Start-up Law: IP Licensing Agreements & Commercializing your IP
Start-up Law: IP Licensing Agreements & Commercializing your IP
What is intellectual property?
Starting a business involves a multitude of challenges, from product development and marketing to financial planning and legal compliance. One of the most important legal aspects that start-ups must navigate is intellectual property protection. The World Intellectual Property Organization defines intellectual property (“IP”) as creations of the mind, such as inventions; literary and artistic works; designs; and symbols, names, and images used in commerce. The phrase intellectual property is a broad categorical description for the set of tangible and intangible assets owned by an individual or a company. Along with the right of ownership for the asset, an individual or company has the right to control the legitimate use of the asset. By the same token, an individual or company that owns the asset also has the right to determine what unauthorized use of the asset looks like. In order to protect their innovative ideas, products, and technologies, start-ups must understand the basics of IP licensing agreements and how to commercialize their IP effectively.
What is an IP Licensing Agreement?
Patents, trademarks, and copyrights are all forms of intellectual property that can be licensed. For example, patent licenses can be used for mechanical devices and systems, healthcare products and services, electronic hardware, computer software, and chemical compositions. Trademark licenses can be used in merchandising various products and services that a company offers. Thus, a license is a grant of a right to do something which the individual receiving the license could not otherwise do legally. More specifically, an IP Licensing Agreement is a contractual license between two parties: (1) the company, individual, or entity that owns the IP (the "Licensor"); and (2) the company, individual, or entity that desires to use the IP (the "Licensee").
The purpose of the IP Licensing Agreement is for the Licensor to outline the rights, responsibilities, terms, and conditions of the license which permits the use and commercialization of the IP. For example, a Licensor who authors computer software desires to commercialize the computer software but does not wish to sell their ownership rights to the software. In this scenario, the Licensor could grant a Licensee sole, exclusive, or non-exclusive use of the computer software by charging a royalty as consideration for permitting use by the Licensee. Ultimately, an IP Licensing Agreement is one way in which an owner of IP can transfer some or most of their rights to the IP to another individual, company, or entity while retaining ownership of the IP.
Why do I need an IP Licensing Agreement?
If you wish to commercialize your IP without losing ownership rights to the IP, you will need an IP Licensing Agreement. An IP Licensing Agreement can help create passive income for the Licensor through unique and creative marketing strategies. For example, in advance business organizations, since IP is an asset, it can be owned by your holding company and licensed to your operating company for royalty. IP Licensing Agreements may also offer flexibility and allow your business to enter new markets or industries.
On the other hand, if you desire to use another person’s intellectual property, you would be considered the Licensee in that scenario. For example, a company starting a business that reproduces the artwork or images of other artists, photographers, or graphic designers, into high-quality prints or applied onto clothing would require that each one of these Licensors provide a license to the company allowing, at minimum, the ability to use and reproduce the artwork or images. In this scenario, the Licensee’s use of the artists, photographers, or graphic designers’ artwork or images is authorized by the IP Licensing Agreement.
What should be included in an IP Licensing Agreement?
IP Licensing Agreements have several common features; however, individual terms of an IP Licensing Agreement will vary depending on the nature of the rights and the intentions between the parties. As a starting point, a Licensor should consider whether the Licensor will offer the Licensee an (1) non-exclusive, (2) exclusive, or (3) sole right to use the IP. The three different types of licenses are described in further detail below.
When a Licensor grants a non-exclusive IP license, the Licensor retains the right to grant an unlimited number of additional licenses to an unlimited amount of third parties. A non-exclusive license also permits the Licensor to continue using the IP. In other words, the Licensee must expect to compete with not only the Licensor, but also additional Licensees. For example, non-exclusive licenses are particularly popular with software companies who issue non-exclusive licenses to all of the user of the software.
When a Licensor grants a sole license, the Licensor typically agrees not to grant licenses to third parties but retains their right of use. In other words, if granted a sole license, the Licensee must only expect to compete with the Licensor for the use of the licensed property. A grant of a sole license, if drafted correctly, may be useful when granting a license to a specific territory in which there will be minimal overlap of the Licensor's business. For example, a company that uses proprietary technology to develop a unique product and seeks to control the wholesale export and international pricing of that product could attain their goals by issuing a sole license to a distributor within a specific territory with terms and conditions that bind the distributor to standardized pricing and operational requirements within the designated territory.
When a Licensor grants an exclusive license, only the Licensee may use the IP. Both the Licensor and additional third parties are prevented from using the IP subject to the license. Since exclusivity guarantees no competition in using the IP, Licensors may require a guaranteed fee, minimum royalty, or a provision which allows the Licensor to terminate the IP Licensing Agreement should the Licensee breach a term of the contract.
Additionally, a Licensor should consider the scope of the license, including defining the subject matter of the license and accurately outlining the scope of use. Furthermore, since Licensors are ultimately responsible for enforcing their own licensing agreements, a Licensor may wish to consider the following, non-exhaustive list, of issues relevant to developing an IP Licensing Agreement:
- Dispute resolution;
- Quality Control;
What is the difference between IP assignment and IP licensing?
Unlike assignment which transfers ownership of the IP, licensing enables the licensee (and sometimes the Licensor) to benefit from the IP while protecting the ownership rights of the Licensor. Thus, an assignment is the transfer of some or all of your IP rights and ownership to another party. An IP Assignment Agreement can be a useful tool when used in the correct scenario, such as in conjunction with a Founders’ Agreement to transfer the IP for a business concept developed by founders’ into a corporation. To learn more about Founders’ Agreements, we encourage you to visit one of our earlier articles in this series here.
Commercializing your Intellectual Property
Commercializing your intellectual property involves carefully considering many factors and devising a strategy that is unique to your business. In order to effectively commercialize your IP, start-ups must follow a few key steps:
- Assess Your IP Portfolio: Start by identifying what IP you own and what IP is most valuable to your business. This will help you to determine which IP is worth licensing and what terms to offer potential licensees.
- Conduct Market Research: Before commercializing your IP, it is important to understand the market for your products or services. This will help you to determine what terms and conditions to include in your licensing agreements.
- Draft Your IP Licensing Agreement: Once you have assessed your IP portfolio and conducted market research, give us a call to start drafting your IP licensing agreement. We will include all of the relevant terms and conditions, such as payment terms, duration of the agreement, and any restrictions on the use of your IP.
- Negotiate the Agreement: Before finalizing your IP licensing agreement, it is important to negotiate the terms with your licensee. This will ensure that both parties are satisfied with the terms of the agreement and that the IP licensing agreement is legally binding. Alternatively, you can negotiate the agreement, prior to drafting the agreement.
- Enforce Your IP Licensing Agreement: Once your IP licensing agreement is in place, it is important to enforce it to ensure that the terms and conditions are being met. This may involve taking legal action against any parties who breach the agreement.
While there is no one-size-fits-all IP licensing agreement, our corporate lawyers in Victoria, BC can assist with successfully developing your IP protection and licensing strategies. As with any business arrangement, negotiation of an IP Licensing Agreement requires familiarity with the topic and our broad experience with IP and licensing ranges from technology, inventions, copyright, trademarks, and entertainment.
A Cautionary Note
This article provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.