Licence option

A licence option is the contract by which the owner of an intellectual property right grants a beneficiary, for a fixed period, the right to enter into a licence over that right. It generally takes the form of a unilateral promise to contract, governed by Article 1124 of the French Civil Code, the beneficiary holding an option that it is free to exercise or not. Common in biotechnology and public research, it allows the beneficiary to evaluate a technology before committing. It often involves the payment of an option fee.

Promise and undertaking to negotiate

The legal characterisation depends on how precise the contract is. Where the essential terms of the future licence are settled, in particular scope, duration, exclusivity and remuneration, the option is a genuine unilateral promise. Revocation of the promise during the option period then does not prevent the licence from being formed by exercise of the option, and a licence granted in breach of the promise to a third party who knew of its existence is void. Where the terms remain to be negotiated, the option is merely an undertaking to negotiate in good faith, the wrongful breaking off of which gives rise to damages that cannot compensate for the loss of the benefits expected from the contract not concluded, in accordance with Article 1112 of the Civil Code. Finally, an option differs from a right of first refusal (pacte de préférence), which only obliges the owner to offer the licence to the beneficiary first if it decides to contract.

Content of the option agreement

The agreement sets the term of the option, the procedure for exercising it, the amount of the fee and whether it is credited against future royalties. It organises the evaluation period, in particular access to know-how and samples, the confidentiality of the information disclosed and the fate of the results obtained by the beneficiary. Finally, it specifies the owner’s obligations during the option, such as keeping the titles in force, pursuing the grant procedures and refraining from granting competing rights. The essential terms of the future exclusive licence or non-exclusive licence are generally annexed to the agreement.

Points to watch

An option ties up the technology and, if it is exclusive and long, may raise competition law issues. In the commercialisation of public research, the fee and the terms of the future licence must reflect market conditions, failing which the transaction may amount to State aid. The owner should ensure that the evaluation does not allow the beneficiary to appropriate the technology without exercising the option, which requires a robust confidentiality agreement and a precise clause on the results of the evaluation.

Key points

A licence option makes it possible to reserve a technology while it is being evaluated. Its strength depends on how precise the terms of the future licence are: a complete option amounts to a promise and binds the owner, whereas an incomplete option only requires fair negotiation. The essential terms of the licence should be annexed, the period and the procedure for exercise precisely set and the use of information and results obtained during the evaluation regulated.

---

This glossary entry is general in scope and does not constitute legal advice.

Dhenne Avocats handles FRAND licences, standard essential patents and contracts bearing on patents, in advisory work as well as in litigation.

FRAND and standard essential patents · Patent contracts · Tell us about your situation