Licensing Intellectual Property
You are well beyond the start-up phase now. You have been delivering a successful product or service for a while, and your brand is well-established with a reputation for quality. You are ready to expand to the next level, but you don’t have the time or energy to take your business into new marketplaces. What do you do? For many, the next step is licensing.
You have already turned your clients into raving fans. Are you ready to create a win-win system that allows them go out there and sell your secret sauce as part of their own business, sending a share of the profits or a licensing fee back to you?
Licensing can seem like a very attractive proposition, but it is not an instant licence to print money – more like a goose that lays golden eggs! It takes time, because the best licences are long-term collaborative relationships based on trust, shared values and mutual respect, and that does not develop overnight. You also need to maintain that trust over time.
What is an Intellectual Property Licence?
An IP Licence is a contract that authorises someone else to commercialise your intellectual property.
There are three types of intellectual property that are generally relevant to the IP licences my clients create. They are:
- Your trade marks (which embody your brand’s reputation as a reliable source of quality goods and services )
- Your copyright (which is all the material you have created as part of your business, including your writing and your images, workbooks, manuals, training guides, blogs, videos and so on), and
- Your trade secrets (which are your methods and modalities, the secret sauce that makes what you do different from anyone else.)
Each of these types of IP are protected under different laws, but all of them share the characteristic that if you allow them to be used freely by others, they enter the public domain and you lose your exclusive ownership rights over them.
Licensing is a way to authorise other businesses to make use of your intellectual property while still retaining control over how it is used, who it is used by and what it is used for. It is important to remember the difference between licensing and franchising here, because licensing generally allows people to have some autonomy over the integration of your IP into their existing business, where in a franchising relationship, they step into a mini-model of your business and generally must comply with strict marketing and sales guidelines.
Licences are often granted in exchange for an upfront licence fee, which covers the initial disclosure or authorisation of the intellectual property, and then ongoing royalty payments which may be a fixed amount or vary depending on the amount of profit made by the licensee.
Here is an illustrative example of this kind of licence:
You have created a course that your clients love. They use your special methodology in their own lives or businesses and have seen the benefit. Now, they want to be able to teach that methodology to their own clients, so they can share the benefit and spread your message more widely, into markets and locations that are outside your niche. However, you are worried about maintaining the integrity of your methodology, and you need to see an ongoing return for the time and effort you have invested in developing it. Through a licensing agreement, you can authorise this expansion in a way that benefits everyone, including yourself.
Other examples might include a book publication agreement, a merchandising licence, a licence to use software or images, or a licence to offer the products of another as part of your services.
Licensing different types of intellectual property
Licensing can apply to both registered and unregistered trade marks, although registering your trade mark first provides more security for both you and your licensees. If you would like to know more about the difference between a registered and unregistered trade mark, this blog post will help: Are You Ready To Register A Trade Mark?
The trade marks that you might want to authorise use of in a licensing agreement include your business name, your logo, and any catch phrases or hashtags that are exclusively used by you to sell your products or services.
Where you own a registered trade mark, you need to ensure you are not allowing anyone else to use it unless they are appropriately licensed, and that there are appropriate limitations on what your licensees can do. This is because, under the Trade Marks Act 1995 (Cth) the owner of a registered trade mark must maintain control over its authorised use. While the degree of control required depends on the circumstances, it is clear from the court cases on this issue that it needs to be actual, active control.
An unregistered trademark can also be licensed through a contract, but it carries much greater risk for both you and your licensees. If a third party manages to register the trade mark, thus gaining the exclusive right to use it and preventing its use by you, you could find yourself in breach of your agreement, and both you and your licensees would need to cease using the trade mark or face court action. You could attempt to circumvent this by arguing a history of use, but even if you are successful, the cost of doing so is likely to be much more than that of registering the trade mark in the first place, without even mentioning the damage you could do to your licensees’ trust in you, and your reputation in the marketplace. If you are willing to take the risk of licensing an unregistered trade mark, due diligence and vigilance to ensure that your use of your trade mark is exclusive must take a very high priority.
The second type of IP relevant to licensing is copyright. You automatically gain ownership of copyright when a work is “fixed” in some form, such as by being written down, painted, photographed and saved to a camera, recorded and saved as a video and so on. If you have purchased work that you wish to include in your licence, such as having a graphic artist draw images for you, or having a copywriter prepare a guidebook or manual, they are the owners of the copyright, even though they have produced it for you. That is why it is essential to have a contractual agreement assigning the copyright in that work to you, before you attempt to grant a licence to someone else, authorising them to use it. Otherwise, you are simply licensed to use their copyrighted image, and that licence may not contain a right to sub-license it to others.
Next, let’s look at trade secrets. Trade secrets are not protected by any specific law, only by confidentiality clauses in contracts. As a result, as soon as they are out in the public domain, they are no longer yours. There is no copyright over ideas. It is therefore very important to have contractual confidentiality provisions in place (such as with your course students) from the very beginning, if you intend to eventually license that material. Those provisions should emphasise that you retain ownership of the ideas you are sharing with them, that you are sharing in confidence, and that they are not allowed to share those ideas with anyone else. If those trade secrets are included in a licence that allows your licensee to share them with their students in turn, you need to ensure that your licensee has sufficient confidentiality provisions in their contract with their students, to prevent the material ending up in the public domain.
Benefits of licensing
Licensing can be a very beneficial exercise when your business is ready for it. It allows you to expand the reach of your brand into new markets with minimal effort on your part. It provides an additional income stream and permits you to serve different modalities that are beyond your personal niche. Licensing raises your brand awareness and reputation as all of your licensees are now out there, advertising and marketing, and enhancing your reputation for quality. It increases consumer recognition, across a much larger range than you could broadcast to on your own. It is also a wonderful way to distribute the workload, so you can reach a global clientele, for example, without having to be the one travelling all around the world promoting and delivering your product or service yourself.
For your licensees, taking up your licence gives them access to a proven product or service that complements their existing business. They get all the benefits of being able to sell a popular offering, without having to invest in developing it from scratch. They also get your wisdom and support to help them with marketing, and their business grows in association with your established brand.
First, it is essential to choose your licensees with care. You will want to form a relationship with reliable business owners who have experience in their field. If you choose to work with less experienced people, you may find it harder to maintain quality control, and you may have to invest more time in training them rather than expecting them to take your ball and run successfully to the goal with it! It is also very important to choose people who understand and know your business. They need to understand and share your long-term goals for the future of your brand, and to know what your core values are and be prepared to defend them.
You need to think about what the licensing arrangement will look like. How long will it last? Will it each person have exclusive rights within a certain territory, or will your licensees share the territory? How will that work? Is your reach local or global, and if global, do you need to extend your trade mark registration internationally to cover new target markets? Are your licensees allowed to grant sub-licences?
What qualifies as unacceptable usage and how will you monitor and enforce those boundaries? Will you conduct audits of their business or the quality of the licensed products or services they are delivering? How will you do that?
How much will they pay you, and over what period? Will their costs be tied to their profit or some other benchmark? What reporting requirements will they have, and will you be setting any benchmarks for measuring their success or the success of the licensing scheme as a whole?
What happens if one of their clients has a complaint about the licensed material? How will you handle a disagreement between licensees, or a licensee who becomes unhappy with you? What dispute resolution processes will you put in place?
How I can help
While licensing can be a highly beneficial relationship for those who are at the right stage of their business, it should not be entered into without serious thought and strategic planning. The more care you put into designing the structure, the less problems you are likely to experience down the track. If you would like some assistance with this strategic planning stage, book in for an IP Strategy Session (click the link for more details).