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."