Understand the Risks of Licensing Intellectual Property

All business agreements are about carefully allocating the risks of a deal, and this rule equally applies to the licensing of intellectual property. The value of many businesses is found in their intellectual property, whether it’s a copyright, trademark, or patent. In some cases, that value is grown through licensing deals that share the usage rights with other parties in exchange for compensation or other interests.

Understanding the common risks within these deals better prepares you to evaluate licensing opportunities down the road. Here, you’ll learn more about the risks for both licensors and licensees of intellectual property and how those principles may apply to a business’s goals.

The Risks for a Licensor of Intellectual Property

A licensor is a party that holds the initial rights to intellectual property, including the right to license it to another party. As a licensor, the priority in a licensing deal is protecting two things: the value of the intellectual property and control over that intellectual property. Several risks can jeopardize these goals.

The Reputation of the Licensee

Associating your brand with another party is not a decision to make lightly. A considerable risk is choosing a partner that ultimately harms the value of the IP. Assuming proper due diligence about a party’s reputation before closing, additional safeguards in a licensing deal can protect a licensor in case of future events that risk the value of the intellectual property.

Representations and warranties, morality clauses, and the like are common themes in licensing deals to hedge the risk of harm to a licensor’s brand. Proper exit strategies and recourse for the licensor are also necessary if a licensee’s reputation comes into question.

The Scope of the License

A risk exists that a licensee may not use the intellectual property in a way that is beneficial for the licensor. Having a tightknit scope for the license is a suitable method for avoiding unintended uses of the intellectual property. The scope terms in a licensing agreement explicitly state how a licensee may use the IP along with other terms (e.g., notice and consent requirements for further uses).

The Risks for a Licensee of Intellectual Property

The party buying the rights to use intellectual property (i.e., the licensee) also carries risks when formalizing a licensing contract. The goal as a licensee is to realize the value of the intellectual property you just paid to use. The risk is the possibility that the licensing deal may conflict or even prevent that goal.

For this reason, the scope of the license is equally important for the licensee. Terms concerning exclusivity, rights of first refusal, and broad usage are likely central to evaluating the potential risk of a deal from the viewpoint of the licensee.

Additional Help with Licensing Intellectual Property

Licensing intellectual property can be a mutually beneficial relationship when done with the right parties and under the right terms. However, consider the risks and potential worst-case scenarios to avoid unwanted surprises by drafting thoughtfully written agreements.

The attorneys at Franchise & Business Law Group appreciate the challenges of helping clients protect their interests in licensing agreements. Please do not hesitate to reach out to us if you have any questions about the information in this article or if you need representation in a licensing deal.

Contact Franchise & Business Law Group today to schedule a consultation about licensing intellectual property.