This article examines exclusive, sole and non-exclusive licences of intellectual property rights and the respective meanings of the terms. It also provides guidance on what is permitting in this respect under EU competition law and provides some advice on the type of licence to choose.

An exclusive licence typically grants the licensee an exclusive territory or an exclusive set of customers. The effect is to exclude the licensor either from that geographical territory or those customers for however long the licence lasts.

Sometimes there are exceptions to that exclusivity. The Licensor may reserve itself the right to serve certain existing customers or certain larger customers who deal with it direct or certain Government bodies who are its customers or customers with a network across several countries.

In general under English law the licensor can carve out as many exceptions as it wants from an exclusive licence. However if it does none of these things then using the word "exclusive" means that the licensor is excluded. It cannot then intrude in the territory otherwise it will breach the licence and can be sued for damages by the licensee.

If the licence is a "sole licence" this means the licensee is the only licensee in that territory or for that group of customers. This is different from an exclusive licence where the licensor itself will not compete. Sole licences mean that the licensor remains free to compete with the licensee but simply that other licensees will not be granted.

Sole and exclusive is a term often used in licences but it is confusing and meaningless. If the licence is exclusive then it is not "sole".

In practice there is much confusion over what these terms means so it is much better to make this clear by express wording in the contract such as that which follows:

A non-exclusive licence leaves the licensor free to compete or appoint other licensees in the territory without restriction. The licensor can in some case impose exclusivity on the licensee in requiring the licensee not to take licences of competing technology during the licence subject to the requirements of any relevant competition law.

Normally it is clear what an exclusive licence is but again it does no harm to spell it out in the agreement. Those who like to keep contract wording vague as they do not want to alert the other contracting party to a point are making future difficulties for themselves.

No one should draft a licence of intellectual property rights which will apply in the EU/EEA states without following regulation 240/96. This ensures the licence complies with Article 81 of the Treaty of Rome. The regulation is at http://europa.eu.int/comm/dg04/lawenten/en/techtft.htm. An earlier article in this series EU Competition Law and IP Licences describes the relevant law. However a more detailed description of the regulation as it applies to exclusive licences is given below.

Licences which comply with the EU regulation will also be exempt from the UK Competition Act 1998. The 1998 Act is at http://www.hmso.gov.uk/acts/acts1998/19980041.htm or via the Office of Fair Trading web site at http://www.oft.gov.uk.

Patent and knowhow licences may contain the following exclusivity restrictions but only where the licence contains no banned clauses under regulation 240/96 (such as price restrictions). As soon as a banned clause is introduced then the exclusivity restrictions are void as well.

This is a highly specialised and complicated area of law. Advice should be sought from competition lawyers such as those recommended in the Directory at http://www.chambersandpartners.com or from the author's firm email: essingleton@link.org. What follows is a short summary of complex provisions.

The following are permitted:

(1) an obligation on the licensor not to license other businesses to exploit the licensed technology in the licensed territory (sole licence);

(2) an obligation on the licensor not to exploit the licensed technology in the licensed territory himself (exclusive licence);

(3) an obligation on the licensee not to exploit the licensed technology in the territory of the licensor within the common market (licensee not to sell outside territory);

(4) an obligation on the licensee not to manufacture or use the licensed product or use the licensed process in territories within the EU licensed to other licensees (licensee not to make or sell in other licensees' territories);

(5) an obligation on the licensee not to "pursue an active policy of putting the licensed product on the market in the territories within the EU licensed to other licensees" in particular not to "engaged in advertising specifically aimed at those territories or to establish any branch or maintain a distribution depot there" (licensee not to advertise outside territory);

(6) an obligation on the licensee not to put the licensed product on the market in the territories licensed to other licensees with the EU in response to unsolicited orders (licensee not to sell outside his territory even where the order is unsolicited); This restriction can only last for up to 5 years from when the technology was first licensed to any licensee in the EU. For many licences the 5 year period will have expired before the licence is granted so an absolute ban on exports is not allowed and instead a ban on advertising outside the territory as at (5) above is all that is permitted.

The restrictions in a patent licence must not last longer than the duration of any parallel patents in the restricted territories.

The restrictions in a knowhow licence must not last longer than 10 years from when the licensed product was first put on the market in the EU by one of the licensees.

The restrictions should expire if the knowhow ceases to be secret and substantial.

Avoid absolute export bans on licensees otherwise the clause is void and fines of up to 10% of turnover can be levied by the European Commission and third parties can sue for damages.

If an export ban is needed take legal advice. If the technology is new and the 5 year period above has not expired then with careful drafting the ban may work.

In most cases using the words in the regulation is best. A ban on advertising outside the territory is usually permitted.

2. Customer Exclusivity

Many licensors want to grant licensees exclusive customers. This is much more difficult under EU competition law than exclusive territories described above which if carefully drafted are often exempt.

One banned clause in regulation 240/96 is where the parties are already competing manufacturers before the grant of the licence and one is restricted within the same technical field of use or within the same product market, as to the customers he may serve. In particular this includes being prohibited from supplying certain classes of user, employing certain forms of distribution or with the aim of sharing customers using certain types of packaging for the products.

The regulation permits an obligation on the licensee to supply only a limited quantity of the licensed product to one customer where the licence was granted to give the customer a second source of supply inside the licensed territory.

Such a restriction is also allowed there the customer is the licensee and the licence was granted to provide a second source of supply and the licence provides that the customer is himself to manufacture the licensed products or have them manufactured by a subcontractor.

The regulation allows a clause whereby the exclusivity will terminate and the licence become non-exclusive and no improvements will be licensed where the licensee begins to compete with the licensor, with connected businesses of the licensor or other businesses in respect of:-

• research and development
• production
• use
• distribution

in each case of the licensed products.

In such cases of new competition the licensee can be obliged to prove that the licensed knowhow is not being used for the production of products and provision of services other than those licensed.

It is not permissible to provide that the licence will terminate if the licensee begins to compete.

The EU regulation described above applies only to patent and knowhow licences. Copyright, trade mark and design licences are not exempted by its provisions but they are still subject to EU competition law generally in Article 81 of the Treaty of Rome.

Businesses should follow the regulation described above as closely as they can when drafting exclusivity clauses in copyright and other licences but there remains a risk as the exemption regulation does not apply, that the mere granting of an exclusive copyright, trade mark or design licence will breach Article 81 particularly if it has the effect of preventing parallel imports of products in the EU. Take legal advice.

Outside the EU there may be local competitions laws which should be respected. Many are similar to those described above.

Where an exclusive licence is granted the licensor keeps itself out of the territory concerned. Unless there are minimum royalty provisions the licensor should think very hard before making such a wide grant of exclusive rights in case the licensee does not properly exploit the territory and the licensor cannot itself do so because of the exclusivity clauses and yet it has not minimum income from the territory.

Consider granting short time periods for exclusive licences

Suggest a narrow territory so the licensee has the resources to cover it thoroughly.

Reserve rights for the licensor to intervene if minimum sales are not achieved.

Most legal disputes over exclusivity arise because a contract does not state precisely and clearly what each party's rights are. Careful drafting should avoid the various pitfalls.

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