Licensing Intellectual Property Rights

A business that owns patents, trade marks and other intellectual property (IP) assets, may potentially be sitting on an untapped gold mine. In many instances only a small portion of these intangible assets are utilized to facilitate the business’ core functions. Leveraging unused IP assets may serve to create new revenue streams for the business. A business may derive significant income from the licensing of its intellectual property. IBM, for example, generates in excess of US$1.5 billion annually solely from the licensing of its intangible assets.

A licence is a grant of permission to do an act which otherwise infringes the rights of the grantor. A licensing agreement is an arrangement between an intellectual property rights owner (licensor) and another who is authorized to use such rights (licensee) in exchange for an agreed payment (fee or royalty). The licence grants the licensee rights in the property without transferring ownership.

There are many advantages that may be derived from a licensing arrangement for both the licensor and licensee. From the licensor’s standpoint, in addition to revenue generation, the grant of a licence may facilitate increased market penetration where the licensee operates in a territory that is otherwise inaccessible to the licensor. In such instances, the licensor will also benefit from the licensee’s marketing efforts thereby building goodwill and reputation.

A business with experience in research and development (R&D) may consider it more efficient to grant a licence to others to use such knowledge rather than engaging in production to commercially exploit it. The licensee, in this situation, is able to capitalize on existing IP instead of re-inventing the wheel thereby minimizing its R&D expenditure. This reciprocal business model has become increasingly common in the field of technology. Microsoft, for example, has over twenty (20) licensing deals with companies such as Samsung, HTC and LG which cover its patents for android technology. In this regard, licensing is an effective way to share technology and build on existing work.

Despite all the potential benefits that may be derived from a licensing arrangement it is important to conduct a thorough due diligence exercise prior to signing on the dotted lines. An investigation should be launched into the licensor’s legal right to the IP asset and its validity. This will include a search of the relevant registers at the Jamaica Intellectual Property Office. However, there are some IP assets for which a register does not exist to facilitate rights verification, for example, copyright. In such instances, an attempt should still be made to trace ownership.

In addition to the due diligence exercise, an important pre-contractual process is deciding on the price that should be paid for the use of the IP. The price demanded by the licensor may not be a reflection of its actual value. As such, an independent valuation of the asset may be necessary. There are three main approaches used for the valuation of IP, these are: (i) cost-based approach; (ii) income-based approach; and (iii) market-based approach.

This article is for general information purposes only and does not constitute legal advice.

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