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When you own intellectual property (IP), you gain various legal rights associated with that IP. These include the ability to use and profit from IP that you own. As the owner, you can license these rights to other parties for a royalty or fee in return. As a result, these other parties can then use or profit from your IP, according to your conditions. You can set out these conditions in an IP licence agreement. Depending on your goals and conditions, you (as the licensor) can also allow your licensees to sublicense to third parties. When they do so, third parties will be able to use your IP. It is important that you set out whether you allow this in your licence agreement, as well as your conditions for sublicensing. Therefore, this article will go through five mistakes to avoid when drafting a sublicence clause in an IP licence agreement.

1. Failing to Require Notification and Other Conditions

If you do decide to allow sublicensing, it is important that you set conditions that will protect your own interests. It is your IP at risk, so you should take steps to protect it. Some conditions you may set include requiring:

  • notification of a new sublicensee;
  • your written consent for sublicensing;
  • that you see the sublicensing agreement;
  • various obligations of the sublicensee, such as performance requirements;
  • that you must vet any potential sublicensees;
  • extra royalties or percentages of income;
  • liability limits and indemnities;
  • restrictions on sub-sublicensing;
  • the keeping of written and accurate records documenting the sublicensing relationship; or
  • time/geographical limits.

It is up to you what conditions you set, but they should be fair. An IP lawyer can help you set conditions for sublicensing that are fair and protect your own interests.

2. Undercharging for Royalties

If you charge royalties or a licensing fee, this sum should reflect your allowance for sublicensing. Therefore, ensure that you carefully draft your sublicence clause so that royalties account for any sales or other profits that the sublicensee may make.

You can make it a requirement that any sublicensees must conduct sales using your licensed IP, such as distributing your products. In addition, you may set various milestones or goals they need to meet and how this affects the royalties they must pay you.

If you do not reflect your allowance of sublicensing when determining licence fees, you may be undervaluing your trade mark. This fact is especially true if you already have established goodwill in the market, and any licensees or sublicensees are gaining value for their own businesses.

3. Not Accounting for Future IP

Depending on the terms of your licence agreement, you may allow both licensees and sublicensees to develop or modify your IP. Allowing this can be excellent for research and development purposes, especially if they have access to resources that you may not.

For example, you may licence out your patent rights to others to improve upon your invention.

However, when you do so, you must account for any sublicensees generating new IP in the course of their research and development. Such creation may generate concerns about your own IP ownership and whether you have rights in what they create. If you do not clarify these scenarios beforehand, you may run into IP disputes further down the line, which can be costly. Therefore, you should specify what ownership rights you return in the event of any new IP that the sublicensee generates.

4. Failing to Detail What Happens at Licence Termination

You also need to make sure you specify what happens to sublicensees when you terminate your overall licence agreement with your own licencees. If you license your IP to many parties without a clear process for cancellation, this can lead to confusion and contention. 

For example, say that when you terminate the head licence, you do not want anyone using your IP after that. Then, you need to make it clear in your sublicence clause that all sublicensing agreements terminate when you end the head licence.

Additionally, you should detail what qualifies as a breach of contract and the subsequent penalty fees.

5. Not Imposing Confidentiality Requirements

Many IP registration rights require that no one sells or publishes the relevant IP before registration. Otherwise, the IP is not new and unique. When this is the case, you will not be able to register those particular IP rights. Additionally, some kinds of IP are confidential by nature, such as trade secrets.

In these situations, it is important that you set confidentiality/non-disclosure requirements for all parties in your licence agreements. In particular, in your sublicence clause, you should extend these requirements to sublicensees where they may deal with sensitive information. If they do disclose your confidential IP, it may be more difficult to get compensation without confidentiality promises.

Key Takeaways

If you allow sublicensing in your IP licence agreement, you must be careful with your sublicence requirements. You need to draft a clause that protects your own interests while still being fair. If you would like more information or help with your sublicence clause, contact LegalVision’s IP lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

What is an intellectual property licensing agreement?

When you own intellectual property rights, you can license these rights out to other parties. In doing so, you give them permission to use or profit from your intellectual property according to your terms. You outline these terms in a licensing agreement.

What is an intellectual property sublicence clause?

If you allow your licensees to sublicense your intellectual property to third parties, you should set out the terms of that arrangement in a sublicence clause in your agreement. Otherwise, you can run into legal trouble later on.

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