A Winding Web: The Importance and Nuances of Licensing Agreements
Post Authored by Natalie Elizaroff
Anyone working within the intellectual property sphere recognizes the importance of protecting a client’s IP rights. In addition to the protection of IP rights, it is equally important for a client to retain their ability to monetize and reap the financial benefits of their product. Outside of patents and trademarks, a licensing agreement is the most effective solution for protecting intellectual property.
Licensing agreements in general
A licensing agreement is a contract between two parties that allows owners of intellectual property to authorize third parties to make, use, alter, or resell the property, without transferring ownership to the third party. When working and negotiating a license agreement, it is important to understand the nature of the intellectual property rights being licensed. Different kinds of IP rights will require different language in the drafting of the license agreement. This is particularly true when entertainment and multimedia products are being licensed.
The importance of comprehensive licensing agreements
A glowing example of the complexity surrounding IP licensing can be seen through the Spider-Man universe. The numerous rights for Spider-Man have been tossed between a variety of studios since the 1990s. The reason for the split rights dates to around 1990 when Marvel faced bankruptcy and sold off the film rights to many of their characters. Marvel licensed the movie rights to X-Men, Fantastic Four, and various other characters associated with them to 20th Century Fox; Hulk to Universal; and Spider-Man and all associated characters to Sony. Although Disney/Marvel has reacquired a majority of their assets, Spider-Man has eluded them.
In 2008, after Sony’s lackluster ticket sales in their Spider-Man reboot, Sony resold Spider-Man’s merchandising rights back to Disney/Marvel. Further, in an effort to reach a compromise and introduce Spider-Man into the Marvel Cinematic Universe (“MCU”), Disney/Marvel pursued a cinematic licensing agreement with Sony that would grant Disney/Marvel the right to film and incorporate Spider-Man into the MCU. The two conglomerates reached an agreement that included Spider-Man’s appearances in Marvel films and that characters whose rights Marvel retained could appear in Sony’s Spider-Man films. The terms also specified that Sony would continue to have essential rights over the Spider-Man films, including ownership, distribution, and creative control over the final product. All of this exemplifies the complexity of licensing rights and the importance of prudent drafting practices.
Necessary elements to a licensing agreement
With that in mind, every licensing agreement should begin from a basic skeleton that includes the following key elements: 1) Subject Matter (what is licensed); 2) Scope (what rights are being given); 3) Financial (what value is being exchanged); and 4) Upgrades and maintenance (what happens in the future).
Subject Matter
- Identifies what kind of IP is going to be licensed. The licensee and licensor should both have a solid understanding of what will be licensed so that the negotiation of the terms surrounding that license goes smoothly.
- Questions to answer include:
- What kind of IP?
- What does the licensee want to do with the IP?
- Does the IP in question have the functionality to meet the licensee’s needs?
Scope
- Identifies all the key components of what the licensing agreement will cover. This typically includes exclusivity of the rights, territory, timelines, guarantee of sales, term, termination, etc.
- Questions to answer include:
- How broad should the rights of the business model be?
- Who exactly holds the rights to make, have made, use, sell, import, transfer, and make improvements?
- Who can copy, display, modify, make derivative works, distribute, and transfer the IP?
Financial
- Identifies the financial arrangement of the agreement. This outlines how the licensee will pay for use of the IP and the negotiation of royalties.
- Questions to answer include:
- What is the total value of the IP?
- How will the payments be made?
- Should the payments be made through royalties, a lump sum, installments, fees, or a combination?
- Who will assume liability for product defects?
- Who bears the risks of infringement?
Upgrades and Maintenance
- Identifies the future of the IP. Licensees may wish to modify the IP to customize it for their internal use. This determines the ownership rights for any future changes.
- Questions to answer include:
- Can the licensee conduct research and product development?
- Who owns future improvements?
- Will grant back provisions be included?
In addition to the above-identified categories, there are further nuances that should be included such as the obligations of the parties; conflict resolution, mediation/arbitration clauses, warranties, and other common clauses that secure the parties involved.
Final Thoughts
Due to the inherent complications that exist within IP and licensing agreements, working with an intellectual property professional to review and draft a license agreement and thoroughly spell out which party is responsible for what will diminish the potential of lawsuits and conflicts.
About the Author:
Natalie Elizaroff graduated with a B.S. in Molecular Biology from Loyola University Chicago in 2016. She is a recent graduate of the UIC School of Law, currently working at Advitam IP where she handles trademark litigation, patents, and other IP-related matters. Natalie is looking forward to starting her career in the area of IP Law.