Intellectual property (IP) can be an organization's most valuable asset. In fact, many of the most valuable companies in the world today have at their core valuable IP portfolios.
According to the consulting firm Brand Finance, the value of intangible assets (or IP) soared from 17% of the value of the S&P 500 in 1975 to around 90% in 2022. One way to leverage the value of owned IP is to license out the IP to third parties.
This form of commercialization is accomplished where an IP owner ("the licensor") grants a set of rights over the IP to another party ("the licensee"). There are several potential advantages to licensing IP, including revenue generation and strategic business expansion. Licensing IP is commonplace in many industries, but there are several legal considerations for both the licensor and licensee to take into account. This blog will discuss several key considerations that these parties should take into account before entering into this type of an agreement.
ONE. Determine the type of IP being licensed
Different types of IP provide different rights to their owners. In Canada, there are several types of IP, including works of authorship (copyright), patents, trademarks and trade secrets. Therefore, the rights that a copyright owner may grant to another party differ from those of a patent owner. Copyright owners, for example, can generally grant licensees rights to copy, reproduce, modify, update, commercialize and/or publicly display the IP. Patent owners, on the other hand, can generally grant licensees rights to make, use or sell the patented invention. As a result, whether you are the licensor or licensee, verify which rights can be granted before entering an IP licensing agreement.
TWO. Validate IP ownership
Before granting or receiving a grant to an IP licence, it is critical to validate its ownership. Some owners of IP believe they are the sole owner when, in fact, they are not. This can be problematic where a licensor is attempting to license IP when they do not have the right to do so. Issues may also arise where a licensor warrants that it owns the IP and is not violating the rights of third parties when, in fact, they are. Listed below are several scenarios where validating IP ownership is important.
- Joint ownership
Issues can arise in cases where IP is jointly owned by two or more people or organizations. If the IP is jointly owned, this does not necessarily mean that a joint owner cannot license it. However, it may mean that the joint owner will have to seek consent from the other joint owner(s) or account for profits they make from the jointly owned IP. A prudent licensor should follow the paper trail to determine if other parties have a stake in the IP and, if so, whether their consent is required in order to grant a licence.
- Employees and other third parties
Before entering a licensing agreement, parties should consider whether third parties were involved in its creation, and if so, whether they signed anything relating to IP ownership. For example, developing IP often involves the help of employees. However, the employer bankrolling development may not always be the IP owner. This is because, with respect to some types of IP, employees are considered generally to be the first owner of IP created in the course of employment. For example, in some cases, an employee is deemed to be the owner of a patent unless they were "hired to invent" or there is an express contractual term in an agreement which states otherwise. Furthermore, in the context of copyright, an employer is considered to be the owner unless there is an agreement stating otherwise.
Before assuming that an employee or other third party does not have an ownership stake in the IP, a licensor and licensee should find out whether employees have signed agreements obliging them to transfer, waive or assign any IP rights arising out of their employment relationship. This process can be simplified by keeping detailed internal records during the hiring process, documenting who is involved in various projects, and noting when, why and how employees contributed to creating the IP.
- Artificial intelligence
Before granting a licence to IP, licensors and licensees should consider whether confidential details about the IP have previously been used in conjunction with artificial intelligence ("AI") tools like ChatGPT. AI tools operate by learning from the inputs of its users. Details including code and other data that has been shared with the AI tool influence how the tool responds to other users. For example, IP inputted into ChatGPT may become the subject of confidentiality breaches. This can be detrimental to a licensing agreement, as a breach of confidentiality may lead to a breach of the licensing agreement and a breakdown in trust.
THREE. Fine-tune the licence terms
Generally, a licensor should not want a licensee to have complete control over the IP and its use. At the same time, licensees need to have enough control such that the licensed IP is useful and profitable to them. For an owner, licensing is risky because there is the potential for licensees to misuse or steal the IP. Licensing is also risky for licensees because they must trust that the IP is effective, legitimate and legally allowed to be licensed by the licensor.
These risks can be mitigated by including contractual language which speaks to where, why and how the IP may be used and which parties may be allowed to use it. This language may include (but is not limited to) the following:
- Specific descriptions about the IP and the rights being granted;
- Details concerning where the IP may be used geographically;
- Where and how the IP may be marketed or otherwise used commercially;
- The duration of the licence grant;
- The duration of the agreement (this may be different than the duration of the licence);
- Exclusivity (i.e. whether the licence is exclusive, non-exclusive or sole);
- The amounts to be paid by the licensee to the licensor and payment model (for example, whether the licensee pays a subscription fee or a lump sum);
- Whether the licence can be sublicensed, transferred or assigned by the licensee to third parties outside of the agreement; and
- Whether the granting of the IP licence requires access and/or use of other IP owned by the licensor.
FOUR. Narrow versus broad
Generally, a narrow licensing agreement (i.e. an agreement that heavily restricts where, why and how the IP may be used by the licensee) is more favourable to the licensor than a broad one. Licensees, on the other hand, will generally prefer a licensing agreement with broad terms that do not limit their ability to use and/or profit off the licensor's IP.
The above has briefly reviewed some of the considerations that parties should pay attention to as they consider entering an IP licensing agreement. Stay tuned for further blogs on this topic.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.