After an owner of intellectual property rights (“IP”) has obtained adequate trademark, patent or other protection, there are well-established routes to create value from the IP: use the IP in commerce; sell the IP to someone to use in commerce; or license the IP to someone to use in commerce. I will address only “licensing” IP to a licensee – similar to “renting” for a period of time, instead of an outright sale.
IP rights are really a “bundle of rights”. Either all rights can be licensed to someone, or the rights can be broken into some key components, such as: geographic scope; exclusivity; products, applications, channels of distribution or end-uses; or duration of the license.
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Geographic Scope. In determining geographic scope (e.g. a
license for the entire world as compared to a more limited territory), consider
the licensee’s needs and its ability to maximize use of the IP in particular countries.
A licensor should not license more territory than absolutely necessary to make
the deal with the licensee, and to provide the licensee what it realistically
needs to maximize the potential of the licensed IP. Many licensees seek worldwide
rights but, when pressed, demonstrate ability to maximize only in certain countries,
and they are seeking the additional countries based upon overly high expectations
of their abilities to succeed in developing the market in additional countries.
Excluding countries from the license, or making them non-exclusive, can deal with
uncertainties over a licensee’s abilities. Sometimes, licensees are satisfied
with receiving a right of first option for identified additional countries, with
terms to be established.
Exclusivity. The decision to grant an exclusive or a non-exclusive
license has some of the same considerations as geographic scope. Also, it is a
function of the particular product or application and whether its introduction
and promotion in a market would be enhanced by non-exclusivity or exclusivity.
Products/Channels. Licensing for a particular product, application,
channel of distribution or end-use again focuses on strengths and weaknesses of
the licensee. If the IP can be used for a number of distinct products or applications,
why should the IP be licensed for use beyond products or applications for which
the licensee has some experience or expertise? Additionally, there may be distinct
channels of distribution or end-use. For example, a particular licensee may have
strength in selling products on the Internet or through catalogs, whereas another
licensee may have strength in selling products through mass merchandisers, while
another may have strength in selling to small to medium-size retailers.
Duration. The license’s duration has implications for introduction
and promotion of products and applications in the market, and the payment of royalties.
If there is no minimum royalty, the licensee will usually want a long-term license.
With a minimum royalty, the licensee may want a shorter term with the right to
renew, or longer term with a right to terminate. The licensor needs termination
rights if certain circumstances occur. For example, if the licensee is not properly
promoting the IP or has not met volumetric targets, the licensor should be able
to terminate the license as a whole, or as to a particular geographic area or
product, application, channel or end-use, or make the license non-exclusive. This
allows the licensor to cancel or alter the license, and license to another who
might properly promote the IP. Remember, IP rights and their products and applications
may have limited lifecycles in the market, and if a licensee does not adequately
develop the market, that opportunity may be lost forever.
Royalties. A royalty is “rent” or payment received for licensing
IP. Its level is usually set to reflect the value of the IP to the licensee, anticipated
licensee profits and what the market is paying for similar rights. Royalty payments
can take the form of up-front payments and/or periodic payments. Periodic royalties
are typically based upon per unit sales, a percentage of actual sales or even
of profits derived. The licensee is usually better off using a percentage of gross
sales, than becoming involved in calculation of sales or profits. Sometimes there
can be minimum guaranteed royalties or minimum guaranteed sales quantities.
All of the above, plus other important provisions, should be contained in a license agreement that is fully understood by both licensor and licensee.
Mr. Gasbarro is a Partner in the Corporate and HighTech/Internet Practice Groups
at Hinckley, Allen & Snyder LLP, and his practice concentrates in business
and corporate law, high tech and internet matters and energy law.
