Profiting from IP assets
In this chapter
When you set up an IP licensing agreement between your company and another business, you (the licensor) are authorizing the other party (the licensee) to use your IP in exchange for a fee or royalty. This provides you with a revenue stream that can help you grow your business.
Conversely, you can pay fees or royalties to license another firm’s IP for your own use. Gaining access to the other party’s IP offers a range of benefits, including:
- You may be able to tap into the licensor’s local capabilities and expertise, depending on the agreement. This collaboration can deepen your knowledge of the market.
- Licensing can help you get your products or services to market quickly and efficiently, while minimizing your capital investment in the market.
- It allows you to share the market risks with the licensor, increase your market penetration and possibly gain a competitive advantage over your rivals in the market.
Different forms of IP often work together such as a patented technology and the trademarks used to market it. As a result, most licensing arrangements include a combination of patents, processes, trade secrets, trademarks or copyrights, all in exchange for a fee or royalty.
Before you begin negotiations for a licensing agreement, you should pay attention to due diligence and confidentiality issues. It’s usually wise to seek professional advice to help you do this properly.
- Due diligence on your own IP
Make sure you own the IP rights in the market for which you are thinking about providing a licence. If your products or services involve IP that you’ve licensed from a third party, your agreement may prevent you from licensing them in another country.
- Confidentiality
Before discussing your IP, get everyone involved in the negotiations to sign a confidentiality or non-disclosure agreement. This is particularly important if you’re dealing with unpatented technology since any public disclosure of the technology can jeopardize your ability to register and secure it. Whether you reach a deal or not, you must ensure that none of the parties steal or use your IP without permission and get away with it.
The major kinds of agreements include:
- Technology licences
These agreements grant a licensee the right to use your technology under certain agreed terms and conditions. The agreement can also be part of a joint venture, in which you and the other party agree to pool resources to achieve a common goal.
For example, suppose another company has patented technology that could help you improve your own products or processes. Or maybe you see an opportunity where your trade secrets could benefit another company, or you’re looking for ways to enter a new market, but don’t have the resources to go it alone. In any of these cases, a technology licence agreement may be beneficial to both you and the other company.
When establishing one of these agreements, it must be clear who owns which rights, who is bringing which IP into the arrangement and how long the agreement will persist. If new IP will be created, the ownership and other rights related to that IP must be clearly defined and documented.
- Cross-licensing agreements
These agreements are between two or more companies and grant mutual rights, so all of them can use each other’s patented technology. They’re sometimes called “patent pools.”
The main reason companies establish these agreements is to avoid lawsuits and countersuits over patent infringements related to similar products. In this way, potential competitors and infringers can become allies. Apple and Microsoft, for example, have set up agreements that cover certain software and design patents that would otherwise be a source of conflict.
Cross-licensing can have other benefits, too. It can spur innovation and product development, and help you gain access to new markets or profit from IP assets that you’re not currently exploiting.
But such agreements do come with risks. Your company may become dependent on the skills and knowledge of a competitor, or your competitor’s products may eat into your own company’s sales. In extreme cases, these agreements can invite the scrutiny of anti-trust regulators who suspect that you may be trying to suppress competition. Experts usually warn against including your company’s core, business-critical patents in a cross-licensing agreement.
- Trademark licences
Companies license their trademarks to other firms in order to gain new markets for their products and services. They can also become the licensee for another company’s trademark, so they can sell that company’s product or service in their own markets.
As well as helping to distinguish products and services in a market, trademarks convey information about the product’s quality and reputation. You’ll want to—and may be contractually required to—maintain a close relationship with the licensor or licensee to ensure that the trademark’s standards are upheld.
- Franchising
In these agreements, the owner of a business model and its related IP (the franchisor) authorizes another entity (the franchisee) to use that model and IP to sell goods or services directly to customers.
A franchisor’s operation usually relies heavily on a range of IP such as trademarks, designs, patents and trade secrets. The trademark is particularly important to a franchisee since it conveys the worth and reliability of an established brand and increases the franchisee’s likelihood of success in the market.
Under these agreements, franchisees are obliged to maintain the quality standards and outward features of the brand and may lose their franchise if they fail to do so. In addition, they’re often required to watch for trademark infringements in the market and take action if they discover any.
- Copyright licenses
If you want to expand the market for your original artistic or literary creation, or for original software code, you may be able to do so via copyright licensing. These agreements can also allow you to market or distribute the original works of another party.
Many authors rely on collective management organizations to represent them and to manage their copyrights. In Canada, for example, SOCAN performs this service for music composers. You usually need to go through these organizations if you want to license copyrights owned by their members.
There are several ways to find licensing and joint venture partners. No single way is the best. You’ll likely want to use a combination of them all. They include:
- Online searches
As noted earlier in this guide, online IP databases can be a rich source of information about companies working in related areas.
- Corporate directories
Business information databases such as Scott’s Directories in Canada and D&B Hoovers in the United States are a good source of information for company profiles and contact details.
- Trade shows
Canadian and international trade shows for your industry can provide excellent networking opportunities. Many inventors use these shows to exhibit technology that’s in development or has been recently patented for precisely this purpose.
- Consultants and other IP professionals
An IP lawyer or consultant may be able to help you find licensing partners. But before engaging a professional, find out what services they’ll perform for you and how they’ll be paid.
- Industry associations
You can join industry and trade associations to look for potential partners.
- Direct contact
Reach out to companies similar to yours. Also, simple word-of-mouth can bring potential partners to your attention.
- Export Development Canada
EDC provides a range of matchmaking services to help you find licensing partners.
The licence states what IP is included and exactly how the licensee is allowed to use it. For example, they may be allowed to use it only in one particular market and nowhere else. Or use of the IP may be restricted to specific products or services. This is an area where your company should seek professional advice.
Before you enter into a licensing agreement, you’ll need to conduct due diligence on the other party or parties. This will help you determine their capabilities and intentions and make sure they fit with your overall business strategy.
Your licensing agreement should address the following issues, together with any other requirements specific to your situation:
- Roles and responsibilities of both parties
An agreement may include knowledge transfer, for example, as well as other commitments. These should all be carefully spelled out.
- Percentage of royalties
Typical royalty rates range from 3% to 7% of a product’s wholesale cost. The rate depends on factors such as the importance of a patent to a product and the product’s readiness to enter a market.
- The amount of any upfront payment, if applicable
Some agreements include an advance payment. This should be clearly specified, along with the date on which it’s to be paid.
- Duration of the agreement
Make sure the span of the agreement isn’t too long. If it is, the license could eventually become a de facto assignment of rights.
- Termination of the agreement
This sets out how and when the license agreement may be terminated, for example, if the licensee goes bankrupt.
- Transferability of the agreement
This specifies whether, and under what conditions, the license can be transferred. This could become an issue if the licensee company is sold to another business.
- Enforcement of the IP rights specified in the agreement
The agreement must specify who’s responsible for maintaining and enforcing the licensed IP rights.
- Territorial limitations
The agreement should specify the countries or regions where the license applies. Also make sure your IP rights are protected in those territories to prevent infringements such as unauthorized sub-licensing.
- Exclusivity of rights
This takes three major forms:
1. An exclusive license means that the licensee is the only one who can use the IP. In this situation, you’re also agreeing not to use the IP yourself.
2. A sole license grants the licensee exclusive rights to use the IP, in addition to your own use of it.
3. A non-exclusive license allows you to you enter into additional licensing agreements with other parties in other markets.
Sometimes, it doesn’t make business sense to retain your IP rights or to license them. In such situations, selling them outright for a one-time fee may be a better option. This simply means that you transfer the rights from your company (the assignor) to the buyer (the assignee).
Once you’ve sold the rights, you can no longer use them for your own purposes. If you do, you’re infringing on the IP rights of the buyer, who has paid for them.
It may be possible, however, to negotiate with the buyer to retain limited rights that you can continue to use even after the sale. This is called a “license back” agreement. If you do this, make sure that all the details are in the agreement and all relevant IP registrations are updated. It’s advisable to use an IP professional to negotiate the transfer agreement and what rights, if any, you’re going to retain. For more information on IP rights transfers, you can refer to: