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Sunday, 29 April 2012

Why Do People Sublicense: Let Me Count the Ways

This Kat will begin with a one-sentence muse. The ultimate challenge in writing about IP is

trying to say something categorically meaningful about how IP plays itself out in that most elusive of places, "the real world." This has once again become acute as this Kat works on an article on one of his IP fascinations--sublicensing. In particular, we have been wrestling with the question of "why do people engage in sublicensing"? We can discourse about how to define sublicensing, what is its legal rationale and what are its most distinctive contractual elements. But all of these considerations rest on the fact, as this Kat's anecdotal experience confirms, that the sublicensing of IP rights is a wide-spread phenomenon. If so, how can this Kat get its "IP paws" around that most simple of questions--"why do people engage in sublicensing"?. As with so many deceptively simple questions, the answer is both multi-layered and multi-faceted. Set out below is our first feline stab at offering an answer.

1.The licensor and licensee may be seeking additional revenues for exploitation of the licensed intellectual property rights. What better way to do so than to share in sublicence royalties.

 2. The exclusive licensee may not be easily able to meet its minimum royalty payments, but sums reasonably received from the sublicensee will likely enable the licensee to do so. (Separately, of course, the question then remains--What is meant by an "exclusive licence" when the exclusive license grants a sublicence?) 

3. In a version of the foregoing, the licensor may from the outset set a high minimum royalty payment for the licensee, secure in his belief that the licensor will be able to identify and manage a successful sublicensee in the territory.

4. By providing for a sublicence, the sublicensee may seek to fulfill market demand that
the licensee is itself unable to satisfy on its own.

5. The sublicense may be necessary to meet customers’ requirements for second sourcing of a product manufactured under the IP right. Here, the impetus comes from the downstream actor, namely the ultimate customer, concerned to protect a reliable supply of the licensed product.

6. The licensor may not itself exploit the IP rights or arrange for exploitation by third parties on a contract manufacturing basis. Instead, all exploitation will take place by the sublicensee under the supervision of the licensee.

7. In a specific instance of the foregoing, the structure of the commercial relationship with the licensor may be such that it is intended that only the sublicensee(s) are intended to exploit the IP. This is especially so in franchise arrangements, where the franchise is often structured to provide for a master franchisee in the territory, which does not directly operate any licensed units, but rather manages a chain of franchisees/sublicensees.

8. The grant of a sublicence may be required to resolve a legal challenge to either the licensor or licensee, such as where there is a competition law concern that the licensee enjoys a dominant position. The presence of a sublicensee may allay this concern, provided that the sublicence is made between unrelated parties.

This is this Kat's initial list. Has he missed anything obvious? To remind you--the task is to create a comprehensive list for that most challenging of questions--"why do people enter into a sublicensing arrangement."

5 comments:

Mark said...

Not sure if it comes within your existing list, eg points 4 or 7, but in the biotech world there is a great deal of sublicensing. This might be because (a) the licensee is itself a small biotech that can raise funds for development activities but will need to license on to a major pharma for late stage trials and product sales, or (b) the licensee needs to sublicense affiliates or others in particular territories where it does not have a presence, or (c) the deal structure involves appointing someone other than the licensee to undertake some aspects of commercialisation, eg manufacture or marketing, and the relationship is better characterised as a sublicense rather than as a subcontract.

Paul said...

We usually stipulate that sub licences will be agreed where the manufacturer to whom we have granted an exclusive licence fails to exploit a territory in which there is demand. We know that this will almost certainly be the case for successful products since few manufacturers in our business operate on a global scale. However, the manufacturer, however small, would usually be unwilling to tool up for our product if they were not licensed exclusively in the first instance. Like Mark, not sure if this is already covered in the list.

Anonymous said...

What about simplifying the chain of responsibility and lowering transaction and enforcement costs? Essentially: simplicity and transparency.

Especially relevant in licensing a corporate group, when the IP owner wants a single point of responsibility and complaint, and the licensee group wants to ensure that the entire edifice is free of accusations of infringement. Not sure that is covered in the list in your posting.

Mark said...

I agree with Anonymous. Some licence agreements deal with this by making the definition of Licensee something like "Licensee Party and its Affiliates" but this has always seemed to me really unclear as to whether the Affiliates are (a) third party beneficiaries, (b) bound by the Licensee's obligations, and if so how, or (c) a direct party to the agreement, and if so how.

Michael Lin said...

I'm not sure which category(ies) below these situations fit into (all taken from real-life examples):
1. Where the licensee needs certain components and parts/services from a sublicensee which either fall into the IP right, and/or if completed by a non-sub-licensee would be contributory infringement, a sublicense is required. The sublicensee may be a separate entity, or even a wholly-owned subsidiary of licensee.
2. In a case where the licensee needs to guarantee supply AND a low price to the licensor, the licensee may need a sublicense. For example, Supplier A licenses a patent for the low-cost production of ethylene from Owner. Supplier A promises to provide 10,000 tons/year of ethylene to Owner. Supplier A's plant blows up. Supplier A now needs the resources of Supplier B's plant to complete the contracted amount of ethylene/year. However, as they are technically competitors, Supplier A does NOT want Owner to directly grant Supplier B a license. So Supplier A sublicenses to Supplier B, with the proviso that all ethylene made with this process is sold to Supplier A, and NOT to anyone else.
3. A University licenses a plastic production technology to Licensee for a flat fee. Licensee seeks to have many packaging makers use the technology so that A) it becomes an industry standard, and B) so that they can get broad royalties from many sources. Therefore Licensee sublicenses to many different and competing packaging manufacturers. This also allows the Licensee to play each supplier off of each other to get a lower or "most favored nations" price.
4. Volvo develops and patents air bags for cars, and patents them as well as the process, and components therein. For public safety and goodwill reasons, Volvo licenses this to all the car manufacturers (at perhaps a nominal rate). The car manufacturers need to have sublicenses in order to have the components made by their suppliers in the logistics chain.

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