15 Landmines To Avoid When Licensing

So you’ve come up with a novel idea or method… and filed the appropriate patent or trademark applications. Maybe you’re waiting for the USPTO to grant your application, or you’ve already received a the red-ribbon stamped package from the government granting you a U.S. patent or trademark. Congrats! You’ve now got a tangible piece of intellectual property (IP) that you can license to other individuals or companies.

Below, I’m going to outline some of the pitfalls and landmines you need to consider when licensing your IP to ensure that:

  • your rights are protected
  • you’re not taken advantage of
  • and, as we all wish, you can make the right deal that will a generate a stream of revenue for years to come.

1. Hire An Experienced Intellectual Property Attorney

One size does not fit all when seeking an attorney to help you negotiate an IP license agreement. IP attorneys are specialists—and while your local real estate lawyer handles contracts, they probably don’t have the expertise to handle IP licenses. The importance of finding an IP attorney experienced with executing license agreements cannot be understated. Because, I assure you, any company worth its salt either has in-house IP attorneys (those that work directly for the company) or are represented by a large New York or California law firm to get the best deal they can for their client. Protect yourself—no one would hire a dentist to do their open-heart surgery.

2. Even David Had A Plan Against Goliath (So should you)

Let’s be clear, you are one individual probably approaching a company with several employees, years of experience and a bucket load of resources. Before reaching out to them as an inventor or IP holder, you’ve got to have an action plan. Remember, its your IP and you are usually the one making the first offer. Have you thought about several important terms before you begin negotiations? Some of these might include:

  • how long is the license grant
  • what is the scope of territories (where will it be sold)
  • are there any non-compete provisions (maybe they sell similar products)
  • what about future IP rights (do you have other applications)

Trust me, any company you’re trying to license to will have thought of these provisions well before you arrive… and so should you.

3. Confidentiality Agreement

We’ve all heard a story of someone shopping their product to a company, only to be turned down outright or simply ignored. Then, two years later an inventor may see his IP on the shelves of a major chain. A properly executed NDA or CDA can provide some protections to prevent this scenario. So, before you send over all your research and prototypes or your pending patent application (or patent), consider having a CDA or NDA in place.

4. Document Everything

So, I’ve said in my previous blogs that emails may not be enough when reaching out to companies. You have to be as proactive as you can. At the same time, keep diligent records of who you reach out to and when—and who you actually speak with. This will go a long way should you ever have to prove you provided a company with copies of your IP and they misappropriated your idea.

5. Exclusive Or Non-Exclusive? (That is the question)

Do you want to put all your eggs in one basket… or have the flexibility to manufacture the product yourself or license with another company? Each of these options has benefits and costs that you must weigh before entering into—and during—negotiations. Beware the company that offers you everything under the sun. Remember, this is a negotiation between two strangers—not a marriage after a long courtship.

6. Do You Trust Your Licensee?

If, and when, you enter into an agreement, you’re building a potential long-term business relationship. Research the company. You can find out how many lawsuits they are currently involved in, and what those lawsuits revolve around. How are the negotiations going… are they providing you with sufficient records? A licensing deal is a two-way street, and regardless of how much money they may propose dreams can fade away fast. This is business, and your IP is your baby. No parent would give their newborn to a stranger. And neither should you.

7. We All Want More Money… But Can You Count It?

If you’re unable to read a profit and loss statement or a financial audit report, I suggest you start reading up on basic accounting techniques. Remember, this is a business—and companies, like people, will cook the books in their favor. Protect yourself and learn the basics of finance.

8. Quality Control: It’s Your Reputation, Too!

Depending on your IP and product, make sure any potential licensee is able to manufacture your product safely. In the world of Twitter and Yelp, one bad review—or a batch of dangerous products—may spell the end of your IP and your reputation. Manufacturing in China may seem like a good idea monetarily. But if you’ve never visited the manufacturing facilities, can you really have faith in how they’re producing and presenting your IP to the public?

9. How Do You Want To Get Paid?

This goes back to my first point of having a plan: How will you get paid? This is the primary objective in licensing, after all. Monthly, quarterly, yearly? Net profits or gross profits? Milestone payments? Up-front fees? Patent prosecution costs (past, pending or future)? Consider how all of these may affect your bottom line.

10. Financial Stability (Don’t go belly up)

Understanding the financial stability of a potential licensee is critical for several reasons:

  • Are they on the brink of bankruptcy?
  • Do they have adequate capital to manufacture, market and sell your product?

Trust me, a worst-case scenario is for you to license your IP to a company—and then spend years in bankruptcy court trying to get your rights back.

11. Don’t Go Into The Graveyard

I will tell you a secret: Certain companies (I’ll mention no names) may simply buy your IP with no intention of ever manufacturing your product. Or maybe something better comes along, and they just move you into the background. Without certain protections and expectations, your IP could end up sitting on the shelf collecting dust. Make sure you have manufacturing and selling goals—and deadlines—somewhere in your agreement. Again, this is why an experienced patent lawyer, although expensive, can literally be worth their weight in gold.

12. Auditing Is Not Just About Profits

Learning how to read a financial audit, quarterly report and SEC statement is another necessary skill. But as an inventor, you may consider whether you want to have a yearly audit conducted relating to your IP and the financial stability of a company. Again, these are negotiations, and if you don’t ask, one thing’s for sure—you’ll never get them.

13. Maybe You Made A Bad Deal (Termination)

The terms for termination should be a two-way street. Understanding clearly how—and when—you can leave an agreement is strategic and may provide motivation for the licensee to meet certain financial or manufacturing goals.

14. Be Prepared To Sue And Be Sued

IP litigation cases are used for several purposes. Maybe a company wants to invalidate your IP, or maybe the licensee wants to bring an infringement case against a competitor. Either way, a few things are important for you as the licensor. First, know the litigation rights you’re giving up or retaining, understand which party is able to bring a suit, who defends it and how damages and/or liability are shared. Most importantly, understand that you as an inventor will certainly be involved in any litigation. You’ll be deposed and may have to testify at trial. Just be prepared.

15. Keep Inventing, And Inventing, And Invent…

So, you signed your first licensing contract. Hooray! Now you can sit back and watch the money flow in… NOT! If your IP is worth anything, you should know that once the bird is out of the cage, everyone else who wants to make money will be circling around like hawks. Companies will look for ways around your IP to provide different, cheaper and better options for the market. Don’t rest, keep inventing, keep thinking and keep pushing the envelope. Having 10 patents is always better than one.