Licence Agreement (IP Licensing)

A licence is permission. The owner (the licensor) allows another business (the licensee) to do something with intellectual property that would otherwise infringe the owner's rights: selling products under a brand, copying and distributing software or content, making a patented product or using confidential know-how. Ownership stays with the licensor, and the permission reaches only as far as the agreement says.

Licences often bundle several kinds of IP. A food brand licence may cover the trademark, the label artwork (copyright) and the recipes, which are protected as trade secrets only while they stay confidential. The agreement should list each asset, with registration numbers for registered marks and patents. In Canadian usage, licence is the noun and license the verb.

The central distinction is between a licence and an assignment:

When a business needs to own what it uses, such as code a contractor writes for it, it needs an IP assignment agreement, not a licence.

Non-exclusive. The licensor can grant the same rights to others and use them itself. Most software and content licences work this way.

Sole. The licensor promises not to license anyone else within the scope but keeps the right to use the IP itself.

Exclusive. Only the licensee may use the IP within the licensed scope, to the exclusion of everyone, including the owner. Section 2.7 of the Copyright Act defines an exclusive licence in those terms, and section 13(7) treats it as the grant of an interest in the copyright. Under section 13(4) of the Copyright Act, that grant is valid only in writing signed by the owner. An exclusive licensee should also consider registering the licence with the Canadian Intellectual Property Office: under section 57(3), an unregistered licence granting an interest can be void against a later assignee or licensee who pays value without actual notice of it and registers first.

Exclusivity is the main price lever. A licensor granting it usually asks for minimum royalties or sales targets, with the right to convert the licence to non-exclusive or end it if targets are missed. Scope is then set by field of use, territory, term and whether the licensee may sublicense or assign. Our article on cross-border IP licensing between US and Canadian companies covers territorial overlap when the parties are in different countries.

Payment structures include an upfront fee, a running royalty as a percentage of net sales, a per-unit fee, milestone payments or a mix. The definition of net sales does much of the work: it should list exactly which deductions are allowed, such as returns, sales taxes and freight, and exclude everything else.

Licensors typically require:

• monthly or quarterly royalty reports with unit and revenue detail
• a minimum annual royalty
• audit rights, with the licensee paying the audit cost if an underpayment exceeds an agreed threshold
• interest on late payments and a stated currency

When a Canadian business pays royalties to a non-resident licensor, Part XIII of the Income Tax Act imposes a 25% tax on many royalty payments, which a tax treaty may reduce or eliminate. The Canadian payer must withhold and remit at the correct rate, so the agreement should say whether royalties are paid gross or net of withholding and who documents treaty eligibility.

Under section 50 of the Trademarks Act, a licensee's use of a trademark has the same effect as use by the owner only if the owner, under the licence, has direct or indirect control of the character or quality of the goods or services. If public notice is given that the mark is used under licence and identifies the owner, that control is presumed unless the contrary is proven. The section speaks of trademarks generally, so it matters for common-law trademarks as well as registered ones.

A licence without real control is risky. If the licensee's use does not count as the owner's use, the mark may stop distinguishing the owner's goods or services, which can weaken it and expose a registration to challenge, for example on the ground that the mark is no longer distinctive. Practical control means brand standards, approval of products and packaging before launch, samples, inspection rights, a cure process and records showing those rights were used.

Section 50(3) gives a licensee a fallback enforcement right: subject to any agreement, it can call on the owner to sue an infringer and, if the owner refuses or neglects to act within two months, sue in its own name, naming the owner as a defendant. Many licences reserve enforcement to the owner instead.

A brand licence that requires payments to the licensor and gives it the right to exercise significant control over, or provide significant assistance in, the licensee's method of operation can be a franchise under Ontario's Arthur Wishart Act (Franchise Disclosure), 2000, with disclosure obligations; see accidental franchise. Where a copyright licence lets the licensee adapt artwork or content, the authors' moral rights cannot be assigned, so the licensor may need a moral rights waiver that the licensee can rely on.

Set the initial term, renewal mechanics and termination triggers: unpaid royalties, missed minimums, quality failures, insolvency, a challenge to the licensor's IP and a change of control of the licensee. Then deal with the end of the relationship:

• a sell-off period for inventory made to approved standards
• return or destruction of confidential manuals and materials
• ownership of improvements, and whether the licensee must license them back (a grant-back)
• final royalty reports and a last audit window

Insolvency is a real risk for a licensee building a business on someone else's IP. Under section 72.1 of the Bankruptcy and Insolvency Act, if the trustee of a bankrupt licensor sells the IP or disclaims the licence agreement, the licensee keeps its right to use the IP, including any exclusivity, for the term of the agreement and any extension it can take as of right, provided it keeps performing its own obligations. Lamba Law's business agreements and contracts practice drafts and negotiates licences for licensors and licensees.

Grace Liu's Oakville company, Northfold Outdoor Inc., owns the registered trademark NORTHFOLD for outdoor furniture covers, along with the pattern files. Rather than sell the brand, she licenses it to Ridgeline Home Products Ltd. of London, Ontario, run by Marcus Bélanger, for five years. Ridgeline gets exclusive rights for Canadian retail stores; Northfold keeps its own online store. The royalty is 7% of net sales, with a $60,000 minimum annual royalty, quarterly reports and an audit right that shifts audit costs to Ridgeline if an underpayment exceeds 5%. Ridgeline must use approved fabrics, submit samples of every new product and print a notice on packaging that the mark is used under licence from Northfold.

In year two, Ridgeline reports $1.1 million in net sales and pays $77,000. Grace's auditor finds $220,000 in retailer marketing allowances deducted that the net sales definition did not permit. The $15,400 shortfall is 20% of what was paid, so Ridgeline pays it with interest and the $6,000 audit fee.

In year three, Ridgeline switches to a cheaper, unapproved fabric. Grace sends a notice under the quality control clause, and Ridgeline returns to the approved fabric within the 30-day cure period and withdraws 2,000 non-conforming covers. The licence continues, and Grace's file of approvals, samples and the cure notice is the kind of evidence of control that section 50 contemplates.