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Gary Baker, Esq., M.T.

BioPatent Communications

LICENSING INTELLECTUAL PROPERTY

• Types of Intellectual Property
• Licensing and Alternatives
• Licensing Consideration and Contract Clauses

Many inventors have patented ideas or inventions that are too expensive to take to market or patents that do not fit well in their current business plan.  These inventors can still receive value from their invention by allowing another business to develop and market the product.  In other cases, a business plan may require technology that is owned by another.  In either case, licensing the intellectual property may be the best solution.

I.  Types of Intellectual Property

Patents can be granted by the United States Patent and Trademark Office (USPTO) for new and useful compositions, processes or improvements thereof (see Patents).  A patent grants a right for the inventor to exclude others from practicing the invention.

Trade Secrets are business information, not generally known in the trade and kept secret through reasonable efforts to maintain confidentiality (see Trade Secrets).  It is illegal for others to take your business secrets by improper means but they can reverse engineer or license them from you.

Trademarks are words or symbols used to identify the source of goods or services (see Trademarks).   Registration of a mark at the USPTO gives national constructive notice to prevent others from using confusingly similar marks.

Copyright protection automatically exists at the moment of creation of original and creative works. It is unlawful to reproduce, distribute, display or perform copyrighted works in public without permission of the author or artist.

II.  Licensing and Alternatives

You can obtain intellectual property for your business in several ways:

• Develop the idea yourself. This may be expensive, slow and uncertain, but can provide you with sole ownership of a technology.
• Reverse engineering or engineering around the ideas of others is a time honored means to acquire a technology.  Reverse engineering or by independent invention does not allow one to practice patented inventions.  However, patent claims can be engineering around to avoid literal infringement or infringement by obvious modifications. Trade secrets may be reverse engineered (copied) based on publicly available information but not based on information acquired through improper means such as industrial espionage or breach of confidentiality.
• Acquisition of intellectual property may involve purchase of the idea from the owner or acquisition of the owner’s business.
• A declaratory judgement can be obtained to determine if activities constitute infringement. 
• Litigation or administrative procedures can be used to invalidate a blocking patent so the technology can be used by all.
• Finally, necessary technology can be licensed in  from a patent holder.

Value can be received for intellectual property you own but do not need:

• Technology can be sold to a non-competing business that values it more highly.
• Collaboration with another business having complimentary skills can allow more efficient marketing of your intellectual property.
• Your intellectual property can be licensed out to one or more other businesses.  There are particular concerns in licensing deals, depending on whether the intellectual property is a patent, trademark, trade secret or copyright.   When licensing out a patent, due diligence in the development and marketing of the product can be stipulated to maximize royalties.  Licensing terms for trademarks often require the marked products to meet certain quality standards.  Negotiating a trade secret license can requires progressive disclosure after signing of appropriate non-disclosure agreements.

III.  Licensing Considerations and Contract Clauses

• The Market. Consider whether your intellectual property is a good fit with your business plan, expertise and product lines.  If not, you may gain more by licensing the intellectual property to another business that can more effectively develop and market the technology.  Identify potential licensees by searching trade journals, trade shows and the USPTO patent database for businesses using similar technologies.  Screen potential licensees for the technical capability to develop the product, and the distribution infrastructure to market the product. Contact the potential licensees to gauge their interest in the intellectual property.
• The value of your intellectual property its worth to potential licensees.  Value to other businesses can be estimated based available public information, such as SEC filings, trade journals or the terms of similar license offerings. Valuation can also be based on industry standards, rules of thumb or the terms of a similar sale.  Valuation often  becomes more clear during negotiations as the parties offer information to justify their positions.
• Negotiations should be a flexible dialog of give and take on terms according to the value placed by each party.  For instance, if the licensee wants strong technical support and an exclusive license, they may be willing to pay higher royalties and to cross license their own technology in the bargain.
• The Licensing Contract typically contains many clauses to document the intent of the parties, the payment terms and the consequences of breach.

- "Whereas" clauses are recitals that document the status and intent of the parties.  This clause can be useful to demonstrate the understandings of the parties at the time of contract formation.

- The Definitions clause clarifies key words and phrases in the contract to make terms of compliance unambiguous.

- Grant of rights clauses specify exactly what intellectual property rights are being transferred to the licensee.

- General Terms clauses specify practical obligations such as how and when technology will be transferred, ownership of new improvements to the technology, quality control of trademarked products and responsibilities for registration maintenance.

- Royalties clauses specify the means of calculation and the timing of royalty payments.  Payments may be, e.g., up front, periodic or linked to sales.

- Reporting clauses define the timing and detail of sales reports associated with royalty payments.  The reporting clause can also define records maintenance requirements and rights of inspection (march in) conditions.

- Infringement/Indemnity clauses specify responsibility for detection, notification and litigation of third party infringers of the licensed intellectual property. The licensor may be required to indemnify the licensee for efforts to protect or defend the intellectual property.

- The Termination clause defines conditions terminating the license contract such as patent expiration or a breach of the contract.

- Applicable law/Arbitration clauses establish the forum to resolve disputes concerning the licensing contract.  Applicable state law can affect contract interpretation, contract enforcement and the location of court litigation proceedings.  Dispute arbitration may be required and arbitration terms outlined such as the choice of arbitrators and who must pay arbitrator fees.

- The Signature Block finalizes a binding agreement.   Corporate officers or general managers are usually authorized and empowered to sign legally binding agreements for their associated business entity.

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