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Intellectual property (IP) is a business asset that you can own similar to any physical asset, except for more abstract property. Your business’ ideas and creations can qualify as IP and can bring value to your business in more ways than one. Once you register your IP rights (or have established inherent ones), you can licence the use of your IP to other businesses or people. In return, you can earn royalties or a licensing fee, according to your conditions. You set out the terms of this process in an IP licence agreement with whomever you grant the licence. However, IP licensing is a complex legal area, so it is important that you take care when reviewing any licensing agreement. For some guidance, this article will go through four mistakes to avoid when reviewing an IP licence agreement.

What is a Licence Agreement?

When you grant an IP licence to another business, you (as the IP owner and licensor) grants that business (the licensee) permission to use your IP assets according to the terms and conditions you set. Notably, they do not get any ownership rights, and they may pay you royalties or a fee in return for the usage of your IP. You can grant different kinds of licences as the IP owner, including: 

  • exclusive, where only the person you grant the licence to can use the IP, and you cannot use it yourself;
  • non-exclusive, where you can grant multiple licences, and you can use the IP yourself; and
  • sole, where you can only grant one licence, but you remain able to use the IP yourself.

Whatever kind of licence you decide to grant, your licensing agreement sets out the terms of your licence. Following that, the paragraphs below list some mistakes you should avoid when reviewing your IP licensing agreement.

1. Failing to Value Your IP Accurately

Just like any other asset, your IP has worth both to your business and potential licensees. This value can determine the:

  • royalties or fees your receive;
  • pool of licensees you have; 
  • profit you can generate from the use of this IP; and
  • length of time for maximum market value.

Therefore, it is crucial that you accurately determine the true worth of your IP assets. There are different ways to do this, and it can be difficult if you do not have experience in the area. For example, you may determine value through:

  • income, cash flow, or cost savings that the IP asset generates;
  • how much it cost to develop the IP asset; or
  • looking at the worth of similar assets in the market.

You should seek expert help in this area so that you are receiving the maximum benefits when licensing your IP assets.

2. Drafting Weak Confidentiality Clauses

Depending on the nature of the IP you are licensing, it may involve confidential information, such as trade secrets. Therefore, it is vital that you include strong confidentiality and non-disclosure clauses in your licensing agreement or include them as a standalone contract.

For example, if you are licensing the right to sell your unique cupcakes, you may include your secret recipe within that licence. To protect your business interests, you need to implement confidentiality protections for that recipe.

In your confidentiality clause, clearly outline:

  • what the confidential information is;
  • the exact people that they may share your information with (if anyone);
  • that the other business’ staff also need to follow these rules; and
  • consequences of a breach of confidentiality.

3. Not Accommodating for Risk

There is the potential to receive major benefits from licensing your IP and spreading your brand. However, you are also taking on risks when you do so. If you are granting an exclusive licence to a licensee, you can only rely on them to handle and commercialise your IP assets appropriately. If they do not perform well, you may lose goodwill and value in your IP. Therefore, you need to accommodate for this risk with appropriate clauses in your licence agreement. These may include:

  • an increased royalty fee for increased risk;
  • performance and best efforts clauses;
  • the scenarios where you can terminate the contract or convert it to a non-exclusive licence;
  • dispute resolution;
  • consequences for contract breach; and
  • any contracting out clauses.

4. Relying on Broad Terms

When defining your IP in your licensing agreement, you need to be specific and comprehensive. However, you also need to include catch-all phrases to cover any unforeseen circumstances. The wording of your agreement becomes very important, so take care to draft it correctly with the aid of an experienced IP legal professional. Include details about:

  • your IP ownership and rights;
  • exactly what kinds of usage/application the licensee can engage in with the IP;
  • the regions/countries/areas where this licence is valid;
  • the period of the licence, such as five or ten years;
  • rights of renewal, but only where the licensee has not breached the agreement; and
  • any quality testing requirements.

Key Takeaways

Licensing your IP to third parties can be a good way to generate profit and market recognition. However, you need to review your IP licensing agreement carefully to ensure you protect your business’ interests. If you would like more information or help with your IP licence agreement, contact LegalVision’s IP lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

What is a licence agreement?

A licence agreement is a contract that sets out the terms of an intellectual property licence. As the licensor, you grant the licensee permission to use and commercialise your IP according to your conditions.

What kinds of IP rights can I register?

There are many different kinds of IP rights you can register, which will depend on the nature of your IP. These can include trade marks, patents, and designs.

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