via Above the Law: The licensing of intellectual property is not something to be taken for granted. In most cases, the decision to license intellectual property rights stems from a desire to maximize potential revenue from intellectual property assets. For some, this may mean expanding penetration in a market though licensed products; for others, it may mean leveraging assets in fields not otherwise part of the company’s core market. In fact, there are a multitude of ways for intellectual property owners to leverage such assets through licensing, but it is this very point that can be an intellectual property owner’s undoing if they aren’t careful.
What many intellectual property owners fail to realize is that intellectual property licensing is a delicate process. Too often, there is a reliance on “forms” to facilitate deals, when in fact, no “form” may suffice for the nature of the deal(s) being contemplated. In most cases, there are a number of commercial factors that impact the way the intellectual property can (or should) be licensed — factors which, if ignored, can set a poor foundation for the license going forward and otherwise hurt the commercial viability of the license over its term. Although there are a number of steps that need to be taken to understand the nature and scope of the license before putting pen to paper, here are five things worth noting before you do so:
1. Do Your Due Diligence. This may seem like an odd point, but it is essential — you need to know your intellectual property assets as much as the potential licensee with which you are dealing. I know, I know — you are probably reading this and saying “duh,” but you would be stunned to realize how many times a company has made assumptions regarding its intellectual property assets that are, quite simply, incorrect. For example, a startup company that has created artificial intelligence software for its office security products and is gaining significant traction in its core market may seek to license its software to a third-party home automation company (i.e., porting the software to a home controller for IoT devices manufactured by the company). Great opportunity, right? Only if the company actually owns the software it created, or has otherwise obtained the rights to sublicense such elements to the other company — if the appropriate assignments from contract developers (or licenses from applicable licensors) have not been executed, any underlying license wold be invalid and place the startup-licensor in the precarious position of being in breach of its agreement at the outset. This recommendation is not limited to the companies themselves — this is especially true for counsel that may not be familiar with the underlying intellectual property of the client. Take the time to not only understand what is being licensed, but whether and how it can be licensed in the first place.
2. Set Boundaries. This point is essential — every license should operate within pre-determined boundaries. That is, the intellectual property owner needs to understand the business implications of licensing the intellectual property on both sides of the deal so that the appropriate parameters for the license can be established. This determination is more than merely addressing exclusivity or the royalty — it goes to the heart of the nature of the intellectual property being licensed. For example, the hoe automation company used in the sample above does not need a broad-scope license to the existing intellectual property — it may only need to license certain copyrights applicable to components of the software, or a license to the entire software suite but limited solely to a narrowly defined field of home automation products or a specific communications technology (i.e., Zigbee). Setting boundaries is essential with children, and it is no different with a company’s intellectual property assets.
3.Test The Waters, Where Possible. Sometimes the potential licensee may not have a prove track record in the space within which the licensed intellectual property will be applied. Such situations demand a delicate touch, asking the potential business partner to “prove-out” the concept under a limited license before engaging in a longer term deal. These situations are not limited to small companies breaking into the marketplace — larger companies seeking to penetrate a specific market may not have the expertise or experience in the specific market either. In fact, I would argue that addressing such circumstances with licenses of limited duration and scope is essential — this structure not only assists the licensor in testing a “proof of concept” with its new business partner, but limits any long-term exposure to a license that may not be able to live up to expectations (and, therefore, miss revenue projections and royalty income to the licensor).
4. Be Careful With Exclusivity. Exclusivity in licensing should only be done after careful consideration has been paid to the potential licensee, the market and the licensor’s other intellectuals property obligations. This may come as a surprise to you, but I have personally dealt with situations where a lack of such care resulted in multiple exclusive licenses needing to be “unwound” by amendments so that the appropriate intellectual property rights were in place. Assuming any grant-back rights, as a general rule exclusivity basically hands a licensee a set of intellectual property rights that cannot be exercised by the licensor for the duration of the license. Tying the hands of the licensor under an exclusive license should be met with appropriate royalties, minimum guarantees and, in some cases, even upfront fees or advances depending upon the nature of the underlying deal. Further, additional responsibilities are placed upon the parties in exclusive licenses (i.e., joinder of the licensor in intellectual property infringement litigation). Sometimes a non-exclusive construct with specific restrictions may work equally well for the parties. In any event, when it comes to exclusivity in intellectual property licenses, always proceed with caution.
5. Balance The Agendas. In every case, the interests of the licensor and the licensee are only aligned in limited ways (i.e., the licensor gets additional royalty income while the license gets to implement technology it may not otherwise have been able to develop or otherwise license). Rarely do such interests remain aligned long term, and it you’re not careful, specific elements of the license (such as the termination and assignment clauses) may not clearly address potential acquisition of a party, which can wreak havoc at a later date. Care should be taken to address the long-term aims of the parties so that any potential problems can be minimized over the term of the agreement.
As you can see, these points only touch on some of the issues presented. Each transaction has its own considerations and challenges, and intellectual property licenses are no different. As a lawyer in private practice, I also understand that time is not always on our side, and in some cases, the deal may require some deft handling of client (and opposing party) expectations to avoid potential problems. That said, taking the time to set the stage for a successful license is critical in more ways than one, and it is something that your clients (or company) will ultimately thank you for in the process.