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Patent Licensing Agreements and the clauses covered under it

By: Riya Bansal

INTRODUCTION:-

In the later part of 19th century new inventions in various fields of art, processing, manufacturing, apparatuses, machinery and other substances produced by manufacturers were at upsurge. Thus, there was a threat to inventors that their inventions could be infringed easily as there was no law to refrain infringers from using or copying such inventions. So to safeguard the inventor’s interests the British rulers at that time enacted the Indian Patents and Designs Act, 1911. With the evolution of Indian political and economic conditions in the later part of the 20th century, there was need of a comprehensive law to ensure the greater effectiveness and security of the patent rights and to encourage inventors for making new and useful inventions in different fields. Therefore, the Patents Act, 1970 was enacted which repealed and replaced the 1911 Act so far as the patent law was concerned. Now there was no threat to the interests of inventors as there was an option of licensing of patents by mode of a written agreement, which is proved to be beneficial for the inventors as they could protect their inventions and at the same time grant permission to make partial use of their inventions.

PATENT:-

Patent is a monopolistic intangible right granted to a person who has invented a new and useful article or a new process of making an article. In India, such right is conferred upon the inventor through a Government issued Certificate, in which it is explicitly mentioned – what the invention is and inventor is the owner of it; and this government issued certificate is known as “Patent”. The inventor or person who invents is called “Patentee” only when his invention gets approved by Government and thereupon he can make exclusive use of his invention.

The word patent is derived from the Latin term ‘Patene’ which means ‘to open’. There is no exhaustive definition of ‘Patent’, but to get the true essence of the definition of patent one can read Section 2(1) (m) of Patent Act 1970 [1][which defines Patent] along with Section 2(1) (j) of Patent Act 1970[2] [which defines Invention].

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PATENT LICENSING:-

Patent Licensing is a contract between Patentee (known as Licensor) and Licensee; wherein licensor grants permission to a third party (known as licensee) to sell, use, exercise etc. his or her patented invention. In case of grant of Patent license the ownership of a patent remains with the patentee and mere partial use of patent is permitted. Thus partial use of patent is subject to certain terms and conditions which are agreed upon by both licensor and licensee. Since Patent Licensing is a contract, it must satisfy all the essentials mentioned under Section 10 and Section 11 of the Indian Contract Act, 1872, i.e., the contract must be done between persons who are of sound mind, who have attained age of majority and who are not disqualified under any law and there must be a lawful object for a lawful consideration with the free consent of parties. There are various modes of patent licensing like Exclusive Licensing, Non – Exclusive Licensing, Voluntary Licensing, Compulsory Licensing, etc.

PATENT LICENSING AGREEMENT:-

Now a day’s Patent Licensing is used as a source of income for the patentees, as it has become the most easiest and convenient way to transform patent into a reality without incurring any financial or marketing or manufacturing expenses. With patent licensing we have to keep in mind that it is associated with an agreement through which a patent is licensed and such agreement will be considered invalid if it is unregistered and is not in writing[3].

Patent Licensing Agreement is a negotiated agreement between the licensor and licensee, wherein licensor authorizes licensee to make partial use of its patent, in compliance with the terms and conditions of the agreement, in exchange for an agreed pecuniary consideration (technically to be called as Royalty). Once the terms and conditions of the said agreement are negotiated upon, then the parties have to convert it into a written agreement so that it can be duly executed and registered in the official Register of Patents. Generally the said agreement is made, with agreed terms and conditions, for an agreed period of time, for a defined purpose, and in a definite territory.

Also we could say that the Patent Licensing Agreement is legally binding upon the parties as they have certain duties which are to be performed according to the terms and conditions of the agreement. And legally binding means that if any of the party fails to perform its duties in compliance with the terms of the agreement then the aggrieved party can sue the party committing breach accordingly, but for that it is mandatory that the Patent Licensing Agreement is to be registered as per Section 67 of the Patents Act, 1970[4].

CLAUSES OF PATENT LICENSING AGREEMENT:-

The clauses of Patent Licensing Agreement generally, defines the scope of rights and obligations of the parties and; helps in eliminating ambiguity and disputes, as they are written only after being negotiated and agreed upon mutually by both the parties. It is very crucial that the clauses of patent licensing agreement are drafted accurately so as to avoid any kind of disputes down the road. The list here in below is not exhaustive but most important and basic clauses of a patent licensing agreement are tried to be covered and clauses are to be included or excluded in the agreement considering various factors pertaining to type of patent and mutual consent of the parties.

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  • GRANT OF LICENSE

This clause mainly deals in what type of licensing is done by the licensor i.e. what type of patent licensing is granted by licensor to licensee (like exclusive license or non-exclusive license etc.) and to what extent the licensed patent can be used by the licensee.

  • TERM OF AGREEMENT

In this head the term or period to use the licensed patent under the agreement is defined and would specify the expiry of agreement which can be set even without the expiry of patent. And all date and time related conditions pertaining to use of licensed patent would be included under this head. It can be included that what would happen in case of bankruptcy or insolvency.

 

  • ROYALTY

 This is the pivotal clause to be included in every agreement because receiving Royalty is the primary objective of licensing a patent. Royalty is basically the amount of consideration to be paid by the licensee, in exchange of receiving permission for using patent, to the licensor.

Thus this clause contains terms like how the royalty payment would be made, what amount of royalty is to be paid by the licensee, what rate of royalty is to be charged (if any), how the royalty charged would be calculated i.e. through which method will the royalty to be charged will be calculated etc. Royalty rate of a patent may vary from 0.5% to 25 % depending on the licensee and type of patent.

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  • LICENSOR’S PATENTS RIGHT

This clause defines the rights of the licensor and the extent to which a licensee can use partial rights of licensor for utilizing the licensed patent to earn profits. Also licensee’s rights are to be defined.

  • LIABILITY AND INDEMNITY

The said clause helps in determining that in what all conditions a licensee would amount to be liable to compensate the licensor and whether licensee would be held completely liable or not. Also it must be elaborated that what are the duties of the parties and if such duties are not performed or if any obligations are not complied with then party in default would be liable.

  • NOTICES

Under this it is to be decided and agreed upon the method of service of Notice (like by way registered AD post or by personal delivery or by nationally recognized courier service etc.) And also it has to be decided that from what date such notice will be considered effective or when will such notice be considered effective after receipt of the notice.

  • ENTIRE AGREEMENT

It has to be discussed whether any previous existing representations or agreements pertaining to the subject matter of the present agreement are to be merged with the present one or not. And whether any changes made to the present agreement are to be validated by written consent of the parties or no such written consent is required.

  • TERMINATION OF AGREEMENT

It should be clear from this clause that what all acts would amount to termination of this agreement. And what all must be done post termination (like immediately cease use of patent by licensee, handover any profits post termination to licensor etc.)

  • DISPUTE RESOLUTION

This helps in determining whether parties would like to solve their disputes (if any) through method of litigation or arbitration or any other way of dispute resolution. Also it is to be mentioned well in advance that which state’s law will govern the arising disputes and what would be the jurisdiction to solve or try such disputes in.

IMPORTANT PROVISIONS UNDER LAW PERTAINING TO PATENT LICENSING AGREEMENT:-

Here under we would deal with the aspects of provisions pertaining to patent licensing agreement and the other aspects of the mentioned provisions would not be discussed.

  1. PROVISIONS UNDER THE PATENTS ACT, 1970
  • SECTION 68 [5]– Patent Licensing Agreement is valid only when it is in Writing and is Duly Executed :

License of a patent shall be valid only when it is in the form of a written agreement, between the licensor and the licensee, which is duly executed. Such written agreement must be presented in form of a Document wherein all the terms and conditions are implicitly or explicitly incorporated. Also the terms and conditions of the Patent Licensing Agreement or we can say Document; play a pivotal role in defining the rights and obligations of the licensor and the licensee.

  • SECTION 69 [6]– Application for Registration of title of Licensee :

By Licensee – According to Section 69(1), where any person becomes entitled as a Licensee, he or she shall apply in writing in the prescribed manner to the Controller for the registration of his or her title or registration of notice of his or her interest in the register of the Controller.

By Licensor – According to Section 69(2), without prejudice to the provision of section 69(1), an application for the registration of the title of any person who gets entitled by the virtue of a patent license may be made by the licensor in a prescribed manner to the controller.

  • SECTION 70 [7]– Power of registered proprietor or grantee to issue Licenses for Patent :

This provision of the Patents Act, 1970 empowers the registered proprietor or the grantee to issue licenses for the patent and to give effectual receipts in lieu of consideration received by them for grant of any such license pertaining to patent.

  1. PROVISIONS UNDER THE PATENTS RULES, 2003
  • RULE 90 [8]– Application of Registration of :

Title of Licensee as per Section 69 of Patents Act, 1970 – According to Rule 90(1), Application for registration of the title of Licensee referred in Section 69(1) and Section 69(2) of the Patents Act, 1970 shall be made, in Form 16 to the Controller; within a period of 6 months from the date of execution of patent licensing agreement.

Document of Patent Licensing Agreement as per Section 68 of Patents Act, 1970 -According to Rule 90(2), Application for registration of any document (i.e. document which may affect the rights and obligations of a patentee in any way), like Document of Patent Licensing Agreement, shall be made in Form 16 to the Controller within a period of 6 months from the date of execution of patent licensing agreement.

  • RULE 91 [9]– Power of Controller to direct or call for any document or proof pertaining to Patent Licensing Agreement Application :

This provision of Patents Rules, 2003 empowers the Controller to direct or call for any document like Patent Licensing Agreement as claimed in Applications under Rule 90(1) or Rule 90(2) or any other proof or written consent as he may require. The required documents or proofs must be accompanied by the 2 copies (i.e. copies which is certified to be true copies by the applicant or his agent) of the Document, like Patent Licensing Agreement, for which such Application was made.

 

This Rule of Patents Rules, 2003 prescribes the way in which the Controller will register the entry of title of licensee or of document of Patent Licensing Agreement in its Register only after the receipt and complete enquiry of the application made by the applicants under Rule 90(1) or Rule 90(2).

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CONCLUSION:-

Licensing a patent invokes registration of a written agreement between the licensor and licensee. The aim of execution of agreement is, to reflect the intention of the parties for licensing a patent and; to gather specifications and details, which they have agreed to, in form of written agreement. It is mandatory that the Patent licensing Agreement is written and is registered in the Register of Patents. Clauses of patent licensing agreement plays an important role in deciding the disputes (if any) or to prevent any disputes between licensor and licensee. Even though it is an easy way to license a patent through a definite agreement, but the parties must pay utmost attention while chalking out the terms and conditions of the patent licensing agreement as this is the only document which shall define the grundnorms for the parties for patent licensing i.e. define the rights and obligations of the parties who agrees to patent licensing. So while preparing Patent Licensing Agreement keep your all senses wide open!!!

[1] Refer to “http://www.ipindia.nic.in/writereaddata/Portal/IPOAct/1_31_1_patent-act-1970-11march2015.pdf” for complete Sections, P.6.

[2] Id. at P.5

[3] Refer to case – National Research Development Corp. (NDRC) vs. ABS Plastics Ltd. ,[April 2009]

[4] Supra 1 at P.55

[5] Supra 1 at P.56

[6] Ibid.

[7] Supra 1 at P.57

[8] Refer to http://www.ipindia.nic.in/writereaddata/Portal/IPORule/1_70_1_The-Patents-Rules-2003-Updated-till-23-June-2017.pdf for complete Rules, P.38

[9] Ibid.

[10] Ibid.