In this fourth and final part of our series, we cover payment models and quality control mechanisms that should be considered when entering into an IP licensing agreement. We will also raise issues that should be considered by Licensors when negotiating these provisions with Licensees and other parties.
1. Payment models
The payment model of a licensing agreement concerns how the Licensor is compensated for the use of its IP by the Licensee. Broadly speaking, there are two main branches of payment models that can be used in the context of IP licensing: (1) fixed-fee and (2) royalty-based.
Fixed licence fees
When IP is licensed for a fixed fee, the Licensee pays a certain amount of money to the Licensor in exchange for the ability to use the IP.
This arrangement may be set up such that the fixed fee is paid at set dates (for example, a yearly subscription payment). Alternatively, it may be paid upon exchange of the IP as a one-time upfront payment.
Fixed licence fees may or may not be paid in addition to royalty payments, discussed below. Fixed licence fees may also be paid out in stages based on the successful completion of milestones. For example, additional fees may apply once the Licensee reaches sequentially larger sales targets.
Royalties
Royalties are another payment model commonly used by Licensors and Licensees. Typically, royalties work such that the Licensor is paid a fee by the Licensee each time their IP is viewed, downloaded or otherwise used by the Licensee. For example, some songwriters agree to terms with a record label that enable them to earn a royalty every time their song is played on the radio or streamed online. Other Licensors may choose to be compensated based on a percentage of sales (such as 1% of gross annual revenue).
Two common issues with royalties that should be considered when drafting the licensing agreement are late payments and taxes. Where payment to the Licensor is delayed, the Licensor may wish to charge a penalty or interest in addition to the principal royalty fee. Licensors should also consider whether tax will be built-in to the royalty fee or whether it must be added on at the time of payment. Where the latter is the case, it may also be prudent to include in the licensing agreement which jurisdiction’s taxes will apply to the payment of royalties.
Non-traditional arrangements
Important to note is that these payment models are not mutually exclusive. Many Licensors structure agreements such that they are compensated by a combination of fixed licence fees and royalties.
Also worth remembering is that payment models can be creatively designed to fit the unique wants and needs of the Licensor and Licensee. For example, upfront payments can be combined with a percentage of royalties that increases proportionally to the Licensee’s market share.
Non-traditional forms of compensation can also be used. For example, a start-up Licensee lacking cash may instead give up equity to the Licensor as consideration for the Licensee’s use of the IP.
2. Quality control and enforcement
A Licensor should include terms in their licensing agreement that speak to quality control and provide options for effective dispute resolution in the event of a breach or other type of negative event. These mechanisms help maintain the integrity of the IP being licensed by keeping the Licensee accountable for how they use it. These mechanisms also help a Licensor predict how their IP will be used by the Licensee or other third parties.
Often, a licensing agreement includes terms that outline the consequences a Licensee may face if they breach the terms of the licensing agreement or are otherwise negligent with their use of the Licensor’s IP. In many cases, consequences include monetary penalties and termination of the licence. Licensing agreements may also include terms that restrict how the IP may be used by the Licensee. For example, a Licensor may indicate that their logo may not be stretched disproportionately, inverted or otherwise manipulated by the Licensee.
A Licensor may also wish to control a Licensee’s business relationships with third parties. For example, in the context of a sub-licensable grant, a Licensor may include terms and conditions that prohibit the Licensee from sub-licensing to the Licensor’s competitors. Practically, the terms could provide that the Licensor has absolute discretion to give or withhold approval over whether a third party may become a sub-Licensee and how their IP may be used by any approved third parties. This may allow the Licensor to audit and enforce requirements relating to the licence agreement.
A licence agreement should also include provisions that outline which party may pursue legal action in the event of infringement. If a third party infringes on the Licensor’s IP, the Licensor may choose to retain the right to sue that third party. Alternatively, a Licensor may allow a Licensee to pursue their own legal action against the infringing third party. Regardless of how the licensing agreement is set up, ensuring that the Licensor and Licensee understand the logistics of enforcement is important to preserving the integrity of the IP.
Key takeaways
This article has briefly reviewed IP licensing agreements and how payment models and quality control mechanisms can affect the nature of your licensing agreement. We hope this IP licensing primer series has been helpful to you as you consider IP licensing and its advantages and risks.
With years of experience helping organizations develop their IP strategies, the MLT Aikins Technology, Intellectual Property and Privacy team is qualified to help your organization consider how it is currently using its IP. Contact us today.
Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.
Share
