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31 October 2023
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.
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, 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.
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:
All that said, there are also possible hazards, including:
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. Nevertheless, a typical copyright, trademark or patent license often falls into one of the following three categories:
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 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.
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.
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.
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