Intellectual Property

What to Consider When Signing a Licensing Agreement for Your Intellectual Property

A well-drafted licensing agreement is critical to your success.
By Brian Farkas, Attorney
Updated: Sep 18th, 2018

While most people recognize the term "intellectual property," they may not understand what exactly it includes. Intellectual property (IP) is essentially intangible property. Unlike tangible property, like a car or a piece of land, intellectual property includes art, music, poems, inventions, designs, processes, and logos.

As you can imagine, ownership of these sorts of intangible assets can be as valuable as many tangible assets, if not more so. Consider, for example, the value of Pepsi's logo, the copyrights over the Harry Potter books, or the various patents on Apple's iPhone. Intellectual property has become increasingly important to our economy, particularly given the rise of software and mobile technology.

If you own intellectual property, there are two common ways to profit from it. First, you could utilize it yourselffor instance, manufacture a patented product or sell your original copyrighted photographs. Second, you could license the intellectual property to another person or entity, such as the right to manufacture your patented product or display your copyrighted photograph on a website.

A license is essentially a contract that helps you control, manage, protect, and profit from your intellectual property. What are some of the issues to consider in a licensing agreement?

Licenses and Your Rights

A license allows an intellectual property rights holder (the licensor) to make money from an invention or creative work by charging a user (the licensee) for the product's use. Licenses protect proprietary rights in areas such as software and other computer products. You can use a license to give someone permission to use your intellectual property in a certain way for a certain time for a certain price.

Types of Intellectual Property

There are four basic types of intellectual property that most businesses, inventors, and creators will encounter:

  • Copyrights: Copyrights protect original works of authorship fixed in any tangible expression form.
  • Patents: Patents protect original inventions.
  • Trademarks: Trademarks protect words, names or symbols identifying goods or services.
  • Trade Secrets: Trade secrets protect methods or systems, such as customer lists, sensitive marketing information, non-patented inventions, software, formulas and recipes, techniques, processes, and other knowledge.

Securing Your Intellectual Property Rights

Intellectual property is a complex area of law, and a lawyer is often in the best position to help you protect and manage your rights. The U.S. Patent and Trademark Office (USPTO) and the U.S. Copyright Office are also valuable sources of information about the process for registering your intellectual property with the federal government.

Some intellectual property protections, such as copyrights, are automatic in some situations but may be formally filed with the government (known as "registration"). Other protections, such as patents and trademarks, are granted by the USPTO and the application process can be rigorous and complex. And trade secrets are often not "filed" at all, but are nevertheless still protected by a combination of state and federal law.

Once you have a handle on your intellectual property rights, you can begin to think about the shape and structure of your licensing agreement.

What Should Be Included in a Licensing Agreement?

A licensing agreement does not need to be long or complicated. Indeed, an agreement that is straightforward is more likely to be understood by both parties, and ultimately enforceable by courts. You also do not necessarily need an attorney to draft the agreement (though it can often be helpful and advisable, depending on the complexity of the project and the dollars involved). Here are some terms and factors to consider when drafting your agreement.

License Scope

One of the first issues to consider is the license's scope. Do you want the licensee to have unrestricted use of your intellectual property? Or can the licensee use your intellectual property only in certain ways (such as for noncommercial purposes) for a limited amount of time (for instance, for one year)?

Licensing is assigning "limited use" rights for property. The rights given by the agreement need to be broad enough so licensees are interested in the deal, but narrow enough that you do not give permanent unrestricted control over your asset.

For example, imagine you took a beautiful photograph of the New York City skyline. Perhaps you would want to license it to a company that will use use the image on a billboard ad. But your license would probably want to restrict (i) edits the company could make to your photograph, (ii) the amount of time for which the image could be used, and (iii) the placement of your name somewhere on the photograph or website for credit.

Revenue From Your Product

Terms controlling revenue streams generated by licensed products are critical. Some license agreements include a one-time license fee, paid at purchase. (For example, the licensor immediately pays you $5,000 at the execution of the agreement, and then is able to use your intellectual property for a one-year period). Other arrangements may include recurring payments such as royalties or monthly lease payments. (For example, the licensor must pay quarterly payments over the course of the year that she is able to use your intellectual property). Consider which of those arrangements makes most sense for your specific situation.

Other License Terms to Consider Including in a Licensing Agreement

Other common license agreement topics to cover include:

  • term (length of the agreement, usually given in years)
  • rights to modify your intellectual property and combine the intellectual property with other products (for instance, editing your photo or using your patent within another product)
  • prohibited uses of the intellectual property (e.g., not using your trademark on shoddy products)
  • transfer and sublicense rights (can the licensee turn around and license your intellectual property to someone else?)
  • rights to source code, if software is involved
  • acceptance, testing, and training procedures
  • warranties you make with respect to your intellectual property (e.g., warranting the validity of your patent)
  • limitations on the licensor's liability
  • support services (will you assist the licensee with using the product?)
  • nondisclosure of confidential information
  • indemnity for infringement
  • enforcement of remedies (what happens if the licensor fails to pay you the license fee?)
  • contract termination rights (can you terminate the agreement unilaterally, or if not, on what terms can you do so?).

Licensing Agreement Enforcement

Even after a license agreement is negotiated and executed, problems can emerge. The licensor may try to use your intellectual property in a manner inconsistent with the agreement, for example using your trademark on low-quality goods, or attempting to sub-license your patented invention to a third-party in violation of your agreement. The licensor may also breach the agreement in a more straightforward way by declining to pay you the license fees that you are owed. What action can you take in such a circumstance?

As a licensor, you can file a lawsuit to enforce your rights and ask for remedies such as an injunction and monetary damages. A court could award you "actual damages," which include the amount you lost because of infringement, or you could seek the profits the defendant gained by infringement. In some extreme cases (particularly when counterfeiting is involved), the federal government may also have a role to play in investigating and ultimately assessing civil and criminal penalties for pirating and other unauthorized use of your intellectual property. In the great majority of cases, however, it will be your responsibility to bring a lawsuit to demonstrate your rights against the licensor.

Importance of Obtaining Legal Guidance

Intellectual property is complex. Licensing of intellectual property involves a tricky mix of legal and business judgment, and also requires a degree of specialization.

An attorney with experience in particular types of intellectual property transactions, such as trademark listening or copyright licensing, can provide invaluable help with drafting your agreement. An attorney can also provide guidance on how to handle a situation where the terms of your agreement are not being followedfor example, if the licensor defaults on payments or uses your intellectual property in an impermissible manner.

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