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Is it possible to conclude a gratuitous license agreement or should the payment of remuneration be exercised in kind?

April 19, 2019

In this article, I am deliberately not going to touch on directly the issue related to the payment of remuneration in a monetary form, because I believe that the payment of remuneration under a license agreement in the form of fixed lump sums or periodic payments, percentage deductions from an income (revenue) occurs in 99% of cases and it is a well-studied and widely used method of the payment under the license agreement.

However, in my opinion, the issue on a possibility of concluding a gratuitous license agreement with a holder of the exclusive rights to a subject matter of intellectual property or a license agreement under the conditions of the payment of remuneration in kind (a non-monetary form) has not been highlighted sufficiently, in connection with which I would like to devote my article to the consideration of these issues.

While working, I often encounter the clients' questions, like: Is it possible to conclude a gratuitous license agreement? Is it possible to stipulate a condition in the agreement that the payment of remuneration will be made in kind, in the form of a product, works, services? Can it lead to the fact that the license agreement will be considered as not concluded?

In order to answer these questions, I suggest that we should refer to the Civil Code of the Russian Federation (hereinafter referred to as the C.C.R.F., the Code) and to Resolution of the Plenum of the Supreme Court of the Russian Federation No. 5, Plenum of the Supreme Arbitration Court of the Russian Federation No. 29 of March 26, 2009 “On Some Issues Arose in Connection with the Entry into Force of Part Four of the Civil Code of the Russian Federation” (hereinafter referred to as Resolution No. 5/29).

Paragraph 3 of Article 1228 of the C.C.R.F. stipulates that the exclusive right to the result of the intellectual activity created by creative labour arises initially for its author. This right may be transferred by the author to another person under an agreement, and it also may be transferred to other persons according to other bases established by the law.

In accordance with Paragraph 1 of Article 1229 of the C.C.R.F., “a citizen or a legal entity possessing an exclusive right to the result of the intellectual activity or the means of individualization (a right holder) shall be entitled to use such result or such means at his own discretion by any method that does not contradict the law.

The right holder may dispose of the exclusive right to the result of the intellectual activity or to the means of individualization, unless otherwise is stipulated by the C.C.R.F.

In accordance with Article 1233 of the C.C.R.F., the right holder may dispose of the exclusive right owned by him to the result of the intellectual activity or to the means of individualization by any method that does not contradict the law and the essence of such exclusive right, including by alienating it under an agreement to another person (an agreement on the alienation of the exclusive right), or by granting to another person the right to use the relevant result of the intellectual activity or the means of individualization within the scope established by the agreement (a license agreement).

The analysis of the legal norms is indicative of the fact that the author or another right holder may dispose of the exclusive right owned by him to the result of the intellectual activity or the means of individualization by any method that does not contradict the law. The conclusion of the license agreement is one of the methods stipulated by the law for registering a will, when disposing of one’s exclusive right.

Thus, according to Paragraph 1 of Article 1235 of the C.C.R.F. one party under the license agreement, which is a holder of the exclusive right to the result of the intellectual activity or the means of individualization (a licensor) shall grant or shall undertake to grant the right to use such result or such means within the scope stipulated by the agreement to another party (a licensee).

Paragraph 5 of Article 1235 of the C.C.R.F. establishes that under the license agreement the licensee shall undertake to pay the remuneration stipulated by the agreement to the licensor, unless otherwise is stipulated by the agreement.

In the absence of a condition on the amount of remuneration or a procedure for determining it in a non-gratuitous license agreement, the agreement shall be considered as not concluded. In this case, the rules for determining a price stipulated by Paragraph 3 of Article 424 of this Code shall not be applied.

Thus, on the basis of Paragraph 5 of Article 1235 of the Code, the license agreement is assumed to be non-gratuitous, unless otherwise is expressly stipulated by the very agreement.

In addition, Paragraph 13.6 of Resolution No. 5/29 states that, if the license agreement does not stipulate expressly its gratuitousness, but at the same time, it does not stipulate the amount of remuneration or a procedure for determining it, such agreement shall be considered as not concluded by virtue of the second Unnumbered Paragraph of Paragraph 5 of Article 1235 of the Code.

It follows from the above norms that the conclusion of the gratuitous license agreement is allowed.

However, it should be noted that there are some restrictions relating the possibility of concluding the gratuitous license agreement.

So, by virtue of Paragraph 5.1. of Article 1235 of the C.C.R.F. the gratuitous provision of the right to use the result of the intellectual activity or the means of individualization in the relations between the commercial organizations on the whole world territory and during the entire period of the exclusive right validity under the conditions of the exclusive license shall not be allowed, unless otherwise is stipulated by this Code.

On the one hand, this norm confirms the principle of the civil legislation that the obligations legal relationships between the commercial organizations are based on the principles of a non-gratuitous nature and equivalence of the exchangeable material objects and the inadmissibility of unjust enrichment, on the other hand, it implies a possibility of concluding the gratuitous license agreements between the commercial organizations under the conditions of the non-exclusive license, and also under the conditions of the exclusive license, if they are restricted by a particular territory and (or) a period of validity.

A vivid example of the possibility of concluding the gratuitous license agreement, including between the commercial organizations, is Paragraph 5 of Article 1286 of the C.C.R.F., according to which the license agreement with the user on granting him a simple (non-exclusive) license to the use of a program for an electronic computing machine or a database can be concluded by a simplified procedure. The license agreement concluded by the simplified procedure is an accession agreement, the conditions of which, in particular, may be set forth in the purchasable copy of the program for the electronic computing machine or the database or on the packaging of such copy, as well as in an electronic form (Paragraph 2 of Article 434). The commencement of the use of the program for the electronic computing machine or the database by the user, as it is determined by the said conditions, shall mean his consent to the conclusion of the agreement. In this case, the written form of the agreement is considered to be observed. The license agreement concluded by the simplified procedure shall be gratuitous, unless otherwise is stipulated by the agreement.

Thus, we can conclude that the conclusion of the gratuitous license agreement is allowed under certain conditions.

Further, I would like to consider the issue regarding a possibility of determining the payment of remuneration in kind in the license agreement.

As it has been indicated above, Unnumbered Paragraph 3 of Paragraph 5 of Article 1235 of the C.C.R.F. stipulates that the payment of remuneration under the license agreement may be stipulated in the form of fixed lump sums or periodic payments, percentage deductions from an income (revenue) or in some other form.

Thus, it can be concluded that the legislator does not exclude, and by virtue of the principle of freedom of an agreement, it allows for a possibility of stipulating the payment of remuneration in a non-monetary form in the license agreement, for example, in the form of a product, works, services.

As an interesting example, it is possible to cite the circumstances established by the courts within the framework of the consideration of case A40-125821/2017.

As it follows from the Decision of the Intellectual Property Court of July 12, 2018 regarding the said case, a partnership agreement was concluded between the ANO “ORGANIZING COMMITTEE “SOCHI 2014” and the insurance company.

Subsequently, a license agreement was concluded between the Autonomous Non-Commercial Organization “Organizing Committee of the XXII Olympic Winter Games and the XI Paralympic Winter Games of 2014 in the city of Sochi” and the insurance company, according to which the organization granted the insurance company for remuneration the right to use (a simple non-exclusive license) the trademark according to certificate of the Russian Federation No. 139795 of March 29, 1996 on the territory of the Russian Federation.

In accordance with the partnership agreement and the license agreement conditions, the insurance company was granted for remuneration the rights, privileges and opportunities, including the right to use the organization’s trademark and the status of the Partner of the Russian Olympic Team, and the insurance company, in turn, undertook an obligation to pay remuneration in an aggregate amount of 36,250,000 US dollars, including 100,000 US dollars as a contribution to organize and hold the XXII Olympic Winter Games of 2014 in the city of Sochi; 12,652,500 US dollars as a license remuneration for the right to use the trademark according to certificate of the Russian Federation No. 139795; 12,652,500 US dollars as a license remuneration for the right to use the trademark under certificate of the Russian Federation No. 394544 and 10,845,000 US dollars as a license remuneration for the right to use other subject matters of the intellectual activity (talismans, pictograms, etc.).

In this case, based on the provisions of Paragraph 5.1 of the partnership agreement, the parties agreed a procedure for the payment of remuneration, namely, directly in a monetary form in the amount of 11,250,000 US dollars and in kind by providing insurance services by the defendant according to the organization's applications in the amount of 25,000,000 US dollars.

The court case cited as an example and the circumstances established in the course of the examination confirm the possibility of stipulating remuneration in the non-monetary form in the license agreement, for example, in the form of a product, works, services.

Summarizing the above, the answers to the issues set forth at the beginning of the article are as follows.

Is it possible to conclude a gratuitous license agreement with the holder of the exclusive rights to the subject matters of intellectual property and the means of individualization equated to them? Yes, it is possible.

Is it possible to stipulate remuneration in kind in the license agreement (in the form of a product, works, services)? Yes, it is possible.

However, when concluding the gratuitous license agreement, it is important to remember about the need to specify a condition that it is gratuitous, and when concluding the non-gratuitous license agreement, to agree a condition on the amount of remuneration or a procedure for determining it, otherwise the corresponding agreement by virtue of the second Unnumbered Paragraph of Paragraph 5 of Article 1235 of the C.C.R.F. will be considered as not concluded.

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Author of article

Roman Larshin

Roman Larshin

Lawyer