Principal Attorney
Businesses use intellectual property (IP) licensing agreements to protect and monetize their creative assets. Here’s a closer look at these agreements and some common misconceptions about how they work.
Understanding IP Licensing Agreements
Under an IP licensing agreement, a party with intellectual property protection, such as a patent, trademark, copyright, or trade secret, allows another party to use that IP under the agreement’s terms. For example, patent licensing agreements allow parties to make or use a patented product or process, as the patent gives the holder the exclusive right to do so.
IP agreements will contain several key elements, including:
- Scope of Use – IP agreements must describe the scope of the licensee’s permitted use, such as the specific contexts or geographic area in which the licensee may use the IP. The license can also state that the licensee has exclusive use of the IP, meaning the rights holder will not license the IP to another party within the licensee’s scope of use.
- Duration of Agreement – IP licensing agreements should state how long they will last (e.g., perpetual or definite term). Agreements with expiration dates can include provisions governing the renewal of the agreement.
- Royalties – An IP agreement will determine how much the user will pay the rights holder for using the IP. Royalty terms may involve a perpetual license for a one-time flat fee or a recurring (subscription) fee, or parties may calculate royalties based on IP usage or sales.
- Restrictive Covenants – IP agreements may also contain non-disclosure clauses that prevent one or both parties from disclosing the terms of the agreement or other confidential information. In addition, IP agreements involving trade secrets must include restrictive covenants ensuring the continued confidentiality and security of the trade secrets to maintain their legal protection under IP law.
Common Misconceptions About IP Licensing Agreements
Some of the most popular myths or misconceptions about IP licensing agreements include:
- The Licensee Owns the IP – An IP license only gives the licensee the right to use the intellectual property under the agreement’s terms. The IP holder continues to own the intellectual property and can use a licensee for infringement that exceeds the scope of their license.
- IP Licenses Last Forever – Although parties can negotiate perpetual IP licenses, many agreements only last for a limited term, with some agreements containing renewal provisions and others requiring the parties to renegotiate their relationship.
- Licensing IP Has No Financial Risks – Just because a party licenses intellectual property does not necessarily mean it will bring their business success. A product or service using licensed IP can still suffer from poor market performance or adverse market headwinds that can lead to financial losses for a licensee.
- You Can Use Standard IP License Agreement Forms – Licensing terms will vary wildly depending on the intellectual property at issue, the parties’ industry, and their objectives and concerns regarding the agreement.
Critical Considerations in IP Licensing Agreements
When negotiating IP licensing agreements, parties should evaluate several critical considerations, including:
- Exclusivity – An exclusive IP license grants the licensee exclusive use of the intellectual property within the scope of the license, whereas a non-exclusive license allows the IP holder to negotiate similar licenses with other parties. For example, parties may negotiate an exclusive patent license to grant exclusivity to the licensee to manufacture or use the patented product or process in a specific country.
- Royalty Structure and Payment Terms – Parties can structure royalty and payment terms to involve flat fees, subscription or recurring payments, or royalties based on percentages of the licensee’s sales using the IP.
- Compliance and Monitoring – Licensors should include agreement terms that allow them to monitor a licensee’s compliance with the scope of their license and their royalty obligations, including allowing the IP holder to audit books and records.
Contact an Intellectual Property Lawyer Today
When you have questions about IP licensing agreements and how they can affect your rights and interests, let a Texas intellectual property lawyer from Sul Lee Law Firm PLLC provide the answers and guidance you need. Contact us today for an initial consultation to discuss your legal options.