Welcome to my “Essential Considerations” series for intellectual property (IP) matters, wherein I review the important principles and processes IP holders need to know. From patenting your invention to keeping trade secrets secret, this series breaks down the sometimes labyrinthine world of IP law into a digestible question and answer format.
This Essential Considerations installment concerns licenses. What are the benefits and drawbacks of licensing your intellectual property? What does a well-drafted licensing agreement look like? Find the answers to these and more frequently asked questions below.
What is a license?
When a trademark, copyright, or patent holder wants to make money from his or her intellectual property without selling it outright or otherwise wants to permit the limited use of the intellectual property by others, he or she may decide to issue a license. Licenses grant others legal permission, typically in exchange for payment, to use IP they do not own. Unlike sales or transfers, licenses allow IP holders to retain proprietary rights, and are usually limited in scope and duration.
A common misconception among licensees is that one “buys” the right to use a software application and “owns” its copy of the same thereafter. Most commercially available software includes a license (called an End User License Agreement, Subscription Agreement, Terms and Conditions or User Agreement), which outlines the user’s obligations (such as not engaging in piracy) and the company’s rights (such as the ability to monitor the user’s account activity). The same is true for stock photos and royalty-free music. There are at least two parties in every licensing agreement: the licensor (IP owner) and the licensee (user). Licensors may authorize the use of their proprietary technology, trademarked characters, copyrighted song, or any other item in their IP portfolio. In some instances, entities may enter into a cross-licensing agreement wherein they trade usage rights with each other in lieu of or as a supplement to a financial transaction. A compulsory license or statutory license refers to the U.S. government’s infringement of a private, registered patent (for instance, for national security reasons); or a court mandate.
Why should I license my IP?
There are numerous potential benefits and drawbacks of licensing your intellectual property assets. Let’s start with the advantages:
- Profit: Licenses create market opportunities for IP holders looking to monetize their inventions and brand characteristics. Through licensing, IP holders create new income streams, which can feed directly back into research and development of products and services. For this reason, licensing is often an attractive option for start-up companies.
- Increased market access and acceptance: By allowing others access to your IP, you can expand your customer base, broaden your company’s exposure in and outside of your sector, and engender goodwill among your partners and associates—all while directly generating income.
- Competitive edge: Licenses allow you to vet and control who uses your IP, and how. If your IP asset is a fundamental differentiator of your products or services, consider a licensing agreement a key bargaining component.
- Decreased risk: Perhaps your company lacks the overhead to mass-produce its own patented, trademarked, or copyrighted products. License agreements can reduce a small or medium-sized business’ manufacturing, marketing, and testing and development burdens while keeping proprietary rights and revenue in-house. Businesses also use licenses to deter would-be offenders and resolve conflicts with existing infringers out of court. Finally, cross-licensing could give you the option to use any improvements licensees make to your IP, potentially eliminating the need for costly, time-consuming future license negotiations or disputes.
What are the disadvantages of license agreements?
- Vulnerability and brand dilution: Unless you institute safeguards early on and draft your agreements carefully, you run the risk of unwittingly exposing trade secrets. With access to your sensitive IP, licensees may be able to uncover a critical source code, or ascertain an undisclosed formula or recipe. Be wary not to license everything to everyone. When consumers associate your brand with a shoddy product, your bottom line will suffer. More damaging, perhaps, is the reverse: a licensee who seriously improves on or adds new features to your inventions could—intentionally or not—make your company obsolete.
- Loss: A licensee may fail to meet sales projections, or cut you out of profit by misreporting sales. If you and your licensee share similar capabilities, and operate in similar industries in similar fashions, you may have in fact authorized a competitor to benefit from your hard work and innovation at a fraction of the cost—with little to no legal avenue to recover from that mistake. Being vigilant in enforcing the IP rights governed by your license against known and potential acts of infringement and dilutions may require a significant investment in administrative costs and procedures.
Licensors can decrease the likelihood of these worst-case scenarios during the license agreement drafting and negotiating stage.
What should I include in my licensing agreement?
Standard provisions in an agreement include:
- Subject matter restrictions: What does the license cover? Focus on the specifics, and don’t license more than you desire to. If you are licensing a standalone software application, for example, consider what could be involved by proxy: Is it part of an application suite? Does it use plug-ins? Is it based on its own coding language? Formulating the agreement will take some time and creative thinking.
- Term length and termination: How long does the agreement last, or is it perpetual? You will likely want to decide on a concluding date, but be careful not to set too brief a term; the licensee will need time to implement the IP. Some agreements include a renewal condition, which may be an amenable option for both parties.
- Exclusivity: Is anyone else allowed to use the IP in question? Consider the licensee’s contractors, subcontractors, customers, and so on. Some agreements allow for broad use by licensees, and broad licensing by issuers; others keep the contract firmly between two parties. Your decision will depend on your business objectives: is it more important to get the IP into as many hands as possible, or to judiciously limit it to a single partner. If you are licensing a product or technology for general consumer use, your agreement may not stop an individual from duplicating or sharing your IP, but it will provide an explanation for any security features that disallow it.
- Restricted Uses: What is the licensee allowed to do with the IP? This section may constitute several pages of the agreement when the subject matter is complex, multi-purpose, or still under significant development.
- Improvements: How much is the licensee allowed to alter the IP, and who owns the improvements? As mentioned above, this section could be crucial for inventors whose designs have untapped potential or in scenarios when the licensee and the licensor could be considered competitors. Suffice it to say, you should try to retain ownership of all improvements of your IP.
- Territory: Is the agreement limited to a particular location? Some agreements stipulate that they only apply in a certain state, country, or continent. While the United States has numerous international accords related to intellectual property protection, you will need to be diligent to preempt loopholes, especially considering the Internet’s location-based gray areas such as virtual private networks and remote access.
- Representations and Warranties: What can you guarantee about the IP? Be cautious not to over-promise. If you are not one-hundred percent certain your technology or product will function properly all the time, do not imply it will. If there is any doubt that you possess complete, legal ownership of your IP, take care of all questions before entering into an agreement and, even then, disclose as much as possible. A well-drafted agreement should protect the licensor from undue indemnification obligations and make clear both parties’ full responsibilities in the event of a breach or infringement. Often, this caveat takes the form of a “non-representation” or disclaimer that the licensed asset carries no representations or warranties, and that the offering is only available “as-is.”
- Compensation and royalties: How does the licensee pay for use? Will you receive any share of revenue from your licensed IP? An IP attorney can help you to not only draft the preceding sections but come up with a financial agreement that works for you and your licensee.
How do I enforce my license agreement? What happens if I fail to enforce my license agreement?
IP holders have a plethora of legal avenues to enforce their license agreements. It starts with a sound contract, which spells out remedies for violations. Your agreement may entitle you to receive monetary damages in the event of a breach. The agreement may require that both parties engage in arbitration before you can escalate the conflict to litigation, preventing unnecessary court costs. If you do sue the licensee, a court may issue an injunction against your opponent, or fine or imprison them. Alternatively, you could end up on the losing side if your agreement is found fraudulent or unlawful. If you fail to enforce your license agreement, you essentially surrender control over your IP. That means you lose both the immediate and lifelong value associated with the ideas you have likely spent years bringing to fruition. In any event, a qualified intellectual property attorney can help you prepare your case, prevent conflicts before they begin, and protect the assets that matter most to your business.
Have a question about licenses I haven’t answered here, or need advice about any other IP matter?
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You can also find more of my guidance on IP-related legal issues at the Friday Factoids’ Resources page.
Offit Kurman’s Intellectual Property Group helps dynamic businesses and individuals to develop and protect their IP assets. We can help you through all stages of your IP matters—from concept through development, registration, licensing, marketing, renewals, enforcement, and sales. Our comprehensive and strategic approach to IP protection is designed to maximize the value of your IP assets and minimize the related risks. Learn more about our IP practice here.
ABOUT JONATHAN WACHS
Jonathan Wachs provides strategic counseling and operational advice to clients in the areas of intellectual property, commercial transactions and outsourced legal departments. As head of the firm’s Intellectual Property Group, Mr. Wachs works closely with clients to develop, register, analyze, enforce, and transfer intellectual property assets in a customized, cost-efficient, and highly effective manner. Additionally, he conducts intellectual property audits through which clients learn the nature and value of their intellectual property assets and the steps needed to protect such assets from misappropriation or dilution. As a business lawyer, he has successfully negotiated and completed several multimillion dollar business transactions and has served as general counsel to several small and midsize businesses and organizations in various industries and professions. He also manages a blog about intellectual property issues, Friday Factoids. Mr. Wachs co-manages New Paradigm Counsel, a service through which Offit Kurman delivers customized, comprehensive and cost-effective outsourced legal departments. Through New Paradigm Counsel, Jon served as outsourced general counsel for a government contractor, a large printing business, a payment processing company and an identity theft restoration business.
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