For many modern companies, their formulas, processes, techniques and custom software are among their most valuable assets. This “intellectual property” (IP) is the foundation of many companies’ profitability.
Licensing Advantages
The most obvious way to make money from IP is to use it yourself. However, if you also license others to use it, it may become even more valuable. Licensing has the big advantage of creating an income stream without all the attached expenses that often go with production. You may be able to take advantage of the synergy of combining someone else’s market with your ideas so that you both come out ahead. Moreover the other guy might also have some good ideas to add to your IP. Perhaps he has some insight on how to adapt your IP to his industry.
Then there are the contacts you can make. In an economy that is quickly becoming an “information economy,” getting your product and your name out in the marketplace in more places (more industries and more physical locations) can be an important long-term growth strategy.
Risks and Challenges
Unless there are proven patents involved, companies are often hesitant to share their secrets with others. Without the legal monopoly provided by a patent, your IP can just disappear if it becomes common knowledge and enters the public domain.
But the big companies license their technology all the time. They get more mileage out of their IP and still manage to hang on to it. How do they avoid the problems?
The Solution
There are ways to allow others to use your IP and protect it at the same time. Here is where your lawyer becomes important. The principal tools to protect IP are (1) Contracts, (2) Procedures, and (3) Policing.
Contracts
The keys to protecting licensed IP are the contracts. You need to carefully craft your contracts with your licensees to protect and keep control of your IP. When the small or medium-sized business licenses their IP, they generally know to negotiate a royalty, define the territory and to require confidentiality. But they do not think of everything.
For example:
• Did you negotiate a right to audit the licensee’s books?
• In an exclusive license, have you reserved a right to use it and improve the subject IP yourself?
• Can the licensee (and sublicensees) give sublicenses?
• Who owns improvements that are jointly developed?
• What if the original IP is later patented?
• What if an improvement is patented?
• What if an improvement has a joint inventor and both have the right to license under patent law?
• What if the licensee is sold or goes into bankruptcy?
These are some of the many issues to consider.
Procedures
Good contracts will not be very effective unless you have procedures in place to prevent the IP from slipping away. Not only is this a practical issue, but the law may not protect you against true thieves if you do not have a system in place to protect your IP.
Policing
Perhaps the easiest safeguard to ignore is the policing of your rights. If others are using your IP in ways that violate your agreements or without any agreements, you can’t stop them unless you keep your eyes open. Constant vigilance is required.
Going Global
You do not need to stop at the U.S. border. International licensing is becoming more and more common, but there are a few more issues. Do I need to go to Canada to enforce the restrictions in my license agreement against a Canadian licensee? Will my contract be enforceable in France, Russia or China? Should the contract be in English? Will a French court (or for that matter, a Quebec court) enforce a contract written in English? How do you deal with all the different legal systems? Are there common American contract provisions that are just unenforceable in Europe?
The short answer is: generally the licensing agreements used in the United States will work elsewhere but there are exceptions. It may also be more difficult and more expensive to get everything in your contract enforced in a far away place. Sometimes, you may even find that certain provisions common in U.S. license agreements are insulting to European or Asian businesses. All of this can get complicated but there are resources out there to help you. Other companies successfully manage these issues, license their technology and thrive in the global economy, why shouldn’t you?
For more information about this matter please contact Kemp Klein.
