Registering your trademarks, patents and other key Intellectual Property (IP) assets is essential for ensuring the legal protection of your ideas — but it can also be critical to your financial bottom line. For some organizations, establishing IP rights and then allowing others to use them through license agreements is a key revenue stream.
Learning the finer points of IP licensing will help you leverage the most value from your intangible assets. A comprehensive licensing agreement can drive profits well beyond expectations — while an overly permissive one can be a net neutral or even a negative.
What is IP licensing?
IP licensing refers to agreements between IP owners and other parties that allow the latter to use the former's intangible assets for a price. This is often paid as a recurring cost and is typically referred to as a royalty.
All major types of IP can be licensed, including patents, trademarks, copyrights, design rights and even trade secrets. That said, registered forms of IP such as patents and trademarks are generally much easier and more profitable to license compared to non-registered forms of IP like trade secrets. This is due to the well-defined and explicit protections for registered IPs that their non-registered counterparts lack. Alongside direct exploitation through products sold or services rendered by the owner, licensing is typically one of the most effective, reliable ways IP can generate revenue long-term. Not only this, licensing has the potential to be massively scalable – putting the IP to work in more ways and places than the licensor alone would be capable of.
Therefore, it is essential for the would-be licensor to establish the purpose of a licensing deal before drawing up any terms. Is it to monetize "on-the-shelf" IP that is of little relevance to the owner's core business, or is it to bring technology to market without going through extended product development? Alternative objectives include influencing the competitive ecosystem, e.g., through standard-essential patents, securing equity stakes in startups and achieving better rates by propping up suppliers. Once the business model is clear, it becomes much easier to structure the licensing deal toward the utmost long-term profitability and cash flow.
Before and during the license drafting process, it is essential to consider the intended outcome of the business relationship. Is the partnership likely to fulfill the short- and long-term goals you have set yourself? If not, how can the terms be improved?
Licensing in action: the power of ownership
You are probably already aware that your IP and other intangibles are your most valuable assets, so why not sell them for some immediate funds? When push comes to shove, this kind of action may be the only way to maintain liquidity, but, by and large, it is advisable to retain all parts of your portfolio that are not cost drivers.
By holding on to ownership of your IP, you keep the rights to monetize and enjoy it while preventing others from doing the same. This second point is just as decisive since depriving a close rival of a competitive edge can be the difference between first and second place in your market. After all, just because you might not be able to exploit an IP asset right now does not mean you will never be. This is where licensing can fill a gap.
IP licensing ups and downs
Licensing IP is often a central part of a company's growth strategy, and with good reason. This undertaking offers many potential benefits:
- Rapid expansion: Pre-existing infrastructure can quickly accommodate new branding, avoiding the massive overheads of starting off from scratch.
- Increased market share: In a similar vein, licensees can bring owners' products, services and branding elements to markets they could not (affordably) access themselves.
- Spreading of risk: Neither the owner nor the licensee is alone in shouldering risk, mitigating the overall damage of any losses. Also, a licensing agreement's function as a passive income stream inherently reduces risk.
- Competitive advantage: If one creator or organization strategically licenses IP while competitors do not, they are likely to gain the upper hand.
Licensing may also help circumvent shipping costs by enabling a partner to manufacture your products in their own territory. In this way, you can also increase the volume of sales without having to strain your production cycle.
All that said, there are also possible hazards lurking beneath the surface, including:
- Potential infringement: With even the most secure of agreements, licensing causes you to lose a measure of control over the assets involved. This increases the chances of infringement as licensees may not be as scrupulous or stringent in guarding your IP.
- Unfair or excessive limitations: Conversely, some IP licenses are quite restrictive as an overcorrection to this entrustment. If a licensee can find a more favorable arrangement with a competing provider, you are likely to lose a strategic partnership.
- Brand tarnishment: Just as a licensee might not respect your IP, their actions could also damage your brand reputation and goodwill. Unethical business practices or inferior quality deliverables will likely harm your brand's public standing by association.
- Possible financial loss: While a well-negotiated license can financially benefit an IP owner, an unclear, haphazard or otherwise flawed arrangement could imperil the bottom line.
Types of IP licensing
Once you have decided to move ahead with a licensing strategy in full awareness of the pitfalls, you must consider what form your agreement will take. The exact terms and conditions that each IP licensor sets vary widely, more or less differing on a case-by-case basis. Nevertheless, a typical copyright, trademark or patent license often falls into one of the following three categories:
- Exclusive: This license provides its recipient with the (largely unencumbered) right to use and benefit from the owner's IP rights. No other parties can use the IP, and barring any exceptions defined in the agreement (e.g., for non-commercial research and development), this restriction also applies to the owner.
- Non-exclusive: Here, a licensee receives the rights to use an IP asset, but the licensor can confer similar or identical rights upon other licensees. Also, the owner is not limited in their use of the IP.
- Sole: The recipient of a sole IP license has no competition from third parties for the use of the particular IP and the rights thereto, but the IP's owner can also use it.
Within the primary types of IP licenses described above, various other conditions or limitations can be placed upon licensees and licensors. Again, the type of license arrangement always depends on your business model and the intended purpose.
Entering into a licensing agreement with a startup can be hugely beneficial to both parties. Established IP is often of great value to younger companies, and an equity stake in a vibrant new business can be secured in return.
As an example, an invention's owner might grant exclusive rights to a licensee to use a patent within a defined geographic area. Outside that area, the license could apply but be non-exclusive — or be completely invalid. Alternatively, a licensee might have exclusive rights to use a trademark for a select time period and have non-exclusive rights thereafter.
In other words, IP licenses often are not entirely exclusive or non-exclusive but some hybrid of both. Numerous factors play into the stipulations and bounds of a license. These often relate to maximizing profit — e.g., granting temporary exclusivity to a licensee who can exploit a specific geographic market for a limited time — but can also depend on jurisdictional IP regulations or other requirements.
Creating maximum value
Inventors and creators must do their due diligence and research long before entering into licensing agreements so they do not run into surprises – or conflicts – later on.
When the time comes for licensing negotiation, precision is the name of the game. There must be no ambiguity or room for confusion for either party, as uncertainty early on could be the seed for litigation in the future. All rights being granted must be precisely specified and all terms concretely defined. The many procedures that a license involves — for meeting reporting and record-keeping requirements, dealing with potential cases of infringement and so on — should have their steps described in the agreement.
Last but not least, negotiating a payment or royalty structure to which all parties agree is a must. In the end, a licensing agreement is a business partnership, so it must benefit all sides to succeed. An exploitative or bad-faith arrangement is not likely to bear fruit for long. While every IP owner has the right to issue licenses to their greatest possible benefit, when properly managed, licensing is a practice where the rising tide can lift all boats.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.