IP Licensing: Legal Tips for Expanding Your Impact
Licensing your intellectual property rights (IP) to a third-party as an additional source of revenue through the commercial exploitation of your IP or for expansion purposes can be an effective strategy to grow your business and extend your reach. Entering into a license agreement enables an IP owner to authorize another party to exercise some of the IP owner’s rights in the IP while retaining ownership and control of the IP. However, it’s crucial to negotiate key provisions in the licensing agreement to protect the integrity of your IP and maximize your returns. Some of these key provisions are set forth below.
License scope and usage guidelines:
The most important step in the licensing process is to clearly define what is being licensed and how the licensee can use the licensed IP. For instance, an inappropriately broad definition of the licensed IP may lead to the granting of substantially more rights than the licensors intended. Further, it is advisable to set forth the permitted use, restrictions, limitations, and guidelines with specificity, to ensure a consistent representation of your IP and to avoid misunderstandings as to the precise scope of the license.
Territory and Duration:
One of the often overlooked provisions for first time licensors is the territory and duration of the license. It is crucial that the licensor clearly specify the permitted geographic scope of the license, within which the licensee can operate and sell products or services using the licensed IP. Similarly, the duration must be clearly defined so that it reflects the parties’ intention. There are many drafting options on this point; for example, the parties may opt for a short initial term with subsequent renewals, or for a longer set term, depending on their needs and commercial positions.
Quality control:
It is important for the licensor to always maintain some degree of control over use of the licensed IP in connection with third party products or services. Use of the licensed IP on products of questionable quality could tarnish the reputation of the licensor, as the party directly associated with the licensed IP in the eyes of consumers. Therefore, especially with respect to licensed trademarks, licensors should make sure to establish stringent quality control measures to maintain the standards associated with their brand. These could include specification of the requirements for product or service quality, packaging, marketing materials, and customer service, among others. To enforce this effectively, the parties may also agree to allow the licensor to audit and inspect the licensee’s premises, where products are manufactured or sold, or where services are provided.
Royalty Structure:
The license agreement must include licensor’s compensation for the license and associated payment terms. Usually, the consideration for IP licenses is in the form of royalties. Things to be considered in setting up a royalty are whether it will be a percentage of sales, a fixed fee, or a combination of both, whether there will be any hurdles and increased royalties, and when and how payment will be made. These terms often vary depending on the nature of the business and the marketplace, as well as the parties’ agreement.
Minimum Sales Targets:
Licensors might want to consider including provisions that outline minimum sales targets that the licensee must achieve within specified time frames. This ensures the licensees’ commitment to promoting and expanding the licensed IP, while also motivating them to commit to marketing and distribution efforts. It is also directly beneficial for the licensor, as minimum sales would translate to a minimum amount of royalties payable under the agreement.
Exclusivity and Competition:
An IP license can either be exclusive or non-exclusive. By granting an exclusive license in a specific territory, the licensor commits to not grant similar licenses to third parties in the territory for as long as the license at issue is in force. Exclusivity can take many forms, except for the geographic exclusivity; for example, it might apply to a specific industry only. The other option is to agree to a non-exclusive license, which gives the licensor flexibility to use or further license the licensed IP as the licensor sees fit. In addition to an exclusivity clause, it is advisable to also include any competitive restrictions, noncompete clauses, or limitations on the licensee’s ability to work with licensor’s competitors.
Marketing & Promotion:
If there are any agreed obligations on licensee regarding marketing and promotional activities with respect to the licensed IP, these should be set forth in the agreement. The relevant clause should also include the required marketing budget, advertising channels and promotional strategies that the licensee must employ to enhance IP visibility and drive sales.
Reporting and Auditing:
In addition to the licensor’s right to audit and inspect with respect to quality control, the licensor should require the licensee to provide regular reports on sales, marketing activities, and financial performance. Licensor shall also retain the right to conduct audits to ensure accurate reporting and compliance with the terms of the agreement.
IP Ownership and Protection:
The agreement should clearly define the licensor’s ownership of the licensed IP, to ensure that it will not be misinterpreted as an assignment or transfer of rights. It should also allocate responsibilities for monitoring against infringement and enforcing rights in the licensed IP. The licensor should generally maintain control over enforcement, but it might choose to allow the licensee to handle on a case by case basis, on licensor’s and licensee’s behalf.
Registration of license:
The agreement should specify if the IP license must be notified to and registered with any relevant IP office, and if so, which party will be responsible for effecting and paying for such registration. While registering a license is almost never a prerequisite for its validity, registration might be advantageous for both parties, especially in the event of disputes or infringement.
Other important clauses:
It is always a good idea to include provisions on termination, dispute resolution, jurisdiction, liability, indemnification, confidentiality and non-solicitation in most commercial agreements, depending on the context. These clauses regulate different aspects of the parties’ contractual relationship and help in the interpretation of the agreement as a whole.