What is IP Licensing?
Intellectual Property (IP) licensing is a legal arrangement where the owner of IP rights (licensor) grants permission to another party (licensee) to use the IP under specified terms and conditions, while the licensor retains ownership. Licensing is a primary mechanism for monetizing IP assets without transferring ownership.
Under Indian law, different types of IP are governed by different statutes - Patents Act, 1970; Trade Marks Act, 1999; Copyright Act, 1957; Designs Act, 2000; and Semiconductor Integrated Circuits Layout-Design Act, 2000. Each statute provides specific provisions for licensing of the respective IP rights.
Benefits of IP Licensing
For Licensor:
- • Revenue generation without manufacturing
- • Market expansion into new territories
- • Risk mitigation in commercialization
- • Retention of IP ownership
For Licensee:
- • Access to proven technology/brands
- • Faster time to market
- • Reduced R&D costs
- • Competitive advantage
Types of IP Licenses
IP licenses can be categorized based on the extent of rights granted and the exclusivity provided to the licensee.
Based on Exclusivity
Exclusive License
Licensee has exclusive right to use the IP. Even the licensor cannot use the IP in the licensed territory/field. The licensee can enforce the IP rights against infringers (subject to agreement terms). Highest royalty rates due to exclusivity.
Sole License
Only the licensor and licensee can use the IP. No other parties can be granted licenses. Licensor retains right to use the IP.
Non-Exclusive License
Licensor can grant licenses to multiple parties. Licensor can also use the IP. Most common type of license. Lower royalty rates due to lack of exclusivity.
Cross-License
Two parties grant licenses to each other for their respective IP. Common in patent thickets and technology standards. Can be balanced (equal value) or unbalanced (with balancing payments).
Based on Scope
| License Type | Description |
|---|---|
| Territorial License | Limited to specific geographical territory (e.g., India only) |
| Field of Use License | Limited to specific field or application (e.g., pharmaceutical use only) |
| Sublicensable License | Licensee has right to grant sublicenses to third parties |
| Assignment vs License | Assignment transfers ownership; license only grants usage rights |
IP-Specific Licensing Considerations
Different types of IP have unique licensing requirements and statutory provisions under Indian law.
Patent Licensing
- • Governed by Sections 84-92 of Patents Act (voluntary and compulsory licenses)
- • Exclusive licensees have right to sue for infringement (Section 109)
- • Licenses must be in writing and registered with Patent Office for validity against third parties
- • Compulsory licenses available for public interest, national emergency, anti-competitive practices
- • Government use provisions allow use of patents for government purposes
- • Term of license cannot exceed patent term (20 years from filing)
Trademark Licensing (Registered User)
- • Governed by Section 49 of Trade Marks Act and Rules 81-85
- • Permitted use by registered user deemed to be use by proprietor
- • Application for registered user must be filed with Trademark Office
- • Quality control provisions essential - licensor must ensure quality
- • Non-compliance with quality control may lead to cancellation of registration
- • License can be registered for entire India or specific territories
Copyright Licensing
- • Governed by Sections 30, 30A, and 31 of Copyright Act
- • Voluntary licenses through direct agreement between parties
- • Compulsory licenses available for withheld works and broadcasting
- • Statutory licenses for cover versions and broadcasting of literary/musical works
- • Assignment vs license - assignment transfers all rights; license grants limited rights
- • Copyright societies (IPRS, PPL) manage collective licensing for music
Design Licensing
- • Governed by Section 30 of Designs Act
- • License must be in writing and registered with Design Office
- • Unregistered license is valid but not admissible as evidence in court
- • License cannot exceed design registration term (10+5 years)
- • Exclusive licensee can sue for infringement
Key Clauses in Licensing Agreements
A comprehensive IP licensing agreement should address several critical aspects to protect both parties and ensure smooth commercialization.
1. Grant of License
Specifies: IP being licensed, type of license (exclusive/non-exclusive), territory, field of use, sublicensing rights, right to enforce against infringers.
2. Financial Terms
Includes: Upfront fees, milestone payments, running royalties (percentage or fixed), minimum annual royalties, royalty reporting and audit rights, currency and payment terms.
3. Performance Obligations
Specifies: Development milestones, first commercial sale deadlines, minimum sales targets, diligence requirements, consequences of non-performance (termination, conversion to non-exclusive).
4. Improvements
Addresses: Ownership of improvements made by licensee, grant-back provisions, cross-licensing of improvements, continued access to licensor improvements.
5. Term and Termination
Includes: Initial term, renewal provisions, termination for convenience, termination for breach, effects of termination (return of materials, survival of payment obligations).
6. Representations and Warranties
Licensor warrants: Ownership of IP, validity of IP, no infringement of third-party rights, no prior grants conflicting with this license. Licensee warrants: Financial capacity, compliance with laws.
Other Important Clauses
- Indemnification: Allocation of liability for infringement claims, product liability
- IP Maintenance: Responsibility for paying renewal fees, prosecution of applications
- Infringement: Obligation to notify infringement, right to sue, allocation of costs/damages
- Confidentiality: Protection of know-how and technical information disclosed
- Governing Law: Indian law, jurisdiction of Indian courts
- Dispute Resolution: Arbitration (institutional rules), mediation, expert determination
- Export Control: Compliance with technology export regulations
- Most Favored Licensee: Assurance of no more favorable terms to other licensees
Royalty Structures
Royalty structures determine how the licensee compensates the licensor for the use of IP. The structure should reflect the value of the IP, market conditions, and risk allocation.
Common Royalty Models
| Model | Description | Best For |
|---|---|---|
| Upfront Payment Only | Single lump sum payment | Low-value IP, standard technology |
| Running Royalty | Percentage of net sales (typically 2-15%) | Most licensing arrangements |
| Per Unit Royalty | Fixed amount per unit sold | Standard products with fixed margins |
| Minimum Annual Royalty | Guaranteed minimum payment regardless of sales | Exclusive licenses to ensure licensor compensation |
| Milestone Payments | Payments tied to development/commercial milestones | Pharmaceuticals, unproven technology |
| Hybrid | Combination of upfront, milestone, and running royalty | High-value patents, balanced risk allocation |
Factors Affecting Royalty Rates
IP-Related Factors
- • Stage of development (early vs commercial)
- • Strength of patent claims
- • Availability of alternatives
- • Remaining patent life
- • Breadth of patent coverage
Market Factors
- • Market size and growth potential
- • Profit margins in the industry
- • Exclusivity granted
- • Territory coverage
- • Competitive landscape
Typical Royalty Ranges (Industry Standards)
- • Pharmaceuticals: 2-10% of net sales
- • Software: 3-15% of net sales
- • Manufacturing: 2-5% of net sales
- • Trademarks/Franchises: 1-10% of gross sales
- • Entertainment/Music: 5-15% of gross receipts
- • Patents (general): 3-8% of net sales
Note: These are indicative ranges. Actual rates vary based on specific circumstances and negotiations.
Competition Law Considerations
IP licensing agreements must comply with the Competition Act, 2002. Certain provisions in licensing agreements may be considered anti-competitive and void.
Potentially Anti-Competitive Clauses
Price Fixing
Setting minimum resale prices for products made using licensed IP is generally prohibited under Section 3 of Competition Act.
Exclusive Dealing
Requiring licensee to purchase only from licensor or prohibiting dealing with competitors may be anti-competitive if it forecloses competition.
Tie-In Arrangements
Requiring licensee to purchase unrelated goods/services as condition for IP license is generally prohibited.
Grant-Back Clauses
Requiring licensee to assign improvements back to licensor may be challenged if it stifles innovation by licensee.
Permissible Restrictions
The following are generally considered reasonable and permissible:
- • Quality control requirements for trademark licenses
- • Field of use restrictions to allocate markets
- • Territorial restrictions (subject to parallel import rules)
- • Confidentiality obligations
- • Non-compete clauses during term of license
- • Limitations on sublicensing
Compulsory Licensing
Under the Patents Act, compulsory licenses may be granted by the Controller in specific circumstances:
- • Reasonable requirements of public not satisfied
- • Patented invention not available at reasonably affordable price
- • Patented invention not worked in India
- • National emergency or public health crisis
- • Export to countries with insufficient manufacturing capacity
Taxation of IP Licensing
Tax treatment of IP licensing payments varies based on the nature of payment, residence of parties, and applicable tax treaties.
Characterization of Payments
| Payment Type | Tax Treatment | TDS Rate |
|---|---|---|
| Royalty (Use of IP) | Royalty income | 10% (Section 194J) |
| Fee for Technical Services (FTS) | Business income/FTS | 2% (Section 194J) |
| Transfer of IP Rights (Assignment) | Capital gains | 10% (Section 194IA/194J) |
| Upfront License Fee | Royalty or FTS depending on nature | As applicable |
Withholding Tax (TDS) Requirements
- • Licensee must deduct TDS on royalty payments to resident licensors (Section 194J)
- • For non-resident licensors, Section 195 applies
- • Tax treaties may reduce withholding rates (e.g., India-US treaty: 10-15% royalty)
- • Lower or nil deduction certificate may be obtained in certain cases
GST on IP Licensing
- • IP licensing is a supply of service under GST
- • GST rate: 12% or 18% depending on type of IP
- • Trademark/copyright license: Generally 12% GST
- • Patent/technology license: Generally 18% GST
- • Export of IP license: Zero-rated (0% GST with input tax credit)
- • GST registration required if turnover exceeds threshold
Enforcement and Dispute Resolution
Effective enforcement mechanisms and dispute resolution procedures are essential for successful IP licensing relationships.
Breach of License Agreement
Common breaches include:
- • Non-payment of royalties
- • Use beyond licensed scope (territory, field, exclusivity)
- • Failure to maintain quality standards (trademark)
- • Unauthorized sublicensing
- • Disclosure of confidential information
- • Failure to meet development milestones
Remedies for Breach
Legal Remedies
- • Injunction to stop breach
- • Damages for losses
- • Specific performance
- • Termination of license
- • Accounts and audit
Contractual Remedies
- • Conversion to non-exclusive
- • Reduction of territory
- • Increased royalty rates
- • Termination with penalties
- • Audit rights and recovery
Dispute Resolution Mechanisms
- Negotiation: Direct discussions between parties to resolve disputes
- Mediation: Facilitated negotiation with neutral mediator
- Arbitration: Binding decision by arbitrators (recommended for cross-border licenses)
- Expert Determination: Technical disputes resolved by industry experts
- Litigation: Court proceedings as last resort
Drafting Tip: Dispute Resolution Clause
Include a tiered dispute resolution clause: 1) Good faith negotiation for 30 days, 2) Mediation under Indian Mediation Rules, 3) Arbitration under SIAC/ICC rules with seat in [Singapore/London/New Delhi], 4) Governing law: Laws of India. For domestic licenses, consider fast-track arbitration or specialized IP tribunals.