(By P. Krishna Mohan) Date : Feb 12th, 2019
This is the second in a continuing series of my articles aimed at increasing the awareness of the value of intellectual property.
Intellectual property (patents, trademarks, knowhow, trade secrets and copyrights) is the product of valuable resources spent by an organization. While IP generation consumes company resources, monetizing IP recoups the value for the organization.
Consider a company that builds a new manufacturing plant. If the plant doesn’t generate revenue, one would conclude that company resources have been wasted.
Similarly, generating IP for its own sake could be considered a waste of company resources. That said, any new innovative “non-obvious” improvement in product or process is Intellectual Property and has value. In my opinion, if the IP is not used internally to grow earnings, licensed externally, sold or otherwise used to generate value, it is a lost opportunity to contribute to the business.
Licensing as an option to deliver Value
There are several ways to monetize intellectual Property. In this article, we will discuss Licensing of IP, a common method and describe a few general considerations useful in drafting license agreements.
Patents, knowhow, trade secrets and trademarks can be licensed individually or collectively as a package and in general, with and without any restrictions on their use. Broadly speaking, the more innovative and more completely developed and ready to use (“shelf ready technology”) it is, the greater its value to a prospective licensee.
In the simplest scenario, Company A (the licensor) grants a license to use its IP to Company B (the licensee) on some negotiated financial and other terms and a legal document formalizes the arrangement.
Based on my experience, here are some general terms that appear in a typical agreement. They are offered only as a guide and are not a substitute for legal advice. Readers are encouraged to seek competent legal counsel with expertise in IP licensing before undertaking a licensing project.
- Specifics of the IP being licensed and treatment of “Confidential Information”.
- Patents, trademarks, documented knowhow should be listed in as much detail as needed to clarify specifically what is being licensed.
- With Trademarks, detailed guidelines must also be included about the proper usage, shape, size, color if applicable and placement on the product and marketing literature (collateral materials).
- Detailed procedures on handling “Confidential Information” must be included to prevent inadvertent disclosures.
- Duration/term of the agreement.
- Generally, the initial time frame (months, years etc.) for the license is specified and procedures for extension are included.
- The “field of use” of the IP.
- Depending on the legal flexibility in the region, it may be possible to specify how or where the IP can be used. As an example, this clause can be used to prevent the licensee from entering into the same market as the licensor.
- If the IP is versatile and can be used to make several different products or used in many other applications, granting a license for use in a completely “field of use” provides a new revenue stream to the licensor.
- Payment calculation method.
- Generally license fees or royalties are based on units of production or sales.
- If it is an enabling technology, negotiating a royalty rate based on the final selling price of the finished product will significantly increase the generated royalties.
- Payment Frequency and Record Keeping.
- Payment frequency can be quarterly, semiannually or annually depending on local custom and mutual convenience.
- The minimum level of record keeping needed to audit compliance with royalties paid and other terms should be specified.
- Upfront payment for technology transfer.
- An initial upfront payment may be useful if there is proprietary documentation or assistance that will be provided to help the licensee practice the IP.
- Exclusive or nonexclusive license grant.
- If the license is granted exclusively to a licensee, a minimum periodic payment will compensate the licensor for potential lost revenues from the inability to license to others.
- Holding the rights to practice internally for commercial purposes and “Grant Back” of improvements.
- In both Exclusive and Non-exclusive agreements, the licensor can retain the rights to his IP to practice it for commercial purposes.
- Sometimes, a licensee may be able to make improvements to the licensed technology. It may be useful for the licensor to have access to these improvements to improve his own operations and this can be negotiated with a “grant back” clause.
- Geographical restrictions.
- Depending on legal flexibility, it may be possible to restrict the licensee’s operations and/or sales of products made using the licensed IP, to a specific geographic region(s) to avoid conflict with the licensor’s own operations in other regions.
- Is the agreement transferable or assignable if the licensor is sold?
- It is always considered good practice to consider potential future events and address them upfront.
- The rights to audit compliance of the terms.
- A good practice is to retain the rights to periodically audit the licensor’s compliance with all of the agreement terms using impartial third-party auditors as needed. Audits can include royalty payments, trademark usage, handling confidential information etc.
- License agreement termination procedures.
- Not all license agreements will remain active till the end of their terms and provision should be made to allow for amicable termination.
- Governing law and procedures to follow in the case of disputes.
- It is prudent to include clear procedures to resolve disputes in case they arise. Whether this includes high level discussions, arbitration, litigation or other recourse, knowing which country’s laws govern such action is also very useful to help resolve them amicably.
These points are offered only as a guide. In future articles, we will discuss several other creative options to monetize intellectual property while the business continues executing its core business strategy.
P. Krishna Mohan recently retired as Global Director of Licensing, E.I. DuPont de Nemours and Co., Wilmington, DE, USA. He consults with individuals and companies on Business Management and Intellectual Property matters and can be reached at kitmohan@gmail.com.