Intellectual Property License Agreement Overview

An intellectual property license agreement is a contract wherein the holder of an intellectual property, or IP, agrees to allow another party to use that IP, in return for some form of compensation. The manner, period, and price for usage is determined by the licensor, and any violation of the usage terms by the licensee may be grounds for legal action. Such contracts are useful for allowing IP holders to profit from their IP without actually having to market the IP themselves.

The Basics of Licensing Intellectual Property

Generally, IP rights are retained by the IP’s creator in order to directly extract value from them and maintain legal leverage against competitors. However, in some cases, licensing the IP out to others may be a more attractive option. Such cases may apply for:

  • Individual inventors. An individual may have a great idea but no means to commercialize it. Thus letting others do so for a fee may be their best option.
  • Universities and research institutions. It may be the stated mission of such entities to discover and transfer knowledge, but not directly commercialize it.
  • Companies. Sometimes a company’s business plan will change or they will have a surplus of IP, thus making direct use of the IP no longer viable.
  • “Patent trolls.” These are entities that purchase patents and sell them to the highest bidder or sue those who violate their IP rights.

No matter the reason for IP licensing, doing so can offer the IP holder several advantages, such as:

  • The ability to retain IP ownership. If the licensee does not honor the agreement or the IP is not profitable, the IP owner can ultimately receive the rights back rather than lose them through a one-time sale.
  • The ability to increase profits. A well-drawn license agreement will allow the licensor to retain a slice of the licensee’s profits if the IP is commercially successful.
  • The ability to maintain flexibility. A well-drawn license agreement will also appropriately lay out each party’s responsibilities, thereby ensuring that the agreement will be as efficient as possible, this being another way that maximum value can be extracted from the IP.

Overall, if one’s IP revenue strategy is based off contingent payments or royalties, a licensing agreement is usually recommended.

Types of Intellectual Property

Before one engages in an IP licensing agreement, they should first understand what the basic types of IP are, of which there are four:

  • Copyrights. These protect original creative works made in any tangible form of expression.
  • Patents. These protect original inventions.
  • Trademarks. These protect symbols, names, words, or other means used to identify services or goods.
  • Trade secrets. These protect systems or methods that have value to a business, such as market information, customer lists, and formulas.

Intellectual Property License Components

Most intellectual property licenses will be made up of the following components, of which one should familiarize themselves with before engaging in a licensing agreement:

  • License scope. This defines how your IP will be handled. Will unrestricted use be granted or will the grant be more limited?
  • Grant clause. This states what IP rights are being granted. They can be exclusive to the licensee or non-exclusive, meaning the IP holder can also use the IP. The grant can also define where and how an IP can be used.
  • Improvements. This section defines what rights a party has to improve the IP. If improvements are allowed, whether such improvements belong to the licensee, licensor, or both should be stated.
  • Consideration. This refers to how the licensor will be paid for their IP rights. Amounts and schedule should be defined, as well as if royalties will be paid and at what rate.
  • Infringement. Here will be stated what constitutes a violation of the contract.
  • Due diligence. Language here will require that the licensee pursue commercialization or development of the IP with all reasonable speed and responsibility.
  • Product liability and indemnities. In this section, the two parties can work out how responsibility for negative consequences stemming from the IP will be handled.
  • Dispute resolution. If disputes occur, how they are to be resolved legally will be covered here.
  • Transferability. A licensor can grant the licensee the right to sub-license the IP further. If so, it should be stated here.
  • Termination. What actions or scenarios will be grounds for termination of the contract will be laid out in this section.

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