The dos and don’ts of licensing intellectual property in India

  1. What is licensing of intellectual property (”IP”)?An owner of 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. 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.
  2. What is a licensing agreement?A license agreement is a document, executed between two or more parties, evidencing the terms and conditions of such contractual license.
  3. Does a license agreement have to be in writing?Once an entity/individual has taken the decision to license its IP, it is imperative that the terms of the license be captured in writing and explicitly agreed between the parties. Provisions of several acts governing different types of IP such as trademarks, copyrights, patents and design state that the license agreement should be in writing. Know-How as an IP has no specific legislation and though not required to be in writing by statute, it is recommended that license of any know-how be in writing as well to avoid ambiguity.
  4. 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?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. A non-binding term sheet would not constitute a license agreement as held in the case of PVR Pictures Limited vs. Studio 18 by the Delhi High Court in 2009.
  5. What terms are essential to a license agreement and should form an integral part of any license agreement?
    • Definition of Licensed Property;
    • Territory;
    • Exclusivity;
    • Royalty;
    • Right to grant sub-licenses; and
    • Revocability.
  6. What is an exclusive license and a non-exclusive license?An exclusive license excludes the use of the licensed rights for anyone but the licensee. It must be clear whether that is meant to exclude the licensor itself from making use of the intellectual property. A non-exclusive license can be granted as often by the licensor to as many licensees as desired. Most commercial software licensed today is licensed on a non-exclusive basis.
  7. Difference between exclusive license of IP and assignment of IP?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. An exclusive license is not an assignment, when you license IP, you are granting the licensee permission to use your IP in a particular way while still retaining an interest in the IP being licensed. When assigning IP to another, there is a transfer of ownership from the assignor to the assignee. This is a permanent arrangement, and you cease to hold an interest in the IP once it is assigned. The terms of the license must explicitly state that 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.
  8. What is royalty?One of the goals of licencing is to enable the proprietor of IP to receive quantifiable sums of money based on a licensee’s use of such licensed IP. The royalty is the consideration amount to be provided to the owner/licensor of the IP for the grant of the license. The consideration may be a lump sum payment or a continuous periodic fee payment, also known as royalties or a combination of lump sum fee and periodic payments.
  9. How is royalty determined?The parties to a license are free to select the basis of royalty calculation that meets their commercial requirements. The most common method is the expression of the royalty as percentage of the revenue, other methods include:
    • A single up-front payment;
    • A pre- determined amount that is paid periodically;
    • A charge based on units of manufacture or sales; and
    • On early stage technology, royalties can be based on development costs.
  10. Who owns any improvements, enhancements and modifications to the licensed 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. An ”improvement” in the context of IP licenses, usually means 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. The license agreement also needs to provide for ownership of IP if there is any joint development.
  11. Is stamp duty payable on license agreements?Stamp duty refers to a tax on a transaction which is paid to the government and the tax is levied on the instrument recording the transaction. Stamp duty is payable on license agreements and the rate of stamp duty payable varies in each State. Prior to the execution of a license agreement, it is important to understand if the benefit of executing the license agreement in a particular state and availing lower stamp duty rates(if possible).
  12. What are the consequences of not paying stamp duty?Under the Indian Stamp Act, 1899, 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.
  13. Is registration of a licensing agreement mandatory?The acts governing different types of IP include provisions regarding the requirement of registration of a license agreement. Where the statute mandates registration of the license agreement, both the licensor and licensee must ensure that the same is registered within the prescribed time period.
    • Patents – The Patents Act, 1970 states that a license agreement must be registered and that a licensee should apply in writing to the Controller of Patents for registration of his title.
    • Trademark – The Trade Marks Act, 1999 does not make registration of a license agreement mandatory, however it does provide for the concept of ‘registered user’. Provisions have been set forth to register any person other than the registered proprietor as the registered user for the use of the mark in commerce. The act provides that registered user can file infringement proceedings in his own name.
    • Copyright – The Copyright Act, 1957 does not make registration of the license agreement mandatory.
    • Design – The Designs Act, 2000 requires that an application for registration of title under a license agreement is filed with the Controller within six months from the execution of the license agreement. A license agreement in respect of which no entry has been made in the register cannot not be admitted in evidence in any court in proof of the title to copyright in a design or to any interest therein, unless otherwise directed by the court.