In this article, we use the example of technology development to illustrate how your business can get the most out of your Intellectual Property (IP) through licensing.
IP may be a company's most valuable asset. IP refers to specific statutory rights, including copyright, designs, registered trade marks and patents. Confidential information, though not strictly IP, also shares some important similarities.
Commercialisation options
The development of technology is often time consuming and costly, with many hours spent researching, designing and developing a product. It can, therefore, be very important for the developer to commercialise any underlying IP in the technology.
The technology developer will generally have three basic options available for commercialisation:
- Sell or assign the IP to a third party.
In these circumstances, the developer will retain little or no control over the IP, but will bear less risk than if they were to exploit it themselves. However, the financial return for the sale or assignment will usually be minimal, compared with other options.
- License the IP to a third party.
This often occurs when a developer does not have the resources, capacity or desire to manufacture or distribute the technology that they have developed. By licensing the IP, the developer can retain a higher degree of control over the use of the IP and has the potential to reap higher financial returns. The developer can license the IP to a number of different parties, depending on the terms of the licences. However, licensing involves a greater risk to the developer than sale or assignment.
- Exploit the technology themselves.
In such a case, the developer would need to ensure that they have the resources and capacity to manufacture and/or distribute the technology they have developed. This is likely to involve a significant investment on the part of the developer. This option would enable the developer to have complete control of the IP, and potentially yield the greatest financial return. However, this option also carries the greatest risk.
Licensing - general overview
Ownership of IP confers certain exclusive rights on the owner.
In basic terms, a licence is an agreement by the owner of the IP rights (in this case the developer) not to enforce their IP rights against the licensee in defined circumstances, usually for a fee.
Ordinarily, if another party performs an act that falls under one or more of those exclusive rights, without the authority of the owner, it would infringe that IP. This authority is given by the licence. For example, the Patents Act 1990 (Cth) allows the owner to exclusively exploit the invention that is protected by a patent. The Copyright Act 1968 (Cth) allows the owner, amongst other things, to exclusively reproduce a particular work.
Licence agreements can also impose other obligations. For instance, in order to assist in the exploitation of the IP, the licensor may agree to provide technical information and training regarding the use of the technology, as well as the disclosure of trade secrets. In those circumstances, confidentiality clauses should also be included in the licence.
Licensing can be flexible
One of the main benefits of licensing is that it is extremely flexible. The developer can grant licences in respect of the use of the technology, the territory in which it may be exploited, or the time over which the IP rights may be exploited. Accordingly, a prudent developer may be able to maximise the value of their IP rights by granting licences to different parties for different purposes/uses, over different territories and for different periods.
Key licensing issues
When deciding whether a licence is suitable for your needs, you should consider:
- Is the licence exclusive, non-exclusive or a sole licence? An exclusive licence permits only the licensee to exploit the technology, so that not even the developer can exploit it without infringing the rights of the exclusive licensee. If the developer wishes to continue to use and/or commercialise the technology themselves, they may grant the licensee a sole licence. However, if the developer wishes to grant multiple parties the right to use the technology, a non-exclusive licence should be granted.
- What is being licensed? This must be clearly defined.
- What is the term of the licence and territory the licence covers?
- What is the extent of control being retained by the developer over the IP? This may extend to the purpose for which the IP is applied, branding, marketing, modification of the technology and the capacity of the licensee to grant sub-licences.
- What are the minimum performance obligations required of the licensee?
- Will the developer provide training, know-how, technical assistance and systems to the licensee?
- What IP ownership rights will subsist in any modifications? When the licensee is able to modify or improve the IP, the developer will usually want to retain ownership of these IP rights. Alternatively, the licensee may license the IP in any such modifications it has made back to the developer.
- What form of payment is required for the grant of the licence (a royalty or annual fee), and how should the payment be structured?
- Will the licensor require some form of performance servicing from the licensee?
Further issues Before entering into a licensing arrangement, you should do your homework.
It is advisable that an IP audit be conducted, to ensure that your business is capable of licensing all of its relevant IP rights to the licensee. It may be necessary to assign IP from contractors and any employment contracts should ensure the employer retains ownership of the IP. Ideally, this should be done at the time of engagement of the relevant personnel.
To optimise the licensing relationship, it will help to be familiar with the relevant market and key businesses within that market. For example, it is recommended that you ascertain whether IP of a similar nature already exists in the marketplace.
A licensor should also familiarise themselves with the proposed licensee to ensure, for instance, they have equipment capable of manufacturing the technology and sufficient resources to complete the manufacturing and/or distribution process. Conducting a due diligence may be appropriate.
The commercial structure of your business should also be considered prior to entering into a licensing arrangement, as various structures will have different taxation implications. It is also important to ensure that the correct entity owns the relevant IP.
In short, licensing can be a flexible and cost effective way of commercialising IP. Licensing enables you to maintain as much control over this IP as you wish, while potentially extracting the most value out of that IP.