A Licence to Snoop?

Many intellectual property licences contain “audit” or “inspection” clauses which permit the licensor (usually the intellectual property owner) a right to check that the licensee has complied with any restrictions in the licence.

Often, these clauses will never be used.  However, where they are used they will become hugely important.  For example, if the licensor believes that the licensee is not accounting properly for royalties.

A recent case has highlighted the importance of getting audit or inspection clauses right.  This note will primarily be of interest to companies engaged in licensing or sub-licensing intellectual property such as software or databases.
The Facts

In 118 Data Resource Limited (“118”) v IDS Data Services Limited & Ors (IDS), 118 had licensed its database of contact details of businesses in the UK (the “Database”) to IDS.  The IDS licence permitted IDS to sub-licence the Database to others subject to certain conditions.  The conditions included:

• 118 had a right to see and approve IDS’s standard sub-licence terms;
• A maximum number of records from the Database which IDS could sub-licence per sub-licensee;
• A non-compete provision requiring the sub-licensee not to use materials from the Database to compete with 118.

The database licence agreement between 118 and IDS contained an audit/inspection clause to enable 118 to verify IDS’ compliance with the licence terms. The clause required IDS to:

“permit any duly authorised representative of [118] on reasonable prior notice to enter into any of its premises where any copies of [the Database] are used, for the purpose of ascertaining that the provisions of this Agreement are being complied with.”

118 had evidence that IDS had breached the licence agreement on at least one occasion.  118 wanted to use the audit/inspection clause to gain access to IDS’ records in order to ascertain if IDS had further breached the contract.  118 brought an application seeking specific performance of the audit/inspection clause.
The Result

The Judge denied 118’s application.  He refused to order specific performance of the audit/inspection clause.  The Judge agreed that IDS had breached the term of the licence agreement.  However, the Judge considered that the wording of the audit/inspection clause was too vague for him to give a clear order for specific performance of it.

In his judgment, the Judge addressed each of the points below as points which needed to be considered and addressed in an audit/inspection clause for the provision to be sufficiently clear to make an order of specific performance:

1. How many people can audit?

Is it limited to one person or more? Is there a limit to the number of people?

1. Who can audit?

Will this be one or more employees of the inspecting company? Will it be an external company, such as an accountancy firm? If you will specify an accountancy firm consider what is being inspected? Are there elements of the licence that an accountancy firm will not be well-equipped to inspect? Should an independent person be present such as a solicitor (not instructed by either party)?

1. Which locations are to be inspected?

Specifically if the offices are at one location (which might include records of any licences entered into) but the database is held on a server off-site consider if you need access to both locations.  Are there any additional locations to which you need access?

1. What can you inspect?

If you want to be able to inspect commercially sensitive issues like the fee that the sub-licensees are paying it may be necessary to spell this out in the contract.

1. What can you do with the material you find?

For example, if you find evidence showing that a breach has occurred are you permitted to take that information?  Do you need provision to copy relevant materials on the day and take them away with you.
Summary

Inspection or audit clauses in intellectual property licences will come in all different shapes and sizes depending on the requirements of the specific contract.

The details of the contract such as its value, the terms of the licence, and the relationship between the licensor and licensee will all affect the details of the inspection and/or audit clause.

For example, in this case, IDS had paid to 118 a flat annual licence fee for the Database.  118 did not receive a royalty from IDS, accordingly, the licence fee charged by IDS was not relevant to 118’s remuneration.  Nor was there another term of the licence agreement which made this relevant.  Therefore, in this case it was determined that fees paid by sub-licensees to IDS were not something that 118 were entitled to see.

Actions:

For existing licence agreements:

• Are the audit/inspection clauses clear? How will you be using them? If you are unsure, our intellectual property and disputes team will be happy to review the clauses in order to advise on their enforceability.

For new licence agreements:

• Consider the points above to get an idea of what you need or want from an ideal audit or inspection clause.  If you are unsure if your standard contract meets your objectives (or you do not have a standard contract) have a chat with our technology and commercial team who will delighted to work with you to draft a suitable clause.