Licensing Agreements: Basics

Before negotiating a licensing agreement, one must identify and understand the subject to the licensing agreement.

Legal nature of a licensing agreement

A licensing agreement is an agreement where the IP owner (the “licensor”) authorizes another party, often a buyer, (the “licensee”) to exercise some of the licensor’s rights in the IP right while retaining ownership and control of the IP itself.

Types of IP Licensing Agreements

Agreement vs contract

To be precise, a mere agreement to license IP itself is not a legally enforceable ‘contract’, but one of the necessary elements to form a contract.The existence of an agreement to license IP (amongst other intentions) is to be determined objectively, irrespective of the parties’ subjective belief a ‘contract’ has been concluded, unless factual circumstances show conclusive evidence of bad faith (Smith v Hughes [1871] L.R. 6 Q.B. 597). For a contract to become legally enforceable , an agreement must fulfill other qualifications. A contract is effective and legally binding only if the following circumstances are met:

(i) the intention to create a legal relationship;

(ii) an offer and acceptance (agreement);

(iii) consideration; and

(iv) capacities of contracting parties

are satisfied. Like most common-law jurisdictions, in Hong Kong, no formalities are required for making a contract, although it is always advisable to have the agreement in writing.

Sell or licence?

Selling IP

When technology is sold or in legal terms “assigned”, the ownership rights for the particular technology transfer from the seller to the buyer for an agreed price. For technology owners who have no experience in bringing a product to market, finding a buyer and completing the transaction in one go might be ideal.

Licensing IP

If, however, he or she prefers to license the technology, then the right to use the technology is passed from the technology owner – or as mentioned above, in legal terms known as the “licensor” – to the “licensee”. The manner in which the technology will be used, for how long, and in what region or the area will be determined by the contractual terms negotiated in the IP licensing contract. Contrasted to simply selling the IP to a willing buyer , the technology owner or the “licensor” continues to own the technology. Some of the benefits of continual ownership over IP includecontinued control over the manufacturing process, sales and, where the licensing agreement is non-exclusive (meaning the right to use the IP is not restricted to a certain region or user), the technology ownermay license the IP right to as many companies as it desires.