If your company is like most companies, fortunately most of your I.P. activity is going to be licensing not litigation. That's a good thing. What is licensing? Well a license is essentially an agreement between the licensor, the owner of technology, and the licensee, the company that wants to use that technology. So they enter into an agreement whereby the licensee gets the rights to use the technology and the licensor gets something, maybe money, maybe something else.
In a technology context, licensing really involves business considerations, technical considerations, and of course legal considerations. And you really want to make sure at the very beginning you know what success looks like on all three fronts. Know what your objectives are. When you're licensing one thing to keep in mind, it's very of important, flexibility, flexibility, flexibility. The hallmark of licensing is flexibility. There is so much you can do to change the deal that you can almost always find some kind of a solution that works both for the licensee and for the licensor. You can change the duration of the license, the scope of the license, the payment process. There's a lot you can change. And you can bring in other factors, perhaps a supply deal is in the works. You may not simply license somebody's technology, you may license their technology and sell them something or buy something from them. All of this can be worked into an overarching deal that works for both sides.
An early question in almost every licensed negotiation is the price. The truth is the price is typically finally settled at the end of the licensing negotiation in my experience. All of the other terms of the deal impact the price. So until you have those negotiated you really don't have comfort that you know what the price ought to be. It's a hard question. It's a business question really at the end of the day.
There are factors that you have to take into account and they're the ones that are intuitive to you areally. Your technology is not worth more than the cost of the next best alternative. If they've got another alternative out there that is as good or almost as good, they might pay a premium for your technology but not that much of a premium. If there is no other game in town you might get a big premium for your technology. There are some rules of thumb. You might have heard that the licensor gets a quarter to a third of the profits. Don't rely on them. They are not a bad starting point, but they are not reliable. It really comes down to who's taking the risk, who's making the investment, who's in a position to take advantage of the technology. If you're licensing technology into your company and you're going to spend money and time and effort creating the marketplace for that technology, you're taking a big risk, setting aside the cost of the royalty. You're taking a big risk with your company's resources. So that goes into the equation. Of course the licensor has already invested in developing the technology that they are licensing. That goes into the equation too. Everything goes into the equation. Try to think of what you need out of the deal. Have a mind for what the other side needs out of the deal, too. It's all well and good to demand everything on your side, that's really a path to a non‑deal. If you want a deal, have in mind your needs, also have in mind the other side's needs.
Remember the hallmark of licensing is flexibility. Licenses come in a lot of different flavors. And this is good. This gives you some opportunity to craft a license to your particular deal, to your particular needs. For example, there are licenses that are exclusive. There are licenses that are nonexclusive. And there are licenses halfway in between. Let me tell you what I mean. An exclusive license means the licensor, the one licensing technology out will not license anybody else to use that technology and won't even use it themselves. A nonexclusive license is one in which the licensor can license any number of different licensees. You may have a nonexclusive license and your competitor may also have a nonexclusive license to the same technology.
Somewhat in between these two is sometimes referred to as a sole license where the licensor will license you, the licensee, will not license any other licensees but has the right to continue using the technology themselves. Another aspect of flexibility in the license agreement is the field of use. Your company has a focus on a certain area of technology, a certain market segment. You may not want to pay for or need a license beyond your particular field of use. The licensor will license you, exclusively or non‑exclusively, in that field of use. And then separately license other people in different fields of use having nothing to do with your market space. That works for the licensor. It works for you. You pay less and the licensor gets to exploit the technology in other fields with people who are appropriate to those other fields.
Another aspect of licensing flexibility is the duration of the license. Not all licenses are permanent. Some have a fixed period of time, a year, a month, ten years, whatever it might be. That's fine. If you're a licensee in that situation with a fixed period of time license, make sure that it's long enough. You do not want to have to go back to the licensor typically to renegotiate. Because of course, by that time you've baked the technology into your platform. And the licensor knows this. The price of poker may go way up. Get the license long enough to cover your entire need.
It could be a simple royalty, I will pay you $1 for each unit of product I sell, straightforward, pretty common. But there's a lot of flavors as you can imagine. You might instead, for example, have an upfront payment of a certain amount and pay no more. That's it, I'm done. I paid you a million dollars. I will never pay you another dime. I've got a permanent license. Fine. Not very usual, but not uncommon. And anywhere in between here. For example, a lot of licenses have a cap on the amount of royalties that are payable in any given year or a cap on the total amount of royalties under the life of the agreement. For example, I'll pay a dollar a unit, but by the time I've paid you $1 million, whenever that happens, I am done. I will pay you no more and my license is now permanent. Not uncommon. Have in mind all of this flexibility in the negotiating of the payment terms. Because if you're a smaller company, you may have cash flow problems at the near end and expect to have no cash flow problems later. Push the payments out as far as you can. It will work for you. If the licensor has sufficient financial muscle, they'll be happy to accommodate that.
Along with the right to use technology you may want to negotiate some technical assistance. Remember the licensor has technology in this area. They've been working in this area. They know it. They know it better than you do probably. So you may want to negotiate for some technical assistance. That might mean they make someone available on a phone. It might mean they put people into your facility for a short period of time to help get you up to speed, help get you up and running on the use of the new technology you just licensed in from them.
If you don't need anything but the rights, we sometimes call this a naked license. So you get a license under the patent of whatever scope in terms of time and in terms of field of use. And that's it. No technical assistance, no nothing.
Just one other flavor I want to mention to you. It's not really a license, it's a right to get rights. And we've used this a number times to help get past a sticky problem. Sometimes you can look down the road and realize that there may being more technology to be licensed in the future. You don't need it now. You're not sure you ever will. Perhaps we're talking about the license who has future improvement. You may want to have access to those. You don't want to end up licensing technology that is old hat. If the technology licensor is going to improve upon it in the future you would like access to that. But who knows what that's worth. So consider adding into your license agreements in those situations a provision that gives you the right to get rights on reasonable terms and conditions. It really kicks the can down the road a little bit, but at least it gives you a place at the table. At least the licensor has to come and negotiate with you on what would be reasonable. Push come to shove, you may actually have to ask a judge to figure out what's reasonable. But at least, as I say, you have a place at the table to negotiate that license.
If flexibility is the first hallmark of license, nuance is the other. The terms of an agreement determine the scope of your rights, the duration of your rights, and so many other things. And you need to pay very close attention. You need to pay exquisite attention to the detail of the written agreement. Comments can make a difference. The placement of a comma can make a difference. Believe it or not, it's very important. There's a fairly famous case in Canada. It's a contract dispute. And the plaintiff argued one side and the defendant argued the other. And the judge rendered a decision. And in writing the reason for the judge's decision the judge said I'm going with one party instead of the other because there was a comma here. Had there been no comma here I would have gone the other way. Wow. That's what I'm talking about. That's the level of nuance. That's the level of detail that you need to pay attention to to get the licensing deal done correctly.
You need to be sure that the provisions of the agreement say just what you need them to say. The provisions of a license agreement are often very complex, with definitions and reference back and reference forward. You need to work through them carefully. You probably need advice of counsel on this. Make sure that it says exactly what you need it to say. Go through the final written agreement before you sign with exquisite detail to make sure that it's what you negotiated and it says what you need it to say. If it doesn't, put your pencil down, fix it.
If you're a technology‑based company almost certainly licensing will be an important part of your I.P. activities. It's important to do it carefully and well.