6 Key Provisions to Include in Your International Licensing Agreements

The following is from a post by Santiago Cueto at International Business Law Advisor regarding the important provisions of international licensing agreements. I will follow up in future posts with more on our experience with licensing agreements and China.  I will include my own comments in italics. Please note I am not a lawyer, and my comments should not be taken as legal advice. 

In basic terms, a licensing agreement is a contractual right that gives someone permission to do a certain activity or to use certain property owned by someone else. Increasingly, these agreements are being reached between companies located in different parts of the world.

An international license agreement doesn’t have to be long or complicated. It can be straightforward and enforceable. However, many issues come up when drafting a license agreement. Laws relating to intellectual property can be extremely complicated. An attorney can provide invaluable help with drafting your agreement and enforcing it.

Exclusive Property Rights

Preliminarily, before you start negotiating a license agreement, make sure you have exclusive property rights. While the law often changes in this area, the best way to lock in your rights is to register for any or all of the following that apply to your situation:

Copyrights – original works of authorship fixed in any tangible expression form 

Patents – inventions

Trademarks – words, names or symbols identifying goods made or sold, distinguishing them from others

The application process can be rigorous, and you may have to disclose your ideas publicly. So you may also want to further protect your intellectual property by relying on laws.  Generally, these laws protect internally guarded ideas, formulas, codes or other information giving a business competitive advantage. A good example is source code to software.

6 key provisions 

Now that you’re sure you have exclusive property rights, you’re ready to start drafting the licensing agreement. To give you some guidance, I’ve selected 6 key provisions that should be included in your foreign license agreements:

1.  Approval of licensed goods. 

When major U.S. manufacturers license products to companies abroad, they often arrange periodic inspections of the manufacturing facilities to ensure the quality of the goods (and also to monitor whether the licensee is siphoning off products or engaging in illegal labor practices). This offers you some assurance of consistency and quality for your work.

2.  Royalties and accounting. 

Payment of royalties from a foreign licensee can get tricky, especially when you consider issues like:

• currency conversion rates (probably best to always insist on payment in U.S. currency)
• how the money will be paid (best to use wire transfers), and
• what taxes may be applied against your sales or royalties (before signing the license, inquire into national or local tariffs or taxes that may apply).  Also, it’s wise to include an audit provision (which allows you to inspect the foreign licensee’s books).

We strongly recommend front-loading your payment terms so that you get the majority of your royalty and licensing fees up-fornt or significantly in advance of the expiration of the agreement. We have seen and heard of many cases where the licensee company will miss the final payments when the agreement will not be renewed. 

3.  Jurisdiction. 

Sometimes referred to as personal jurisdiction, jurisdiction is the power of a court to bind the parties by its decision. Unless the company does substantial business in the states, the only way to get a foreign licensee into a U.S. court is to include a provision in the license agreement that requires the licensee to consent to U.S. jurisdiction.

Generally, when licensing products into China, you should consider where the Licensee does the bulk of its business, and what jurisdiction makes the most sense if enforcement of the contract is necessary. Take into consideration that Chinese courts don't recognize US law or the English language. Although many companies prefer the US, we most frequently see compromises for arbitration in neutral jurisdictions such as Hong Kong or Singapore. 

4.   Choice of law. 

Every country (and every state) has laws as to how contracts are interpreted. The licensee will want the disputes to be resolved under the laws of its country. Try to include in your agreement that disputes will be resolved under U.S. law for copyright purposes and the laws of your state when it comes to contract issues.

5.  Arbitration.

In arbitration, instead of filing a lawsuit, the parties hire a neutral arbitrator to evaluate the dispute and make a determination. You’ll almost always benefit by agreeing to have disputes arbitrated and inserting this in your agreement. If possible, your agreement should award attorneys’ fees to the prevailing party in the arbitration.
Try to get the licensee to agree to arbitrate the matter in the United States. If the licensee does not agree, there are three popular spots for international arbitration:
London (The London Court of International Arbitration)
Paris (The International Court of Arbitration of the International Chamber of Commerce), and
Stockholm (The Arbitration Institute of the Stockholm Chamber of Commerce).

Hong Kong and Singapore are often selected for business agreements of western companies in Asia. They have strongly developed legal systems stemming from their colonial histories under Britain, and the official language is English. 

6.  Foreign registrations.

If your works are protected by U.S. intellectual property laws like copyright or design patent law, you should determine whether it’s worth your while to obtain foreign copyright or patent registration in the countries where your work is being manufactured or distributed (this will be the subject of a future post).You may be able to require that the licensee handle these administrative tasks 

This is absolutely necessary for doing business or any kind of Licensing agreement in China. We also recommend including a No Registration term in your licensing agreement that stipulates that your Licensee cannot register your IP in the local or other jurisdictions.  

Include these provisions in your international licensing agreement and you’ll be well on your way to international business success.