This manufacturing licence is in two languages – English and Chinese.
The agreement is suitable where the inventor of a product licenses a company to manufacture and sell that product in return for a licence fee and royalties on sales.
This ten page document contains 14 clauses covering
• the licence
• fees and royalties
• records and royalty payments
• development programme and manufacture
• intellectual property
• infringement of IP rights
• language, governing law and resolution of disputes
• a general clause detailing notice, assignment, waiver and the scope of the agreement
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This Agreement provides a basic model for an arrangement between the owner of a patent – probably the inventor of a new product – and a company which has the capacity to manufacture and bring that product to the market. There are, of course, many possibilities with such an arrangement and we have only given an example.
Dealing with the clauses, by reference to their numbers:
Some defined terms are set out here. Note that the definition of IP Rights assumes that existing patents and trademarks will be listed in a Schedule to the Agreement.
This establishes the main purpose of the Agreement, namely for the inventor or designer of a product, the Licensor, to give an exclusive licence to another company, the Licensee, to manufacture and sell the product. The right to sub-licence is contemplated by this clause but it may not always be appropriate: the Licensor may want to deal directly with the company involved in the manufacture and marketing of the product. By having a sub-licence, the Licensor will not have a direct contractual link with that sub-licensee which could create difficulties.
An arrangement such as this will need to be long-term, especially if the development phase before the product is ready for the market is going to involve substantial time and expense on the part of the Licensee. We have provided here for 10 years but 5 to 20 years is not uncommon, especially if there is a lot of development work in the early stages.
4. FEES & ROYALTIES
Our draft provides for the Licensee to make an up-front payment on signing the agreement: the Licensor will see this as some early return on his own effort in developing his idea and applying for the patents. The Licensor will then receive, for the duration of the agreement, a royalty calculated as a percentage of the sales price. We have specified the ex-works price in this draft. If the Licensee is a retailer as well as a manufacturer, then a price which takes account of the retail price might be appropriate.
We have not in this agreement provided for any minimum royalty, although that is sometimes appropriate: a Licensor, before entering into an agreement such as this needs to be satisfied that the Licensee does intend to devote effort to the products. If some other product came along which, for example was cheaper to develop, the Licensor might have an effective agreement with a Licensee who only manufactures and sells much smaller quantities of the product each year than had originally been planned, or even none at all. By specifying a minimum annual royalty, at least a basic return is guaranteed to the Licensor. If such a clause is contemplated, something along the following lines could be used:
“The minimum royalty in each year shall be [£ ] and if royalties payable under this clause are less than the minimum royalty in a year, the Licensee shall within 30 days from the end of the year pay the shortfall to the Licensor. However, the minimum royalty will not be payable in the first [two] years.”
The purpose of the final sentence is to cover the development phase of the products.
If such a clause is inserted, the Licensor may also want the right to terminate if sales do not reach the target figure.
5. RECORDS & ROYALTY PAYMENTS
This provides for royalties to be accounted for on a quarterly basis, with interest payable on late payment amounts. It also gives the Licensor the right to have access to the Licensee’s accounts – an important reserve provision to allow verification should this be thought necessary at any time.
6. DEVELOPMENT PROGRAMME & MANUFACTURE
Development of a new product is not an entirely straightforward matter and the Licensor’s input is usually going to be needed. This clause provides for this but does limit the Licensor’s commitment of free time. We have provided for the Licensor to be paid a consultancy fee in certain circumstances.
In today’s global market, the manufacturer of a successful product will be thinking about overseas markets. We have provided, in this case, for the basic territory to be specified in clause 1.
Sometimes it is in the interests of the parties for the Licensee to have an option to extend the territory. By granting an option the Licensor gets a chance to see whether the Licensee will perform in the original territory and, if so, the Licence can be extended, probably on payment of an option fee, to additional territories. From the Licensor’s point of view, one successful licensee is probably easier to deal with than several. On the other hand, the opportunity of dealing with different manufacturers in different areas has attractions – apart from anything else, a UK manufacturer, however good his wholesale outlets, may not have any marketing capacity in the United States whereas a company based there is more likely to know that market.
There is always a possibility that either party in an arrangement like this wants to make changes or improvements and various questions arise, not least the question as to who owns the intellectual property in any improvement. Our agreement provides, first of all, that there will not be any modifications without the Licensor’s consent, which will not be unreasonably withheld. Secondly, as this is a long term arrangement, we have provided for co-ownership of the improvements if they are developed by the Licensee. This is a complex area and specialist advice – from a patent agent as well as a lawyer – could be appropriate to deal with this provision.
Clearly, this is an agreement where confidentiality is quite important and an appropriate clause has been included.
10. IP RIGHTS
This clause contains confirmation from the Licensor that the Licensor is the owner of all intellectual property rights relevant to the Agreement and gives the Licensee the right to use them solely for the purpose of the licence. The Licensee is prohibited from registering any of the IP Rights without the Licensor’s consent.
The Licensor also has the right to register patents and other rights in the Territory and the Licensee is required to provide assistance if required. It is, in fact, usually recommended that a Licensor should take steps to register its rights in any country where protection is appropriate.
11. INFRINGEMENT OF IP RIGHTS
The first sub-clause deals with a situation where some third party may be infringing the Licensor’s IP Rights and it is in the interests of both Licensor and Licensee to act to prevent that infringement. The second sub-clause deals with the possibility of a claim by a third party that the Licensor’s IP Rights infringe his intellectual property rights. In this second situation, the Licensee may well take the view that the Licensor should be responsible for defending that claim and should indemnify the Licensee against any losses it incurs: the Licensor has, after all, in 10.1 given what amounts to a warranty that no third party rights have been infringed.
This contains fairly standard wording allowing either party to terminate if the other commits a material breach of the Agreement or becomes insolvent. If you want it simpler so that any breach justifies termination, the word ‘material’ can be removed. We have given the Licensor the right to terminate if the Licensee does not get the products into the market within a specified period. This should act as an incentive to the Licensee and, if, for any reason, it does not go ahead with manufacturing, the Licensor can withdraw. In those circumstances the Licensor might want the right to buy any tooling equipment which has been developed by the Licensee and, if this is required, some additional wording should be inserted.
We have not given the Licensee the right to terminate but, with a long term arrangement, a manufacturer may well require this right, albeit after a reasonable period of notice. For example, it may undergo some reorganisation of its business which makes the Product of marginal or no interest to it. Alternatively, sales may not justify the production costs or there may be competing products developed which are far superior to the products which are the subject of this Agreement.
On termination, after the manufacturing process has got underway, there are likely to be products which are ready for sale or in the course of manufacture and our clause deals with a run-off period during which royalties will continue to be payable. An alternative could be for the Licensor to acquire all products which are already manufactured at the termination date and then to sell them himself.
This contains a number of standard provisions designed to regulate the arrangements between the parties.
13.1 Notice: It is usually sensible to include a provision dealing with notices, specifying that they should be in writing and the method and timing of delivery.
13.2 Assignment: An agreement such as this is somewhat personal in nature and we have provided that neither party shall have the right to transfer or assign its rights to any third party without the other’s consent.
13.3 Entire Agreement: Such a clause makes it clear that the terms of this Agreement supersede any previous agreements, discussions or understandings the parties may have had.
13.4 Waiver: If either party does not enforce a particular clause, that failure will not prejudice it later on.
13.5 Severability: If any part of the Agreement held by a court to be unenforceable or invalid, the remaining provisions of the Agreement will continue in effect.
14. LANGUAGE, LAW & DISPUTES
This clause specifies the ruling language of the Agreement – either English or Chinese in 14.1.
14.2 specifies the governing law – i.e. the law of the country that will be applied when interpreting the contract.
14.3 provides for the parties to try to resolve any dispute by direct negotiation.
If this fails, the dispute will either be referred to the courts or to arbitration and we have alternative versions of 14.4, one of which should be deleted. If the courts are preferred to arbitration, the country to be selected will normally be the same as that in clause 14.2. If arbitration is chosen, the arbitral tribunal needs to be specified and we have suggested either CIETAC, China International Trade and Economic Commission, which is based in China or the LCIA, London Court of International Arbitration, which is in London. There is free information on our website concerning governing law and arbitration.