If your company has created an innovative product or service, you may have considered licensing it. Licensing your technology can provide new opportunities for a company — if you find the right partner.
“If you’re not in the business of making the product, if you are what is called a non-practicing entity, you have to license in order to exploit the technology,” says Philip J. Moy, a partner with Fay Sharpe LLP. “But if you are practicing your technology, if you are making products that are covered by your patent, or utilizing the knowhow to make products in the marketplace, there is always a tension between getting profits on your own goods versus giving somebody else the opportunity to make money you would otherwise make.”
Smart Business spoke with Moy about how to determine if licensing is right for you and how to get the most out of your intellectual property.
How can licensing its intellectual property benefit a company?
The main benefit of licensing your technology is you can derive income from a market segment where you do not operate as efficiently as the licensee. For example, a licensing partner may have a geographical presence in a particular country, and the cost for the you to ship your goods to that country does not compare favorably with having a licensee make them there.
If someone else can do it more efficiently, there is a benefit to letting them do what they do better, and receiving a license royalty because you have the exclusive right to make that technology. Sometimes a licensing partner’s success in a different market can lead to additional success in your original market because the product becomes popular, or you might learn something from your licensee.
What issues should companies consider when negotiating a license agreement?
It’s important to fashion a license so that it is not going to be subject to litigation or disputes. To accomplish this, you have to work hard on defining the licensed product. What does the licensee sell that will require them to pay you royalties?
If you don’t take care to define the licensed product or technology, there can be disputes down the road. When that happens, the only people who make out are the lawyers.
Unnecessary disputes interfere with companies’ mutually beneficial business relationships.
Companies should also consider exclusivity issues. Typically when you grant an exclusive license, the licensor may continue to practice the technology, but often you give up the right to sell products using that technology. The agreement gives the licensee the exclusive opportunity to do that. Then, you are at the mercy of their efficiency and diligence in exploiting your technology. In these cases, you should draft requirements into the license, like requirements for selling a minimum amount of product or incentives for selling more. Whatever the requirements are, they should be appropriate so the licensee can meet them and provide an incentive for them to vigorously practice the technology. You want to make sure the terms allow the licensee to have success and that you can derive income from their success.
How can a company protect itself from license disputes?
With a patent, the easier way to avoid disputes is to define everything that is covered by the claims of the patent. If you license both a patent as well as the technology and techniques that enable the licensee to make the product, you are able to expand the scope of the licensed product beyond the claims of the patent because you are providing additional knowhow and power to create something that the licensee wouldn’t otherwise be able to make.
The more concrete that definition is, the less likely disputes are to arise. Think long and hard about it, because the definition of your licensed product will determine whether you will get any money from the licensee’s activities.
What are the keys to negotiating a successful license agreement?
Unless you are dealing from different levels of bargaining power, and you can impose terms that are distinctly to your advantage, you want to strive for terms that are to the mutual benefit of both parties. That requires stepping into the shoes of the other guy to make sure he’s got a deal that works for him.
You also have to think about what can go wrong and account for it. For instance, making provisions for currency conversion for foreign licensees.
Another key to a successful business arrangement between the two parties is to have a good dispute resolution provision, particularly if the parties are contemplating an ongoing relationship. You don’t want to have to bring a valued business partner to court, so there is a lot to be said for having a step-by-step procedure for dispute resolution.
Typically, start with discussion. If that doesn’t work, go to mediation, where a third-party tries to bring both sides to their senses. Having an arbitration provision to ultimately resolve disputes that don’t cure themselves is appropriate for parties with ongoing relationships, especially as an alternative to litigation, which can be expensive for both parties.
Another issue with patent or technology licenses is the improvements and innovations that often take place due to the license relationship between the two parties. The license should determine who owns those changes.
Philip J. Moy, Jr. is a partner with Fay Sharpe LLP. Reach him at (216) 363-9109 or firstname.lastname@example.org.