The Reason For Intellectual Property

Progress comes from innovation. But innovation requires the right environment – creative (and hard-working) people; room for experiments and failure; and not least the expectation that success can lead to rewards in the end. The larger the investment is – in terms of money, time or manpower – the more important this chance for reward becomes.

This is the ultimate reason for IP rights: ensuring that the intellectual hard work is protected and that the creator is given a fair chance to exploit his/her work to earn back all these investments (and ideally beyond).

Different IP rights exist granting this possibility, protecting different aspects and granting a different scope of protection. While patents protect a technological invention, trademarks protect a product's name and ultimately its commercial origin, design rights can protect the appearance of a product, and software can be protected by especially copyrights.

Commercialization via Licensing Agreements

Once obtained, IP wants to be monetized. One of the most common ways to exploit IP rights is through licensing agreements.

The reasons for licensing agreements are manifold and depend on the individual situation. The most important reason for getting a license though is that using a third party's IP rights without permission is a tort, leading to cease-and-desist and damage claims, not to speak of reputational damage. But there are other reasons as well – for example getting access to an improved technology to get a competitive advantage. Or to exchange technology with other parties to in the end provide general progress..

The reasons for granting a license can be even more diverse. It could be that the IP owner lacks the means to exploit the IP itself, or that it wants to venture into new markets or countries where it is not sufficiently experienced in. Again, the general distribution of technology might be a reason, just as using this in exchange to get a license to a third party's technology in return. Or just creating a revenue stream.

The Groundwork

Just as different as the situations might be, licensing agreements in general also grant the parties much freedom on how to structure and shape them. But this freedom of course comes with the risk to take wrong decisions or conclude agreements on terms that do not match one's needs.

Many decisions will be made based on the underlying commercial agreement and risk allocation. When entering into license agreements, the first question(s) should therefore always be: Why do you need this license? What do you want to license? Once you are clear on these simple questions, the groundwork for entering into a "fitting" license agreement is made.

The groundwork of any license agreement, therefore, starts with the specific IP rights that are subject to the license. As simple as this may sound, it is easy to overlook for example that besides the patent you really want to license, there is protected know-how that you need to have licensed as well, or that you also require a license to additional design rights.

Just as important as the question of territory and scope. Especially the scope – e.g. fields of use, specific products or applications – must be defined correctly. And not least, the involved parties need to be identified to e.g. allow subsidiaries or sales entities to use the licensed IP as well.

Money Talks – The License Fee

Licenses do not necessarily need to be granted against a fee or other compensation (at least not in most countries). Licenses can also be granted free of charge. Or they can be granted under certain conditions (e.g. no commercial use), against the granting of a cross-license, or in exchange for additional services. But mostly they are granted against a remuneration, which again can be structured very differently – a lump sum payment (upfront or later), a percentage of turnover or sales, a per-unit license, or any other form that you can (legally) imagine.

There is no one-size-fits-all solution. But the underlying rationale of any license fee arrangement will be a combination of the bargaining position of the parties with the distribution of the commercial risk between them. A lump-sum payment for example puts more risk of market success on the licensee, while a per-unit license shifts the risk to the licensor. No model is superior to the other, but each has advantages and disadvantages that the parties need to carefully consider.

Think about the long run

License agreements should also think about what the future will hold:

Especially, improvements and further development of the licensed rights and technology should be regulated. It should be clearly defined whether such improvements will automatically become part of the license, whether the licensee is allowed to create any such improvements, and if so, who they are attributed to. Again, the "right" solution for this will mirror especially the commercial risk allocation.

And although this seems a long time away when concluding the license agreement, it should always regulate when and how the parties can exit the agreement. This should not only account for regular termination rights and termination rights for cause, but also keep in mind situations such as change of control or insolvency, or similar situations where the parties might no longer be best friends.

Other Things to Consider

Of course, there is a wide variety of additional topics that might have to be considered in licensing agreements, from feedback clauses to confidentiality provisions to non-attack provisions.

And although licensing agreements grant a lot of freedom as to their scope, structure and shape, boundaries of course do exist. It is therefore worth considering if regulations left or right of licensing provisions and IP rights play a role. This is especially advisable in regulated industries such as pharma, healthcare and life sciences. But also generally applicable limitations such as antitrust boundaries for licensing in the area of research and development activities should not be overlooked.