Business mentor: Licence to print money? It's not always that easy

I have a small business that manufactures and sells a fantastic product, for which I have a patent and trademark. Recently, I was approached by another business that is interested in licensing my product. It seems like a great opportunity to expand my business without incurring significant costs but I am unsure what licensing really entails.

Small business sector specialist Sarah Trotman spoke to solicitor Sarah Harrison from A J Park's commercial team:

Licensing can be a lifeline for small businesses. A licence is the grant of a right to do something in return for a royalty or licence fee. It is an important way of commercialising intellectual property (IP) and can be tailored to suit your needs.

The most common forms of licences are patent licences and trademark licences. You can also seek to licence other areas of IP, such as know-how, copyright and plant varieties.

Here are some of the many issues to consider when licensing your IP.

Firstly, you should ensure that a confidentiality agreement is signed before disclosing any confidential information in licence negotiations.

Next, you will need to think about royalties, which are a matter for negotiation and can be calculated in several ways. The royalty may be based on minimum price per unit, gross or net sales, or sometimes even profits (although this is not recommended).

There are many factors influencing the fixing of royalties, including the level of protection for the IP being licensed, how much (if any) is to be paid upfront and whether the licence is exclusive.

One method for calculating a royalty is to apply the well-known 25 per cent rule of thumb, which states that the licensee should expect to receive 25 per cent of the licensee's long-term operating profits earned from exploiting the IP being licensed.

You should also consider the tax consequences when structuring the royalty. Although licences can be tailored to suit your needs, you need to think carefully about what rights you wish to grant and on what terms.

As a licensor, you will want to define your IP rights as broadly as possible. A patent licence may also involve licensing the know-how and copyright so, if the patent fails, the licence may still continue.

You also need to decide whether your licence will be exclusive, sole or non-exclusive and how your licensee may use your IP.

An exclusive licence is one where the licensee alone can use the IP. A sole licence is where the licensor and the licensee can use the IP, but neither may appoint any other licensee. A non-exclusive licence allows you to appoint other licensees.

Establishing how your licensee may use your IP is also crucial. Licences can be very flexible, so you can limit use of your IP as necessary. Licences can be confined to geographical areas. A patent licence may be confined to a particular field of use. A trademark licence may be confined to a particular type of goods.

If you are thinking of licensing others to use your trademark, controlling use of your trademark is important. If you lose "control" of your trademark, you may put ownership of that mark at risk and also risk your brand's reputation.

Also, the licensee should acknowledge your ownership of the IP and the agreement should be terminated if the licensee challenges the validity of that ownership.

Consider who is to own any improvements to your IP, especially if the licensee devises them. Will your licensee have the right to sub-license your IP. If so, on what terms?

And the issues to consider when licensing IP keep coming. Other matters to consider include liability, infringement and termination.

You should ensure your licensee indemnifies you against claims by third parties arising as a result of their use of your IP. And, if (unbeknown to you) the use of your IP was to infringe the rights of a third party, what warranties or indemnities are you willing to give to your licensee?

Alternatively, if your IP is infringed by a third party, are you obliged to sue? If not, can your licensee sue in your name?

In short, a licence can be as simple or as complex as you wish. But negotiating and preparing a licence for IP is a specialised area of the law and you should get expert advice.

* Any inquiries about licensing IP can be directed to Sarah Harrison at A J Park on (09) 353 8214 or email Sarah.

* Email your small business enquiries to Sarah Trotman using the link below.