Strategic licensing of intellectual property

As the U.S. economy continues its
shift from the manufacturing sector
to services and the information age, a new commodity has emerged: intellectual property. Initially, most intellectual
property was employed by its owner for
internal use. Now, licensing of intellectual
property to others has become a huge
generator of income for a vast number of
U.S. businesses.

The global intellectual property licensing
market is estimated to be worth hundreds
of billions of dollars annually. By some
measures, the value of U.S. intellectual
property licenses abroad is now comparable to that generated by the export of
goods.

“In addition to using licensing as a revenue generator, licensing of intellectual
property from others is an essential element of virtually all businesses’ strategic
plans,” says Jacob C. Reinbolt, partner and
member of the Intellectual Property Team
at Procopio, Cory, Hargreaves & Savitch
LLP. “Those who license most effectively
— both in and out — will have a far greater
chance of succeeding than their competitors who do not license effectively.”

Smart Business spoke with Reinbolt
about what CEOs should know regarding
the licensing of intellectual property.

What should CEOs know about licensing
intellectual property?

Licensing is an extremely effective tool
because of its infinite flexibility compared
to the purchase or a sale of intellectual
property. However, that same flexibility
can be a double-edged sword if the license
agreement isn’t structured properly.

Most businesses license both ‘in’ and
‘out.’ A good example of ‘licensing in’ is a
software application. The software company grants you the rights to use its software
in the manner that it specifies, but it retains
ownership of the intellectual property that
continues to generate revenue for them.
When you sell a widget to another business, that business is free to use the widget in any manner it wishes, with no restrictions. If you ‘license out’ the rights to use
that widget through a license agreement, it may limit when, where and how that business can use the widget, or only grant the
rights for a specific period of time.

Whether a CEO is ‘licensing in’ or ‘out,’
the terms of the license agreement are
important.

What are the different forms of license
agreements and what are the issues to be
aware of with each of them?

The first is the patent license. The most
common problem with patent licenses is
the failure to recognize that a patent does
not grant the patent owner the right to
make anything. Rather, it grants the right to
exclude others from making, using or selling the invention.

The second is the trademark license; its
main problem is that the licensor must
maintain quality control over the product
or service sold by the licensee, but may not
go so far as to create a franchise by specifying a manner of doing business. For
example, if you own the service mark
‘Sunny Tanning Salons’ and license the
right to use that mark for a salon, you can
specify the minimum quality level for the
tanning services — tans that don’t fade for
a week — but not that the walls in the
salon have to be yellow.

The third is the copyright license.
Copyrights are unique because they
include six different rights within the copyright itself. By not anticipating their future
needs, the licensee may not get all of the
rights that they require. For instance, the
New York Times licensed articles from
writers for print publications but then later
published them electronically. The newspaper didn’t anticipate the evolution of
electronic media when it acquired the
pieces and thus never obtained the right to
republish the works in that manner. It was
sued and lost.

The fourth are trade secret licenses,
which are critically important because
trade secret protection can be perpetual.
The catch is that the licensor must take
reasonable efforts to maintain the confidentiality of the trade secret. A good example is the Coca-Cola formula. Had it been
protected by a patent, the protection
would have expired and the recipe
divulged. By using trade secret licenses,
Coke has managed to protect the recipe for
over 100 years.

What are the top five clauses to include in
license agreements?

  1. Representations and warranties:
    because the licensee needs to be sure the
    licensor has the right to grant the licensed
    element.

  2. Scope: it’s important because it covers
    territory, manner of usage and distribution.

  3. Delivery and acceptance: to ensure
    that what you are getting actually works.

  4. Modifications and enhancements: to
    ensure that the licensee remains competitive, such as having the right to receive
    upgrades.

  5. Limitation of liability: it’s important to
    put a cap on your potential exposure.

Protection of the licensed intellectual
property is also extremely important, particularly if any trade secret information is
involved.

JACOB C. REINBOLT is a partner and a member of the
Intellectual Property Team at Procopio, Cory, Hargreaves &
Savitch LLP. Reach him at [email protected] or (619) 525-3868.