IP licensing
“Intellectual property” (IP) refers to the bundle of legal rights granted, usually by legislation, in various types of industrial or creative material, eg copyright in books, plays, artworks and music, patents in inventions, design registration in the appearance of products and registered trade marks. See here for the different types of IP in Australia.
As the name suggests, intellectual property is property. It can be bought and sold and it can be licensed. Intellectual property licensing essentially means giving someone else permission to exercise some or all of the rights that make up the IP.
For example, in Australia copyright in a book includes the exclusive rights to copy the book and communicate the book to the public online. Thus, in a publishing agreement (which is a copyright licence) the author normally owns the copyright but gives publisher the right to make print copies and electronic copies of the book.
An IP licence can be in writing, verbal or even implied from the circumstances. However, if valuable IP is involved, the licence should always be in writing. This is the best way to avoid future disagreement about what the parties actually agreed. A well-drafted licence agreement will set out the rights licensed, the obligations of each party and allocate the risks of the transaction.
Terminology of IP licences
In intellectual property licensing the licensor is the person who is granting the rights. The licensee is the one who is receiving the rights. The licence will typically allow the licensee to make and sell the licensed product (the book, play, widget etc).
If a licensee is permitted by their licence to further license the IP to one or more other parties, they are called sublicensees.
Who drafts an IP licence?
In intellectual property licensing, it is often the licensor’s lawyer who prepares the agreement because the licensor own the rights (with some exceptions, eg book publishing). When a lawyer drafts an agreement, they usually slant the agreement for the benefit of their client. So a draft prepared by a licensor will look different to a draft prepared by a licensee.
If you receive an agreement from another party, you may wish to negotiate the terms to better protect your interests (unless it is a take-it-or-leave-it type of agreement).
What to consider when licensing intellectual property
A business’ IP is valuable. It can be used by the business itself to give it a competitive advantage. Alternatively, it can be licensed to someone else in return for a revenue stream. If you are considering licensing your IP, you will need to think about the questions below. If you engage a lawyer to draft an IP licence, it would be helpful if you think about these issues before meeting your lawyer, so that you be prepared for the meeting.
Question |
Issues |
| What rights are to be licensed? | Is it only a patent or is there also confidential information? Does the licensor use a trade mark? Rights need to be identified clearly in the agreement, eg the country, number and title of registered rights |
| Where can the licensee use the rights? | The territory must be specified, ie the country or countries or other area where the licensee can use the rights. IP rights are regulated country by country, so owning IP in one country does not mean you automatically own IP in another country |
| Is the licence exclusive or non-exclusive? | In an exclusive licence the licensor will only grant one licence to this licensee and cannot use the IP itself. In a non-exclusive licence the licensor can grant other licences of the same IP to other licensees and can use the IP itself |
| Can the licensee sublicense? | This can increase the revenue from the licence and may be important if the territory is world-wide |
| How long will the licence last? | The term may be for 1, 2, 5 years or any other period. For patent or design licences, it may be for the term of the patent/design. The agreement may provide for renewals of the term – either automatically, upon agreement between the parties or allow the agreement to continue unless one or other party terminates the agreement |
| What will the licensee pay? | A commercial licence normally involves payments from the licensee to the licensor. These can be one or more of – upfront payments, fixed recurring payments or royalties. Royalties are normally calculated as a percentage of the sales of the licensed product. If there are fixed recurring payments, will these increase over time and, if so, how? |
| Minimum sales/ payments and milestones – are they realistic? | Minimum sales/payments or milestones protect the licensor against an underperforming licensee, especially if the licence is exclusive, where the licensor is depending on one licensee to commercialise the licensed product. The agreement may require the licensee to sell a minimum quantity of licensed product. Failure to meet minimum sales may mean either that the licensee must pay a minimum amount even if it did not sell this much, or the licensor may be able to terminate the agreement or turn the licence into a non-exclusive licence. For licences involving the development of a product, milestones for the commercialisation process may be set and breach may allow the licensor to terminate the licence. |
| Who pays the IP prosecution and maintenance costs? | For registered types of IP (eg patents, trade marks, designs, plant breeders rights), a licence needs to specify who is responsible for the costs of applying for and renewing the IP, and what happens if the parties disagree about what should be protected. These costs can be significant if patents are involved or the IP portfolio is large |
Other typical clauses in an intellectual property licence
Issue |
Provision |
| Statements and reports | Payments by the licensee to the licensor are usually accompanied by a statement about the level of sales by the licensee and any sublicensees. At least annually, the licensee may be required to provide a report on sales and marketing activities to show they are maximising revenue |
| Auditing records | If the agreement provides for royalties based on sales, the licensee normally must keep sales records and allow the licensor to inspect them. This is to make sure that the licensee is not cheating the licensor by under-reporting sales and failing to pay all royalties due |
| Quality control | An important part of IP licensing from the licensor’s perspective is to make sure that licensed products are of good quality and the licensor’s reputation in its trade marks is maintained. Thus a licence will include quality control provisions, eg the licensee must supply to the licensor samples of the licensed product and examples of use of the trade mark(s) and must allow the licensor to inspect the manufacturing premises |
| Who bears the risk? | If a licensor is responsible for drafting an IP licence, the draft will often try to exclude or limit liability on the part of the licensor, exclude licensor warranties and require the licensee to indemnify the licensor against any claims made by a third party because of the conduct of the licensee or sublicensees |
Issues for a licensee
If you receive an IP licence drafted by someone else, it is best to get a lawyer to review it. Is the draft fair? Are the obligations on the licensee reasonable? It is a good idea for the proposed licensee to undertake due diligence about the IP they are proposing to license.
If you would like an IP licence drafted, I can create a bespoke agreement that meets your commercial needs. If you have received a draft licence from the other side, I can advise you about it and negotiate with them to see that your rights are better protected.
This is general information only, and is not intended as legal advice specific to your circumstances. Please seek the advice of a lawyer if you have any particular questions.
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© Margaret Ryan, Melbourne, Australia, 2026