A guide to IP licensing in India
31 October 2020
India has risen up to be a global market leader. The country attracts investors with its huge market base, lucrative foreign policies, skilled workforce and favorable administrative set-up that invites investments from all around the globe. Therefore, for foreign entities who wish to step into Indian markets, licensing has become extremely vital. To derive the maximum benefit out of a license, it is important that the parties carefully understand the relationship they are to enter into, alongside the impact that the relevant laws would have.
A foreign licensor or franchisor primarily needs to understand that setting up a business in India is governed by multiple laws. However, with strict regard to intellectual property, it is necessary to know that the same is not covered by one single act but instead is covered by multiple intellectual property laws alongside other relevant laws, depending on the terms and conditions laid under the agreement.
Licensing of intellectual property is extremely beneficial, as it allows flexibility and allows the parties more control over how and which rights are to be exercised and until what extent. An intellectual property license can provide one with reduced and shared risks, increase in market penetration, generation of revenue, access to expertise, competitive edge and opportunity to minimize capital investment. It is, however, necessary that the business fully understand the clauses within the agreement that binds them and directs their conduct. An agreement has to be made in a manner that achieves the goal of the parties involved and the same can only be done by a craftily prepared agreement.
Major components of license agreements
A written IP license agreement should primarily contain clauses related to grant of rights, the relevant time period, consideration in exchange of grant, guarantees, representation and warranties, indemnities and other such clauses that are incorporated as per the requirement of parties. A license agreement is a contract and should contain all the requisites as are required by Indian Contract Act, 1872. Additionally, the parties can incorporate provisions to govern their relationship within the agreement.
- Parties. It is necessary that the agreement clearly defines the parties and their representative, if any that are entering into the agreement along with their addresses.
- Recital or grant clause. It conveys the intellectual property that is the subject of the license agreement and its usage and sets forth the rights that are being granted to the licensee. It is vital that the parties lay down very clear provisions regarding the rights that are being granted to avoid conflicts at the later stage.
- Consideration. This constitutes one of the most important clauses of the agreement. It can be formulated in many ways, with the licensor getting the license fee initially and periodic royalties depending upon the revenue or sales of licensee. In some cases, a cross-license can also be the form of consideration, where the licensor is granted a license by the licensee. The licensor can demand reports of sales to ensure accurate payment of royalties.
- Term. The time period of the license should be specified very clearly in the agreement. The term of the license should not exceed the protection accorded over the property.
- Warranty. Provisions related to warranties are extremely important. These are the promises made by parties to each other which, if false, would result in breach of the agreement. Warranties ensure basics such as that the licensor is the owner of the IP and has right to license the IP which, if turns out to be false, would breach the agreement.
- Indemnity. Provisions related to indemnity set out the financial responsibilities that would be borne by the parties in case of breach of representation or warranty given by the parties or breach of agreement due to other reasons.
- Dispute resolution. It is beneficial to incorporate provisions related to dispute resolution to ensure smooth proceedings in case a dispute arises. Arbitration is a preferred system for dispute resolution, and same can also be rendered for disputes.
- Termination. The agreement should contain clauses as to what would lead to termination of contract. This includes negotiated reasons that would lead to termination, and same should also be related with the provisions of indemnity.
- Trademarks. Though the Indian Trade Marks Act, 1999 does not directly mention licensing, Section 49 states that the registered user and registered proprietor shall apply jointly by way of an agreement in writing to the Registrar for permitted use of the trademark.
- Copyright. Section 30(3) of the Copyrights Act, 1957 allows the author of the work or prospective author of the future work to grant rights in the work duly signed by him/her or their agent. The act also contains provisions regarding compulsory licensing and statutory licensing that can be resorted in appropriate cases.
- Patents. Section 68 of the Patents Act, 1970 requires the agreement to be in writing to be valid. Section 69 further requires the licensee to get registered with the Controller of Patents. The act also contains provisions related to compulsory licensing on multiple grounds such as public health or national emergencies.
- Designs. Section 30 of the Designs Act, 2000 upheld the validity of a license for design only if it is in writing and requires the agreement to be registered within six months from its execution.
General key points
Aside from the applicable laws and skilful drafting of the agreement, it is equally crucial that the parties involved look after general factors that might challenge the legality of the agreement.
- Pre-contractual disclosure. Though there are no specific provisions demanding disclosure, misrepresentation is a valid ground to render a contract null and void under the Indian Contracts Act, 1872 and is punishable under the Indian Penal Code, 1860.
- Stamp Duty. Licenses are subject to the Indian Stamps Act, 1899. Stamp duty varies from state to state and a document is upheld to be invalid if correct stamp duty is not paid.
- Competition Act, 2002. Antitrust laws and IP laws have to be construed in harmony. Various precedents have been exemplary to reflect that IP agreements, be it in regards of joint venture or setting up of royalty, have to conform to antitrust laws.
- Registration of IP. Whereas some forms of IP (such as trademarks) allow licenses even when the IP is not registered, others (such as patents) require the IP to be registered to allow it to be licensed.
- Registration of Agreement. Few of the IP laws mandate the registration of license agreements, whereas acts such as Copyright Act do not require necessary registration.
There are multiple other components that are to be kept in mind for effective licensing. For instance, the licensor should first understand that mere creation of IP does not result in income. A successfully created intellectual property has to be rightly protected and effectively managed before it can be commercialized. Therefore, the licensor has to make sure that the IP is registered, renewed and consistently protected against infringers. Well-protected IP is highly valued in the market. The licensor, while entering into the agreement, should be very clear on provisions of exclusivity, royalties, whether sub-licensing is allowed, cost of keeping-up of the IP portfolio, provisions regarding quality checks, etc., for efficient and maximum benefit of its IP.
On the other hand, the licensee should be watchful of a few provisions as well, since it will be the party to pay royalties and licensee fees to the licensor. The licensee should conduct due diligence of the IP involved in the agreement. The up-keep and maintenance of the IP is fundamental for the agreement. It is important to put it on paper all the purposes for which one would be using the IP to avoid disputes. The licensee should insist on clear demarcation of cost sharing to further avoid increased costs or who would have right over development of the IP. It is important to know and express of what is expected out of the agreement for better drafting of the terms and conditions.
Licensing has created many successful businesses due to its benefits of collaboration, access to required techniques and know-how and expansion of market area. It has come out to be most efficient for global market expansion with blurring trade boundaries. However, it still remains vital that the parties involved in the agreement fully understand what licensing brings and takes to decide on the clauses of the agreement. It is best that each party engage an IP practitioner to represent their interests and look into the technicalities of the agreement. An effective licensing strategy coupled with a long-term relationship with the partners is now a tested method to create successful business globally.