Intellectual Property Licensing: 8 Key Things to Consider Before Licensing Your IP

You have spent years building your business. Along the way, you have developed valuable intellectual property (IP), perhaps a trademark, software, technology or product design.

Now, you have decided that it is time to scale the business.

You found an investor who is willing to invest. The investor contributes capital, while you contribute the IP and know-how. Together, you will set up a new spin off company and become shareholders.

There is just one thing you are not comfortable with.

You are comfortable collaborating with the new investor, but you are not ready to transfer ownership of your IP to the new company.

Can you keep the IP in your existing company and allow the spin-off company to use it?

Yes. One way of structuring the arrangement is through IP licensing.

Your existing company remains the owner of the IP and grants the spin-off company a licence to use it. Depending on the arrangement, the spin-off company may pay a licensing fee or royalty in return.

The next question is more difficult:

How should you structure the IP licensing agreement between your original company and the spin-off company?

Here are eight key issues to consider.

1. Have You Registered Your Intellectual Property?

Before discussing the IP licensing agreement, start with the IP itself.

Have you registered the IP that you intend to license?

Depending on the type of IP involved, this may include protecting your:

• brand through trademark registration;

• software through copyright registration and, where applicable, patent registration; or

• product design through patent and/or industrial design registration.

Registration does more than protect the IP owner's rights. It also provides greater certainty as to the ownership of the IP.

From an investor's perspective, this provides greater confidence, as the very foundation of the collaboration is secure. The investor does not have to worry that any Tom, Dick or Harry can simply use or claim the IP.

2. What Intellectual Property Are You Licensing?

Once you have identified the IP, the next step is to clearly define what is being licensed.

Are you licensing your:

• trademark;

• copyright;

• patent;

• industrial design; or

• other technology or IP?

  
  

If the relevant IP has already been registered, the registration details can provide a clearer legal foundation for identifying the licensed IP in the licensing agreement.

But identifying the IP is only half the exercise. You also need to define the scope of the licence.

Can the licensee manufacture products using the IP? Can it sell them? Modify the software? Reproduce copyrighted materials? Advertise using the trademark?

A good IP licensing agreement should not merely state what the licensee can do. It should also make clear what the licensee cannot do.

This distinction matters. Do not leave the scope of an IP licence to assumption. Define it from the outset.

3. Where Can the Licensee Use the IP?

Territory is another issue that can easily be overlooked.

Imagine that you grant a distributor a licence to use your trademark or patent in Malaysia.

Does that mean the distributor can export the licensed products to Singapore? Indonesia? Hong Kong?

What about online sales? Can the licensee sell through its website to customers outside Malaysia?

Your IP licensing agreement should clearly specify the territory in which the licence may be exercised.

A useful example is a Malaysian case GS Gill Sdn Bhd v Descente Ltd [2010] 5 CLJ 613. Descente owned the Le Coq Sportif trademark and licensed GS Gill to manufacture and sell products bearing the trademark, subject to specific restrictions. In particular, the licensed products were only permitted to be marketed within Malaysia and Singapore. GS Gill was subsequently found to have made a sale involving shipment of the products to Hong Kong, outside the permitted territory. The Federal Court treated the transaction as an export sale in breach of the licensing agreement.

The case shows a simple but important point: a licence does not give the licensee an unrestricted right to use the IP. What the licensee can or cannot do depends on the scope of rights granted under the licensing agreement. This is why the permitted activities and restrictions should be clearly defined from the outset.

If you only intend to grant rights for Malaysia, say so. If online or cross-border sales are permitted, define their scope.

A clearly drafted territorial clause gives both parties a contractual reference point if the licensee later expands beyond the agreed market.

4. How Will You Protect the Quality of Your Brand?

This is particularly important in trademark licensing.

Suppose your licensee starts selling poor-quality products under your trademark.

The customer may not know that those products were manufactured by your licensee. They simply see your brand on the product.

Your reputation may therefore suffer even though you were not directly involved.

This is why an IP licensing agreement involving trademarks should address quality control.

Depending on the business, this may include requirements concerning product specifications, packaging, marketing materials, inspection rights and compliance with applicable industry standards.

The case Playboy Enterprises International v Zillion Choice Sdn Bhd & Anor [2011] 2 CLJ 329 shows why quality control matters in trademark licensing. Playboy licensed Zillion Choice to manufacture and sell products bearing its trademarks, but the agreement required products and designs to go through Playboy's approval process before they were sold.

The dispute arose when Zillion Choice sold products bearing the Playboy trademarks without obtaining the required approval. The High Court regarded Playboy's right to approve products before sale as an important quality control measure under the trademark licence.

The lesson for trademark owners is simple: if someone else is putting your trademark on their products, you should retain sufficient control over the quality of what carries your name.

5. How Will the Royalty or Licensing Fee Be Calculated?

One of the first questions business owners ask is:

"How much royalty should I charge?"

Perhaps the better question is:

"How should the royalty be calculated?"

There is no single payment model suitable for every IP licensing arrangement.

The parties could agree on a fixed licensing fee, a percentage of sales or another commercial structure that fits the business model.

You should also decide when payments are due. Will the licensee pay monthly, quarterly or annually?

If royalties depend on sales, another question immediately arises:

How will you know whether the sales figures reported by the licensee are correct?

The agreement should therefore consider reporting obligations and whether the licensor has audit rights to verify the licensee's records.

It should also deal with late payments and the consequences of failing to pay licensing fees or royalties on time.

A clear royalty and payment mechanism can reduce future disputes and make enforcement easier if something goes wrong.

6. Who Owns Future Improvements and Newly Developed IP?

Your licensing agreement should address ownership, but this is not as simple as saying: "The original IP belongs to the licensor."

Of course, you may want the trademark, patent, copyright, industrial design or other existing IP to remain with your original company.

But what happens after the collaboration begins?

Suppose the parties work together and develop:

• new software;

• improved technology;

• new written materials;

• a new trademark; or

• improvements to the existing product.

  
  

Who owns this newly developed IP? Does it belong to the original IP owner? The spin-off company? The licensee?

This is something both parties should discuss before the new IP is created.

Once the collaboration is successful and valuable new intellectual property has been developed, negotiating ownership can become much more difficult.

There is not necessarily one right answer.

The parties may agree that improvements belong to the original company. Alternatively, they may decide that newly developed IP should belong to the spin-off company.

What matters is that the issue is discussed and clearly recorded in the agreement from the beginning.

7. What Happens When the Licensing Relationship Ends?

Every commercial relationship can eventually come to an end.

Your licensing agreement should therefore provide a clear exit mechanism.

For example, what happens if the licensee:

• sells products outside the permitted territory;

• uses the IP beyond the agreed scope; or

• fails to pay royalties or licensing fees?

  
  

Should the licence terminate immediately?

Should the licensee first be given an opportunity to remedy the breach?

And once the agreement ends, what happens next?

Should the licensee immediately stop using the trademark? What happens to confidential materials or technology provided by the licensor?

If the parties decide to close the spin-off company, what happens to improvements or new IP developed during the collaboration?

These questions are much easier to answer before the relationship breaks down.

8. How Will You Resolve a Dispute?

Finally, consider what happens if the parties cannot agree.

Your IP licensing agreement should address matters such as the governing law, jurisdiction and method of dispute resolution.

Will disputes be resolved through court proceedings? Arbitration? Another form of alternative dispute resolution?

This becomes particularly important in cross-border intellectual property licensing.

For example, your company may be Malaysian, but your investor or licensee may be based overseas. If a dispute arises, the parties do not want the first argument to be about where the actual argument should take place.

Agreeing on these issues at the beginning provides greater certainty if the commercial relationship later deteriorates.

A Common Mistake: Using a Template Without Considering the Actual Deal

One of the most common mistakes is also one of the easiest to make: downloading an IP licensing agreement from the internet and using it without considering the actual transaction.

Every licensing arrangement is different.

A trademark licensing agreement for a consumer brand raises different concerns from patent licensing for manufacturing technology or copyright licensing for software.

Even if you start with an online template or an agreement generated using AI, read it carefully.

Ask whether it actually reflects the deal you have negotiated.

If necessary, have a lawyer review the agreement with you so that the document reflects the actual commercial arrangement rather than forcing your business transaction into a generic template.

Conclusion

An intellectual property licensing agreement is not simply a document giving another party permission to use your IP.

It determines what intellectual property is being licensed, what the licensee can do with it, where it can be used, how you will be paid, who owns future improvements and what happens when the relationship ends.

Thinking of Licensing Your IP?

If you are planning to license your trademark, technology, software or other intellectual property, get the commercial terms right before the collaboration begins.

A good IP licensing agreement should reflect how the deal actually works — what your partner can do with your IP, how you get paid, who owns future improvements, and what happens if things do not go according to plan.

Feel free to speak to LAWENCO if you would like us to help you structure, review or negotiate your IP licensing arrangement.

Written by,

Lawrence Tan 

Registered Trademark, Patent and Design Agent

LL.B (HONS), CLP

Advocate & Solicitor

Disclaimer: This article is for general information only and does not constitute legal advice. Intellectual property licensing arrangements vary depending on the circumstances. You should obtain legal advice specific to your business and transaction before entering into any licensing agreement.