How Does Intellectual Property Licensing Work?

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How Does Intellectual Property Licensing Work?

11 January 2021

Corporate & Commercial expert, Caroline Armitage looks at one of the biggest growing sectors, the so-called ‘Knowledge Economy’.  
 

The ‘Knowledge Economy’

The ‘Knowledge Economy’ means ideas and ideas have value.  Ideas create Intellectual Property.  It’s a huge area and includes copyright, industrial designs, trade marks, service marks, business names, domain names know-how and software rights.
 
When making use of intellectual Property (IP), all businesses must make sure they have the legal right to do so.
 
Licensing is a way for the creator to get value from their IP, and for a user to use someone else’s knowledge and ideas. However, from the perspective of both the licensor and the licensee, there are many legal aspects to consider.
 
The following gives a brief introduction to intellectual property law and addresses some common questions around IP licensing. We will go over some of the reasons for creating a licence and cover some important considerations when doing so. 
 

What is an intellectual property licence?

Intellectual Property might include logos and graphics, slogans and text, inventions, unique ways of doing business, creative works such as music or video, and other assets created by an individual or employees of a business.
 
There are different types of protections available for different types of IP to prevent others from using these creations without the consent of the owner: 
 
  • Copyright and design right are considered automatic protection - the creator does not have to apply for them to be covered, the work will qualify for protection when it is created. 
  • Trademarks can be used to protect things like product names and logos.
  • Registered designs protect a product's distinctive appearance - in other words, the visual aspects of the product that differentiate it from competitor items (such as packaging, decorations and shapes).
  • Patents are used to protect inventions and novel types of products.
 
In light of these protections, businesses must make sure they have a right to any IP they want to use - meaning that if they are not the owner, it must be licensed. 
 
An intellectual property licence grants a second business the right to use the IP assets of the licensor. This can have significant advantages for both parties.
 

Why license intellectual property?

For the intellectual property owner, licensing their IP can be a good way to generate a new revenue stream and expand the reach of their assets. Licensing products and inventions to another business can allow for their expansion into new locations. 
 
From a licensor's point of view, an IP licence can also be a good way to share the associated costs and risks of business expansion with another party - as the risk of manufacturing, promoting and selling the licensed products will generally be assumed by the licensee. 
 
For licensees, taking an IP licence allows them to save time and money on research and development for new products, branding or assets by bringing in materials from another business. An IP licence may also enable a company to gain access to new expertise and collaborative benefits. 
 
However, licensors should be selective about who they allow to use their intellectual property, as in the wrong hands its misuse could be financially and reputationally damaging to the IP and/or to the licensor. For example, allowing another business to sell products featuring the licensor's brand name and graphic assets could potentially harm the licensor's reputation if appropriate standards of quality are not met. For this reason it is important to take precautions and carefully consider the implications of licensing out valued intellectual property. 
 

Legal considerations when licensing intellectual property

Licensees should be aware that there are different types of intellectual property licences:
 
  • An exclusive licence means that only the licensee can use the IP rights such that not even the licensor can use them at the same time (although they retain ownership). 
  • A sole licence allows both the licensee and the licensor to use the rights.
  • A non-exclusive licence means that the licensor can allow multiple businesses to license and use the IP rights. 
 
For licensors, licensing out intellectual property rights in the form of otherwise unused trademark rights can be a good tactic to preserve ownership of those rights. A trademark that has not been used for five years can be revoked, but allowing a licensee to utilise the name will usually count as use in this situation (although additional evidence of business by the licensee may be needed).  It is important to retain rights to oversee the use of such a right from a quality control perspective, as you have to be seen to be retaining some control. 
 
When negotiating an IP licence, all discussions and correspondence should be had on a 'subject to contract' basis. Without specifying this, it might be possible to accidentally enter into a legally binding agreement before both parties are ready.
 
There are many questions that must be asked during the creation of an intellectual property licensing agreement. Clarification will be needed with regard to restrictions on the licensee (will the use of the IP be limited to one or more specific locations, fields of use, or distribution channels? Is the licensee allowed to transfer the license?).
 
Depending on the situation, some other considerations might include:
 
  • Is the licensee allowed to build on the IP by making improvements or amendments to the licensed inventions or assets? Who would own the IP for those changes?
  • Can the intellectual property be used in combination with other assets or incorporated into another work?
  • If the licensee makes changes to the IP, are they able to 'license back' the alterations? 
 
The licensor will also want to think about risk, and ways to avoid or limit liability for the actions of the licensee. This may be primarily achieved through the use of limitation and exclusion clauses - but also through vetting potential licensees before deciding to do business with them.
 
On the licensee's end of the deal, risk avoidance might include seeking warranties for matters such as:
  • Verifying that the licensor's intellectual property is valid
  • Confirming that the licensor has the legal right to license the IP
  • Making sure the licensor will take steps to defend unauthorised use of the IP.

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Expert legal advice

Intellectual property is a complex area of law, and enlisting expert legal help is a must when entering the world of IP licensing. 
 
With a well constructed IP licence agreement, both the licensor and the licensee can benefit hugely from their arrangement - allowing the IP owner to monetise the increased reach of their assets, while at the same time enabling the licensee to receive the benefits of adopting well-established intellectual property without taking on research or development costs. 
 
For further advice on IP or any other corporate and commercial legal issue, please contact a member of the Corporate & Commercial team.
 

Girlings has offices in AshfordCanterbury and Herne Bay.

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