The word licence has been derived from the Latin term ‘licentia’ meaning ‘ freedom or liberty’. To a layman, a license means ‘a permission to use another’s property.’ The licensee is given a right to make specified use, without which he would be liable for infringement of the licensor’s property rights. An owner of intellectual property (“IP”) can grant another person the right or permission to make, use or sell property or items embodying or covered by this IP by means of a contractual license. For patent licensing in India, it is necessary for the license to be reduced in writing. A license agreement is a document, executed between two or more parties, evidencing the terms and conditions of such patent licensing in India. A license may apply to any type of IP –trademark, patent, copyright,design and/or know-how. Under the license, the licensor maintains title in the IP and the licensee is authorized to make use of the IP only in accordance with the terms and conditions of the license. There are a number of issues that arise when a license is granted and in this article we have set forth certain key transactional issues involved in IP licensing in India.
1.Does a License Agreement need to be in writing?
- Relevant Legal Provisions
Once an organisation has taken the decision to licence its IP, it is imperative that the terms of the licence be captured in writing and explicitly agreed between the parties. We have set out below the different types of IP and the relevant legal provisions that state whether a Patent license agreement is required to be in writing or not:
|Trademark||The Trade Marks Act, 1999 (”TM Act”)||Section 49 of the TM Act states that the registered user and registered proprietor shall apply jointly by way of an agreement in writing to the Registrar for permitted use of the trademark.
|Copyright||The Copyright Act, 1957 (”Copyright Act”)||Section 30(3) of the Copyright Act states that the copyright owner may grant any interest in his copyright work by a licencein writing signed by him or his agent.
|Patent||The Patents Act, 1970 (”Patents Act”)||Section 68 of the Patents Act, a patent licence will only be valid if it is reduced to writing. Further, Section 69 requires a licensee to get himself registered with the Controller of Patents.
|Design||The Designs Act, 2000 (”Designs Act”)||Section 30 of the Designs Act, states that a licence will only be valid if it is in writing and the same shall be registered with the Controller within 6 (six) months from its execution or such further period as may be allowed by the Controller.
|Know-How||No specific legislation||While license of know-how is not required to be in writing by statute, it is recommended that such license be in writing to avoid ambiguity.
1.2 Binding Document: A Necessity
As has been mentioned above, a license agreement should be in writing with the relevant terms clearly defined. But if the parties execute a term sheet, would that suffice as a valid license agreement? This issue was examined by the Delhi High Court in PVR Pictures Limited vs. Studio 18.In this case, the parties had entered into a term sheet agreement (TSA) under which it was agreed that PVR would be the exclusive licensee for distribution rights in respect of certain cinematographic films for which formal agreements would be executed. PVR filed a suit for infringement against Studio 18 on the ground that Studio 18, by not entering into an agreement with PVR regarding the film Short Kut has infringed their exclusive distribution license. PVR also sought ad interim relief against Studio 18. The question involved was whether PVR is the licensee of Studio 18 for the film Short Kut, and if so, entitled to ad-interim injunction. It was held that:
- the TSA does not constitute a license agreement as the parties did not contemplate that with execution of the TSA, a binding contract, and a licence, contemplated under the Copyright Act, will come into existence; and
- since PVR did not possess any legal right or copyright to entertain the suit, PVR cannot claim specific performance or ad – interim injunction.
Therefore, it is clear that for a valid license, not only must the license terms be set out in writing but should also be in the form of a binding definitive document.
2.Terms of a License Agreement
In order to avoid ambiguity, a license agreement must be well drafted to provide details of the exact rights being provided and the restrictions being imposed on the licensee. An IP license agreement has certain integral parts namely definition of licensed property, the geographical locations for which license is granted, a right given to the licensee to sublicense the IP granted to it, clauses regarding revocation of the license, royalty or consideration for the grant of license, dispute resolution, termination etc.
The drafting of the licence agreement and inclusion of certain licence terms are essential to ensure that the licensee cannot claim that the IP has been assigned to it. There are numerous instances where the licensor has granted an exclusive license and the licensee has claimed that the same is an assignment of the IP. In various decisions, Indian Courts have looked at the substance of the contract and more specifically the clauses on royalty payment to determine whether a transfer would be treated as an assignment or an exclusive licence. While analysing the difference between assignment and licensing of Copyright, the Court in Deshmukh and Co. (Publishers) Pvt. Ltd. Vs. Avinash Vishnu Khandekar and Ors. held that:
- To determine whether a document is an assignment or merely confers a licence, regard must be had to the substance and not to the form of words used. The question usually arises in the context of whether there has been a partial assignment or an exclusive licence of the right in question, the distinction is a slender but an important one.
- Two propositions in respect of commercial contracts are well recognised. Firstly, that there is no presumption in favour of permanence of an agreement. Secondly, if a contract involved mutual trust and confidence in its fulfilment, normally, Courts would not interpret its term to employ permanence.
- If the consideration consists of payment of royalties or a share of profits instead of downright payment, then the copyright is not assigned. It would be a licence to publish and sell. In this case, payment of royalty instead of a sum of money paid down will also weigh heavily against partial assignment.
Therefore, the terms of the license must explicitly state it is a license (whether exclusive or non-exclusive) and define the mutual obligations. Most importantly, the clause on royalty payment should be drafted in a manner that does not give rise to implications that any downright payment is towards assignment of the IP.
3.Ownership of Improvements, Enhancements and Modifications to IP
A person may create and design an improvement of an existing technology or a feature that enhances the use or functionality of the technology. The new invention may come about as a result of an idea that relates to the use of the licensed IP, or it may actually be the result of modification of that IP in order to produce any enhancement. There is no widely accepted definition for “improvement” in the context of IP licenses, but it is usually used to mean a development within the field of the licensed technology that enhances the usability, functionality, efficiency, performance or other characteristic of the original IP. A license agreement must spell out what constitutes an improvement and who owns such improvement and all IP that vests in the same.
Quality control is a part of Indian Trademark law. The underlying principle is that quality cannot be severed from a trademark as it plays the lead role in building its repute and goodwill. The quality control theory basically permits the owner of a trademark to ensure that the licensor maintains quality control over the products reaching the customer. Without there being a provision for quality control, there is a possibility that the quality of two products sold under the same mark might vary. This may lead to confusion in the mind of the customer and destroy the distinctiveness of the trademark. What is equally important is enforcement of the provisions of a license agreement pertaining to quality control – in a case where the licensor did not enforce of its rights under the definitive agreements, the Bombay High Court concluded that they had relinquished their rights qua the said marks unconditionally in favour of the Defendants.
5.Registration of License Agreement
Once a license agreement is proposed to be executed, the question that then arises is whether the licence agreement needs to be mandatorily registered. If yes, then what are the repercussions of non-registration. The Patents Act, the Trademarks Act and the Designs Act mandate the registration of license agreement while Copyright Act does not mandate such registration.
6.Stamp Duty on License Agreement
Intellectual property documents like transfer of IP rights in the form of licenses, assignments, sales etc. come under the purview of the Indian Stamp Act, 1899 (”Indian Stamp Act”). Since the rate of stamp duty varies from state to state, prior to execution of a license agreement, it is important to understand the prevailing duty rates and determine if benefit of execution in a particular state (i.e. with lower stamp duty) can be availed of.Under the Indian Stamp Act, if adequate stamp duty has not been paid on a document, such document cannot be admitted in evidence for any purpose nor can it be acted upon, registered or authenticated.
While royalty determination may to a large extent depend on the commercial understanding between the parties, in the event the licensor attempts to set exorbitant rates by virtue of its dominant positions in the market, it could fall foul of The Competition Act, 2002(“Competition Act“). The reasonableness of a royalty would depend upon the correctness of the royalty base. The royalty is determined on a case to case basis. For instance, the Standard Essential Practices (‘‘SEP”) holders tend to impose royalty rates based on the net sale price of the final product rather than only on the component which comprises the infringed patent.
The Competition Commission of India (”CCI”), has pronounced multiple decisions on determination of royalty rates. It has held that charging different licensing fees for the use of same technology from different users is against FRAND terms. In another case, the CCI concluded that since there was no alternate technology available for Ericsson’s patents 2G, 3G and 4G standards, Ericsson charged unfair royalty rates.