Designs for Life: Exploitation

Designs are key assets for many businesses and there are several aspects that are vital to success. In this guide from our Designs for Life series, we take a look at exploitation.

Given the important role they play in preventing copying, it is very easy to view design rights as having a purely protective function. However, legal proceedings relating to design rights are relatively rare. Design rights are, in fact, more likely to be licensed than litigated. It is therefore important to remember that design rights can also play an important role in generating income. Indeed, an effective licensing strategy can more than reimburse the costs associated with filing the design in the first place.

Licensing

1. Most of the issues raised by licensing design rights are common to those that need to be considered when licensing other intellectual property rights. The approach adopted by each designer will vary according to their specific circumstances and the design(s) in question. Nevertheless, an effective licensing strategy should take at least the following into account:
   1. Why the design is being licensed;
   2. What is being licensed;
   3. Where the design is being licensed; and
   4. The terms on which the designs should be licensed.

   Each of these points is considered in more detail below.

Why the design is being licensed

1. There are many reasons for licensing a design. However, as a general rule, licensing activity should reinforce the business's overall IP strategy. For example, if a company has highly recognisable designs which it uses to distinguish itself from the competition, it may not be appropriate to license designs which form part of its current or future design language. Doing so would dilute the association the public makes between the design and the designer, and the more extensively a design is licensed, the less distinctive it will become.
2. At the other end of the scale, a design agency will want to license its design ideas as widely as possible to maximise its revenue. As such, its business model will depend upon retaining the ability to license designs in relation to certain fields of use and territories.

What is being licensed

1. A licence to use certain design rights will need to specify the design rights in question. In relation to registered design rights, this is relatively straightforward as the registered design in question and its owner can be identified by reference to the relevant design registry. However, in relation to unregistered designs, it is sensible to specify exactly which features are being licensed, preferably with reference to design drawings. It is also important to ensure that the licence is being granted by the owner of the unregistered design.
2. As could be seen in the "Ownership" section, this will not always be straightforward and may need the original designer to assign rights to the company which is exploiting the design if it was created pursuant to a commission.
3. It is also important to remember that certain types of licence will affect the licensor's ability to continue to exploit the design in question. For example, an exclusive licence in the same territory and field of use will exclude the licensor from using the designs. A broad exclusive licence should therefore only be granted if the licensor has no intention of using the design itself, and has not previously licensed the design.
4. Nevertheless, exclusivity may sensibly be granted on a narrow considered basis, such as in respect of certain fields of use, or territories, in which the licensor has no interest. Naturally, the relevant field of use should be carefully considered by the licensor to ensure the company has no plans of operating in that field, but the advantage of taking this approach is that it allows the licensor to maximise the licensing revenue it can derive from the design.

Where the design is being licensed

1. The territory of licence will often depend on the geographical scope required by the licensee. Therefore, for designs for which multi-jurisdictional protection exists (for example, through copyright law or parallel registered rights being obtained), a licensing strategy may involve multiple exclusive or sole licences being granted in respect of different countries. However, it is sensible to ensure that the geographical scope of the licence is no wider than what the licensee requires to carry on its business. The licensee is unlikely to be willing to pay for rights it is not going to use and the licensor risks missing out on future opportunities if it grants the licensee rights which the latter will find superfluous.
2. The licensor should remember that once a licence is granted, it will need to be policed. In certain territories, this will be relatively straightforward as the use the licensee is making of the design will be quite visible. However, in other territories where the licensor does not have a local presence, it will be harder to police compliance with the licence, and may even require third parties to assist by, for example, carrying out audits. The cost of carrying out such activity will, therefore, be affected by the number and scope of licences granted by the licensor.

Licensing terms

Royalties

1. The driving force behind most licensing decisions is maximising licensing revenue, meaning that the calculation of royalties is of paramount importance. A common misconception is that this will depend simply on what percentage royalty is agreed. However, other terms, such as the basis on which royalties are payable, will often have a bigger impact on the overall licensing revenue obtained under a licence. For example, whether the royalty is calculated on the wholesale or retail price can make a significant difference.
2. A licensor will also commonly want some certainty as to the revenue it will derive from the licence. One method of doing so will be to link the payment of royalties to the manufacture rather than the sale of the products. This has three advantages - the licensor receives payment as soon as the licensed right has been exploited, rather than when the eventual sale is made, the licensor does not bear any risk of sales at under- value, and further it does not risk the products remaining unsold altogether.
3. Unsurprisingly, licensees often resist this. A compromise is to agree minimum guaranteed royalties, which will provide the licensor with a minimum level of certainty as to the revenue it will derive from the licence, but allow the licensee some flexibility that the eventual royalty due (beyond the minimum level) is largely dependent on the level of sales.

Protecting design rights

1. Licensing can bring the licensor considerable benefits in the form of royalties. However, it also brings risks because the licensed design is likely to obtain greater exposure than it has previously enjoyed, including to possible new design fields. It is therefore important that the licensor includes contractual terms to reduce the risk of invalidity proceedings, and to ensure control of such proceedings if they are commenced.
2. If a dispute arises, who can sue for infringement depends upon the form of protection involved and the licensing arrangements concerned. A licensee must have the consent of the licensor to commence proceedings. As the proprietor of the design is required to be party to any proceedings, from a licensee's perspective it is important to clarify the circumstances in which the licensee will require the licensor to take action. This is particularly so where the licence is in respect of a territory or field of use in which the licensor is not active and may not suffer any damage itself, because without the licensor's cooperation the licensee risks being left without any remedy against potential infringers. In return for the licensor's cooperation, the licensee will often indemnify it for any reasonable legal costs and expenses it incurs by participating in the proceedings.
3. Sublicensing presents particular risks to the licensor, not only because sublicensing provides the design with even greater exposure, but also as the licensor is unlikely to have either a direct contractual relationship with the sublicensee, or any knowledge or visibility of the sublicensee's activities. It is therefore advisable for the licensor to exercise some control over the granting of sublicences, or to require the sublicensee to enter into a standard form collateral contract with it, providing the licensor with some recourse against the sublicensee if there is a problem that the licensee is unable or unwilling to address.

Quality control

A further aspect of protecting the design is to require the licensed product to comply with certain quality standards. Quality control provisions will be most relevant where the licence is also granting trademark rights to the licensee. However, they are also necessary when the manufacture of licensed products is subcontracted to a third party. As mentioned above, the licensor should also bear in mind how these quality standards will be policed to ensure compliance

Formalities

In the case of registered design rights, once the licence has been granted it may have to be recorded at the relevant design registry or registries. From the licensee's perspective this is important. For example, in the UK, failure to record the transaction will mean that third parties who acquire the rights from the licensor without notice of the transaction will not be bound by it, leaving the licensee with nothing other than a claim against the licensor. Responsibility for taking the relevant steps to perfect the registration, and paying the relevant fees, should therefore be attributed to one of the parties prior to completion of the licence agreement.

Licenses of right

1. UKUDRs are subject to legislation which requires the licensor to grant a 2licence of right" to any person (including an infringer) who applies for such a licence in the last five years of the design right term. The terms and conditions for granting the licence are up for negotiation between the parties, but if the parties cannot reach agreement, an application can be made for the terms to be settled by the Comptroller-General of Patents Designs and Trade Marks (who is based at the UK Intellectual Property Office, or "UKIPO").
2. The process by which an applicant can apply for settlement of terms by the comptroller requires the applicant to submit the terms on which it would like the licence to be granted (via a form available on the UKIPO website). The Comptroller will make the licence holder aware of the application and its suggested terms of licence, following which there is a time period for the licence holder and the applicant to submit objections and a counter-statement in relation to the proposed terms of licence.
3. When determining what royalty rates should be charged on the licence, the Comptroller will either use the "comparables" or the "profits available" approach. The "comparables" approach requires the existence of a comparable licence for use as a reference and the Comptroller will work on the assumption that both parties are willing to enter into the agreement (even if this is not, in fact, the case). Alternatively, the "profits available" approach works on the basis that the profits made from use of the licence should be split between the licensor and the licensee, with about 25% going to the licensee. As a very rough generalisation, licences can therefore vary between 20% and 45% of available profits.
4. Even where legal proceedings have been commenced, provided an infringer undertakes to take a licence of right before the final order after trial, the rights owner will be unable to obtain an injunction. Further, the damages or account of profits payable to the licensor by the infringer during the licence of right period will be no more than twice the amount of a royalty payable upon a licence of right.

Gowling WLG's Brands, Advertising and Designs team is a leading designs law team and are actively involved in shaping designs law. We have acted on a number of the significant, reported designs law cases in the UK over recent years, and have been the proud holders of the MIP Designs Firm of the Year Award for four years (2019 - 2022). We act for a number of design-led clients.