14 March 2022
Intellectual Property Licensing And Negotiating Your First Deal
If you have developed a new product, or perhaps come up with an innovative way of doing something, you may find that other businesses who are keen to make use of your ideas or creations ask you to enter into an intellectual property (IP) licensing agreement.
It may be tempting to say an immediate ‘yes’ to such an invitation, particularly where you have incurred a lot of development costs and are keen to start making a return on your investment. But it is important that before doing this you take a step back to consider the potential pros and cons and, if you decide to proceed, you have at least a basic understanding of the key issues to be negotiated.
What Is An IP Licence?
An IP licence is a contractual agreement between you and someone else that grants them the right to lawfully use or exploit your IP in return for the payment of an agreed fee. You are referred to in the agreement as the ‘licensor’ and they are referred to as the ‘licensee’.
What Are The Benefits Of IP Licensing?
The main benefits to licensing your IP are that you can capitalise on your efforts without having to invest directly, as it allows you to tap into markets you might otherwise have found difficult to reach and you may be able to gain far deeper market penetration.
Are There Any Drawbacks?
The main downsides to IP licensing include a possible loss of control over how your IP is used, the risk that your IP may be inadvertently shared or published where the licensee fails to implement sufficient safeguarding processes. There is also the chance that you may undervalue your IP and agree a fee which is lower than you could properly have charged.
Having said that, if you ask a lawyer to support you through the licensing process then the likelihood of any of these risks materialising can be greatly reduced. You can also discuss alternative options such as commercialising the IP yourself, rolling it out through a franchise, or even selling it on.
Assuming that you decide that the licensing of your IP is the best way to proceed, then there are several things you need to think about before the contract can be drawn up and signed off. Here is our suggested checklist to ensure you have got the key points covered.
Who Are The Parties To The Agreement?
Do you own the IP to be licensed alone, or is ownership shared with someone else who needs to be consulted before the licence is agreed? Do they need to be named alongside you as licensor, assuming that they are happy for the deal to proceed? Likewise, is it proposed that the right to use your IP will be conferred on one person or entity only, or that the definition of the licensee will be wider than this. For example, can it be used by a group of companies who all operate under the same umbrella?
How Long Will The Licence Last?
Is the intention for the licence to run until your rights in respect of the IP expire or for a fixed term which is yet to be agreed? If a fixed term is your preferred choice, then you need to think about the length of that term and whether there will be any right of renewal on expiry or conversely an ability to bring the licence to an early end if certain trigger events occur.
What Is It That You Are Going To Licence?
Is it just the use or exploitation of your own IP that you are offering up under the terms of the deal, or are you proposing to confer rights in respect of a product or process which also contains components or elements covered by IP belonging to a third party? If so, do you have their permission to do this and, if not, what are the chances of that permission being obtained?
What Rights Will Be Granted And Restrictions Imposed?
Is it your intention that the licensee will have the exclusive right to use your IP once the licence is in place, or do you want to retain the ability to continue to use and exploit the IP yourself or to grant further licences to other businesses if and when the opportunity arises?
Will any rights you confer be unfettered or subject to specified limits which control, for example:
- the purposes for which your IP can be used;
- the territories into which your IP can be exported or sold;
- the circumstances in which a licence may be assigned; and
- the extent to which your IP may be copied, modified, improved or incorporated into something else.
How Much Will You Be Paid?
What fee are you going to charge for the right to use your IP and how will this be calculated and structured? Will there be an initial lump sum payable, followed by royalties based on use by the licensee or on sales generated? Or will you instead opt to charge an annual fee which is fixed at a set amount? And will any ongoing fees be subject to review (e.g. to enable them to be adjusted in line with the retail price index) and what rights will you have in the event that the payments due are not made, that they are received late or the licensee goes bust?
How Will You Ensure That Your IP Continues To Be Protected?
Assuming that you have registered your IP rights where permissible and effectively asserted them where not, you need to think about the steps that should be taken to ensure those rights remain intact. Where any actual or threatened infringement occurs, it will need to be swiftly dealt with. This will necessitate you striking a deal with the licensee about who is responsible for IP protection and for the enforcement of IP rights while the licence agreement remains in force.
Is A Confidentiality Agreement Needed?
If you will be disclosing confidential or commercially sensitive information as part of the licensing process – such as technical know-how or industry specific expertise – then appropriate safeguards will need to be built into your contractual arrangements to ensure that this information remains secure and that it cannot be used, shared or disseminated without your consent or in an otherwise unauthorised way.
Will You Be Required To Give Any Warranties?
If you have been asked to give certain assurances about your IP as part of the licensing deal (known in legal terms as contractual warranties), then you will need to ensure that your agreement contains an effective limitation of liability clause. This will cap the compensation you might otherwise have to pay the licensee should it turn out that your assurances were wrong or that any promises you have made cannot be delivered or honoured.
IP licensing can be a great way for entrepreneurs and inventors to capitalise on the value locked up in their creations, but it is important that where a licensing arrangement is contemplated that you go into negotiations with your eyes open. Expert legal advice will ensure your interests are protected and that any potential risks can be mitigated.
For more information about commercial contracts, click here.