Following my article ‘Tips to exploit commercially your IP using Licensing’, I will develop the differences between an exclusivity and a non-exclusivity clause in a licence agreement.
Key notions of Licensing
Licensing is a business arrangement in which one company gives another company permission to manufacture its product for a specified payment. (https://www.entrepreneur.com/encyclopedia/licensing).
We can compare Licensing to the idea of renting somebody’s idea to develop and commercialise a product and/or a service.
Licence agreements involve the following players:
- The licensor is the Intellectual Property (IP) owner, the creator of an innovative idea.
- The licensee is the company which has been given the right to exploit commercially the IP against a payment for its use.
What is an exclusivity clause/non-exclusivity clause?
An exclusivity clause gives the right to one partner only to manufacture, distribute and commercialise a product or a service authorised by the licence agreement in a specific territory. Therefore, the licensor is not allowed to contract with partners other than the one mentioned in the contract.
On the other hand, a non-exclusivity clause gives the licensor the right to contract with as many partners as they want without restriction of number and territory.
What is the best option between exclusivity and non-exclusivity?
The choice between exclusivity and non-exclusivity will depend on the company’s strategy and the industry in which they operate.
An exclusivity clause will fit better a fashion company, who will contract with a privileged distributor in a specific territory. It will enable the company to implement a better control against the risk of counterfeit by promptly identifying any unauthorised distributors.
On the other hand, a tech company wants their technology to become the standard in the industry. Therefore, a non-exclusivity clause will fit better their purpose by penetrating larger market shares worldwide. This strategy will enable companies to create a strong ecosystem supporting their technology to expand even further.
Opportunities and risks
Opting for a non-exclusivity clause offers opportunities to:
- Increase market coverage
- Increase sales
- Retain independence from their business partners
By opting for an exclusivity clause, by choice or by obligation, the company needs to take a particular care to protect themselves against abusive contractual terms.
Let’s review the example of a start-up which came up with a disruptive innovation and wants to licence their innovation in the market. They start negotiating with a big player, who is willing to include their technology in their products. However, the large company will prefer the use of an exclusivity clause to prevent their competitors from using this technology and to give them a competitive advantage in the market.
The use of an exclusivity clause clearly goes against the start-up interests. The best move will be to negotiate towards a non-exclusive clause.
However, if the exclusivity clause is chosen, they will need to mitigate the risks by including the following elements in the contract:
- Sales targets conditional to an obligation of results – Failure to meet the targets will give room to the licensor to end the licence agreement.
- An expiry date, clarifying the contract end date – it will prevent the creation of an indefinite contract.
This will prevent the licensor from being trapped into the worst-case scenario: Not getting any revenue from their innovation as part of an indefinite licence agreement!