Whether you're a software developer granting access to your application, a manufacturer allowing others to use your patented technology, or a brand owner permitting the use of your trademark, licensing agreements form the backbone of intellectual property commercialisation in Malaysia. Understanding the key legal considerations in these agreements can mean the difference between a profitable partnership and a costly dispute.

What Is a Licensing Agreement?

A licensing agreement is a legal contract where the owner of intellectual property (the licensor) grants permission to another party (the licensee) to use that IP under specified conditions. Unlike an assignment, which transfers ownership entirely, a licence allows the original owner to retain their rights while monetising their intellectual property.

In Malaysia, licensing agreements are governed by general contract law principles, with specific considerations under the Patents Act 1983, Trade Marks Act 2019, and Copyright Act 1987, depending on the type of IP involved.

Essential Terms in Licensing Agreements

1. Scope of the Licence

The scope defines exactly what rights are being licensed. This includes specifying the intellectual property covered, the permitted uses, and any limitations. Ambiguity in scope is one of the most common sources of licensing disputes.

For example, if you're licensing software, does the licence cover installation on multiple devices? Can the licensee modify the code? Can they sublicense to third parties? Every potential use should be clearly addressed.

Practical tip: Draft the scope clause with specificity. Rather than stating "the licensee may use the trademark," specify "the licensee may use the trademark solely on packaging for food products in the categories of..."

2. Exclusivity

Licensing agreements typically fall into three categories regarding exclusivity:

Exclusive licence: Only the licensee can use the IP, and even the licensor cannot use it or grant licences to others. Under Section 38 of the Patents Act 1983, an exclusive licensee in Malaysia has the right to institute proceedings for infringement.

Sole licence: The licensee and the licensor can both use the IP, but no other licences will be granted to third parties.

Non-exclusive licence: The licensor retains the right to use the IP and grant licences to multiple parties.

The type of exclusivity significantly impacts commercial value. Exclusive licences command higher royalties but limit the licensor's flexibility. Consider your business objectives carefully before committing to exclusivity terms.

3. Territory

Territory clauses define the geographical boundaries within which the licensee may exercise their rights. This is particularly important for Malaysian businesses engaging in cross-border licensing arrangements.

You might grant a licence for Malaysia only, for ASEAN countries, or worldwide. Consider market potential, the licensee's distribution capabilities, and your own expansion plans when negotiating territorial scope.

Practical tip: If granting regional licences, ensure clear boundary definitions. "Southeast Asia" can be interpreted differently by different parties. List specific countries to avoid ambiguity.

4. Royalties and Payment Terms

Royalty structures vary widely depending on the industry and the nature of the IP:

Percentage royalties: A percentage of the licensee's revenue or profits from products or services using the licensed IP. Common in trademark and patent licensing.

Fixed fees: A set amount paid periodically regardless of sales. Provides predictable income for licensors.

Minimum guarantees: A minimum payment that the licensee must make regardless of actual sales, often combined with percentage royalties.

Lump-sum payments: A one-time upfront payment, sometimes used for technology transfers.

Payment terms should also address currency, payment schedule, audit rights, and accounting requirements. Malaysian licensors dealing with foreign licensees should consider exchange rate fluctuations and include provisions for currency conversion.

5. Quality Control

For trademark licences, quality control provisions are not merely advisable but essential. Under Malaysian trademark law, a licensor who fails to exercise quality control risks the trademark becoming vulnerable to cancellation for non-use or loss of distinctiveness.

Quality control clauses should specify standards the licensee must meet, inspection rights, and consequences for non-compliance. This protects both the integrity of the brand and the legal validity of the trademark registration.

6. Duration and Renewal

The agreement should clearly state the initial term and any renewal options. Consider whether renewal is automatic or requires positive action, what notice periods apply, and whether terms can be renegotiated upon renewal.

For technology licences, align the duration with the expected lifespan of the technology. A ten-year licence for rapidly evolving software may not serve either party's interests.

7. Termination Provisions

Termination clauses are crucial for managing risk. A well-drafted agreement should address:

Termination for cause: Circumstances that allow immediate termination, such as material breach, bankruptcy, or failure to meet minimum sales targets.

Termination for convenience: Whether either party can terminate without cause, and what notice period applies.

Consequences of termination: What happens to inventory bearing the licensed IP? What are the wind-down obligations? How are final payments calculated?

Practical tip: Include a clear dispute resolution mechanism, specifying whether disputes will be resolved through mediation, arbitration, or litigation, and in which jurisdiction.

Registration Requirements in Malaysia

Certain licences must be registered to be effective against third parties in Malaysia. Under the Patents Act 1983, patent licences should be registered with MyIPO. Similarly, trademark licences benefit from registration, which provides public notice and strengthens the licensee's position.

Failure to register does not invalidate the licence between the parties, but it may affect enforceability against third parties and limit the licensee's ability to take legal action independently.

Common Pitfalls to Avoid

Many licensing relationships fail due to preventable issues. Watch out for vague language that creates interpretation disputes, failure to address improvements or modifications to the licensed IP, inadequate provisions for confidentiality and data protection, overlooking competition law implications, and neglecting to include appropriate indemnity and liability provisions.

Conclusion

Licensing agreements are powerful tools for commercialising intellectual property, but they require careful drafting to protect both parties' interests. By paying close attention to exclusivity, royalties, territory, duration, and termination provisions, Malaysian businesses can create licensing relationships that generate value while minimising legal risk.

Given the complexity of these agreements and their long-term implications, professional legal advice is essential when negotiating or drafting licensing terms.

Disclaimer

This article is intended for general informational purposes only and does not constitute legal advice. The information provided should not be relied upon as a substitute for professional legal counsel tailored to your specific circumstances. Licensing agreements involve complex legal considerations that vary based on the type of intellectual property, industry, and jurisdiction involved. For advice regarding your particular situation, please consult a qualified intellectual property lawyer.