» Top Tips for Drafting Licences

Our free online Resources include a number of guidance notes plus our popular Top IP Tips to help get you started.

When I draft (or receive) licence contracts for clients I am always concerned to include (or check) any provisions which require the licensee (or my client) to use their “best” endeavours to do something.

Obviously where I am drafting a licence for a client who is appointing a licensee, it is important to require that licensee to use his/her/its best endeavours to promote the intellectual property rights which are being licensed.

In a recent Judgment from the High Court in Leofelis SA and Another v Lonsdale Sports Limited and Others Judge Evans-Lombe has held that this commonly used clause:-

“the licensee shall use its best endeavours at all time during the Term to create, promote and retain goodwill in the business utilising the Goods under the Trade Mark” (“the Best Endeavours Clause”)

is far too uncertain to be enforced.

This has enormous consequences for licensors who are attempting to ensure that their licensees fully exploit the whole of the territory provided under a licence.

Many licence agreements cover territories which are wide ranging. The licence agreement in this particular case was for Europe including Switzerland but excluding the UK and the Republic of Ireland. The Judge found that the licensee had been doing its best to exploit its licence throughout its territory, to the maximum possible, within its resources. This was held to be sufficient compliance with the Best Endeavours Clause.

The particular facts of this case led the Judge to this decision but these facts are common to many licences and licensees, so as Licensors, or lawyers drafting licence agreements, you should be aware of the following:-

» Fixed Royalties?

If your licence agreement has a requirement that a fixed royalty be payable, and therefore the licensee is in a position to take the full benefit of any increasing turnover from the exploitation of its licence anywhere in the territory, the courts are likely to construe any effort by the licensee as being sufficient to comply with the Best Endeavours Clause.

The Judge held in the Leofelis case that it would be intrinsically unlikely that the licensee was not doing its best almost whatever it did, when the motivation was evident from this particular term.

» Business Plans?

In Leofelis evidence was put forward by the licensee that its business plan was to consolidate as much as possible in its initial territory and then move into other countries. The court was happy to accept that such a business plan was reasonable and as such could not constitute a breach of the Best Endeavours Clause.

So if your licence requires the provision of business plans be careful to check that they match your expectations regarding the development of your market.

» Reasonable commercial decision? — licensor’s responsibility to provide evidence of unreasonableness.

The Court further noted in Leofelis that even if there had been evidence that the licensee was failing to exploit particular markets for the Goods within its Territory, there would need to be evidence to demonstrate that a decision not to do so was not a perfectly reasonable commercial decision.

» DRAFTING TIPS

Licensors should consider:

1. LIMITING TERRITORY

Only grant a licensee a territory that is clearly capable of being exploited by that licensee, taking into account the resources available to that licensee, including its size, and contacts, and current geographical location.

In my experience it is often the beginning of any discussions with a potential licensee which are the most important time. This is the period when you should be working out whether or not this is the right licensee to exploit your Trade Marks to its full potential. If you are not sure then you need to be careful to use short term agreements, and/or flexible arrangements, and spell out exactly what your expectations are in your licence agreement.

2. INCLUDING ABSOLUTE CRITERIA

This will allow “best endeavours” to be judged rather than wasting time when negotiating contracts trying to make a licensee agree to the use of the unenforceable Best Endeavours Clause.

The Judge in Leofelis followed the decision in Bower v Bantam Investments in 1972 where Mr Justice Reginald Goff stated:-

“The relief must be commensurate with the duties, express or implied, of the defendants under the contract, and those at most only require Bantam to use their best endeavours to procure if practicable the development of the property for the purposes of a marina with associated recreational facilities, as shown by the declaration framed by Mr Godfrey for the plaintiff in the course of his argument. I ask myself, could anything be less specific or more uncertain? There is absolutely no criterion by which best endeavours and practicability are to be judged”

It is clear that if you are a licensor wishing to ensure that your licensee uses its “best endeavours” in relation to exploiting all of the market within its territory you must spell out what is required. For example I would suggest that you include a requirement that the licensee opens a certain number of shops in certain territories within a certain timeframe. Anything that can allow a court to assess specifically and with certainty whether or not the licensee has made more than a reasonable effort to comply with its obligations under its licence will be important.

3. INCORPORATING FLEXIBILITY by allowing for future change.

For example it can be helpful to include clauses which allow you to amend the definition of “Territory” and/or “Goods” (normally by reducing it!) where a licensee fails to exploit a particular market within a particular time period.

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© 2007 SARA LUDLAM www.ludlams.co.uk