How to scope a license
Since the third and fourth industrial revolution, the importance and value of intellectual property (IP) has been growing continuously. The art of exploiting a company's IP in the most profitable manner is thus crucial for IP-heavy companies and distinguishes the most successful companies from the rest. In this newsletter, we focus on which aspects should be considered when scoping a license.
By Anuschka Teresa Hager-Thoresen & Knut Sverre Skurdal Andresen
Schjødt has assisted in some of the biggest pharmaceutical licensing transactions and digitalization projects within main industrial sectors. Contact our team of IP lawyers and specialists from the Life Sciences practice group and the Digital Innovation & TMT practice group for assistance with drafting and negotiating license agreement and an evaluation of how you may achieve the highest return from your IP.
Step 1: Preparation
Careful and precise drafting of the license is only one side of a successful license agreement and would not be possible without thorough understanding of (a) the company's protection of information, (b) the company's freedom to operate, (c) the market the company currently operates in, and (d) the market the company has potential to operate in. This knowledge is key to maximizing the company's profit through licensing. Also, in case of incoming licenses, even if your intention mainly is to prevent others from exploiting a certain marked segment, this knowledge is necessary if you are not interested in (or during the course of negotiations do not get) an all-inclusive license.
Step 2: Scoping
Licensing is one way for the holder of IP to commercialize such IP by giving others a more or less limited right to exploit the IP, usually in return for royalties (and sometimes a sign-on fee or further payments, e.g. for commercial, developing, or regulatory milestones). Unlike the sale of assets or shares in a company, licensing may lead to the sharing of business risk and profit.
A licensing agreement will usually define the following aspects:
1. The subject of the license
2. The scope of the license
3. Financial and other conditions to the license
4. Licensor's (or both parties') obligations
The level of detail will vary not only based on the parties, but also on the sector. Therefore, for pedagogic reasons, we introduce two typical license grants for different sectors with the scoping elements highlighted:
Technology License grant:
"Licensor hereby grants to Licensee a non-exclusive, non-transferable license under the Patent Rights and the Licensor Know-How for use in the design, construction, and operation of any and all future Oil Plants in the United States of America."
Pharmaceutical License grant:
"Licensor hereby grants to Licensee, a worldwide, royalty-free, non-exclusive license, without the right to sublicense (except to CMOs of Licensee as permitted under this Agreement), under the Licensor Background Intellectual Property, solely for the purpose of Developing, Manufacturing, and Commercializing the Licensed Product within the Field."
With these two examples in mind, we can categorize the scoping elements in a license grants as follows:
(a) the activities allowed under the license;
(b) for what purposes the license may be used; (c) in which geographic area the license may be used;
(d) whether others may be allowed to exploit the underlying IPR:
- exclusive vs. non-exclusive,
- transferrable vs. non-transferable,
- right to sublicense; and
(e) the timely aspect:
- limited term vs. perpetual; and
- revocable vs. irrevocable.
(a) Allowed activities
Depending on the sector, the activities possible to conduct under a license may vary. Some license grants list all activities, while others use defined terms. Both may work, but when using not defined terms one needs to be aware of that certain terms include a whole range of activities even if they are not defined, e.g. the term "commercialize".
In general, activates under a license may be categorized as follows:
(1) Commercialization. In general, commercialization includes activities such as the launching of a product including marketing, labeling, pricing, distribution, sale, import, and export.
(2) Development. Included activities will depend on the sector, e.g. in the pharmaceutical sector this will usually include clinical and non-clinical drug research, the conduct of clinical trials, and preparation and filing of regulatory approvals. In the technology sector this may include activities such as improving, modifying, enhancing, or creating derivative work from the underlying IP.
(3) Manufacturing. This category is more common in the pharmaceutical sector than the technology sector, but is also relevant for sectors not covered by this article, e.g. merchandizing in the music industry. In general, this may include activities such as to make or have made certain products, the processing, packaging, labeling, shipping, storage, and freight, including in the pharmaceutical sector the quality assurance and stability testing.
(4) Operation. Means the use of the IP, e.g. software license are often limited to this activity only.
(b) Allowed purpose
Even though the wording "for the purpose of" is often used in connection with allowed activities, e.g. in the pharmaceutical license grant example mentioned above, it relates to the allowed (non-geographical) area rather than the allowed activities. In pharmaceuticals this is usually named as the "Field" which may be defined to cover certain (i) indications (use of the drug to treat a particular disease), (ii) recipients, e.g. "human use", and (iii) dosage forms, e.g. oral dosage which includes pills, powder, liquids, tablets, and capsules. This is either positive defined, meaning the allowed purposes are listed, or defined negative meaning it includes every other purpose than the one defined. The scoping element is also relevant in the technology sector, e.g. software technologies may often be limited to the licensee's "internal business only" or, as used in the technology license grant example mentioned above, for the use of certain industrial locations.
(c) Allowed geographical area
When scoping the license with respect to the geographic region to be covered one needs to be aware of two aspects: (i) whether a license is already granted to others for the same area (however conflict is not given, e.g. if licenses are granted for different activities or purposes) and (ii) that a license is not granted to a greater area than necessary as this will prevent the licensor for granting licenses to others for this area and thus preventing the licensor from getting the most value out of the IP.
(d) Third party's rights
As mentioned above, this category covers (a) exclusivity, (b) transferability, and (c) sublicensing. Exclusivity needs to be assed together with the other scoping aspects, e.g. there may not be a conflict if two parties are given an exclusive license as long as the allowed activities, purpose and/or geographic location do not collide.
In general, a license may not be transferred to others, meaning the licensee transferring its granted rights (and/or obligations) to third parties. On the other side this option is often desired by the licensee e.g. in connection with corporate reorganization, or a transaction. Transferring the license is not the same as sublicensing, which is the act of the licensee granting a third party a right under the original right to IP granted by the licensor to the licensee. The licensor's interest in such situation is to safeguard the proprietary and commercial interest in the IP as well as remaining control of the use of the IP, on the other hand granting a licensee a right to sublicensee may increase the licensor's return and there are also standard mechanism which address the licensor's typical concerns.
(e) Time frame
Unless the word "perpetual" or "never-ending" is used in the license grant, this aspects is usually covered not by the license grant but by a separate term-clause. The absence of a timely limitation is more common in the technology sector for software than in the pharmaceutical, e.g. by paying a bigger lump sum up front instead of monthly subscription fees.
In general, if the license is non-exclusive and there are no other terms in the agreement governing the term, it can be argued that the licensor may terminate the license at any time at its sole discretion. Thus it is advised to not only consider the use of the term "revocable/non-revocable" but also take into account aspects as to whether, and in such case what reasons are required not only for the licensor but also for the licensee to terminate the license.