Read an Excerpt
Should You License Your Intellectual Property?
Excerpted from Profit from Intellectual Property by Ron Idra and James L. Rogers © 2003
Why should you enter into a license agreement? If you own intellectual property-a patent, copyright, trademark, or trade secret-is it preferable to commercialize these rights yourself? Alternatively, is it simpler to sell (to assign) these rights to another party in one complete transaction? Conversely, if you are a potential licensee, why not develop your own intellectual property-or purchase it outright-instead of licensing someone else's?
In most cases, whether to license intellectual property is a business decision made by each party. It is as simple (or sometimes as complicated) as determining whether the potential revenues from licensing will exceed its costs and/or be more profitable than the alternatives. The licensor and licensee must each make a separate analysis. The licensor will weigh whether licensing fees or royalties will exceed the costs of investing to commercialize the intellectual property itself. The licensee will make similar judgments with respect to its own costs and profits.
Licensing vs. Producing It Yourself
There are situations when licensing must be undertaken in order to avoid infringement. Though this, too, is a choice on the part of the potential licensee, it involves a different type of analysis.
Licensing is frequently an attractive option because commercialization of intellectual property is difficult, expensive, and often requires specialized knowledge. Developing a patent or copyright into a commercially successful product requires great investment of resources and costs. In addition, since the outcome is never guaranteed, trying to market intellectual property is often fraught with risk. Therefore, for most intellectual property owners, it will be far easier and less risky to license intellectual property, than to commercialize it directly.
At the same time, there are companies that have the manufacturing, marketing, or other resources, but lack the idea, brand, or invention. These companies will make ideal licensees. One can see the licensing transaction as an efficient division of labor. A licensor typically has the idea, invention, artistic work, or brand, but lacks the manufacturing or marketing resources. The licensee usually has the manufacturing capabilities (depending on its size), but no intellectual property. Thus, a solo inventor who receives a patent will very often license the invention to a company with a factory (to make the product) and a sales force (to sell it).
But licensing applies in other situations as well. Sometimes an intellectual property owner does have the resources to turn his or her intellectual property into a commercially successful product, but desires not to do so for a variety of reasons. Maybe the IP owner can make more money by producing other products. Or perhaps the owner lacks particular knowledge regarding a certain market and seeks to learn more about it before manufacturing and marketing a product. Regardless of the reason, this type of situation is ideal for a licensing arrangement.
Example: A large corporation such as IBM owns many patents that it chooses not to develop into products, but instead offers to license to others. This is yet another example of how a license channels intellectual property to the party most desirous (and willing to assume the risk) of commercializing it.
In short, if you are the intellectual property owner and are looking to manufacture and market a product based on your intellectual property, there are many excellent reasons to license. This is especially true if you are licensing to a licensee who is an established and well-known company. Some of these important business advantages are:
? licensee's effectiveness to reach new markets;
? licensee's possession of effective manufacturing and distribution capabilities;
? licensee's established customer base; and,
? name recognition of licensee.
There are times that two or more parties will each want to use technology that belongs to the other. In this unique situation, the parties will enter into what is known as a cross-license. As the name implies, each party licenses its intellectual property to the other, so that each is both a licensor and licensee.
Licensing vs. Selling Your IP
If you own intellectual property, is it more beneficial to sell your intellectual property in lieu of licensing it? It is a given that an intellectual property owner always has the option of selling his or her intellectual property (assignment). However, while an assignment is much simpler than a license, it has its own drawbacks.
The difficulty with a sale of intellectual property is often in the setting of a fair price that the buyer and seller will agree on. Since the intellectual property oftentimes has not yet been commercialized or used in a significant way, it is hard to know how much money it will ultimately make, and therefore how valuable it is.
Another drawback to selling-as opposed to licensing-intellectual property has to do with the permanence of a sale. Once a sale is made, there is no going back. There are no refunds in the world of intellectual property. And this is risky for both parties. For the intellectual property owner, the risk is that he or she could be giving up intellectual property that could later turn out to be very valuable. For the intellectual property purchaser, the risk is that he or she is buying something that may later prove to be less valuable than the purchase price. An intellectual property license has an advantage over a sale. In this respect, a license has the advantage of allowing both licensor and licensee to test out the commercial potential of intellectual property and see whether it meets with each party's expectations. However, that being said, there most certainly are situations where a sale (or purchase) of intellectual property makes financial sense for both parties.
Licensing to avoid Infringement
There are situations when licensing is undertaken almost by necessity. This happens when an individual or company starts making, using, and/or selling a product or artistic work that is already covered by someone else's intellectual property.
If the intellectual property owner discovers what is believed to be infringing use, he or she may then threaten a lawsuit unless the infringing party either: (1) stops the infringing uses or (2) enters into a license with the owner. The owner is saying, in effect, either pay me for the right to use my property or stop using it.
This scenario often takes place with patent rights, but may also occur with trademark and copyrights, as well. Sometimes, if an intellectual property owner sues an alleged infringer and the lawsuit ends up in court (as opposed to being settled), a court may even impose the equivalent of a license on the infringing user. In patent law, this is known as the reasonable royalty measure of damages.
If the intellectual property owner makes this kind of demand, the alleged infringer does have several choices. He or she can:
? continue using the intellectual property, and face a possible lawsuit;
? stop all uses of the intellectual property; or,
? enter into a license with the intellectual property owner.
Continue using the intellectual property and face a possible lawsuit. Even if you choose this option because you believe the owner is mistaken (or is bluffing), it is risky and potentially very costly. This is especially the case where valuable intellectual property is involved. In general, defending against a lawsuit is a very costly endeavor, even if you win. And in the event you are found to be infringing, you risk the possibility of paying very high monetary damages, in addition to your legal costs. Finally, the intellectual property owner may be able to obtain a preliminary injunction from a court before the lawsuit even begins (and a permanent injunction afterwards), and thus may stop your use of the intellectual property, regardless.
However, that being said, it is also possible that the intellectual property owner will not pursue a lawsuit against you, even if you continue your alleged infringing uses. After all, a plaintiff (the suing party) in any lawsuit bears the expenses of initiating the litigation and so must weigh the costs and benefits. Sometimes, it simply will not be worth the effort.
For these reasons, it is often hard to predict what will happen in the abstract, without reference to the details of a particular situation. Therefore, if you plan to pursue this course of action, it is strongly recommended that you consult with an experienced intellectual property attorney.
Stop all uses of the intellectual property. Again, this could be costly, depending on the intellectual property involved and the nature of the infringing use. Once production or manufacture is set up and begun, it may be costly to stop production and switch to noninfringing alternative. However, there are times where halting your planned uses and finding an alternate means is very simple and inexpensive. Examine all the financial and legal aspects of your specific situation and weigh this choice versus taking a license.
Enter into a license with the intellectual property owner. If the alleged infringer does choose to enter into a license with the owner, he or she may do so for a variety of reasons. He or she may believe the intellectual property owner is correct and has a valid claim. Or, while there is not enough conclusive evidence, it would be too costly and time-consuming to try to litigate the issue. Either way, you may not have a great deal of bargaining power if you enter into a license under this kind of threat. Sometimes, this may be your best bet to deal with such an alleged infringement. Once again, an intellectual property attorney may help you make this kind of determination.
NOTE: If you receive any kind of cease and desist letter from an intellectual property owner, consult with an intellectual property attorney. An attorney will assess the merit of the alleged owner's claim, as well as the likelihood that your actions are actually infringing. The attorney will then be able to advise you as to your best available options, given your financial and legal situation.
Business Issues to Consider
Once you have made the decision to enter into a license, whether you are the licensor or license, you now have a whole new set of business decisions to make, legal issues to consider, and a license agreement to draft and negotiate. During each phase, you will be dealing with a wide variety of important issues. Along the way, many decisions you make will be quite significant. These decisions will have a great effect on whether your license is well-drafted and will effectively serve your needs.
License agreements are made up of a series of terms or provisions, typically written out in paragraph form, with section headings. For the sake of convenience, these provisions have been grouped into three broad categories:
1. The Main License Terms-These are the general business issues that provide the overall structure to your license, including definition of the parties, the license grant, payment, term, termination, and so on.
2. Legal Protections-These are provisions that cover the parties, both financially and legally.
3. Standard Terms-These are additional, miscellaneous legal terms that are fairly consistent across many licenses.
The business provisions define and structure the overall licensing transaction. In thinking and writing out a license's business terms, each party will clarify its intentions and pinpoint the exact nature of the transaction.
When trying to make your overall licensing decisions, it helps to consider all the separate business issues. In this respect, it is often helpful to think of the business terms as the answers to a series of questions.
The basic business questions that should be answered by both licensor and licensee are:
? Who are the parties to the licensed?
? What intellectual property will be licensed?
? What can the licensee do?
? Will the license be exclusive or nonexclusive?
? What will the payment be?
? What is the license term?
? How can the license be terminated?
? Will any services be performed?