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Monday, 18 April 2011

Two Riffs on Sublicensing


Can there be a topic in IP licensing that is more neglected than sublicensing? When this Kat was asked to prepare a talk on the topic a half-decade ago, he was surprised -- no, he was stunned -- at the paucity of both relevant secondary literature and instructive judicial discussion (especially, sorry to say, in the UK). While we all intuitively know that the practice of IP sublicensing is common, it is so very difficult to find useful guideposts, both in concept and in practice. This ranges from a lack of consensus on the legal justification for sublicensing to a list of the recurring commercial circustances in which sublicensing takes place.

Since that talk, this Kat has taken a particular interest in the subject, and he is always on the lookout for new uses for the sublicensing arrangment. During the last year, he has encountered two recurring situations of particular interest.

In the first, the licensor, licensee/sublicensor and sublicensee are all part of the same corporate group and are directly or indirectly under the same ownership. The ultimate intended user of the licensed right (say software) is the sublicensee, but it is the licensee that has the most substantial ongoing commercial activities (especially if the licensor is an IP-holding company) Under such circumstances, what are the most efficient arrangements to enable the licensee to maximizze its tax position, taking into acount the deduction for the payment of the royalty to the licensor, on the one hand, and receipt (or imputed royalty income) from the sublicensee, on the other? How different are the considerations when the licensor is not a mere IP-holding company but has fully-fledged operations? Depending on the answer to these considerations, the very locus of the various entities to the licensing arrangement may differ.

In the second, the licensor provides a platform intended for customers of the licensee 
which includes, as a central part of it, use of the licensor's IP. The licensee itself makes no use of the licensed IP right. Rather, it merely serves as a legal conduit (what sometimes is characterized in a license/sublicense agreement as a "pass-through" license) by which the right to use the IP is granted to the licensee's customers. Indeed, if the platform is online, the licensee may not even provide the sublicensee customers with the software or the like and, in principle, the licensor could provide the customers with the software directly.

Here, the interest of the licensor is to bring the licensee into the set of contractual arrangements with respect to the licensed IP right, whereby the licensee will ultimately be responsible for the management of the use of the IP rights by the customers (including collection of payments, a portion of which is then remitted to the licensor). All the licensor wants to do is "clip the coupon" from revenues received from customers, and leave all of the rest (including liability for customer conduct) to the licensee.

Readers' comments on these, or other sublicensing scenarios, are welcome. Indeed, for those of you who cannot get enough of sublicensing, this Kat will be delighted to share his work-in-progress PowerPoint on the topic. Just let him know by email here, using the subject line 'Sublicensing'.

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