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Your business is home to valuable information, including your intellectual property (IP). If your company owns and controls valuable IP, you may consider licensing it to other organisations. Many business owners seek to license their IP rather than sell it. A licence agreement can help set limits on what other organisations can do when possessing a licence for that IP. This article will explore how licence agreements work and their potential benefits for your organisation.
What is Intellectual Property?
IP covers information your business owns regarding unique creations or trade marks. It can cover many things such as:
- ways of thinking;
- methods of manufacture; or
- specific design.
The critical word is ‘unique’. For example, numerous companies can have IP over different digital mapping software if they are all different. Your business can also gain IP by purchasing it from another company. Naturally, this would not be a licence but rather an outright purchase. Purchasing IP from other organisations can be profitable if it gives your company a competitive edge. Alternatively, your business may wish to license it to others.
What Does Licencing My IP Involve?
By licensing its IP, your company effectively lends it to others. When the licence expires, your business prohibits further use.
This is similar to renting a DVD or purchasing it in a shop. If an individual purchases a film from a store, they can watch it as often as they want for as long as they wish. If they get bored of the film, they can lend it to someone else (akin to licensing) or sell it. What they do and when is entirely in their hands.
Alternatively, if the individual borrows or rents the film, they can only watch the film for the period allowed by the owner. They cannot sell it, nor should they lend it to anyone else, as the owner may ask for it back at any point. This is akin to the licence period ending.
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Useful Terms for a Licence Agreement
While all licence agreements are different, most will contain:
- confirmation of the specific intellectual property to be licensed;
- whether they have exclusive rights in that territory (e.g. England) to the licence;
- the limits of the licence (e.g. the licensee cannot licence it to another party);
- whether the contracting party (the licensee) can market the product (e.g. a car manufacturer might want to advertise that their vehicles contain Apple CarPlay);
- whether the other company can amend the product or not; and
- explicit termination provisions to allow the contract to end if the terms are breached, or the contract duration ends.
An Example
Suppose your company is a software developer working on state-of-the-art voice recognition software for vehicles. It has developed the system over several years at a considerable cost. The software is now ready for customer use and constitutes precious intellectual property.
Three truck manufacturers approach your organisation. One of the manufacturers expresses interest in purchasing the IP so that the technology becomes theirs and does not end up in the hands of a competitor. At the same time, another manufacturer wants to purchase the IP because it may increase in value in the future, and they wish to license it to others.
However, your company’s business model may be based on the presumption of producing a yearly income through long-term licensing. In this way, your organisation may prefer to offer each truck manufacturer an annual (or multi-year) licence for the product under a licence agreement.
This will allow your company to control the rental price and how the product is used (such as agreeing not to sub-license it to others). You could also set other rules under a licence agreement. This may include displaying your company name within the vehicle handbook or promising not to modify the product. Many business owners license a product, thereby allowing end-users to notice it, and then sell the IP at an increased price based on its good reputation.
Key Takeaways
Licence agreements are valuable in giving your business control over your intellectual property. They can contain clauses controlling the length of the licence, cost and (particularly with digital software) whether updates are included. Every licensing arrangement differs depending on the type of IP and the licensee’s requirements. Due to this, it is common for a lawyer to draft a licence agreement to ensure that it fully protects your company’s IP.
If you need help with a licence agreement, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
No, your company should only use a licence agreement to licence IP. However, your business could consider using an assignment agreement to sell intellectual property. Naturally, deciding whether to sell IP usually involves weighing the purchase price against potential future licensing income.
This would be a risky option. Most licence agreements are drafted from the ground up to ensure they suit the IP. For example, a licensing agreement for digital mapping software in new markets would be useless in protecting the IP of a business payroll system in England.
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