This article looks at clauses in patent and knowhow licences relating to a licensed territory and, in particular, drafting issues relating to such territories.

Most licences are granted for particular areas only. Sometimes rights are granted for sales to particular customers only, though customer restrictions may breach the competition rules which apply to the contract concerned. Other restrictions or provisions relate to the "territory" of the licence.

The contract should clearly define what is meant by the "Territory" and then throughout the agreement use the term with a capital letter to show that this means a reference back to the defined term.

Using a country name is common to define a territory. It is not without its problems. When Germany was reunited that caused some legal difficulties with country definitions, particularly where exclusive rights have been granted in, say "Germany" or more likely "West Germany". Another example was after the collapse of the Soviet block or the division of the old Yugoslavia or the splitting of Czechoslovakia.

At the very least the contract should state if the territory is as delineated at the date of the agreement or from time to time.

Make sure that it is clear what is included in a country. For example when would in the UK the Isle of Man or particular outlying islands be included.

An alternative is to attach a map to the contract on which the borders of the area concerned are etched in red. This is clearer.

In the UK sometimes post codes are used, for example where exclusive franchising territories are sold off to franchisees.

Sometimes the licensor wants a right to change the territory later. If the licensee is given exclusive rights it would rarely permit a unilateral right of the licensor to make an alteration later.

However under English law such a right can be reserved under the contract and it would be effective if the licensee were foolish enough to accept it.

Sometimes the agreement has a definition of "territory" but then customers are listed. This is to be avoided. If a customer restriction is to be imposed or rights granted for certain customers, do not call it a "Territory". It is the customers to whom the Licensee may sell the products. It is better called "Approved Customers" or some other such phrase.

In the EU it is not permissible to carve up the EU market absolutely on territorial grounds. The technology transfer regulation 240/96 of the EU sets out what is permissible under Article 81 of the Treaty of Rome. Reference should also be made to the other articles in this series: Exclusive, sole and non-exclusive licences and EU Competition Law and IP Licences.

In summary: normally a ban on exports from the territory is not allowed, but a licensee can be given an exclusive territory provided the other provisions in regulation 240/96 are followed.

An example of wording might be:-

"Territory" The UK

"Territory" France

"Territory" The European Community as constituted from time to time

"Territory" The state of New York, USA

It is becoming increasingly difficult to tie licensees down to particular countries. If they are selling goods which can be purchased over the internet the seller may not know the true destination of the goods. In any event EU competition law prevents a restriction on sales where the sale is made in response to an unsolicited order (except in very limited cases).

Licensors may therefore find the trend will be away from granting exclusive rights for particular territories and indeed from any necessity to define a territory at all.

Normally the licence will state that the licensee is licensed to exploit the Licensed Technology in the Territory. It is better if the licence agreement states exactly what is or is not to be done in the territory. For example it may be licence to manufacture using the Technology in the Territory. It may apply to use of the Technology too and for sale of the resultant products.

In some cases the licensor may want to require the licensee to make the products at one factory in the licensed territory only which has been checked from a quality control point of view.

There may be restrictions on moving manufacture elsewhere.

In other cases the territory may be the whole world. When considering granting an exclusive worldwide licence of unlimited duration always consider the alternative option of an absolute assignment of the rights which may achieve much the same effect.

Some contracts restrict manufacture to one territory and allow sales throughout the world. Others allow manufacture anywhere but restrict sales to one licensed territory only.

The aim of the contract will be to achieve clarity so that both licensor and licensee know exactly what the licensed territory is and what is and is not permitted in relation to the licensed technology in that territory.

The definition of the territory in which the licensee is allowed to operate may well be different or wider than the country which laws apply to the contract. The reader must not confuse issues of choice of law and jurisdiction which will be considered in a later article in this series.

A patent is registered for one territory only. Therefore any granting of rights for a territory will only work if there are rights to be licensed in that territory.

If there is no patent abroad nor an application which may result in a granted patent later, then the licence may not work. Indeed the charging of royalties for technology which any third party may use without legal restriction may of itself be anti-competitive.

Also the licensor needs to avoid any warranty that there is a patent in a territory where there is none. Although it is not certain that the granting of a patent licence for territories parts of which are not protected by patent amounts to a warranty by the licensor that there are patents there, and all licensees should undertake their own local patent searches in any event, the licensor is better advised to rely on an express disclaimer in such a case.

A full listing of intellectual property web sites may be accessed from the UK patent office web site at http://www.patent.gov.uk.

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