Key Issues to Consider in Intellectual Property Licensing

The owner of the intellectual property (IP), whether copyright, trademark, or patent, is entitled to take full advantage of that creation or acquisition. First of all, the owner has an exclusive right to use the work unrestrictedly and develop future products and services based upon it. He or she can legally prohibit others from using the work without his or her express authorization. Most often, the future development, exploration, and utilization of the IP work will be limited if its owner relies solely on his or her personal capabilities and resources. Also, not everyone will be interested in further exploration of his or her own intellectual property; or it could be that while a person owns IP, a third party may be better suited to commercialize and monetize it. Even if the involvement of IP owner stops with the initial creation and registration of the work, or if the owner decides to involve other professionals in order to promote it, he or she can derive substantial benefits and generate royalty revenues from it, as long as the work has some value to others. This is where all kinds of licenses come into the picture, allowing the IP owner to become a licensor.

 

While licensing affords certain benefits to the licensor, it is an effective business model from the licensees’ perspective as well. A party may prefer to license a product or technology that it can utilize in its business operations rather than to construct one by themselves; this may allow them to save time and money. Also, the business may not have the necessary time or other resources to create the product it needs. A licensee may also accept a license proposal for very practical reasons, such as avoiding a lawsuit for infringement or avoiding being precluded from using an essential technology. Licenses can also be an important element in joint ventures or projects in which two or more parties are collaborating, and they have to share the product of their work in order to reach a mutual goal.

 

A license is permission from the IP owner to another party to use or do certain things with his or her IP. Any form of intellectual property can be licensed. Copyrights are licensed for music, books, movies, and other written works. Trademarks are licensed for franchising, endorsements, cross-promotions, and merchandise deals. Trade secrets are licensed in dealings between companies or individuals seeking to work together and sharing confidential information in order to accomplish their projects. Rights of publicity are licensed by individuals in endorsement deals, advertising, and marketing.

 

Each form of IP has certain associated rights. These rights can be licensed together to one person or separately to different parties. The owner of copyright can license one party to reproduce the work, the other to publicly display the work, the third to include the part of the work in that party’s other project, the forth to distribute or produce variations of the work, and so on. The owner of IP has almost unlimited ability to divide these rights and the work itself and license each piece separately. For example, separate chapters of a book can be licensed to different people for different reasons - one licensee is allowed to include the chapter in his or her own materials, while another is authorized to create a screenplay based on that book’s chapter. The licensor can draft a license agreement as broadly or as narrowly as desired.  The licensee will be able to use only the pieces of the work named in the license agreement and only for the indicated purposes. Also, the owner can issue both exclusive and nonexclusive license. The latter means the owner can issue exactly the same license to multiple parties. Ownership of the IP remains with the licensor, and only certain rights are conveyed to the licensee.

 

A license is a legally binding agreement, and its terms are strictly enforced by the courts. The licensor should be very careful not to give away rights he or she intends to keep and not to expose him- or herself to liability because of the actions of his licensees in the course of using the product or service. Drafting a license agreement requires consideration of many issues, both presently known and anticipated in the future; together, these form the scope of the license. Each of these elements, if not properly addressed, may bring unfavorable consequences on the licensee, the licensor, or both. The most common problem is that the scope of the license is not clearly and specifically identified. Parties mistakenly offer only broad, general description to what is licensed and do not indicate all possible uses. Then arguments may arise that one party exceeded the scope of the license. This may result in protracted and expensive litigation and in the licensor losing substantial profits, unable to collect the dues or to license the same rights to others. Another example is when rights are granted to the particular licensee without saying more. In the future, the licensee may be acquired by another company, and the acquiring company may end up with the license rights that the licensor never intended to grant in the first place. Such oversights may prove to be very detrimental to the licensor.

 

Other important issues to consider when licensing are:

 

·                    The scope of the grant: What can the licensee do with the licensed IP and for what purpose?

·                    Where can the license be exercised? What is the geographical scope of the license?

·                    Can the licensee assign the license or sublicense IP? If so, for what purposes?

·                    Is it exclusive or nonexclusive?

·                    How long is the license valid? Is it perpetual or temporary?

·                    Is the license terminable or irrevocable?

·                    What is the process of returning the licensed materials once the license expires?

·                    License payments and audit rights: Is it a one-time payment or are there ongoing royalties? Flat fee payments or varying amounts based on profits?

·                    Are developments, extensions, and derivative works of the licensed product allowed, and who will have the ownership interest?

·               Are warranties and indemnification included? (For example, a warranty that the licensed product will comply with the representations and descriptions; a warranty that its use will not infringe any third-party IP rights; in case any claims arise from the use of the licensed product, who is entitled to indemnity and up to what amount).

 

The list above is far from being exhaustive, but it is a demonstration of the key issues in licensing. The drafting of licenses will vary greatly, depending on the materials being licensed and the interests of all involved parties. The IP owner can be restricted in using his or her own IP if he or she grants a poorly drafted license that does not explicitly state the licensee’s and licensor’s rights and obligations and other essential terms. Moreover, the law does not require that the license be in writing. Courts may consider the course of business dealings and relationships between the parties in order to determine whether the license agreement existed and whether it is proven by the prior conduct of the parties. For example, if one party is using the IP of another with the IP owner’s knowledge for some time and the IP owner claims he or she did not authorize the first party to do so, the court may determine that the license existed based on the fact that the IP owner knew about such use and did not object in a timely fashion. As the main value of IP rights is in their exploitation, it is vitally important to have a well-written, all-inclusive, specific, unambiguous license agreement with every person who may use an IP product, be it for a short or long period of time.

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