"INTELLECTUAL PROPERTY LICENSING"

James W. McClain

What is intellectual property licensing? Why should an inventor, programmer or company be interested in licensing?

A patent, trademark, copyright or trade secret owner is entitled to exploit its intellectual property rights for its gain. One way to do so is to retain an exclusive position and reap all of the rewards for itself. But what it the owner does not have the funds, business knowledge, facilities or time to exploit that exclusive position?

Conversely, what if a company needs new technology to enhance its business, but does not have the funds, personnel, facilities or time to develop that technology?

In licensing, an owner of intellectual property (the licensor) contracts with a potential user of that property (the licensee) for the licensee to use the property under the terms of the license agreement. The licensor can profit from the licensee's use in ways often not available to the licensor, such as in overseas markets or other technical fields. The licensee in turn may obtain access to technology without having R&D costs, or to innovative technology not available to its competitors, or to information which enhances its business opportunities.

As a contract, the license defines the respective rights and obligations of the licensor and licensee. Licenses are usually controlled only by contract and intellectual property law. The licensee does not obtain any ownership of the technology, trademark, software, etc. -- it only obtains a limited right to use it as defined in the license agreement. Essentially the licensee obtains a covenant from the licensor not to sue the licensee for what would otherwise be infringement of the intellectual property right.

Licenses may be exclusive or non-exclusive. In an exclusive license, only the licensee can exploit the licensed property, either directly or through sublicenses to others. A non-exclusive license permits the licensor to issue equivalent licenses to many licensees, so that frequently licensees complete with each other in the marketplace.

Compensation to the licensor from the licensee is usually in the form of a lump-sum payment or periodic royalty payments, or a combination of the two. There is no "standard" percentage for royalties -- the form and amount of royalty payments are usually dependent on the nature of the marketplace and the demand for the licensed intellectual property. Scaled royalties are often used, which provide for changes in royalty payments upon the occurrence of defined events. Cross-licensing is also common, where each party licenses the other, usually for related technologies, and often to settle potential disputes.

Contrary to popular belief, a new invention need not be patented in order to be licensed. However, the royalties for licenses involving pending patent applications are usually less than what is paid for licenses for patented inventions. Moreover, ideas which are not at least the subject of patent applications ("patent pending") are rarely successfully licensed. Similarly, trade secret information is usually licensed only when continuing confidentiality of the information can be reasonably assured.

Negotiations for a license can be long and arduous. Frequently the intellectual property owner is competing for the licensee's business with owners of other technologies or trademarks. Potential licensees often refuse to sign confidentiality agreements early in negotiations, fearing that they will then discover that the licensor's information is something they already knew. Only later, if they continue to be interested in the property, will they consider confidentiality. The intellectual property owner must therefore plan how much information to disclose at each stage in the negotiations while yet keeping the potential licensee's interest.

Licensing overseas involves many factors which are not present in domestic licensing. Accurate language translations in written documents and negotiations are a problem. Often, particularly in new or evolving technologies, one language lacks terms equivalent to those in the other language. Language difficulties can lead to different understandings of the license. The legal and business systems of the countries involved often differ, so that interpretation and enforcement of a license may be difficult or impossible. Further, in some countries certain classes of technology may not be licensable, or may be subject to "compulsory licensing" to local third parties, or the licensed property may be deemed "public domain" after a short period. The potential problems must be considered early, when the licensor is determining its overall foreign licensing strategy.

Intellectual property licenses involve legal, technical, business, and often political considerations, which may be independent or interrelated. What is quite common for licensing in one field may be entirely unrealistic in another, so broad generalizations may be both inaccurate and unwise. License planning and negotiation therefore require close and continuous cooperation and consultation between the client and the licensing attorney if the best result for the client's business is to be obtained.

Reprinted by perMission of the author.

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James W. McClain is a former research engineer and a partner in the San Diego intellectual property law firm of Brown, Martin, Haller & McClain LLP.