by Jean Sifleet
Licensing is a key business strategy. It’s a way to maximize the earnings from inventions and creative works, which are called intellectual property or "IP.".
What is licensing?
Licensing is when you grant some rights to intellectucal property "IP" that you own. It is really a partnership of mutual cooperation between the licensor, who owns the IP, and the licensee, who is given the right to use it for certain purposes.
Question: What are royalties?
Royalties are a way of calculating compensation for use of intellectual property. The licensee is granted the right to use it for a royalty. Royalties are usually based on a percentage of the revenues that are generated. For instance, if I license my course to a company and say, “For every subsequent use of this course, I get 5% of the revenue,” that’s the royalty — 5% of the revenue would be the royalty/payment that I would receive.
Question: Are there rules of thumb for royalty amounts?
Figuring out what royalty to ask for is always a challenge. As sort of a really rough rule of thumb, the allocation of the revenue generated can be 25% for the licensor and 75% for the licensee. This is because the licensee is usually doing all the sales and marketing related to generating revenue. It varies greatly from industry to industry.
Question: What are some examples of the types of works that can be licensed?
Many types of IP can be licensed. For example, copyright-protected works, trademarks, and patented inventions can be licensed. Materials and know-how may be licensed and generate additional income. Other examples include images, photographs, music, a recording – on any kind of media.
It’s very difficult to license something that has not been reduced to writing or some kind of tangible form. Just trying to license “know-how,” for instance, is very difficult. Someone could have a lot of expertise, but unless they turn it into something concrete or tangible, it’s difficult to license it.
Question: What are the pitfalls of licensing?
A classic pitfall is that the licensee does not pay royalties. The licensor gives rights to a licensee and the licensee doesn’t do anything with them. So the licensor’s IP rights are tied up in the license agreement, but the licensor isn’t getting any money for the IP. I recommend that a licensee be required to pay at least a “minimum” royalty or forfeit the license. That way, the licensor is guaranteed a certain level of revenue. That’s also motivating for licensees because they’re going to have to pay that money in order to keep the license, so they’re going to focus on using your IP.
Another pitfall is granting an exclusive license, or giving away way too many rights. The scope of the license grant is extremely important. For example, one situation that I’m familiar with involved a patent for a chemical process. It was licensed to a very large pharmaceutical company. But in that license, we were very careful to limit it to medical applications. We turned around two years later and licensed that same patent to a paint company. Had we granted all the rights in the first license, we wouldn’t have been able to do the second licensing agreement, which was a very different market and a very different application.
Question: What if I want to use someone else’s work?
Using someone else’s work is sometimes called “licensing in.” That’s a very good business strategy as well. Why recreate the wheel if you can use materials that are out there or content that’s already been created? Usually, what I suggest is that you approach the owner of the IP and say, “I’d like permission to use some of your materials,” and you negotiate an agreement.
It’s OK to use other people’s works (without payment) if the work is in the public domain or if the use is considered to be within the “fair use doctrine.” (See enews archives for further discussion).
Question: What if someone copies my work?
Registering copyrights is an important step. If an infringement occurs after the copyright is registered, you can recover statutory damages per infringement and attorney fees. If an infringement occurs prior to registration, you can only recover actual damages, which are extremely difficult to prove.
Question: What is a territory?
Licensors try to specify territories for authorized use. Say, for instance, you have a way to fix cars and you were going to deliver a training program and it required on-site training to show people how to do this particular type of repair – fix the paint or fix the dents. That’s a service that would probably be delivered in person, so it makes sense to carve that up geographically.
But, if you market on the Internet, it’s really hard to specify a geographic territory. For example, if you’re developing an e-learning kind of program and it is going to be marketed over the Internet, then it’s very difficult to restrict geographies, just because you could have potential customers coming from anywhere in the world.
In conclusion, these are just a few of the frequently asked questions about licensing. Licensing is a great way to generate revenue from IP. Is licensing a strategy that you want to explore for your business?
Jean Sifleet is a practical and experienced business attorney whose career spans many years in large multi-national corporations and includes three successful entrepreneurial ventures. Jean has extensive experience in dealing with intellectual property matters in the large and small companies and as a small business owner. She has authored numerous books and publications on avoiding legal pitfalls in doing business. This article is excerpted from her new book, Advantage IP – Profit from Your Great Ideas (Infinity 2005). For more information, Jean’s website is http://www.smartfast.com.
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