This article examines how long a licence of patents and/or knowhow should last. Competition law can have a bearing on this and the EU regulation 240/96 should be considered for EU licences.

A licence is a permission and as such is normally granted for a limited period. In any event patents only last for a maximum of 20 years so few licensees would in practice want to pay royalties for a period longer than the life of the patent itself.

EU regulation 240/96 contains various clauses setting out how long particular restrictions in a patent licence may continue, including exclusivity clauses (see earlier articles in this series including EU Competition Law and IP Licences and Exclusive, Sole and Non-Exclusive Licences). The regulation is on the Internet at http://europa.eu.int/comm/dg04/lawenten/en/techtft.htm.

Article 1.2 provides that exclusivity restrictions in such licences may only last for as long as the technology is protected by "parallel patents" and for knowhow under Article 1.3 only for so long as the knowhow remains "secret and substantial".

Article 1.4 states that where the agreement is a mixed patent and knowhow licensing agreement the exemption in the regulation from the EU competition rules - Article 81 (ex 85) shall only apply as long as the invention is protected by "necessary" patents for "as long as the licensed product is protected in those Member States by such patents" and an exemption applies as long as the patents remain in force or to the extent that the knowhow is identified and remains secret and substantial, whichever period is longer.

"Necessary patents" are defined in regulation 240/96 Article 10.5.

"Secret" is defined in Article 10.2.

A's patent has 5 years left to run. Its licence agreement restricts its licensee to exploitation in France in accordance with regulation 240/96. The agreement must terminate when the patent runs out. If not, the restrictions will be void and A has breached Article 81.

In practice licensors should ensure that a clause is added to their patent and knowhow licences along the following lines:-

"The licence granted in this agreement shall last for so long as the technology is protected by our patent in the Territory or, if shorter, the period until the knowhow ceases to be secret, other than through the Licensee's act or default".

Article 2.1 of the Regulation 240/96 does permit a restriction on the licensee divulging the knowhow even after the licence agreement is over (but only if it is still secret at that point).

Article 2.3 allows a restriction on the licensee not to exploit the licensed knowhow or patents after the licence is terminated as long as the knowhow is still secret and the patents are still in force.

This illustrates an important distinction - between the period during which the rights can be used and the length of the licence agreement.

A clause to reflect these provisions might be:-

It is permissible to grant a perpetual licence subject to these EU constraints, described above. The aim of the EU legislation is to ensure that licensees are in no worse or restricted a position than third parties operating on the market. If a patent expires all third parties can use the technology. A licensee restricted by a contract might not be able to do so subject to the provisions of Article 2 described above.

However the European Commission has no interest in determining lengths of licences other than in relation to the issues raised above. A licensee if he is able to negotiate it may obtain a perpetual licence. Many licences, particularly for computer software, which is not covered by regulation 240/96 as it is copyright, not patents which protect it, are fully paid up and perpetual.

The licensee pays an up front lump sum and has a right to use the technology forever. This is rare for manufacturing licences but not for internal licences for use within a business only for its own purposes, particularly for software copyright.

Licences are to be distinguished from assignments in this respect. If the licensor wants to be rid of entire ownership of the patent out right then all the rights in it can be assigned or transferred and the licensor's right to use it ceases. Obviously this is permanent though it is permissible in contracts to provide that the rights could be assigned back on the happening of some future event. This is largely left to the parties to negotiate as assignments are not regulated under competition law (although regulation 240/96 Article 6.1 does apply to some assignments with continuing royalty provisions).

In the UK under s45 of the Patents Act until 1 March 2000 there is an automatic right for parties to a patent licence to terminate within 3 months of the patent expiring. This section with s44, which relates to "tying clauses" in patent licences, is abolished by the Competition Act 1998 with effect from 1 March 2000 so will not be considered further here.

Licences which comply with regulation 240/96 will automatically be exempt from UK competition law under the Competition Act 1998. The Act is on the OFT web site at http://www.oft.gov.uk (under Competition Act where there are also all the OFT guidelines on the Act which can be downloaded).

There will be Intellectual Property Guidelines under the Competition Act 1998 on the OFT web site, probably by the end of 1999.

The EU regulation 240/96 permits a clause in licences allowing termination of the licence if the licensee challenges either that the patents are valid in the EU or that the knowhow is secret or substantial (Article 2.1.15).

EU regulation 240/96 permits a clause allowing the licensor to terminate the exclusivity given to a licensee and to stop licensing improvements to him if the licensee begins to compete in the EU with the licensor (Article 2.1.18). A ban on the licensee competing is not allowed.

In such a case the licence would continue but not on an exclusive basis. This means the licensee could not give a third party exclusive rights as the non-exclusive licence with the first licensee would continue.

The EU competition rules describe above are important as if they are breached the parties can be fined up to 10% of turnover and clauses are void. Third parties can sue for damages. However the "tail must not wag the dog" and the parties should in general terms negotiate the deal which best suits them.

Also many licences do not relate to the EU at all so the EU competition rules are irrelevant, though there may be other local laws.

In all cases the parties should consider:

• for how long do the want to be locked in? If the licensee is given exclusive rights then it may want a minimum royalty to justify the restriction and would then not be concerned about a long period; indeed some licensors would want as long a period as possible to ensure the maximum royalties are received;

• when will the patents expire? (See above for the EU rules on this which in essence are that the licence should not go beyond that period);

• for licensees if a large lump sum is paid for the licence, whether it should be perpetual - in some countries all contracts have to have a limited life, even if that be 999 years, but not in all cases;

• will the licence be for a fixed period or an indefinite period but terminable on notice after an initial period is over? Sometimes fixed terms which have to be renewed are complicated because parties forget to renew them and they may or may not continue by default; in other cases only a short term licence is desired; and

• whether any relevant competition or patent laws affect the length - see above.

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