What is a licence agreement?

5 key points to help you understand

by GLS GROUP May 28, 2020



Intellectual Property (“IP”) is generally defined to mean “creations of the mind” – these include inventions, literary and artistic works, and symbols/names/images used in commerce.

Depending on the nature of your business model, IP may form a crucial part of your operations. You may for example:

● require certain IP from third parties in order to operate your business and turn it into a profitable one

● provide third parties with certain rights in your IP in order to generate revenue

In situations where a party seeks to use the IP rights that belong to another party, it would be prudent for parties to enter into an IP licence agreement.

An IP licence agreement sets out the terms upon which a holder of IP rights grants to another party the permission to use its IP, and lends enforceability to these terms.

In this article, we examine the top 5 issues to look out for in an IP licence agreement.

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Issue 1: Scope of licence

We start with the very subject matter that an IP licence agreement is intended to cover – the IP and the permissions in relation to these IP rights.

The IP licence agreement ought to cover the relevant IP that the parties have been in discussions over. These IP need to be set out as clearly and precisely as possible.

Where the IP is something that cannot be expressed precisely in print, parties would need to take innovative steps to set out these IP in the agreement. For example, where the IP is a sound bite, parties may wish to consider setting out within the agreement a link to a sound file that embeds that relevant sound bite.

The permissions that relate to these IP rights would also need to be expressed in an accurate manner. When contracting as an IP licensee, you would need to ensure that these permissions are sufficient for you to reap the benefit of the IP, and that there are no undue restrictions on these permissions. Restrictions may include:

● Time restrictions on the permissions

● Requirement to obtain consent for specific matters

● Permissions granted only for specific purposes

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Issue 2: IP rights infringement

Where the licensor grants permissions in relation to its IP rights, the licensor exposes itself to the risk of its IP rights being infringed (either by the licensee or the licensee’s personnel).

It may thus be prudent for the licensor to require the licensee to take certain actions, in the event that the licensee detects an infringement of the IP rights. These actions may include:

● Notifying the licensor immediately of such a breach and providing all known details with respect to the breach

● Taking all steps necessary to mitigate the effects of the breach

● Make no comment or admission to any third parties with respect to such circumstances


Issue 3: Representations and warranties (R/W)

R/Ws are a form of performance assurance. Over the course of discussions between the parties with respect to the IP, the licensor is likely to make certain assertions with respect to the IP.

Given the important nature of the IP in question, a licensee may wish to consider requesting the licensor to undertake certain R/Ws with respect to these assertions.

The effect of obtaining an R/W with respect to such assertions is that where such assertions are found to be untrue, the licensee would be entitled to a wider range of remedies.

A breach of a representation would generally entitle the innocent party to rescind the contract (i.e. terminate the contract and restore parties to their respective positions prior to their entry into the contract). A breach of a warranty would entitle the innocent party to monetary damages.

Accordingly, where a R/W is breached, the innocent party has the option to claim monetary damages or to terminate (even rescind) the contract.

Matters in relation to which a licensee would typically require a R/W include:

● The use of the licensed IP rights does not infringe any third party’s IP rights.

● There have been no third party claims that have been made against the licensed IP rights.

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Issue 4: Improvements

The licensee may at times make certain improvements to the licensor’s IP over the course of operating its business. These may entail certain enhancements to a patented invention or a registered design.

The IP license agreement should set out which party owns the IP rights in relation to such improvements. As a general rule, if a party (“Party A”) had requested the other party (“Party B”) to make improvements to Party A’s IP in exchange for some form of consideration, Party A ought to have the IP rights in such improvements.

In addition, parties may wish also to consider if there should be an obligation on a party to take any steps to ensure that the IP rights in such improvements are vested in the other party.

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Issue 5: Exclusivity

Another important issue to consider is whether the licence with respect to the IP is exclusive or not.

If the licensee intends to gain a competitive advantage over its business rivals, it may wish to request for an exclusive licence from the licensor, so that other businesses would not be able to use that IP.

On the other hand, a licensor that relies on issuing such licenses as a source of income may not be inclined to agree to providing such licenses on an exclusive basis.

When examining an exclusivity clause in an IP licence agreement, it would be prudent to pay attention to the following matters:

● What are the circumstances under which exclusivity may be revoked?

● Are there any exceptions to exclusivity?

● What are the consequences if the licensor breaches its obligations of exclusivity?

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We hope that this article has been helpful to you as a start-up trying to make headway in the exciting, yet uncertain, world of commerce.

To aid in your quest to survive and thrive in the complex business world, GLS offers a Total Start-Up Support solution which provides you with all business-critical templates for the price of what most pay for coffee each month.

Needless to say, our solution comes with a 24/7/365 helpline whereby one of our legal professionals can assist you with any queries that you may have.

Check out our GLS Start-Up Support (Bronze) and our GLS Start-Up Support (Silver).

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If you liked this topic, you might also like Legal 101s - Contracts.  

*The above content does not constitute, nor is it offered as, legal advice of any kind. GLS Solutions Pte Ltd is not a law firm and any support provided pursuant to this entity is not regulated legal advice or legal opinion.  


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