Many companies wishing to do business in South-East Asia choose to license their IP to third parties in order to be able to expand their business ever more rapidly and conveniently. Well-drafted licensing and technology transfer agreements are the key to a successful business endeavor in South-East Asia and thus, we have chosen to discuss the art of drafting these contracts in today’s blog post. This blog post will provide you with some useful tips and watch-outs to keep in mind when drafting contracts with your partners in South-East Asia.
IP can create value and revenue to the European SMEs through IP commercialization via licensing the IP to third parties. A company that owns rights in a patent, but cannot or does not want to be involved in the manufacturing of products, can benefit from licensing their IP assets to third parties who have better manufacturing capacity, wider distribution outlets or greater local knowledge. Furthermore, licensing trade marks can allow companies to expand their operations into new markets faster and more effectively as the companies can benefit from the wider distribution networks and contacts that the licensees have.
The people and companies that SMEs do business with, and therefore contract with, will often use the European SMEs IP to varying degrees. Therefore, it is also very important for the European SMEs to protect their IP well-written licensing and technology transfer contracts. In this article we will take a look at licensing and technology transfer agreements.
Licensing and Technology Transfer Agreements
An IP license is a contract between the IP owner (“licensor”) and a third party (“licensee”) that simply allows the latter to do certain things with the licensor’s IP. Businesses can license almost all types of their IP including trade marks, patents, design patents and copyright. The scope of the activity and the exact IP that is licensed should always be set out clearly in the agreement. The type of IP license will usually depend on the nature of the SME’s investment in Southeast Asia. The following considerations will typically apply to every type of license:
Types of Licenses
When drafting a licensing and technology transfer agreements, European SMEs need to figure out whether they want to grant their partners an exclusive license, a non-exclusive license or an exclusive license with reservations that would allow the European SME to exploit the IP in parallel with the licensee in South-East Asia.
The licensee is the only party given the right to use, manufacture, sell or distribute technology, products, content or other licensed assets in a particular territory. To determine whether the licensor has kept the right to grant another license to other licensees, one must examine the terms and conditions in the license agreement to see whether the licensor grants an exclusive or a non-exclusive license to the licensee. A term specifying whether the license grant is exclusive or non-exclusive must be included within the terms and conditions in a trade mark license agreement under some local laws within Southeast Asia (e.g. Thailand and Vietnam).
In relation to copyright, if the license agreement does not include a provision prohibiting the copyright owner (licensor) from granting to additional persons the use of such rights, it will be presumed that the copyright owner (licensor) has the right to do so. In the patent context, a license agreement for a registered patent is often required to be made in writing and registered. Local advice should be obtained on these points.
In a non-exclusive trade mark license agreement, the trade mark owner will have the right to use the trade mark or authorise any person in addition to the authorised licensee to use the trade mark. Many local laws require that this term be specified in the agreement, or the agreement cannot be registered with the local Department of Intellectual Property Office.
In relation to copyright, a non-exclusive copyright license will usually have the benefit of allowing the copyright owner to grant the license to the copyrighted work to as many persons as the licensor deems appropriate to use such rights. For a patent license, the law normally does not state whether exclusive or non-exclusive license provisions must be included in the patent license. Therefore, the parties involved should come to an agreement on this term. Again, local advice should be obtained on these points.
Reservations to Allow the Licensor to Use the IP
In this scenario, the licensor typically grants the licensee rights which are akin to an exclusive license, but the licensor also retains the right to use the intellectual property in that licensed territory (and elsewhere, of course). This enables the IP owner (licensor) to carry on business in that area, at the same time as the licensee. Such licenses are often used in circumstances where the licensee’s ability is unclear and where the licensor desires the right to exploit the intellectual property where the licensee has failed in its obligations.
Transferable and Non-Transferable Licenses
It is generally a matter of negotiation between the parties to choose whether a license will be transferable or non-transferable to third parties. A strong licensor will generally reserve the right to transfer/assign as it wishes, but it will not allow the licensee to do so unless the licensor agrees in writing. Allowing the licensee to transfer the license to third parties creates the potential for licensees to profit further from the licensor’s IP as well as risking unchecked distribution of the IP.
What to Pay Attention to when Drafting a Licensing Agreement
There are several points that European SMEs should be aware of when drafting licensing agreements, since South-East Asian laws governing the licensing of IP rights may sometimes differ from the European laws. Below we will take a look at the main points to keep in mind, when drafting licensing or technology transfer agreements.
Protection of new IP rights generated
It is very important to address ownership issues in license agreements (i.e. who owns rights to the derivative works and improvements of licensed technologies), so that there will be no later disputes. In the absence of a clear contract on ownership rights, the law generally recognizes the creator of a work/inventor as the owner, even if the underlying licensed rights belong to another party. For example, the translator of an original licensed literary work would be the owner of the copyright of the translated work, even though the copyright of the underlying licensed work belongs to the original owner. The party who makes improvements to a technology based on the licensed technology automatically owns the IP rights on such improvements. The licensee can afterwards enter into a separate agreement to assign or license its rights to the improvements back to the licensor. Furthermore, many licensors in IP licensing contracts include so called “grantback” clauses providing that any improvements/modifications made to the licensed technology/work by the licensee shall belong to the licensor. Drafting of an effectual licensing agreement is a complicated and challenging process – it is advisable to seek advice of a local legal practitioner in order to avoid legal pitfalls.
SMEs should consider how the licensee may compete (unfairly or otherwise) in the market during and after the term of the license. Non-competition clauses are generally acceptable in Southeast Asia, though the region is adopting various anti-monopoly regulations which must always be considered in light of your desired non-competition covenant. Only if these restrictions are considered fair and reasonable under local law will they be upheld as valid. It is important to consider non-competition, especially if there are transitional arrangements in place between the parties such as at the start or end of an agreement. A zero-tolerance policy is usually unwise in Southeast Asia in the weeks just after completion, as things may move slower than expected.
Parties are free to select the governing law of their IP acquisition agreements and, generally within Southeast Asia, are not required to be based on the law of the jurisdiction where the assets are registered. Typically, this will be the law of the licensor’s jurisdiction, as they will want to ensure the adequacy and familiarity with their law in case of future disputes. There may, however, be relevant laws and regulations of the licensee’s jurisdiction where the IP exists which may require consideration. Certain technologies may be prohibited or restricted from foreign ownership or export and government approval for assignment may be required. If the IP is one part of a larger asset acquisition deal, then there may be local regulations which govern the acquisition of the other assets. Local legal advice is essential.
Monitoring of the Licensee’s Activities
To prevent unauthorized use of the licensed rights license agreements usually contain clauses stating that licensors can monitor and inspect the licensee company’s activities so as to prevent unauthorized use of the licensed rights. These clauses usually identify the parties who will have permission to use the licensed rights, as well as the security procedures that are in place to prevent unauthorized use or misuse of the IP assets.
Watch-outs Concerning Copyright
Copyright is slightly different in nature to other types of IP since the right in the work subsists upon creation or publication. It therefore tends to be more difficult to identify, manage and, consequently, to license. In addition, infringement of such copyright work, whether it is software, music or other work, is generally much easier, with modern media (the Internet) allowing for rapid copying and sharing of materials. In some Southeast Asian jurisdictions, such as Malaysia, Indonesia and Vietnam, it is possible to record ownership of copyright works. This may help the SME establish ownership when it comes to proving this to their business partner, or indeed to a court or administrative enforcement body.
South-East Asia IPR SME Helpdesk Team
The South-East Asia IPR SME Helpdesk supports small and medium sized enterprises (SMEs) from European Union (EU) member states to protect and enforce their Intellectual Property Rights (IPR) in or relating to South-East Asian countries, through the provision of free information and services. The Helpdesk provides jargon-free, first-line, confidential advice on intellectual property and related issues, along with training events, materials and online resources. Individual SMEs and SME intermediaries can submit their IPR queries via email (firstname.lastname@example.org) and gain access to a panel of experts, in order to receive free and confidential first-line advice within 3 working days.
The South-East Asia IPR SME Helpdesk is co-funded by the European Union.
To learn more about the South-East Asia IPR SME Helpdesk and any aspect of intellectual property rights in South-East Asia, please visit our online portal at http://www.ipr-hub.eu/.