Basic overview of Intergroup IP License Agreements

IP License Agreement:

An intellectual property license in its simplest form is an agreement where an IP owner (the licensor) permits another person (the licensee) to engage in activities that, in the absence of the IP license agreement, would infringe the licensor’s legal rights attaching to the IP.

In return the licensee pays the licensor a fee or confers some other benefit.

It is a written agreement that gives rights to do something that would otherwise be an infringement of the IP rights of someone else.

 Intergroup IP License Agreement:

This is an agreement for the licensing of intellectual property by a parent, IP holding company, or other company to an affiliated company within the same corporate group.

With an intergroup IP license agreement, the licensor and the licensee are members of the same corporate group.

It is worth noting that intergroup IP license agreements are legal agreements between the corporate group members.

Transfer Pricing:

Transfer pricing refers to the rules and methods for pricing such IP transactions between companies under common ownership or control.

It is highly recommended that intergroup IP pricing be based on the arm’s-length principle. The arm's length principle simply states that IP transactions between group members should not be distorted by the special relationship that exists between the parties. As such, the arm's length principle is neutral.

At its most basic level, the arm's length principle states that the IP price charged in a transaction between two related parties should be the same as the IP price charged in a comparable IP transaction between two unrelated parties.

Examples of where intergroup IP License Agreements may be required:

If the parent company owned a patent describing an invention in use by a group member in one of its products or services, then such a patent would need to be covered by an intergroup IP license between the parent company and the group member. In the absence of such an IP license agreement, this may be a case of patent infringement

If one group member focused say on R&D has developed a unique valuable confidential process for use say in the manufacturing facility of another group member, then such a trade secret would need to be covered by an intergroup IP license between the two group members. In the absence of such an IP license agreement, this may cause problems with the valuation of the trade secret. In the extreme case, it may be viewed as a case of trade secret misappropriation.

If the parent company owned a trademark in use by a group member to advertise and promote its products or services, then such a trademark would need to be covered by an intergroup IP license between the parent company and the group member. In the absence of such an IP license agreement, this may causes problems to that trademark going forward. One could argue that if a company fails to enforce its trademark rights, the trademark may weaken, loose its distinctiveness and, ultimately, the company may lose the right to use or defend it.

Why is it important?

Firstly, it is important to note that the members of the corporate group are separate legal entities.

Absent such an intergroup IP license agreement, Company A within the corporate group may be infringing or misappropriating the IP of the parent, IP holding company or other corporate group member (e.g. Company B within the corporate group).

To make sure that company A has the rights to use such IP assets belong to the parent, IP holding company or Company B, there needs to be a legal document between the two members to formalize this arrangement.

Other Drivers:

However, there may be other reasons for ensuring that such intergroup IP license agreements are robust and fit for purpose …

• For regulatory compliance reasons
• To ring-fence such IP assets and protect them from certain risks
• To help improve corporate governance
• To reduce personal liability risks for Directors & Officers
• When supporting any audits of any group members
• To avoid any issues if and when the company goes through some corporate event (e.g. M&A; JV; Investment Round; Re-organization)
• For tax efficiency reasons
• To ensure tax compliance (e.g. OECD BEPS)
• To ensure that such IP rights can be enforced against 3rd parties
• To support any IP exploitation activities

 Current State:

Many companies would score an F- if rating on this aspect of IP management.

Many unfortunately take the view that the relationship between corporate members within a group is unlikely to come under much scrutiny. They therefore neglect to invest much time and energy in intergroup IP license agreements.

However, the value of such intergroup IP license agreements often only becomes apparent when something goes amiss.