What is Licensing?

In today’s world, it has become an integral part of every industry or business to get involved in some form of licensing in or out, some tangible or intangible assets. It is very important for any business to know the basic concepts of Licensing to be able to deal with it.
Let us learn the basic facts of Licensing, its meaning, concepts, its importance and various types.
What is a licence?
According to the Oxford Advanced Learner’s dictionary, the noun “licence” means an official document that shows that permission has been given to do, own or use something, whereas the definition of the verb “license” is, to give somebody official permission to do, own, or use something . The rights under a licence are usually granted for a specific purpose, under certain agreed terms and conditions. The person or entity granting the licence is called the licensee.

Licensing transactions can broadly be divided into two categories -

ØOutbound licensing (also referred as “licensing out” or “out-licensing”)
ØInbound licensing (also referred as “licensing in” or “in-licensing”).
The term “outbound licensing” or “out-licensing”, refers to granting a licence to another party to use your asset, whereas ”inbound licensing” or “in-licensing” means obtaining a licence from another party, to use its asset for your own use. Under an outbound transaction, when a party licenses out its asset to someone, said party assumes the role of licensor. Conversely, in an inbound deal, when a party licenses in an asset owned by somebody else the role becomes reversed and said party now takes on the role of licensee.

What is a licensing agreement?
A licensing or licence agreement is basically a legally binding contract between a licensor and a licensee, by which the licensor gives the licensee certain rights or permission for the use of its asset, which would not otherwise be available to the licensee.

What may be licensed?
Broadly speaking, anything that one owns or has rights to may be licensed. For example, patents, industrial designs, know-how, trade secrets etc. would typically be the subject matter of a licence.

Who may licence?
The owner of the asset has the right to license to an interested party or multiple parties. In some cases, the owner may grant a licence to a main or master licensee, giving him sub-licensing rights. With such rights, the master licensee in turn, grants further licences, which are referred to as sub-licenses, to other interested parties. The parties receiving the sub-licences are known as sub-licensees.


Who may obtain or use a licence?
Any interested party, either an individual or a company, may approach the owner of an asset to obtain a licence to use the same.

Difference between Licence and Assignment
Assignment, means sale. It is basically an outright transfer of ownership of the rights of the owner, i.e. the assignor, to another person or entity, i.e. the assignee, for a sum of consideration. This means that, in an assignment, the assignor, i.e. the seller, relinquishes the title to the asset while the assignee, i.e. the buyer, acquires the title and becomes the new owner of the asset. A licence, as opposed to an assignment, does not involve any transfer of ownership. In licensing, the owner retains its ownership of the asset. The licensee is only given an authorization to use the asset, usually in return for some consideration, within certain stipulated terms and conditions. Further, a licence is revocable but an assignment is not. For a better understanding of the difference between the two, let us take the example of a tangible property such as a house.

The sale of a house is similar to an assignment of an asset in that the ownership of the property is transferred from the owner to the buyer in return for an agreed price. Upon sale, the buyer becomes the new owner of the property, just like in an assignment. Renting a property such as a house, on the other hand, is similar to licensing an asset. When a house is rented by the owner to a tenant, usually for a fixed period of time, the tenant is obliged to pay a rental to the owner for the duration of his occupation. Here, the ownership of the house is not transferred to the tenant. The house remains the property of the owner. Similarly, in licensing, the ownership of the asset remains with the licensor.

Types of Licenses
Types of licenses vary based on the degree of rights granted. They are:


•Exclusive licence;
•Non-exclusive licence; and
•Sole licence
Exclusive licence - Where the licensee is the only one that is granted rights by the licensor. An exclusive licence not only disallows the licensor to license the same rights to any other party, it also excludes the licensor from using its rights. Essentially, an exclusive licence allows only one party to exploit the asset, namely the exclusive licensee.

Non-exclusive licence - It means that the rights granted by the licensor to the licensee may also be granted to other parties. In other words, a non-exclusive licence does not exclude the possibility of the licensor granting further licences to other parties, that is to say that the licensor may license the same rights to more than one party. This type of licence is appropriate in situations where the licensor intends to offer licences to multiple parties. One common example of a non-exclusive licence is a computer software licence where numerous users are granted licences for use of the software.

Sole licence - It is the same as an exclusive licence with the exception that the licensor retains its rights to use the asset. This means that, for a sole licence, both the sole licensee and the licensor have the rights to use the asset.

Why license?
Licensing, in general, can benefit both the licensor and the licensee. The key advantages of licensing are:

ØRevenue generation
ØRisk minimization
ØReduction in costs
ØMeans of avoiding costly legal action
ØCompetitive advantage
ØCollaboration opportunities
ØRetain control of asset