Patent Licensing for Manufacturing Partners

Introduction : India’s emergence as a global manufacturing hub has increased complex international licensing arrangements, manufacturing arrangements and exploitation of IP. Often foreign and domestic patent owners will outsource their manufacturing to another party to increase production, reduce costs and meet local demand. However, allowing another party to manufacture your patented invention can expose you to many risks. Ambiguities in the contractual arrangements can create unauthorised manufacturing, grey market issues, disclosure of trade secrets and invalidate your licensing documentation. Patent licensing in India is highly regulated under the Patents Act, 1970. There are specific requirements that must be complied with including signing the licensing agreement, registering the licensing agreement and any restrictive anti-competitive clauses are prohibited. There is also a distinction between a manufacturing licence (granting the licensee the right to make and use the patented article under section 48) and a distribution arrangement. This article provides an in- depth legal analysis on patent licensing for contract manufacturing in India.

It covers the relevant legislation, the difference between manufacturing licences and distribution agreements, key provisions within the licensing agreement such as geographical restrictions, quality checks, royalty calculations and what happens to stock upon termination. It also covers notable case law. Finally, there is a compliance checklist to help businesses avoid unauthorised manufacturing.

Legal Provisions 

Section 48: Exclusive Right to Exploit the Patent

Section 48 of the Patents Act bestows exclusive rights in favour of the patent holder to stop any third party from using the invention by making it available, using it, offering it for sale, selling it or importing it into India. Any manufacture license provides for explicit waiver of the rights provided under section 48. This allows the contract manufacturer to use the patented process or make the patented article.

Section 68: Compulsory Formalities 

Section 68 provides that any assignment, mortgage or license of a patent or any interest therein will not be valid unless:

the license is in writing, all terms and clauses are included in the licensing Instrument,

and properly executed by the licensing parties. Failure to comply with Section 68 creates an invalid contract. There will be no effect if there is a handshake agreement, email, side letter or MoU which refers to schedules or terms to be agreed. This will fail to meet the requirements set out in Section 68 and will be invalid under Indian law.

Section 69: Registration 

Section 69 states that any person who becomes interested in a patent as a licensee must apply to register the interest with the Controller of Patents. This can be done using Form 16 along with the prescribed fee. Section 69(5) states that a license will generally not be admissible as evidence of interest in a patent unless the license has been registered. This means that if you have an unregistered contract manufacturer/licensee you won’t be able to enforce your rights in infringement proceedings. However, if you wish to keep your terms confidential you can ask the Controller to do so at the time of applying by including a request under Section 69(4).

Section 140: Relief from restrictive and anti-competitive conditions 

Section 140 is a statutory protection to prevent misuse of a patent. It provides that any condition which aims to:

• Require the licencee to purchase any article or process other than the patented article/process from licensor or nominee
• Prevent the licensee from using articles or processes from third parties or outside the scope of the patent
• Require that any improvements are exclusively licences back
• Prevent the licensee from questioning the validity of the patented item
• Require that the patent must be licensed on a package basis, making the licensee take unwanted patents along with the patent they want

Section 140(3) provides harsh relief to licencees who have entered into a contractual relationship with the patentee which includes a condition that has become void under section 140. If the patentee brings an action for infringement against a third party whilst still having a licence contract with void conditions, the existence of the void conditions can be used as a full defence. Therefore, if the contract is poorly drafted, the patentee will lose the ability to enforce their portfolio.

Sections 50 & 51: Licensing by Joint Owners 

Section 50(3) provides that if there is a joint owner, no licence can be granted or share assigned by the joint owner without the agreement of all the other joint owners, unless there is a contract to the contrary. Within a contract manufacturing arrangement, if there is joint development and the joint proprietors have not agreed to the licence then it is void.

Distinguishing Manufacturing Licences from Distribution Arrangements

A common structural issue is failing to recognise the difference between a manufacturing licence and a distribution agreement. Although both can be used to enter a market legally the two differ significantly in terms of the rights granted by Section 48. Below are some key differences between the two: 

Primary right: A manufacturing licence gives the licensee the right to make, build or create the patented invention. A distribution agreement gives only the right to sell, offer for sale or distribute finished goods. It assumes the item was already lawfully made by the patentee or an authorised manufacturer. 

Legal basis: A manufacturing licence is directly governed by Chapter XII of the Act (Sections 68, 69 and, for the underlying rights, Section 48). A distribution agreement rests on contract law, and the rights it passes on are limited by exhaustion under Section 107A(b).

Technical know-how: A manufacturing licence usually transfers a great deal: technical specifications, trade secrets, tooling and production know-how. A distribution agreement transfers little, mostly information about selling and marketing the product.

Exhaustion risk: In a manufacturing licence, the risk of unintended exhaustion is low because production is tightly controlled by the licence conditions. In a distribution agreement, the exhaustion doctrine is highly relevant. Once an authorised party sells the product, the patentee can no longer stop its resale.

Quality control: For a manufacturing licence, quality control is technical and production-focused, covering raw materials, tooling and the manufacturing process. For a distribution agreement, it is commercial, covering storage, packaging, brand standards and customer service.

Right to sue infringers: An exclusive licensee has a statutory right to sue under Section 109, whereas a non-exclusive manufacturing licensee does not. A distributor will generally not have a statutory right to sue for patent infringement.

A manufacturing licence confers positive rights on the manufacture of the patented article. A distribution agreement assumes that the article has been legitimately manufactured by the patentee or an authorised manufacturer. Section 107A(b) of the Patents Act provides that “any person importing or reselling products of a patented invention from someone who is legally authorised to make and sell those articles does not infringe the patent”. If the distribution agreement is incorrectly viewed as granting unrestricted sale rights from the contract manufacturer then the patentee will risk depleting its rights in relation to secondary distribution.

Key Aspects to Include in Manufacturing Agreements 

When entering into any manufacturing agreement, it is key that there are clear contractual provisions surrounding the territory, quality standards, royalties and rights upon termination. Territory and Exclusivity There should be clear provisions as to where the goods can be manufactured and sold. In India there are three types of licences: 

Exclusive Licence: This entitles the licensee to exclusively use the patented technology, meaning others cannot use it including the licensor. However, under section 109 exclusive licensees may bring infringement claims if they are joined as a party. 

Sole Licence: This allows manufacturing within the territory. The licensor will also have the right to use the invention however no third party can do so. 

Non-Exclusive Licence:  This allows the licensor to licence out manufacturing rights to more than one party. Often a mistake made by licensors is to provide exclusive manufacturing rights to a licensee in India. They will forget to include provisions meaning the licensee can export the manufactured goods to other countries where they hold patents. This should be considered when drafting manufacturing rights globally.

Quality Control and Brand Protection 

The patentee will be at risk of damaging its products if there is little or no quality control in the patent licence. Under Indian Contract Law, if there are covenants which require strict standards of manufacture and non-compete conditions in operation, these can be enforced. In Gujarat Bottling Co. Ltd. v. Coca Cola Co. (1995) the Supreme Court of India decided that restrictive negative covenants in operation during the existence of a commercial contract will not breach section 27 of the Indian Contract Act 1872 (which renders agreements restricting trade void). The patentee can impose audit requirements, raw materials specifications and processes to ensure the contract manufacturer does not create poor quality units which could damage the patentee’s brand.

Royalties Mechanism and Price Controls

The royalty is generally paid either as a flat rate per head, a lump sum per period or a percentage of the net sale price. When drafting the clause dealing with royalties in your manufacturing licence it is important to consider the following factors under Indian Law:

Fair, Reasonable and Non-discriminatory (FRAND) Licensing Standards – The Delhi High court have confirmed in Telefonaktiebolaget LM Ericsson v. Lava International Ltd (2024) that the royalty should be determined based upon similar licensing and be a percentage of the net selling price of the end device.

Price controls – In Monsanto Technology LLC v. Nuziveedu Seeds Limited (2019) it was confirmed that the trait fee will be subject to price control. This means that the contractual clauses should anticipate any price control and not be immediately breached.

Post Termination Inventory and Offboarding

Once a manufacturing licence has expired or been terminated prematurely, the contractual manufacturer will lose their legal right to practice the invention. Therefore, further manufacturing or sale of patented goods would constitute an infringement of the patent in accordance with Section 48. To avoid any issues with this, the Licence Agreement should clearly state: A sell off period allowing the Contract Manufacturer a strict non-exclusive time frame (for example 60-90 days) to sell existing stock produced before the termination notice was given. An option to repurchase or destroy any unmanufactured parts. This gives the licensor an option to repurchase the unmanufactured items. The licensor should require the immediate return or confirmation that blueprints, production schedules, bespoke tooling, moulds and confidential technical knowledge have been destroyed.

Case laws

Telefonaktiebolaget LM Ericsson v. Lava International Ltd. (Delhi HC, 2024)

Unlicensed manufacturing of tech hardware exposes partners to portfolio-wide damages based on finished product value. The court affirmed that FRAND royalties are calculated on the net selling price of the end-user device, not individual components. It also ruled that manufacturers who delay negotiations or avoid licensing terms are “unwilling licensees” liable for full damages. Manufacturing partners must ensure component supply chains feature explicit patent indemnities and license authorizations to prevent end-product liability.

Gujarat Bottling Co. Ltd. v. Coca Cola Co. (SC, 1995)

Restrictive non-compete clauses during the term of a manufacturing agreement are legally valid and enforceable. Negative covenants prohibiting a manufacturer or licensee from producing competing products during the subsistence of a contract do not violate Section 27 of the Indian Contract Act, as they protect operational capacity, brand fidelity, and trade secrets. Licensors can legally restrict manufacturing partners from making competing patented products for third parties while the agreement remains active, provided the restraint ends upon agreement termination.

Contract Manufacturing Licence Compliance Checklist

To ensure that manufacturing licences are drafted appropriately for compliance this checklist outlines key considerations for legal counsel, IP managers and corporate officers.

1. Pre-drafting: Ensure full ownership of the patent. Verify that you have full title in the patentee in the Patent Register and written permission from all co-owners to grant (Sections 48 and 50(3)). Be clear on what is being granted. Specify exclusivity/sole/non-exclusive; what will it be used for? What are the export rights? (Sections 48 and 109)
2. Drafting: There are several things to consider during drafting. Complete Document (Section 68). This should be a written contract with all terms, schedules and technical annexures included. Restrictions (Section 140(1) to (3)). Review your drafted document and ensure there is no void clauses within the document. This includes tie-ins on non-patented items, exclusive granting back or no challenge clause. Quality Control and Negative Restrictions. Within your contract include any strict quality requirements, audit rights throughout the process and any non-compete clauses whilst under licence. This will follow the Gujarat Bottling doctrine and section 27 of the Contract Act. Form 27 (Section 146 and Rule 131). Your manufacturer should provide you with annual information regarding local production, sales and working information.
3. Execution: Ensure the contract is signed by the correct signatories (Section 68). Ensure the correct stamp duty has been paid for the specific state under the Indian Stamp Act.
4. Post Execution: Within the required time frame you should file Form 16 with the Controller of Patents. You should also request confidentiality on the financial terms (Section 69(1), 69(4) and Rule 90). As a best practice commercially ensure you have controls in place to prevent over production. This could include serialisation, raw material limits and random on site audits.
5. Termination: Ensure there is a sell off period agreed, provisions for buy back or destruction of excess stock. Return of technical drawings and know-how.

Conclusion 

Issues of patentability will need to be tried at full trial. However, pending trial, the parties to the manufacturing/license agreement will generally be required to comply with their licensing terms. However, any royalties will be subject to the statutory maximum chargeable prices. The licensor is unable to enforce any contractual royalty rates which may conflict with the statutory price controls. Therefore, termination of the manufacturing licence without resolution of these issues could result in the court enforcing the continuation of the commercial relationship between the parties.

Author:- Aishwarya Santosh Ledange, in case of any queries please contact/write back to us at support@ipandlegalfilings.com or   IP & Legal Filing.

References

1. Patent Licensing For Indian Market Entry Structuring Control Without, https://www.globalpatentfiling.com/blog/patent-licensing-for-indian-market-entry-structuring-contr ol-without-a-local-presence 
2. Strengthening Intellectual Property Rights Ecosystem in India, https://www.drishtiias.com/current-affairs-news-analysis-editorials/news-editorials/26-09-2026
3. Procedures to be followed in contract manudacturing export – TaxTMI, https://www.taxtmi.com/forum/issue?id=119808
4. Gujarat Bottling Co. Ltd. v. Coca Cola Co. | Urban Rights, https://urbanrightslegal.com/cases/gujarat-bottling-v-coca-cola-1995
5. LICENSING – LexOrbis, https://lexorbis.com/pdf/2023-Licensing-India.pdf Monsanto Technology LLC v. Nuziveedu Seeds Limited, https://www.argus-p.com/updates/updates/monsanto-technology-llc-v-nuziveedu-seeds-limited/
6. SEP FRAND Licensing India: 5G & IoT Guide – Maheshwari & Co., https://www.maheshwariandco.com/blog/sep-frand-licensing-india-5g-iot-guide/
7. Case analysis of Gujarat Bottling Company v. Coca Cola Ltd., https://blog.ipleaders.in/case-analysis-gujarat-bottling-company-v-co