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Licensing of Intellectual Property in India: A Detailed Study of its Working

Intellectual property is the backbone of the corporate world. Possession of rights over intellectual property allows for several advantages such as growth in market share, profit making, leveraging etc. They are necessary in today’s world to maintain creativity and growth. The Cambridge Dictionary defines intellectual property as “someone’s idea, invention, creation etc., that can be protected by law from being copied by someone else”. These are legal rights that allow exploitation of one’s creation.

The basis of intellectual property rights is that whosoever came up with the idea or invention or creation should have sole control over its use since it is his hard work. They recognise the commercial value of these rights. Intellectual property rights in India are guaranteed are Acts such as Patent Act, 1970, Trademarks Act, 1999, Indian Copyright Act, 1957 and Designs Act, 2000. These Acts provide protection to the author or inventor or owner of the intellectual property and allow for remedies in case of his work being reproduced without his permission.

Licensing is a major aspect of Intellectual property. A licensing agreement is a partnership between an intellectual property rights owner, known as the licensor, and another who is authorised to use such rights, known as the licensee, in exchange for an agreed payment, known as royalty[1]. There is no transfer of ownership involved.

Licensing

Licensing is a contract between a minimum of 2 parties wherein the licensor agrees to allow the licensee to share the rights enjoyed by the former subject to consideration by the latter. In an intellectual property license, the licensee is permitted to use the intellectual property, however it is subject to conditions and payment of consideration. Since it is a contract, it must satisfy all the essential mentioned under Sections 10 and 11 of the Indian Contract 1872, i.e., the contract must be between person who are major, of sound mind and not disqualified from contracting under any law and there must be free consent of parties, with a lawful object for a lawful consideration
.
The three major types of intellectual property licensing are[2]:
1. Exclusive License: This type of license involves the exertion of intellectual property rights of the licensor by the licensee to the exclusion of all, including the licensor. Thus, only the licensee is authorised to use the intellectual property.
2. Sole License: In this license, while the licensee is permitted to use the intellectual property, the licensor is also authorised to use the property, however, such rights cannot be transferred to any third party. Only the licensor and licensee may exercise these rights.
3. Non-Exclusive License: This license allows for the licensee to exercise the rights as well as the keeping open the scope for the licensor to exercise the rights and licensing these rights to any other third party.
Generally, licenses are a combination of these types such as giving a license for intellectual property for exclusive rights only in a particular geographic area.

Further, the World Intellectual Property Organisation broadly categorises intellectual property licences under[3]:
1. Technology License Agreement: In this license, the licensee is permitted to exercise rights related to patents, utility models or know-hows protected by a trade secret owned by the licensor. The licensee is, thus, authorised to use the technology under certain conditions.

2. Franchise or Trademark License Agreement: Trademarks are a way of distinguishing the goods and services of one enterprise from another. The franchiser has usually gained reputation for his trademark and via a license agreement, authorises the franchisee to make use of the trademark under certain conditions like maintaining the quality of goods and services since the goodwill of the trademark is at stake. The franchisee may provide financial resources or his own expertise.

3. Copyright License Agreement: Copyrights are granted over creative works such as music, cinematograph films, artistic works etc. In order for them to be reproduced and published by others, there must a be copyright license agreement between them authorising the licensee to exercise rights over the copyright owned by the licensor.

Licensing Provisions

The intellectual property license is limited by the scope of the provisions included in the agreement.

The following are some of the common provisions that are used in licensing agreements:
1. Parties: It is necessary to clearly identify the licensor and licensee and to mention whether they be individuals or companies and their respective addresses.

2. Recital Clause: This clause explains the background of the agreement. It contains what the intellectual property rights are owned in and what they are to be used for.

3. Definition of Licensed Property: This clearly defines the intellectual property. Usually, license agreements contain an attached schedule that provides a complete description of the property[4].

4. Jurisdiction: This defines the territorial limits to which the license extends.

5. Grant: This defines the scope and the rights that are accorded to the licensee and any limitations[5]. The language needs to be clear and unambiguous in order to avoid any future misinterpretations by either party. License may be granted for either types: exclusive or non-exclusive[6].

6. Term: The term of the license should clearly be mentioned in the agreement. The license duration should not exceed the term of protection accorded to the property. The license is usually cancellable only by a fundamental breach of the agreement or a clause that allows for early termination[7].

7. Consideration: This forms the basis of any contract. For any valid contract, there must be consideration. In a license agreement, this takes the form of royalties payable by the licensee to the licensor. These may be monetary or even in the form of cross licenses, which involves granting a license to a party in return for a similar license being granted to the licensor[8].

8. Confidentiality: This is an important clause to prevent the licensee from gaining any additional benefits by disclosure of information of the license.

9. Warranties: These are promises made by either party to the other, the breach of which results into a claim for damages. Usually, the warranty provided by the licensor is that he is the owner of the property and has the right to license the property to the licensee[9].

10. Indemnity: This involves the financial responsibility taken by parties for any loss or damage or penalty etc. occurring to the other by virtue of the former’s breach of the agreement[10]. This involves infringement and the further consequences faced by a party due to the other party’s fault.

Licensing v. Assignment

Licensing is an agreement that only permits the licensee to utilise the property in a particular manner for a particular period while the licensor still holds interest in the property. Assignment is the complete transfer of rights and interest over to the assignee with the assignor needing to buy back the property if he wishes to use it again.

The following are the key differences:
1. Licensing a property is only for a particular purpose with the knowledge of the licensor whereas after assignment, the assignee may utilise the property as he pleases. There is a complete transfer of ownership and cessation of interest of the assignor in the property in assignment[11].

2. In India, under the respective laws, assignments of copyrights, patents or trademarks are required to be done in writing.
3. An exclusive license grants the licensee the exclusive right to use the property, even to the exclusion of the licensor, however, it has to be used only in the way expressed in the agreement between the licensor and the licensee. It cannot be used in any manner the licensee wishes. Further, it is time bound. On the other hand, after assignment of ownership in a property, the assignor has no control over the use of the property and the assignee is free to use it as he likes. It is permanent.

Licensing under Copyrights Act, 1957

Licensing is contained under Chapter VI of the Copyrights Act, 1957. Section 30 permits owners of copyright in existing work or a prospective owner of the copyright in any future work may license the rights in the copyright in writing by him or by his duly authorised agent. Licenses in future works will only take effect when the work comes into existence.

The business of issuing or granting licenses in respect of literary, dramatic, musical and artistic works incorporated in cinematograph films or sound recordings can be carried out only through a registered Copyright Society[12]. An owner of copyrights can grant licenses, in his individual capacity, in respect of his own works consistent with his obligations as a member of a registered copyright society[13].

The Act further mentions 7 different types of license:

1. Compulsory in works withheld from the public[14]: Any person may approach the Appellate Board board to grant a compulsory license for work withheld from the public by the copyright owner, however, he must have approached the copyright owner first for a license to republish or perform the work which should have been unreasonably rejected by the copyright owner.

2. Compulsory licenses for unpublished works of unknown authors[15]: In case of unpublished works of unknown or dead or untraceable authors, any person may apply for a license to the Appellate Board for communicating the work or the translation thereof to the public. Before such application, he must publish his proposal to do the same in a national newspaper.

3. Compulsory licenses for benefit of disabled[16]: Any person or non-profit organisation working for the benefit of disabled persons may apply for a compulsory license to the Appellate Board, for any work in which copyright subsists, for their accessibility.

4. Statutory licenses for cover versions[17]: This section allows for issuance of statutory licenses for making cover versions of any sound recordings of literary, musical or dramatic work. Such person must give prior notice of his intention to make such a cover version.

5. Statutory licenses for broadcasting literary, musical works and sound recordings[18]: The Appellate Board issues such licenses to any broadcasting organisation that wants to broadcast to the public, any literary or musical work or sound recording, which has already been published by the copyright owner. The organisation must give prior notice of its intention to broadcast the work giving the duration and territorial coverage of the broadcast.

6. License to produce and publish translations[19]: Any person may apply to the Appellate Board for a license to produce and publish a translation of a literary or dramatic work in any language after a period of seven years from the publication of the said work. The license is not exclusive and the applicant must pay royalties as determined by the Board.

7. License to reproduce and publish works for certain purposes[20]: If after the passage of relevant time after the publication any literary, scientific or artistic work, the said work is not made available in India or not been on sale in India for a period of six months, any person may apply for a license to publish the work in India.

Licensing under Designs Act, 1999 is permitted under Section 30(4) which states that any person registered as proprietor of the copyright in any design has the power to grant licenses for the same in return for valuable consideration. It is required to be in writing, embodying the terms and conditions and the rights and obligations of the parties concerned[21]. The Licensee has to get himself registered as regards his title in the register by an application to the Controller[22].

Licensing under Trademarks Act, 1999

Trademarks licensing in India is governed by Section 49 of the Trademarks Act, 1999. The Act does not explicitly mention license but refers to the licensee as a registered user[23]. The license needs to be written and allows the licensee to be a registered or an unregistered user[24]. Registered users under this Act can institute infringement proceedings whereas unregistered users may not.

Section 49 lays down the following:

1. Written agreement between the registered proprietor and proposed registered user;
2. Affidavit as to the relationship between the above-mentioned detailing the extent of control over the trademark, concerned good and services of which registration is proposed, conditions to be applied, and duration.

The license is registered with the Registrar.

Licensing under Patents Act, 1970

Licensing under Patents Act, 1970 is required in writing between the licensor and the licensee which should contain all the terms and conditions governing their rights and obligations[25]. The Act empowers the proprietor or the grantee the power to issue licenses for the patent[26].

The Act has provisions related to compulsory licensing. Compulsory licensing is only done for public health or in national emergencies or health crisis[27]. It is when a license is given to a third party to manufacture, use or sell a product or use a process which is patented without the permission of the patentee.

Under Section 84 of the Act, after the passage of three years from the grant of the patent, any interested person may make an application to the Controller for grant of compulsory license on the grounds that:
1. The reasonable requirements of the public with respect to the patented invention have not been satisfied;
2. The patented invention is not available to the public at an affordable price;
3. The patented invention is not worked within the territory of India.

The Act also makes special provisions for the grant of compulsory license on notification by the Central Government[28]. It lays down that if the Central Government is satisfied that circumstances relating to national emergency, extreme urgency or in case of any public non-commercial use, then it may notify for grant of compulsory license, in respect of a patent in force, in the official Gazette. Any interested person may make an application to the Controller in respect of the same.

The Controller while setting forth the terms and conditions of the compulsory license has to take several factors into account.

He has to make sure that[29]:
1. Royalty and remuneration for the patentee are reasonable;
2. Patented invention is used to the fullest by the licensee;
3. Patented articles will be available to the public at reasonable prices;
4. The license is non-exclusive;
5. The license is non-assignable;
6. The license is not longer than the term of the patent;
7. The license is for better supply in the Indian market;
8. In case of semi-conductor technology, the license granted is for non-commercial public use;
9. In case the license is to remedy an anti-competitive practice, to allow the licensee to export the patented product, if need be.

Further, compulsory licenses can be granted in cases of patented pharmaceutical products. These are exceptional cases and are only available for the manufacture and export of certain pharmaceutical products that are necessary for the public health of a country, having weak capacity in the pharmaceutical industry, provided compulsory license has been granted by such country or has allowed importation from India[30].

Advantages of Licensing for Licensor

1. It is a source of revenue for the licensor in the form of royalties, especially in the case of intellectual property which is not being used by the licensor at the time. It is a source of passive revenue[31]
2. It allows the licensor to enter markets in different countries if the licensee is a local as the latter lays the ground work, having a better understanding of the market. This allows for brand recognition of the licensor since people become aware that the licensing company is responsible for the production of the licensee business[32].
3. Licensor still retains ownership of the property and still earns revenue on it.
4. By licensing to an established enterprise, the licensor can leverage their experience, infrastructure and involvement, thereby being able to move the product into the market with greater ease and speed[33] and giving a competitive advantage[34].
5. If the licensor does not have money to manufacture the product, the licensee takes over all manufacturing costs while paying the licensor royalties for usage of the property.
6. It allows for penetration of more markets, having licensees in different areas[35].

Advantages of Licensing for the Licensee

1. Licensee can use the brand, logo or other property of the licensor with low investment[36] into the research and development of the property.
2. It allows access to patented technology.
3. Since there is always a rush to bring new products into the market, licensing allows the licensee access to established technologies to reach the market faster[37]. It saves the trouble to research and develop new and superior products for small companies who cannot afford to do the same[38]
4. If the license is exclusive, the licensee will be the only user of the property in the defined area, thereby giving a competitive advantage[39].

Disadvantages of Licensing for the Licensor

1. The licensee may ‘cannibalise’ the sales of the licensor, that is, cause the licensor to earn less from royalties than it would from sales of the property by themselves since the licensee may be more effective and get to the market faster with fewer development costs[40].
2. There is reliance on the licensee’s ability to be able to commercialise the licensor’s product effectively[41].
3. In a franchising agreement, the poor-quality management by the licensee can damage the reputation of the licensor.
4. During the agreement, the licensor may transfer sufficient expertise to the licensee to set himself up as a competitor in the market[42].

Disadvantages of Licensing for the Licensee

1. The licensee is obligated to pay fixed royalties to the licensor, irrespective of the performance of the product.
2. The licensee has to do all the work, such as manufacturing and distributing. The licensor may be obligated to provide expertise in respect of the product if the agreement demands it.
3. If the license is not exclusive, the licensee may face heavy competition in the market from other licensees.
4. The licensee may need to pay more royalties if he seeks to expand into other markets[43].
5. The license does not confer ownership of the property on the licensee, thereby making any improvements he may have made, the property of the licensor.

End-Notes
[1] As defined by the World Intellectual Property Organisation
[2] https://www.priorilegal.com/intellectual-property/intellectual-property-assignment-agreements-and-licenses
[3] Licensing of Intellectual Property Rights; a Vital Component of the Business Strategy of Your SME, World Intellectual Property Organisation, http://www.wipo.int/sme/en/ip_business/licensing/licensing.htm
[4] Abhishek Raman, Guidelines to Intellectual Property Licensing and its Adherence to Competition Law, Altacit Global, https://www.altacit.com/publication/guidelines-to-intellectual-property-licensing-and-its-adherance-to-competition-laws/
[5] Aruna Mukundd, Key Clauses in a License Agreement, https://blog.ipmetrix.in/2014/03/09/key-clauses-in-a-license-agreement/ (last updated 9th March, 2014)
[6] Supra Note 4
[7] https://www.canada.ca/en/heritage-information-network/services/intellectual-property-copyright/guide-developing-digital-licensing-agreement-strategy/sample-licensing-clauses.html
[8] https://definitions.uslegal.com/c/cross-licensing-agreement/
[9] Supra Note 7
[10] Supra Note 7
[11] Esther Mistarz, Three Differences Between an IP License and Assignment, https://legalvision.com.au/three-differences-between-an-ip-licence-and-assignment/ (last updated July 27, 2016)
[12] Section 33(1)
[13] Ibid.
[14] Section 31, Copyrights Act, 1957
[15] Section 31A, Copyrights Act, 1957
[16] Section 31B, Copyrights Act, 1957
[17] Section 31C, Copyrights Act, 1957
[18] Section 31D, Copyrights Act, 1957
[19] Section 32, Copyrights Act, 1957
[20] Section 32A, Copyrights Act, 1957
[21] Section 30(3)
[22] Section 30(2)
[23] Stuti Bansal, Assignment and Licensing of Trademarks in India, http://www.mondaq.com/india/x/202886/Trademark/Assignment+Licensing+of+Trademarks+In+India (last updated 15th November 2012)
[24] Rakesh Prabhu and Ramya Kumar, Assigning & Licensing IPR in India, http://www.mondaq.com/india/x/87398/Trademark/Assigning+Licensing+IPR+In+India (last updated 14th October 2009)
[25] Section 68, Patents Act, 1970
[26] Section 70, Patents Act, 1970
[27] Anubhav Pandey, Compulsory Licensing of Patents in India, https://blog.ipleaders.in/compulsory-licensing-patent/ (last updated October 18, 2017)
[28] Section 92, Patents Act, 1970
[29] Section 90(1), Patents Act, 1970
[30] Section 92A, Patents Act, 1970
[31] Stephanie Dube Dwilson, Advantages and Disadvantages of Licensing Agreements, https://bizfluent.com/list-6299066-advantages-disadvantages-licensing-agreements.html (Last Updated June 25, 2018)
[32] Ali Zahid, Advantages & Disadvantages of Licensing the Rights to Company’s Production Process, https://www.linkedin.com/pulse/advantages-disadvantages-licensing-rights-companys-process-ali-zahid (Last Updated November 4, 2016)
[33] Anonymous, How to Manage Your Patents, https://www.nibusinessinfo.co.uk/content/advantages-and-disadvantages-licensing-patents
[34] Michael Lightfoot, Benefits of Licensing Intellectual Property, http://intellectualpats.com/benefits-of-licensing-intellectual-property/ (Last Updated March 6, 2015)
[35] J’net Smith, 20+ Benefits of Licensing, https://blogjnet.wordpress.com/2013/07/31/20-benefits-of-licensing/ (Last Updated July 31, 2013)
[36]Kenneth L Wild, John L Wild, International Business (7th Edn.), https://www.chegg.com/homework-help/international-business-7th-edition-chapter-13-problem-3qs-solution-9780133063004
[37] Anonymous, What are the Advantages and Disadvantages of Licensing?, http://www.intracen.org/What-are-the-advantages-and-disadvantages-of-licensing2/
[38] Ibid.
[39] Supra, Note 27
[40] Supra, Note 31
[41] Supra, Note 27
[42] Anonymous, Licensing and Franchising, http://www.exporthelp.co.za/modules/8_export_plan/distribution/licensing_franchising.html
[43] Ibid.

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