From a business perspective developing an on-going licensing process is one way of fulfilling the requirement of optimizing the value of a business’s intellectual property portfolio or a way for an individual or entrepreneur to obtain manufacturing, distribution, and sale of their product in a significant manner that would otherwise be difficult to establish.
One of the beauties of the licensing of intellectual property is that there is potentially unlimited opportunities for income by expanding your licensing to additional territories and markets for a given technology. This is as opposed to a tangible asset such as a lathe in a machine shop wherein the income from the tangible asset is strictly limited to the physical output of the machine, say running 24 hours a day.
The following list is a starting point of issues to consider prior to entering into a licensing agreement to protect your interests and to allow you to secure alternative licensee’s should the relationship prove unsatisfactory. Basically you and the licensee are open to defining the scope of the licensee’s activities and what you expect in return for royalties with the following given to clarify obligations of the parties. Remember you are “selling” your proposal to the potential licensee and need to create a win-win situation for both yourself and the licensee while at the same time adequately protecting yourself.
- The first step is to have an awareness of the intellectual property assets that you have that are available for licensing. Thus, having an intellectual property portfolio that clearly documents all aspects of your patents is important.
- Locate potential licensee’s to consider their capabilities, past reputations, and “fit” with your goals in licensing your technology. You and your potential licensee are contemplating entering into a fiduciary relationship which means that good faith, honesty, and each parties best efforts are important in making the ongoing relationship a success for each party. Thus investigating the potential licensee’s past performance in similar agreements and the background of the potential licensee is important. Compare a license agreement with an executory contract in that with an executory contract there is less risk because a contemporaneous exchange of value occurs and each party has a better understanding of the goods or services received. With a fiduciary relationship there is a required trust of the other party into the future making the value exchanged not as obvious.
- Discuss with the licensee what your goals and expectations are for the relationship.
- The grant of the license defines the scope of what and where you are allowing the licensee to use your technology. This would cover issues such as whether the license is exclusive or not, and whether the licensee can assign the license to third parties.
- The term of the agreement normally cannot exceed the life of the patent, however, non-patented technologies with longer terms could be included also.
- Royalties can be defined by market levels and can vary greatly depending upon the split of tasks between you as the licensor and the licensee. Other items to consider related to royalties are minimum payments, method of payments, method or calculating payments, and consequences of non-payment.
- Inspections, audits, and documentation of the licensee’s activities should be considered also.
- Control of your technology and associated documents should be defined also, such as maintaining confidentiality and control over what is publicly disclosed.
- Also, what are the parties’ obligations to each other for technical and other support activities such as marketing, distribution, promotion, manufacturing, proper part marking, etc.
- How are improvements to the technology going to be handled, who is going to own what improvements and who is going to pay for the improvements, this is often called “grantbacks”.
- Who is going to police, enforce, pay for, and receive any awards of damages related to infringement of the patent by third parties?
- Are you indemnified from the various liabilities related to the licensee’s manufacturing, use, and sale of your technology, such as who is responsible for product liability and related items such as standards compliance, codes, required permits, etc.
- Under what conditions can the agreement be terminated by either party.
- What constitutes official notice between the parties.
- What obligations exist for the parties after termination of the agreement.
- How are disputes to be handled, either through arbitration, specific courts, etc.