Simply stated, licenses give those who have them the right to do something which they would otherwise be forbidden to do.
Just about any form of intellectual property can be licensed as long as ownership is proved. A license agreement will almost always provide both parties with some form of reward. The licensor is rewarded for providing access to the intellectual property, and the licensee is rewarded by gaining some special technical advance without themselves having the need to innovate. It is a cost-effective way of transferring technology and has significant advantages for both parties.
The main reasons to enter into a license arrangement include:
- It is a cost-effective way to gain entry into a particular market;
- It enables an inventor to maximize the full potential of his/her invention;
- It provides the opportunity for technology transfer from the haves to the have-nots, including cross-licensing;
- It can prevent costly legal issues arising relating to infringement/validity;
It allows for the making, selling, importing and exporting of patented products.
There is no such thing as a standard license. Every arrangement is unique and has its own special requirements, aims and objectives. Each party should also be acutely aware of the responsibilities of the other party.
Amongst other things a license agreement will define:
- Territorial or geographical boundaries
- Payment obligations and how they are calculated
- Clearly scheduled payment dates
- Penalties, breach of contract conditions, rights to assign, the term of the contract, and the right to renew are also crucial aspects of any arrangement
- Bonus conditions should not be dismissed in a licensing agreement
No intellectual property purchase should be made, or license agreement entered into, without due diligence having been conducted beforehand. Due diligence generally involves a two stage process. Firstly, the intellectual property that is the subject of the transaction needs to be verified by conducting a "due diligence" search, which will ascertain the material facts relevant to the intellectual property, namely its status (i.e. whether it is in fact a registered right, whether it is currently in force, and its expiry date) as well as ownerhip details, inventorship details, whether there are any challenges against the intellectual property, whether there are any third party interests registered against it, and whether there are any outstanding payments due. In any intellectual property transaction or licensing agreement, regardless of its size both parties should present a Non-Disclosure Agreement and an independently commissioned IP Due Diligence Report. Secondly, the value of the intellectual property in question should be investigated.
Needless to say, there are many formulae involved in this exercise and all have at least some relevance. The bottom line is that the value of what is being bought, sold or licensed needs to be clearly understood. It is very easy to undervalue intangible assets, given that they can be wide ranging. For example, intellectual property assets can include the company brand, its patent, design or trade mark portfolios, R&D strategies and existing licensing arrangements. Other significant intangible assets are invested in a company’s human capital, its know-how, trade secrets, and include such things as its databases, manuals, product specifications and manufacturing guidelines. All of these intangibles have a value and some effort should be made to quantify them so that when technologies are transferred or a business is bought or sold, or a merger occurs, a fair market price can be realised.
How much is your patent worth? For every invention five common factors determine value, including: the importance of the patent (breakthroughs are better than improvements); market size (volume and price will have a significant bearing); patent term (with a maximum life of 20 years, the longer the patent life the more valuable the patent); amount of prior art (the number of cited documents or products populating an area of innovation will have an effect on value; patent significance depending on the particular industry and the IP strategies of players in the industry.