by Reto Hilty
1. Definition and characteristics of the license agreement
The license agreement (Lizenzvertrag, contrat de licence) permits the licensee to use an intellectual property right or a trade or business secret. The reciprocal rights and obligations are determined privately and autonomously by the parties. There is no catalogue of the features that characterize this contract that is recognized throughout Europe. However, in a comparison of the legal systems, the following elements can be regarded as typical: (i) at least two parties are involved, namely a licensor and a licensee; (ii) the licensor permits the licensee to use, with or without restrictions, the contractual subject matter to which the licensor is entitled; (iii) the contractual relationship is as a rule concluded for a specific or an unspecific duration; (iv) as a rule, the licensee is obliged to render consideration.
The subject matter of a license agreement can, on the one hand, be intangible goods to which the licensor holds a legal right to prevent use (genuine license agreements), such as industrial property rights, copyright or related rights (copyright), as well as certain personality and name rights (law of names). It is, on the other hand, also possible to license de facto exclusive goods, in particular secrets or know-how (non-genuine license agreements).
The licensor can be anyone who holds a de jure or de facto exclusive right, or even the licensee himself in a sublicense relationship. Cross-licenses are also possible, in which the parties reciprocally grant each other licenses and act alternately as licensee and licensor; in more complex relationships between the parties, the subject matters of the license are often brought into a license pool.
The licensor is typically obliged to provide and maintain the enjoyment of the right; there may also be a restriction on the grant of additional licenses or on the licensor’s own use. It is also possible to agree on obligations to improve the subject matter of the license, provide guarantee commitments, most-favoured-party clauses, or competition agreements; the latter can be the subject matter of a review under antitrust law (intellectual property and restraints of competition).
The licensee’s usual obligation to provide consideration (except in the case of a free license) is mostly in the form of a monetary payment, combined—in the absence of a lump sum agreement—with an obligation to render accounts (for instance, a turnover or profit-related or mixed license fee). In addition, it is also possible to agree on obligations to use, to improve the subject matter of the license, to use specific labelling or advertising, as well as non-contestation clauses.
The substantive applicable contract law is disputed and is not determined uniformly in the different legal systems. In Germany, the majority of judgments assume a sui generis contract, but in practice—alongside the application of general contract law—there is frequently a less systematic recourse to special contract categories (in particular rent law and the law of sales). In other legal systems, the proximity to contracts for the transfer of use is given greater emphasis (eg in France, contrat de louage). In any event, the license agreement is mostly regarded as a risk transaction in which neither of the parties can predict and guarantee the commercial success of the agreement. This tends to lead to a reduction of the licensor’s liability unless he assumes corresponding guarantees or there is a default (eg the invention fails to work) that is regarded as foreseeable. In the case of ex post nullity, the restitution of the license fees is generally refused.
Licenses can be registered in certain industrial property rights registers, such registrations having different effects depending on the legal system. In German law, registration only has a declaratory effect, and the substantive legal situation alone is decisive. In other legal systems (such as France, Italy, Switzerland and Austria) the licensing—like assignments—of intellectual property rights only has an effect as against third parties (except in cases of bad faith) following registration. European law shows a clear tendency towards the latter solution, ie the register concerned has the effect of a public announcement.
The license agreement must primarily be distinguished from assignment agreements. The identifying feature of the license agreement is that the licensor fundamentally retains control over the subject matter of the agreement and that the duties specified are of the nature of a (continuous) obligation; they end ex nunc upon expiry of the term of the contract or by notice of termination. In contrast, in an assignment the subject matter of the agreement is disposed of in a manner that is ultimately an exchange relationship (as a rule a purchase contract). In light of the nature of the intangible subject matter of the agreement, the assignment contract can, however, assume different forms that are not always so easy to differentiate from the license agreement, such as in the case of a partial or limited assignment.
The license agreement must also be distinguished from service agreements (service contracts), in which the focus is not on the use of a ‘completed’ intangible good but rather, for instance, on its production. Franchise agreements (franchising), for instance, constitute a particular form of license agreement, in which the franchisee sells the products or services of the franchisor subject to the obligation to comply with requirements concerning presentation, names, labelling, etc. In the case of quasi-partnership license agreements, the parties pursue a common objective, which may lead to increased duties of allegiance.
2. Categories of license agreements
There are many ways of structuring a license agreement; in practice, this has led to the formation of certain non-exhaustive categories. A superordinate factor is the distinction between whether the parties conclude the agreement on a consensual basis or whether the permission to use under given conditions is based on a statutory regulation in the legislation concerning intellectual property rights (conditional licenses, such as the compulsory license pursuant to Art 12 of the Biotechnology Directive 98/44).
Conditional licenses are always of a negative nature, ie they only constitute a (legally imposed) waiver of the assertion of the right without any further obligations on the part of the licensor. Also, consensual licenses can be agreed purely negatively; this, for instance, excludes all liability on the part of the licensor for default in the subject matter of the license. As a rule, however, the assumption is that the grant of a license is of a positive nature, ie the contents of the contract constitute not merely a waiver but also the procurement of a positive right to use with specific features, combined with liability in the event of defaults, eg if third-party rights exist with respect to the subject matter of the license.
A central factor for the categorization of (consensual) license agreements is the question of the scope and form of the permission to use from a variety of aspects. First of all, a distinction must be made between non-exclusive and exclusive licenses. The feature of the former is that the licensor is entitled to grant additional licenses concerning the subject matter. In the case of an exclusive license, in contrast, further grants of license are excluded, although a distinction can also be made as to whether the licensee reserves the right to use (sole license). In practical terms, it is also possible to conceive of mixed forms in which, for instance, only certain additional licenses can be granted (qualified licenses).
The division into exclusive and non-exclusive licenses has led to a theoretical discussion on the legal nature of the license agreement, which is not regarded uniformly throughout Europe. While the majority of countries regard all forms of the license agreement as a purely contractual legal transaction (juridical act), the prevailing doctrine in Germany and Austria only regards the simple license in this way while the exclusive license is seen as being quasi in-rem (or rather, erga omnes), ie with effect as against everyone. The practical effect of this difference is that the (exclusive) licensee, without this approach, is—theoretically—deprived of an own entitlement to take legal action against third parties (eg in the event of infringement) and of succession protection in the event of a disposal of the licensed subject matter by the licensor. These different points of view have prevented harmonization so far being achieved at the European level, and thus the EU Member States pursuant to Art 4(b) of the Enforcement Directive 48/2004 can ‘in particular’ grant licensees the right to petition for the remedies provided for in the Directive in the event of infringement of intellectual property rights only ‘in so far as permitted by and in accordance with the provisions of the applicable law’. From a practical point of view, the benefits of the erga omnes interpretation of the exclusive license are today doubtful; they do not necessarily correspond to the intentions of the contracting parties, nor does the strict division into two parts reflect contractual reality. Instead, the desired protection of the licensee can be achieved using corresponding statutory provisions, as is increasingly occurring both at the national (including Germany) and European level (see also 3. below). In addition, the parties themselves can achieve corresponding effects by means of a restricted assignment; ultimately, the differences are thus reduced to the terminological level.
From the point of view of the parties, the limits of the licensee’s entitlement are of fundamental importance; these limits can be either substantive (production, marketing, user licenses, etc), geographical (territorial license), quantitative (quota licenses), or time-based.
Defaults of performance result specifically from the failure to respect such contractual limits of the licensee’s entitlement. Not only may contractual obligations be infringed, but also intellectual property rights involved insofar as a right of exploitation has not been granted. Already preceding the conclusion of the contract, license agreements are characterized by extensive duties directed at the provision of information and corresponding pre-contractual forms of liability. Furthermore, typical problems include, on the one hand, difficulties with regard to the subject matter of the license, which subsequently—but with ex tunc effect—may turn out to be legally inexistent (eg a granted patent for a progression that already forms part of the state of the art) or which, contrary to the assurance of the licensor, never arises for failure of being granted. Often such legal defects become evident only years after exploitation has ensued, this being a daunting doctrinal challenge for legal systems in which such constellations are qualified as forms of ab initio impossibility, which entails the contract being null and void. On the other hand, complex problems arise where third parties are involved, specifically in those cases where prior rights conflict with the subject matter of the license or where the subject matter of the license is transferred without the entitlement to the intellectual property right. Nowadays, and particularly so in Union law, the latter problem is often dealt with by having recourse to specific functions of the registers involved (see also 3. below); in the case of copyright this solution is not available, though, as corresponding registers do not exist.
3. The license agreement in international and European law
As in most national legal systems, the license agreement has not been subjected to detailed regulation at international or at Union level. Its lawfulness is, instead, assumed, as is shown by sectoral provisions both in intellectual property law (where at times a distinction is made between a selective assignment of the rights and a continuing permission to use by means of a license; see also Art 9(4) of the Rental and Lending Rights Directive 2006/115) and in competition law.
In the field of intellectual property legislation, the term license is used in a number of Union legislative texts; however, there are no provisions concerning the parties’ mutual rights and obligations, since harmonization only extends to the intellectual proprietary rights as such—as ‘objects of property’ (Arts 16–24 Reg 207/2009; Arts 27–34 Reg 6/2002; Arts 22–28 Reg 2100/94)—but not to the corresponding contractual issues. For the latter, the European legislation as a rule refers to the legal systems of the Member States, and in the absence of specific regulations to the contrary, the Community rights (Community trade mark, Community design, plant variety protection) and the (bundle) patent (patent law, European patent) that exist independently of Union law are subject to the provisions of the Member States that would apply to a corresponding national proprietary right (Art 16 Reg 207/2009; Art 27 Reg 6/2002; Art 22 Reg 2100/94; Art 74 EPC).
There are also a number of indications in Union law that give certain contours to the category of the license agreement. Thus, the lawfulness of the substantively and geographically restricted licenses derives not only from the need to review corresponding agreements under antitrust law; with respect to the various intellectual proprietary rights themselves, it is made clear in a variety of ways that they can be the subject matter of licenses in whole or in part, exclusively or non-exclusively, for the entire territory or only a part of the Community (see eg Art 7 of the Trademark Directive 2008/95; Art 22(1) Reg 207/ 2009; Art 32(1) Reg 6/2002; Art 73 EPC; slightly different, Art 27(1) Reg 2100/94). Similarly, Union law makes it clear that an infringement of a temporal, substantive or geographical restriction of the license by the licensee infringes not only contractual rights but also the underlying property right (Art 8 Trademark Directive 2008/ 95; Art 22(2) Reg 207/2009; Art 32(2) Reg 6/2002; Art 27(2) Reg 2100/94).
The doctrinal differences concerning the legal nature of the (exclusive) license (see 2. above) are then taken up at a number of points in Union law. First, subject to certain conditions, the licensee’s status as plaintiff is embodied in the law in the event that third parties infringe the licensed right. Even if the consent of the rightholder is required as a matter of principle, the exclusive licensee can act autonomously if upon demand the licensor himself fails to file an action for infringement within a reasonable time. In addition, any licensee can join an infringement action filed by the rightholder in order to claim compensation for his own losses (Art 22(3-4) Reg 207/2009; Art 32(3-4) Reg 6/2002). Secondly, Union law lays down the constitutive effect of the registration of assignments and licenses as against third parties. Before registration, therefore, acquisition in good faith (acquisition of ownership from a non-owner) is possible (Art 23 Reg 207/2009; Art 33 Reg 6/2002; concerning assignment, Art 23(4) Reg 2100/94)
With respect to competition law (competition) the license agreement is subject to selective statutory provisions within the framework of what is known as antitrust licensing law, specifically the question of the extent to which contractual clauses constitute agreements that are an obstacle to competition within the meaning of Art 101 TFEU/81 EC. This problem is also addressed at the international law level (Art 40 TRIPS), since the license practices that restrict competition also have a negative effect on trade and restrict the transfer and dissemination of technology.
At the European level, the relevant requirements are given concrete form in the block exemption regulations pursuant to Art 101(3) TFEU/81(3) EC; of initial relevance for the license agreement is the Technology Transfer Regulation 772/2004. In contrast to its predecessor regulation, 240/96, recital 5 of which had set out a definition of the license agreement, Reg 772/ 2004 uses the broader term of the technology transfer agreement, which includes patent license agreements, know-how license agreements, software copyright license agreements or mixed patent, know-how or software copyright license agreements as well as agreements that relate to the sale or purchase of products or to the licensing or assignment of intellectual property rights, provided that those provisions do not constitute the primary object of the agreement and are directly related to the production of the contractual products. Technology transfer agreements also include ‘assignments of patents, know-how, software copyright or a combination thereof where part of the risk associated with the exploitation of the technology remains with the assignor, in particular where the sum payable in consideration of the assignment is dependent on the turnover obtained by the assignee in respect of products produced with the assigned technology, the quantity of such products produced or the number of operations carried out employing the technology’ (Art 1(1)(b) of Reg 772/ 2004). The core of the European legislation draws from the US Antitrust Guidelines for the Licensing of Intellectual Property of the US Department of Justice and the Federal Trade Commission dated 6 April 1995; the primary criterion for the non-application of antitrust law is the market share threshold (Art 3 of Reg 772/2004), with specific agreements being defined as hardcore restrictions (Art 4).
4. The license agreement in uniform law
The license agreement as an independent contractual category has not yet been given particular consideration in the academic drafts for a European contract law. Accordingly, with respect to questions concerning reciprocal rights and obligations, defaults in performance and the like, recourse must be had to the general provisions such as the Principles of European Contract Law (PECL). Nor does Book IV on specific contracts in the Draft Common Frame of Reference (DCFR) contain any provisions concerning license contract law. Nevertheless, this latest text for a uniform European contract law contains certain references to contracts concerning intellectual property rights. Indirectly, a number of the basic features of the DCFR can thus also apply to the license agreement.
According to Art IV.A.-1:101(2)(c) of the DCFR, the provisions for the purchase of movable physical objects are to apply with appropriate adaptations to the purchase of intangible property like know-how and intellectual property rights. In contrast, the provisions for the lease of goods—as a contract to permit the use of tangible objects (Art IV.B.-1:101 ff)—are not declared as being applicable mutatis mutandis to contracts permitting the use of intellectual property rights and know-how.
A number of aspects of license contract law have an indirect effect in the special provisions concerning commercial agencies, franchise and distributorships (sales (forms of distribution). That these categories of contracts must again be distinguished from the license agreement follows first from Art IV.E.-1:101 of the DCFR, according to which this part of the DCFR covers contracts in which a party, the intermediary, engaged in business, independently brings another party’s goods and services onto the market. In contrast, the license agreement (leaving aside pure marketing licenses) is typically intended to enable the licensee to manufacture or permit the manufacture of goods or services himself, thereby making use of the licensor’s intellectual property rights or know-how. Nevertheless, aspects of relevance to the license agreement are in particular to be found in the section on franchising concerning the right and simultaneously the obligation of the franchisee to use the intellectual property rights and the know-how (Art IV.E.-4:101 of the DCFR). Like the licensor, the franchisor is also obliged to procure and maintain the undisturbed use of the rights (Art IV.E.-4:201(1), (2), 4:202 of the DCFR), while the main obligation of the franchisee and, as a rule, the licensee is to pay the agreed fees.
In light of the detailed provisions on commercial agencies, franchises and distributorships, the question naturally arises of why the license agreement as the often underlying and commercially highly relevant contractual category has not been explicitly taken into account. The development of a common European approach is in particular supported by the typical cross-border relevance of such legal relationships. However, the legal uncertainty that results from the neglectful treatment of the license agreement by national legislatures also demands a clarification at the European level in the interests of a reduction of costs for the participants in the economy.
Wolfgang Lüdecke and Ernst Fischer, Lizenzverträge (1957); Martin Hauser, Der Patentlizenzvertrag im französischen Recht im Vergleich zum deutschen Recht (1983); David Marchese, Business Licensing Agreements (1994); Reto M Hilty, Lizenzvertragsrecht (2001); Günter Henn, Patent- und Know-how-Lizenzvertrag (5th edn, 2003); Louis Pahlow, Lizenz und Lizenzvertrag im Recht des Geistigen Eigentums (2005); Frank L Fine, The EC Competition Law on Technology Licensing (2006); Kurt Bartenbach, Patentlizenz- und Know-how-Vertrag (6th edn, 2007); Michael Groß, Der Lizenzvertrag (9th edn, 2007); Jochen Pagenberg and Dietrich Beier, Lizenzverträge/License Agreements (6th edn, 2008); Yves Van Couter and Bernard Vanbrabant, Licence Agreements, Competition and the Internal Market (2008); Alexandra Abello, La licence instrument de régulation des droits de propriété intellectuelle (2008).