IP license is an agreement between an IP owner providing rights to a third party to use a part of IP for a limited time in exchange for a fee or royalty. The IP owner and the third party are the licensor and the licensee respectively.
Let’s know more about it from Raddhika Singh, Managing Partner, and Founder, Aletheiaa Legal. It is a law firm specializing in IP, media & entertainment, commercial contracts & IT Law that has advised 300+ startups.
Here’s what we’ll cover in this discussion.
|1.||What is an IP?|
|2.||Different Types of IP|
|3.||How to Commercialize an IP?|
|4.||How to Generate Income by Licensing Your IP?|
|5.||Important Clauses in an IP Licensing Agreement|
|6.||Advantages of IP Licensing|
What is an IP?
IP is called Intellectual Property. It is the mind’s creation that’s used commercially. Examples, Inventions, literary and artistic works, designs, names, and images.
Different Types of IP
There are four main types of IPs:
Brands claim trademarks as an IP for their products, services, company name, business, slogans, taglines, or domain names.
Any business that creates original literary, dramatic, artistic, musical works, sound recording & cinematograph films claims to copyright as an IP.
Manufacturing companies come up with their own innovative designs and unique aesthetic features on a product, unique products over which they can claim the design as an IP.
A novel innovative idea having an inventive step is patented and claimed as an IP.
How to Commercialize an IP?
We commercialize an IP in three ways:
- You keep it for your personal use.
- You use it commercially and earn revenue by leasing it to a third party. The third party pays you a royalty. The IP’s ownership stays with you (IP creator).
- You can assign it for a value to a third party or sell it to a third party.
How to Generate Income by Licensing Your IP?
The basic licensing allows a third party to use your brand’s information that pays you a royalty in return for it. Nuances of each IP agreement will be different depending upon the understanding between the parties. There are different modes of licensing your IP. Let’s know about all of them one by one.
You can generate income by a trademark in three ways:
Trademark licensing by a parent company to its subsidiaries:
If a company situated in Singapore needs to use the same product in India, their parent company needs to license the brand trademark to the Indian company. The parent company and its subsidiaries enter a licensing agreement that has all the important clauses clearly mentioned.
Trademark licensing by a franchisor to franchisees:
It is the most famous form of licensing trademark. There are several restaurants, they all look the same. A famous food joint, restaurant, or salon license the right to use their brand to entities that are willing to use it. They license it to a third party. They have different models of licensing of franchising basis which they permit the third party to use their brand name. There are certain conditions in respect of that & there’s a royalty & franchise fee that’s payable to the franchisor.
Trademark licensing to facilitate a sponsorship:
A brand sponsoring an event permits the event organizers to use logos. Two brands can have a co-branding agreement. They permit each other to use their brands & they have a licensing agreement amongst each other.
You generate income by copyright in two ways:
Copyright licensing by authors of a book via movie contracts & book publishing contracts:
There are authors who write a book & they enter into an agreement with a publisher to publish their books. They license the right to publish a book to a publishing house and keep its ownership with themselves.
Copyright licensing in a software:
One of the most common forms of copyright. Companies that develop software, generate income by giving users the right to download the software/app. In turn, users pay a certain royalty or a certain amount to the owner of the software in the form of a subscription or a fee depending on the arrangement between the parties.
Design companies design products that are aesthetic. They design it and license it to a manufacturer. The manufacturer takes it and designs it on their own. For every product they manufacture based on the design created by the designer, they give a certain revenue per piece to the designer.
Entrepreneurs file a patent for their exemplary ideas. They find manufacturers and permit them to manufacture the design. Manufacturers pay a royalty to the designer per piece.
Important Clauses in an IP Licensing Agreement
If you have to license your IP to a third party, here’s what you need to keep in mind:
Nature of IP
Identify the nature of IP if its software’s code, literary work, or trade’s name, etc. There could be different IPs for any tech startup. You need to give the right to use a software’s feature if it’s patentable. This makes the nature of IP is important.
Ownership of IP
The licensor should mention that they’re the owner of the IP they’re licensing to the licensee. It is important for the licensees to get the representation of it. This can lead to a legal battle if there’s no such representation from the owner’s end. The agreement should identify that ownership stays with the licensor to avoid any confusion.
Scope of license
The scope of the license can be exclusive & non-exclusive. The owner of the IP has the right to license it to one person or multiple people. The license’s scope should be non-exclusive if several customers have to use your IP. If you give exclusive rights to a customer, only that person has a right to use that IP even to your exclusion. This will exclude the owner from using it.
Term of the license
IP’s time period is an important clause to consider. You’ll need to mention the consequences for it after the term is over. On expiring of the term, the IP rights must go back to the owner.
The license’s territorial limits are important. This can range from specific states, countries, or worldwide. It is important for a franchising agreement. Franchisees need to understand the territory where they can use the products. The licensor must mention it.
The licensee pays royalty in different ways. Here’s more about it:
- A single up-front payment
Licensee gives a single upfront payment to the licensor. Licensor does not track the number of sales that happened.
- Periodic payment of pre-determined amount
The franchisee pays royalty to the franchisor for net revenue made every month. It is a pre-determined percentage of the net revenue. You can find it commonly in copyright and design licensing.
- An amount periodically paid based on ancillary conditions
This agreement allows you to use an IP royalty free and pay royalty if a big client signs up. It depends on basic negotiations between the party.
Permitted use of IP
A license agreement must mention IP’s use and the restrictions if any. There may be restrictions on reverse engineering or creating something similar.
IP misuse or agreement breaching consequences needs to be clearly mentioned.
Advantages of IP Licensing
Below are the advantages of IP licensing you must know:
- Generates a passive income for the IP owner, without any significant overheads
- Creates new business opportunities for licensor & licensee
- Enables businesses to enter new markets or industries & expand their business
- Provides the potential for better marketing