13 November 2012

Exploiting your IP

The investment in securing registered intellectual property (IP) rights is all well and good, but the reward comes from the exploitation of that right. Many rights holders exploit their IP directly by using the patent or by affixing the trade mark to their goods. Others seek rewards from allowing third parties to use their IP, which is where the question of licensing versus assignment arises. While this article mainly addresses the exclusive licensing or assignment of patents, many of the considerations will also apply to other IP rights.

The different types of licensing arrangements are:
• Exclusive licence: this means that the owner of the patent agrees not to grant any other licences of the technology concerned, and agrees not to use the technology himself.
• Sole licence: the owner of the patent agrees not to grant any other licences of the technology, but is allowed to use the technology himself.
• Non exclusive licence: patent owner reserves the right to grant licences of the technology concerned to third parties and use it himself.

A patent assignment entails transferring ownership of the patent to a third party, so the assignor no longer has any involvement or claim on those rights (unless agreed contractually otherwise). If the patent's owner licenses use of that right exclusively to another party (so cannot use the right himself), one might well ask what the difference is between an exclusive licence and simply assigning the patent to the third party.

A licence is not always a desirable means of dealing with commercialisation of an IP right. For example, under English law, IP created during the course of one's employment is usually first owned by the employer (not the employee); however, some rights created by consultants for a company, such as copyright in software or design drawings created by a consultancy for a client, are owned by the consultant and not the client (unless the parties have agreed otherwise in writing).

A licence would not generally be appropriate and the client would typically require that all IP in whatever is created is assigned to the client. In relation to patents, an assignment would also be more appropriate where the rights holder wishes to withdraw entirely from a specific field of exploitation, or in the context of the sale of part of the business.

Exclusive licence vs assignment
The key benefit in assigning ownership of a patent is that the original owner does not retain responsibility for paying renewal fees for the right and will typically receive an up front payment for the sale of the right.
The third party, on the other hand, gains control of the IP right on which they are relying. On the other hand, there are costs involved in registering the change of ownership at the applicable registry and the parties should agree who should bear those costs. In the UK in relation to patents, for example, there is no statutory requirement to register an assignment; however the Patents Act provides that an assignee who does not register the assignment within six months cannot claim costs or expenses in infringement proceedings for an infringement that occurred before registration of the assignment, unless they can satisfy the court that it was not practicable to register it in that period and that the transaction was registered as soon as practicably possible.

Competition law can be an impediment to the exclusive licensing of patents and advice should be sought to ensure the licensing arrangement does not fall foul of competition law. However, there are a number of benefits to licensing over assignment of the rights:
• Licensing may be more practical if the value of the patents has yet to be determined.
• Licensing is often preferred where exploitation of the right requires substantial investment and the owner does not want to commit to that investment initially.
• Licensing allows for the exploitation of the right to be divided up by field of use, potentially by market, so the licensor can engage multiple exclusive licensees for different purposes.
• If the licensee is ineffectual in exploiting the patent, becomes insolvent or undergoes a change of control (particularly to a competitor of the licensor), the licensor may be able to terminate the licence (depending on the terms of the licence agreement) and regain control of the patents.

Often, the decision will come down to means of payment: up front payment; royalty payments; or a combination of the two. Technically, it is possible to assign the patent and to receive royalty payments; however, there are two key risks: the assignee may not exploit the patent fully; and if the licensee becomes insolvent, the patent may be lost and irrecoverable.

For these two key reasons, if the owner of the patent wants to be paid by way of royalties, a licence is preferable. Tax may also be a consideration: an assignment of patents may give rise to a capital gains liability, whereas royalties under a patent licence are treated as income or trading receipts. VAT or sales tax may be chargeable.

Five key questions
• How do you want to be paid?
• Are you able to determine the potential value of the technology?
• Do you want to get the rights back in certain circumstances (for example, if the third party becomes insolvent or if the third party is bought out by one of your competitors)?
• Do you want the third party to have full use of the technology for all fields of use, or a defined field of use?
• Will you keep researching and designing in this field (that is, improving the original technology)?

For more information, please contact Carina Badger, Senior Associate, on 020 72698550 or email cxb@dyoung.com.

D Young & Co LLP

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D Young & Co LLP

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