The Benefits of Licensing Agreements for IP Owners

          There are generally two ways to exploit the value of intellectual property rights: use the property yourself or transfer the rights to someone else to use.  A transfer of rights – whether in the form of an assignment or license – is often an attractive option for IP owners since it is not always possible or practical for an owner to put their intellectual property to use themselves. 

If a total and unrestricted transfer is made of the rights, then the transfer is referred to as an “assignment” or “sale.”  If fewer than all the rights are transferred, then the transfer is called a “license.”  In an IP licensing agreement, the owner of intellectual property (licensor) grants permission for another (licensee) to use the property, subject to the terms of the agreement.  In exchange for permission to use the IP, the licensee pays the licensor an agreed amount of money, typically in the form of a royalty.  A licensing agreement can have tremendous benefits for licensors. 

For one, licensing to an already established company can allow an IP owner to avoid the manufacturing, marketing, and distribution costs associated with getting their IP into the market.  Additionally, licensing to an already established company may allow a licensor to penetrate the market much sooner.  The reality is that many IP owners have valuable ideas but either lack the methods, resources, or know-how to build their IP into a profitable business, or decide to remain exclusively a creator or inventor.  The utility of licensing is that it allows a licensor to partner with a licensee to monetize the licensor’s IP in a way that would not be possible if the licensor had to do everything on their own.  

Unlike an assignment or sale, a licensing agreement can be structured to allow for the return of the rights should the deal fail to live up to the licensor’s expectations.  Major advantages of a license also include the ability to split rights geographically (wherein a licensee's rights are limited to a specific region) and the ability to split rights temporally (e.g., granting an exclusive license for 5 years after which the license becomes non-exclusive).  Also, a license allows an IP owner to grant rights to multiple licensors, whereas an assignment transfers the rights to a single party subject to any existing licenses.  Finally, an IP owner who enters into an assignment gives up all rights to any future profit derived from the IP, subject to any profit sharing or royalty provisions.

While licensing agreements have many advantages, a poorly drafted one can lead to unexpected troubles.  Moreover, because IP licensing agreements tend to be complex documents, many important components are routinely overlooked by inexperienced drafters.  An article on some of the most overlooked components in IP licensing agreements is forthcoming. 

Authored by Brandon Hamparzoomian