guide - For non-exclusive licensing of low value / low risk IP
• Standard Non-Exclusive Licence template and accompanying plain English guide - For non-exclusive licensing of higher value/ more complex IP
• Standard Exclusive Licence template and accompanying plain English guide - For exclusive licensing of IP in a field and/or territory
• Variation Agreement and accompanying plain English guide – For recording agreed changes to a licence

Sources of further information

For further background information on licensing please see:

• IP Australia’s guide to licensing
• WIPO’s publication - Exchanging Value - Negotiating Technology Licensing Agreements: A Training Manual

This table sets out the key points each party needs to consider when entering a licence. Understanding your own key considerations, as well as those of the other party, will help you to negotiate a fair and reasonable agreement that works for both parties. Further guidance on how each of these points is approached in the individual licence templates is given with the respective template