Does your client need to acquire rights to certain intellectual property (IP), e.g., someone else’s invention or copyrighted work? Licensing IP, rather than purchasing, can be advantageous in many circumstances, but there can be drawbacks as well. Before advising a client to enter into an IP license agreement, consider whether it makes sense given the client’s business needs.
Here’s an overview of IP licenses: They’re usually limited in their scope (what IP may be used), territory (where the IP may be used), term (how long the IP may be used), and consideration (how much the license costs). A nonexclusive license offers a licensee the most limited form of IP control, but it’s also usually the least expensive way for a prospective licensee to acquire rights to use the IP. If the IP being licensed is central to the licensee’s business, the company may prefer an exclusive license, which will be more expensive but ensures the licensee that no other potential competitors could later obtain the same rights.
IP licensing is advantageous in these situations:
- The IP is important, but is not core. The intellectual property right isn’t central to the company’s business but would still be useful, making outright ownership less necessary.
- The IP is core, but an exclusive license is available. The intellectual property right is central to the company’s business, but the company can obtain exclusive rights to the IP through licensing.
- The IP isn’t for sale. The IP owner isn’t willing to sell the IP, but the IP rights are important to the prospective licensee.
- A low-cost method to acquire use of the IP is desired. A license is advantageous for a company that’s financially risk-averse (or unsure of the ultimate value of the IP rights) and wishes to gain access to the IP rights for a low up-front investment.
- The need for the IP is time-limited. If the company only needs the intellectual property for a short period of time, a license may be the most cost-effective alternative for obtaining it.
- There are multiple potential licensees. A license is a useful structure for an intellectual property owner if the owner has multiple potential licensees that can provide an ongoing revenue stream.
But a license may not be advisable when these conditions exist:
- The license is not transferable. The license may not be assignable to a buyer if the licensee is bought out, thereby lowering the value of the license.
- There are too many restrictions. Licenses may carry a number of restrictions, some of which could interfere with the company’s product development or entry into new markets by restricting use of the intellectual property to particular products or regions.
- The license is short-term. Licenses are usually time-limited, raising the possibility that the license may not be renewed or may be renewed only at a substantially increased rate, potentially disrupting the licensee’s production or undercutting profitability.
- The licensee must rely on the owner for enforcement. Because patent and copyright law generally permit only the rights holders to bring suit for infringement, without an explicit agreement to the contrary, a licensee will be reliant on the owner-licensor to police infringements of the licensed rights. This may be a problem if the licensor lacks sufficient funds or interest to prosecute potential infringements, or acts more slowly than the licensee would like.
For more on intellectual property licensing, including sample alternative license provisions, turn to CEB’s Intellectual Property in Business Transactions, chap 5.
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