Licensing is a business arrangement commonly regarded as an alternative to franchising. Under a licensing arrangement, the beneficial owner of the relevant intellectual property rights (“Licensor”) grants the other party (“Licensee”) the right to use or sell products or services under the Licensor’s intellectual property rights (“Licence”). These intellectual property rights include copyrights, trademarks, trade secrets and patents.
Mechanisms of Licensing
In contrast with franchising which is governed by the Franchise Act 1998, the concept of licensing is not governed by any specific legislation. The concept of licensing is purely based on the terms and conditions of the contractual agreement between the Licensor and the Licensee, which is more commonly known as a Licence Agreement.
A Licence Agreement will essentially set out, amongst other, the rights and obligations of the Licensor and the Licensee, the terms of the grant of the Licence, and the type of Licence granted to the Licensee. In consideration of the grant of the Licence to the Licensee, a licence fee is imposed on the Licensee, which will also be set out in the Licence Agreement. The licence fee is typically calculated based on a percentage of sales or profits made by the Licensee.
Types of Licences
There are various types of licences that can be granted by a Licensor, which are as follows:
1. Exclusive Licence
An Exclusive Licence allows only the named Licensee to use or operate under the relevant intellectual property rights owned by the Licensor. This means that any and all other parties, including the Licensor, are not allowed to use or operate under the relevant intellectual property rights.
2. Non-Exclusive Licence
In contrast with an Exclusive Licence, a Non-Exclusive Licence allows the Licensor and the named Licensee to use or operate under the relevant intellectual property rights. A Non-Exclusive Licence further allows the Licensor to grant the Licence to other interested Licensees to use or operate under the same intellectual property rights.
3. Co-Exclusive Licence
A Co-Exclusive Licence allows a Licensor to grant the Licence to more than one Licensee, but agrees to only grant the same Licence to a limited group of other Licensees. This type of licence is commonly regarded as a hybrid of an Exclusive Licence and a Non-Exclusive Licence.
4. Sole Licence
A Sole Licence allows only the Licensor and the named Licensee to use and operate under the relevant intellectual property rights. The Licensor does not have the right to grant the same Licence to other interested Licensees, and the named Licensee does not have the right to grant the same Licence to other interested sub-Licensees.
Advantages and Disadvantages
The concept of licensing is a business arrangement for the parties to agree on. However, before making a final decision towards any business arrangement, parties must be aware of and take into consideration the advantages and disadvantages of that business arrangement.
Advantages of Licensing
A Licensor can benefit from the granting of its Licence to the Licensee, as the licence fee sets up an opportunity for the Licensor to establish an alternate stream of income. For example, where a Licensor grants a Non-Exclusive Licence to four different Licensees, the Licensor will receive a licensee fee from each Licensee.
An advantage that Licensees can take into consideration is the amount of capital required to operate a business under a Licensor’s intellectual property rights, which is typically lesser as compared to the amount of capital required to start a brand new business. In addition, the Licensee may be able to reap more benefits if the trademark or brand name is already well-known.
Disadvantages of Licensing
In contrast with franchising, the concept of licensing allows a Licensee a vast amount of operational flexibility, which means the Licensor does not have much control over the Licensee’s business operations. Accordingly, the Licensor is exposed to a higher risk of misuse of its intellectual property rights.
Depending on the type of Licence granted by the Licensor, a Licensee may find itself competing with other Licensees operating under the same Licence. However, it is possible to minimize such risk by negotiating and incorporating a clause in the Licence Agreement, whereby no other Licensees are allowed to commence business operations within a specified radius from your business address and/or specified territory.
It is important that Licensors and Licensees understand that, despite the prospects of success under the concept of licensing, there can be no guarantee that a licensing business arrangement between a Licensor and a Licensee will be profitable. Often, where a Licensee does not make profits, the Licensor is not paid any license fee.
Differences between Licensing and Franchising
There is a fine line between the concept of licensing and the concept of franchising. As mentioned above, the concept of licensing is governed purely by the Licence Agreement, and the concept of franchising is governed by the Franchise Agreement which must be in accordance with the provisions of the Franchise Act 1998.
A key difference between the two concepts is that the concept of licensing offers more flexibility to a Licensee to conduct its business operations, while a franchisor retains a strict degree of continuous control over the operations of the franchisee’s business operations under a franchise business. Another key difference between the two concepts is the requirement to register the business before the commencement of business operations. While there is no requirement to register a business intended to be operated under a Licence Agreement, there is a requirement to register a franchise business under a Franchise Agreement pursuant to the Franchise Act 1998.
Licence Agreement amounting to a Franchise Agreement
Under the Franchise Act 1998, the four requirements to be satisfied for a business to constitute a franchise are as follows:
- Granting the right to operate a business according to the franchise system as determined by the franchisor during a term to be determined by the franchisor;
- Granting the right to use a mark, trade secret, confidential information or intellectual property owned by the franchisor to a franchisee, which includes a situation where the franchisor is licensed by another party to use any intellectual property and grants such right or license to the franchisee to use the intellectual property;
- Possessing the right to administer continuous control over the operations of the franchise business during the term of the franchise; and
- In consideration of the grant of rights, the franchisor is paid a fee or some other form of consideration.
It is easy for a Licence Agreement to be regarded as a Franchise Agreement based on the requirements above. More often than not, a Licence Agreement will satisfy requirements 1, 2 and 4 above. The main difference between the two agreements is the element of continuous control over business operations. Even where a Licence Agreement does not expressly contain or define the word “franchise”, the Licence Agreement may still be regarded as a Franchise Agreement should the Licence Agreement satisfy all four franchise requirements, particularly the requirement of continuous control.
The concept of licensing is strictly based on the Licence Agreement entered into between a Licensor and a Licensee. As it is purely based on the Licence Agreement, there is no specific legislation for a Licensor and a Licensee to adhere to, as compared to commencing a franchise business. However, although it is more simple to operate under a Licence Agreement, there is no guarantee that the concept of licensing will succeed. As such, parties should take into consideration all factors before executing the Licence Agreement.
By Tommy Wong
Note: This article does not constitute legal advice to any specific case. The facts and circumstances of each and every case will differ and therefore will require specific legal advice. Feel free to contact us for complimentary legal consultation.