‘She won’t be right’ – six IP licensing mistakes to avoid

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By Scott Yorke,

senior associate, A J Park

A business’ intellectual property (IP) will often be its most valuable asset. That IP may include rights in patents or designs, trademarks, copyright, or know-how.

If your business holds IP, you may be thinking about licensing others to use or exploit it. Or you may be thinking about taking an IP licence from someone else. Licensing is not always simple, but it can be very rewarding if you get it right. Like most things in business, a bit of serious effort at the beginning can make a big difference to the outcome.

But that is why so many IP licence deals fail. Far too many businesses take a ‘she’ll be right’ approach towards negotiating and finalising IP licences. New Zealand businesses often lack confidence on the world stage, and will often look to do a deal with the first person who shows an interest, when they should instead be focusing on finding the right person.

And when it comes time to negotiate the contract, New Zealand businesses will often expect the deal to be wrapped up quickly using a standard document that is no more than a few pages long. These practices usually result in failure and disappointment.

This article examines six of the most costly mistakes people make when they enter into IP licence deals.

First mistake: homework? No need!

A licence creates a business relationship between two parties. You probably wouldn’t rush down the aisle with the first person who gazed at you amorously, so take your time to evaluate potential business partners. Failing to carry out a proper due diligence can be catastrophic.

To avoid selecting the wrong business partner, gather as much information as you can about the other party. Are they financially stable? What is their reputation in the market and the relevant industry? If they are the party taking the licence, do they have sufficient manufacturing and distribution capabilities in the relevant markets to exploit the IP successfully? Do they have a business and marketing plan?

Make sure you know what the other person wants to get from the deal. If you understand your business partner’s needs you’re well on your way to success.

Second mistake: you’ll keep it to yourself won’t you?

Don’t fail to get a confidentiality agreement signed at the outset. Negotiating a licence inevitably involves an exchange of proprietary information between the parties. You may find out during negotiations that the other party is less reliable than you thought, or can’t be trusted. Make sure that party signs a confidentiality agreement early on to protect the secrecy of your information.

And if you end up doing a licensing deal, make sure your licence agreement includes comprehensive confidentiality provisions.

Failing to protect your confidential information can in some cases destroy your IP assets. It can also arm a potential rival with the knowledge it needs to compete with you.

Third mistake: let’s keep the lawyers out of this

Nobody likes to use lawyers. We know that. But don’t leave everything to a handshake.

If you decide to document the deal on the back of an envelope, you may have trouble working out what the deal was if things don’t turn out how you intended. If you don’t know who is responsible for doing what, you risk ending up in dispute with the other party. That dispute could easily turn into litigation.

Spend some time getting the deal documented properly. It may save you a lot of money.

Fourth mistake: that wasn’t part of the deal

It may seem obvious that the IP licence needs to state clearly what rights are being licensed. But licence agreements often fail to clarify what rights are being granted to the licensee. Common mistakes in licences include:

Failing to state clearly which of the IP owner’s IP assets are being licensed

Failing to state whether the licence is exclusive or non-exclusive

Failing to state clearly which territory or field of use the licence is being granted for

Being silent on what rights, if any, the licensee has to grant sub-licences, or to transfer its rights to others

Don’t leave any uncertainty about what you are actually licensing.

Fifth mistake: I’m sure you know what you’re doing

If you’re the IP owner, don’t leave your reputation completely in the hands of your licensee. Impose quality control obligations on your licensee. These will help to establish what your expectations are of the licensee.

Make sure your licensee is required to provide samples and the right to inspect its operations. If you give the licensee the right to use your brand, make sure you have the right to approve the way that brand is used.

If you are granting an exclusive licence, it is also a good idea to impose minimum performance targets on your licensee. A common performance target is a minimum sales or royalty obligation.

Sixth mistake: just give me a profit share

It can be difficult to determine what to charge someone for your IP. Most licences provide for up-front fees, rolling royalties, or a combination of

these things.

But be careful how the royalty is calculated. And don’t agree to take a percentage of the licensee’s profits. Profits can be manipulated, but it is harder for a licensee to manipulate its sales figures. In most cases the royalty should be a price per unit, or a percentage of the licensee’s net sales.

Royalty provisions need to be drafted carefully, to avoid the temptation for the licensee to rort the IP owner. A common scam is for the licensee to sell the licensed products to a related party for less than their true market price. A well-drafted licence can avoid these loopholes.

Good luck out there

You can avoid these mistakes by getting on the right track from the start. Find out if the other person is the right fit for your business. Get proper advice from a professional who knows about IP licences. And don’t write your contract on the back of an envelope. Maybe then, you’ll be more justified in saying, ‘she’ll be right!’

Email: [email protected]

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