All About Intellectual Property Contracts (Part 2)

You have a new idea for a product or service. You have also found the perfect business partner–someone with capital and quality connections to take this idea to the next level. All you need is a formal, licensed agreement. Some might ask, how hard can it be?

More difficult than you think, but much easier if you set time aside for preparations prior to beginning licensing negotiations. When it’s time to license your idea, first invest some efforts in preparing to license wisely.

• Know What You Own. While it is hard to state a general rule for each of the different types of intellectual property (IP) that you might be licensing, you should review what you have before you begin the licensing negotiation. This is essentially a two-part process, because you should be creating improved documentation while you are confirming the existence and extent of your IP. Additionally, you will benefit in licensing negotiations from knowing who the potential customers of your potential licensee could be and what economic model will make the most sense in determining the royalty rate.

• Help Your Employees Understand What You Own. Both you and your employees should know what you own. Your employees should be able to identify your company’s valuable IP assets. Teach them (and encourage them to reveal to you) what makes up your company’s unique and valuable assets and why. Is your IP’s value based on patents, trademarks, copyrights, information held as a fiduciary, or proprietary trade secrets that create the valuable secret sauce that you will be licensing? The value may arise out of any combination of these legal categories. Your employees should be aware of what you own and that carefully drafted legal documents are necessary for retaining your IP’s value. Educated employees are also less likely to ruin your licensing negotiations.

• Take Steps to Maximize Your Rights in Your Intellectual Property. Consider with your counsel whether there is anything you can do, before the negotiations begin, to enhance the IP rights that you have confirmed that you control. Don’t forget the fabricator who developed a key component of your system. Rely on your counsel to help you assure that the legal agreements you are using for the contributions that go into your IP give you the rights that you are paying for.

• Present the Organized Results of Your Process. Be organized and look organized, as this can affect the way you are treated by the people on the other side of the bargaining table.

• Royalty Rates Vary. No matter how experienced the licensee on the other side of the table is, be confident that there is no such thing as a standard way to calculate royalties, nor a standard royalty rate. Do not be intimidated by the experience, bluster or economic advantage of a potential licensee who may be claiming that you are unreasonable or asking for too much. Make sure that you have done your own economic modeling of the market potential for your IP and stick with reasonable advice that you have received from reliable sources.

Be clear as to who is responsible for maintenance of the IP rights and who owns what regarding later-developed technology that may be developed using your IP.

Plan in advance for what should happen if the licensee or its assets are acquired (particularly if by a competitor of yours) or if the licensee grows.

Avoid renewal clauses that automatically kick in with long lead periods. There is no reason that an agreement should trick or trap somebody into an automatic renewal. Further, either party may benefit from being able to change the terms of the license based on more recent circumstances.

Follow your attorney’s advice with mandatory venue and choice of law clauses to ensure that each party is discouraged from commencing litigation without trying to work matters out first, but is not deterred from bringing a suit when one ought to be brought because it would be inconvenient or expensive to do so.

In the indemnification area, a party should not have to pay for what it cannot control.

The termination provision should have different periods before the other party may terminate for different events. The termination provision should also deal with what happens with the IP after termination. Some obligations should stop, but others must survive. 

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