Introduction
Licensing is a business arrangement commonly regarded as an alternative to franchising. Under a licensing arrangement, the beneficial owner of the relevant intellectual property rights (“Licensor”) grants the other party (“Licensee”) the right to use or sell products or services under the Licensor's intellectual property rights.
In contrast with franchising which is governed by the Franchise Act 1998 in Malaysia, the concept of licensing is not governed by any specific legislation. The concept of licensing is purely based on the terms and conditions of the contractual agreement between the Licensor and the Licensee, which is more commonly known as a Licensing Agreement.
A Licence Agreement will essentially set out, amongst other, the rights and obligations of the Licensor and the Licensee, the terms of the grant of the Licence, and the type of Licence granted to the Licensee. In consideration of the grant of the Licence to the Licensee, a licence fee is imposed on the Licensee, which will also be set out in the Licence Agreement. The licence fee is typically calculated based on a percentage of sales or profits made by the Licensee.
The two prominent types of licenses granted are:
- Exclusive License: An Exclusive Licence allows only the named Licensee to use or operate under the relevant intellectual property rights owned by the Licensor. This means that any and all other parties, including the Licensor, are not allowed to use or operate under the relevant intellectual property rights.
- Non-Exclusive License: A Non-Exclusive Licence allows the Licensor and the named Licensee to use or operate under the relevant intellectual property rights. A Non-Exclusive Licence further allows the Licensor to grant the Licence to other interested Licensees to use or operate under the same intellectual property rights.
There is a fine line between the concept of licensing and the concept of franchising. As already mentioned, the concept of licensing is governed purely by the Licence Agreement, and the concept of franchising is governed by the Franchise Agreement which must be in accordance with the provisions of the Franchise Act 1998.
A key difference between the two concepts is that the concept of licensing offers more flexibility to a Licensee to conduct its business operations, while a franchisor retains a strict degree of continuous control over the operations of the franchisee's business operations under a franchise business. Another key difference between the two concepts is the requirement to register the business before the commencement of business operations. While there is no requirement to register a business intended to be operated under a Licence Agreement, there is a requirement to register a franchise business under a Franchise Agreement pursuant to the Franchise Act 1998.
Under the old Trademarks Act 1976, Malaysia adopts the system of registered users. Upon the repeal of this archaic law, the new Trademarks Act 2019 has since introduced stricter formality requirements in that a license must be in writing and signed by or on behalf of the Licensor in order for it to be effective as per Section 69(3) of the Act. This represents a change from the relevant provision under the repealed Act which states that a license needs only be by ‘lawful contract’ including verbal ones. In addition, the new Act has expressly excluded trademark licenses from mandatory record with the Registry in order to have effect against a person acquiring a conflicting interest, unlike other registrable transactions such as a trademark assignment.
Although not mandatory, it is highly recommended to record all licenses affecting Malaysian trademark registration because once so recorded, the license shall be binding on every successor in title to the Licensor’s interest, except in the case where valuable consideration has been given for the registered trademark or unless the license agreement provides otherwise. Once recorded, the entry of the license in the Register shall be deem notice to the public.
For International Registrations designating Malaysia, the 2019 Act has specifically stated under Rules 20bis(6)(b) of the Common Regulations that, recording of licenses in the International Register (WIPO) has no effect in Malaysia. In other words, the Holder must record the license affecting the International Registration designating Malaysia with the Registry (MyIPO).
Conclusion
The concept of licensing is strictly based on the Licence Agreement entered into between a Licensor and a Licensee. As it is purely based on the Licence Agreement, there is no specific legislation for a Licensor and a Licensee to adhere to, as compared to commencing a franchise business. However, although it is simpler to operate under a Licence Agreement, there is no guarantee that the concept of licensing will succeed. As such, parties should take into consideration all factors before executing the Licence Agreement. Malaysia has aimed at improving its laws with respect to trademarks and intellectual property rights. However, certain grievances and hurdles have still not been solved. Therefore, there is a scope for certain changes in the law.