Licence agreement – regulates rights of use for licensees

Licence agreement, what is it? Licensing an intellectual property right means allowing another party, such as a company or other organisation, to use the protected work. With the help of this contract, a work can be commercially exploited in different ways and to different extents.

Topics in our legal advice

When one party (the so-called “licensor”) grants another party (the so-called “licensee”) permission to use its industrial property rights, this is referred to as a licence agreement.

In Germany, registration of a licence is not possible in the same form as is the case with trade marks. Since licence agreements as a whole are not covered by the law, there are only a few specific provisions, such as the copyright licence agreement (Sections 31 et seq. UrhG).

Therefore, licences are often governed by individual contracts, which are subject to normal contract law. Under the licence agreement, the licensee receives permission from the licensor to use the IP right to a certain extent.

Licence agreement – what is it?

As with patents, the licence agreement has a special significance for trade marks, designs and utility models. A licence agreement can be used for a variety of things, e.g. for licensing a film, a trade mark or a graphic design.

Licence agreements are also widely used for the use of software as well as for the use of a protected technology. All three business areas rely on a licensing agreement to protect their intellectual property rights.

To give you a quick overview, we have compiled the following list of possible uses of licence agreements:

• Trade mark law
• Designs which are admitted for use
• Models which can be used in everyday life
• Copyright for software signs
• Patents

The licensor retains the right to exploit the product and grant further simple licences, while the licensee retains the right to use the product. It is common for exclusive licensing agreements to prevent the rights holder from exploiting its own rights and granting further licences.

In the case of an exclusive licensing agreement, infringements can be pursued through legal action.

Licence agreement software and other products

Examples of common licence agreements

• Copyright licence agreements
• Film and television licensing agreements
• Trademark licensing agreements
• Licensing agreements for patents
• Licensing agreements for software

The scope of the licence grant is one of the most important aspects of the licence agreement. It specifies which rights of use, such as patent or copyright, the rights holder wishes to transfer to the licensee.

Operating licence agreement: An operating licence agreement is strongly linked to the operation of a company. This means that only employees of the company can use the licence.

If an individual is granted an exclusive right of use, this means that no one else has access to the right or the type of use granted to the licensee.

In a simple licence agreement, the licensee is granted permission to use a copyrighted work. The licence agreement contains a detailed description of the terms of the licence. The licence rights may be used by the licensor, including entering into further licence agreements with third parties, to the extent permitted by the licence agreement.

Payments and royalties

In terms of the agreement, a licence is a type of transfer of rights. A fee is often paid to the owner of the intellectual property rights for the transfer.

The type of licence one obtains has a significant impact on the amount of remuneration one receives: The cost of a simple licence is usually low, but the rights of use can subsequently be acquired by competitors. With an exclusive licence, the costs are higher, but the licensee is the only one who benefits from this knowledge.

The licence costs can be freely agreed by the contracting parties. In practice, flat-rate licences, where a predefined price is regularly agreed, and turnover licences, where a share of the turnover generated by the licence is to be paid, are common. Depending on the pricing model chosen, billing and payment terms may be included in the licence agreement.

Payment models for licence fees can be agreed in different ways. These types of models are commonly used:

• With a per-unit licence, the licence fee is paid for each unit of use or production generated.
• Payment is made in a single sum at the beginning of the licence period.
• With a profit licence, the fee is based on the profit per unit.
• With a revenue licence, the licensor receives a share of the money earned by the licensee from the licensed object.

Licence agreement – structure, content and the most important terms

Each contract has its own set of contractual obligations that must be fulfilled by the parties involved.

In most cases, the licensor is responsible for maintaining the IP right, which includes paying the annual fees, defending against challenges to the right and prosecuting infringements by ordinary licensees.

The licensee is responsible for paying the agreed royalties, exercising the licence regularly and keeping separate books and accounts if the licence is exclusive.

The structure of the licence agreement

The terms of a licence set out how and to what extent a particular intellectual property right can be used by the licensee.

Theoretically, it is not necessary to sign a written licence agreement. However, for documentation purposes, a written agreement is recommended. Agreements generally contain the following elements:

1. Description of the scope of the licence
2. warranties and liability
3. Rights of use granted – definition, scope and extent in the event of non-compliance with the terms of the agreement.
4. The pricing structure of the licensing model
5. Signatures of both parties

There should be no agreements between the parties other than those contained in a licence agreement. The primary objective is to ensure that the IP right can be used. For this reason, licence agreements often contain provisions on the payment of fees to maintain the IP right.

Transfer of the licence right by means of a sub-licence

With a sub-licence, an exclusive licensee can grant a third party access to the rights in a protected work. As with a full licence transfer, the “master right” remains with the licensee.

Sublicensing should only be permitted with the consent of the licensor and should be documented when the licence agreement is drafted.

Sub-licences may be granted if the licensee is entitled to do so. Sub-licensing is only possible if the licensor’s consent or subsequent authorisation has been granted within the framework of a basic licence agreement. When drafting the contract, it is advisable to include a sub-licensing provision at an early stage.

Default in performance and warranty protection

The contractual agreements and the general civil contract law as well as the provisions on the statutory tenancy agreement (581, 535 ff. BGB) shall apply.

The licensor is only liable for the technical feasibility and usability, but not for its economic exploitability.

The licensee is largely responsible for ensuring that the product is marketable and has the potential for acceptable commercial exploitation. It is still the licensor’s responsibility to ensure that the IP right exists at the time of signing the contract.

If the IP right does not yet exist, he is liable to the licensee if it is not granted. The licensee may refuse to pay the fees until the licensee has remedied substantial defects in title.

Terminating a licence agreement

When a licence agreement expires, the right of use granted to the licensee reverts to the original owner of the IP right.

The licence purchase is regularly fulfilled in full by both parties when the mutual main performances have been rendered, i.e. the licensor has granted the licence and the licensee has paid the purchase price.

The licensee can no longer use the licence once the contract has been terminated.

In order to avoid infringement after the expiry of a licence agreement, the licensor may include transitional provisions in the licence agreement.

Licence agreement lawyer

You should seek legal advice as early as the contract drafting stage to avoid problems later on. You should also have the content of licence agreements submitted to you checked.

The lawyers of the Herfurtner law firm are available to you for this purpose within the framework of a free initial consultation.

If you have invested in or made payments to one of the companies on this list, our lawyers will be at your disposal at short notice.