The licence / franchise distinction

Licensing

A very cost effective way of making the most out of intellectual property is licensing it.  A licence agreement is a contractual arrangement, whereby the owner of the intellectual property grants to the licensee the right to use the licensor’s intellectual property in relation to the manufacture or distribution of its products.  In a licensing arrangement, the licensor imposes guidelines on the way in which licensee uses the intellectual property in order to avoid de-valuing the intellectual property, although the operation of the business is left largely to the licensee.  Licensing is not regulated by a code of conduct, unless the agreement is drafted in such a way as to fall within the Franchising Code of Conduct.

It is important to distinguish licensing from franchising.

Franchising

Under a franchise, the franchisee will normally be under stricter controls in terms of the way they conduct their business, than in the case of a licence arrangement.  Franchising relies upon the use of brands or trade marks, and it is more commonly implemented as a commercial structure in consumer/retail-oriented areas.  The Franchising Code of Conduct was introduced on 1 July 1998 to govern the rights and responsibilities between franchisors and franchisees.   The Code contains specific requirements for the issuing of complex and onerous disclosure statements on an annual basis, amongst other obligations.  Compliance with the Code is mandatory, and it is enforced by the Australian Competition and Consumer Commission (ACCC), with severe penalties for contraventions of the Code.

For more information on franchising, see our franchising page.

The benefits of licensing

Licensing is of significant benefit to Australians because Australia comprises only around 2% of the world market, and due to its geographical isolation, the majority of Australian companies rely on their global networks for distribution which is achieved via licensing. 

Commercialisation - How to maximise profit and minimise risk

Licensing plays a critical role in the commercialisation of intellectual property (IP), whether it be technology or otherwise.

There are three basic options available for commercialising IP with differing levels of risk, which are as follows:

·         To sell or transfer the IP to a third party;

·         To license some or all of the IP to a third party;

·         To produce and/or distribute the IP yourself.

Sell/assign

If you choose to sell or transfer your IP to a third party, this option involves the least commercial risk on your part.  However, you will retain no control over the IP once it has been sold, and the potential return from such a sale is also likely to be quite low, because there will be no ongoing income stream.

Licence

This is where licensing can be of great benefit.  By licensing, you can keep a relatively high degree of control over the IP, and also obtain an ongoing income stream through royalties. However, there is a higher degree of risk involved with this option than if the IP was sold to a third party.

Licences can be granted for different purposes, such as manufacture or distribution.  If you license a third party to manufacture the IP, you can save a substantial amount in terms of set up costs on plant and equipment.

Licences can also be granted for different territories, such as the various states of Australia and different countries, provided that your intellectual property is protected in those jurisdictions. Licensing therefore provides a great deal of flexibility and opportunity to reap a significant financial advantage.

For example, a Melbourne-based company, through licensing, could sell its products Australia-wide or even internationally, without having to set up offices in each location, and be able to earn royalties from each territory.  See our example below for further information.

Produce and/or distribute the IP yourself

If you select the third option – to produce and/or distribute the IP yourself – then you will have an even greater degree of control over the IP, and potential returns also increase.  But all of the risks, in terms of both the investment required to commercialise the IP and the consequences if your business is not as successful as expected, remain with you.

Our services

At mdp McDonald Partners, we have extensive experience in helping people to licence and commercialise inventions and other intellectual property, particularly in the petroleum, toy, food and information technology industries. 

Whether you have existing IP, or if you simply have a good idea on which you would like to capitalise, we can advise you on which commercialisation alternative is most suitable for you, and can help you to turn your plans into action.  This can include considering alternatives for funding the commercialisation of your idea or invention.

We negotiate and draft agreements for large publicly listed companies as well as for private family companies.  In drafting such agreements, to ensure they place our client in the most commercially advantageous position, relevant issues that must be considered include:

·         Whether the licence will be exclusive, non-exclusive or a sole licence;

·         The geographical area to be covered by the licence;

·         The duration of the licence;

·         The type of rights being granted under the licence, e.g. right to manufacture or distribute, right to use a trade mark

·         The types of goods and services covered by the licence;

·         Performance requirements, eg. minimum sales criteria;

·         Rights of audit;

·         Royalties.

Licensing Publications

·         Case Study: One of Victoria's largest residential builders uses licences to expand business interstate

·         Case Study: Commercialising an invention – mutually beneficial outcomes

·         Case Study: Leighton O'Brien complex international licence agreements

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For more information please call us on +61 3 9620 9660 or send us an e-mail at info@mdplaw.com.au. We are here to help.