Tips for a good licencing contract

Collaboration is all about trust, but simply doing business based on blind trust is not wise. So, are you planning to engage in licencing? Make sure you have a professional contract with agreements about the collaboration. Which agreements you include is up to both parties involved. The following topics are usually included in a licencing contract:

• The parties involved. Also pay attention to the details: which company are you actually doing business with? Does it belong to a larger group? If so, does this agreement also give rights to a subsidiary or not?
• The scope. Does the licence cover the entire product, or only part of the technology? In which market may the licensee apply the product? And in which geographical area? This can be a country or a part of a country, but even a continent is possible.
• The inclusion of the licence in the patent register. This is not an obligation but is recommended.
• The rights and obligations of both parties. Such as monitoring compliance with the contract, and conditions for ending the collaboration. You can also agree on product liability, promotion, possible enforcement in case of infringement, and whether or not you allow the sharing of the technology with third parties in the form of a sub-licence.
• The type of contract. Is it an exclusive licence or not?
• The duration. Usually, the duration of a licencing agreement is the same as the duration of the patent. But it is important for both parties to record this in writing. For the licensee, if the contract period is shorter, it is desirable to have an option to extend at the end of the contract. You can also include a clause that states that the licensee must start using the product within the agreed period. If they do not, the licencer can take back the licence. In addition, you can agree that the licence will be terminated if one of the parties does not comply with the contract.

Pricing and payment

Entrepreneurs use different ways to pay for the right to use a protected invention:

• Lump sum (or ‘up-front payment’): a set amount the licensee pays periodically or once for the licencing agreement.
• Royalties: a pre-agreed percentage of turnover or profit, or an amount per product sold or produced. Parties can agree on a minimum fee per year. This discourages the licensee from leaving the technology ‘on the shelf’.
• Milestone payments: fixed amounts that the licensee pays at predetermined events. For example, you pay for the right to use at the beginning. And then you pay extra by the time you get the product to market. You can also vary the cost depending on the quantities you sell. Such a milestone payment gives the licensee a bit more certainty about recovering the licencing fee. And this construction protects them against a (in retrospect) worthless patent.
• Are you doing business with parties in other countries? Then it is advisable to think about what currency you use, and in what country you will settle accounts and pay taxes.

Karen Kraan-Sam, specialist at the Netherlands Patent Office, a department of the Netherlands Enterprise Agency (RVO), advises entrepreneurs who are drafting a licencing contract to always work with a specialised lawyer. “A licencing contract gives you the freedom you need, but that is also the pitfall. Everything you have not properly arranged legally, will become a problem. Make sure that your lawyer has intellectual property as an area of expertise. There is also a trade association for lawyers working with licences, the LES (Licensing Executives Society).”

Conflict and ending the agreement

You can compare a collaboration contract between 2 businesses to a marriage. You hope to work together happily for a long time. Unfortunately, that does not always work out. That is why you include conditions for dissolving the collaboration in the contract. You make agreements about how you will act if the collaboration no longer works out and you want to dissolve the contract.

If you collaborate with a partner in another country, also consider under which law you will conclude the contract. After all, that determines where you have to go, should a lawsuit arise. Suppose you are working with a partner in China. In that case, it can make a big difference whether you litigate under Dutch law in the event of a conflict in the Netherlands, or whether you have to go to China to obtain your rights under the local legal system. Gather knowledge about this well in advance.

The best preparation for a troubled divorce is to make agreements about it as early as the conclusion of the contract. Because preventing problems is preferred to having to solve a problem. Avoid meeting each other in court. Investing in good collaboration is usually the best protection against conflicts. Read tips for collaborating on licences.