I get asked this question a lot. It is a great question. You may be surprised by the answer….
But first, let’s review some information that’s relevant to our question.
What is Licensing? Essentially, licensing is ‘renting’ your intellectual property (“IP”) for compensation to a third party, usually a company, that will make and sell products or services using that IP. The agreement used is called a licensing agreement.
What are the main types of IP that typically get licensed? The basic IP’s that are licensed include patents, trademarks and copyrights.
Generally, patents protect unique and novel inventions or designs; trademarks protect brands – which can include names, logos, taglines and other things that qualify as source identifiers; copyrights protect original artistic works – which can include illustrations, logos, designs, songs, books and more.
Although we won’t be getting into the details of each one, you should know that each IP mentioned above has its own set of rules and protections, and that some items can actually qualify for, and get, protection from more than one type of IP at the same time. So for example, Starbucks Coffee®, as well as numerous other companies, protect their logos using copyright and trademark law.
Why would you consider IP Protection? In my experience, deciding whether to protect your IP should be made in the context of your particular business situation so you should be considering, among other things, market conditions, your budget, how unique or proprietary your idea, product or brand is, as well as the current and future opportunities you would like to pursue. Keep in mind, though, that in some cases, once the opportunity to protect your IP is gone, you would have limited recourse to recapture your ability to protect it. At that point, it would become a major expense as compared to what the original expense to file for IP protection might have been. Think of it this way: you can spend a few thousand up front (depending on what you’re protecting) vs. having to spend upwards of $10,000 on litigation fees and costs. Typical lawsuits can range from $10,000 (just to prepare and file a complaint) up to hundreds of thousands of dollars and often higher – that’s enough to put many companies out of business.
Here are some important reasons why you may want to consider proactive protection:
- Puts others on notice and you get a presumption of ownership. By protecting IP, others get ‘constructive’ notice that you have protected your IP. ‘Constructive’ notice is really a legal fiction that someone actually received notice of your IP. That can be a powerful tool. Plus, a trademark, copyright or patent registration gives you presumption of ownership. That means it’s presumed that you are the rightful owner and that third parties wanting to license your IP will have to deal with you.
- It makes it harder for others to steal. Once you share your idea with others, what’s stopping them from stealing it? Did you know that if you’ve come up with an amazing brand name and tell someone else about it before you protect it or use it, then that person (or anyone that person tells) can file for trademark protection before you do? It’s true; and unless you have a contract (like a non-disclosure agreement) with them that states they can’t use the IP associated with your ideas, you’re probably not going to be able to stop them. Think of it this way: don’t you lock up your car when you park? Lock up your house when you go out? Password protect your devices? Of course you do, because it allows you to protect your property. Whether your property is physical (like a car) or intangible (like IP), without putting in safeguards, you leave yourself vulnerable to theft. Remember, a lot will depend on your particular business situation and the type(s) of IP in question.
- It gives you some negotiating power. If you have protectible IP, you should be able to get more money. Let’s say you’ve come up with this amazing product and show it to Company ABC for licensing purposes. If you’ve protected your IP, then as we’ve noted that makes it harder to copy your product’s utility or design (if you’ve protected it with a patent and/or copyright) or brand name (if you’ve protected the trademark) and more likely that the company has to deal with you to use your idea. That means if the company really wants to manufacture and sell your product, you should have more leverage to negotiate a higher up-front advance, minimum guarantee or royalty rate.
- Indemnification. In most licensing agreements, there is an indemnification clause that states you, as the IP owner and licensor, are responsible to indemnify (shield) the company as the licensee for any intellectual property infringement. So what does that mean? Well, that means if a third party believes that your licensed product is infringing on their IP, then they could sue you as the IP owner and the company because the company is manufacturing and selling the products. If that happens, then you will be responsible for shielding the company from the lawsuit and would have to pay their legal costs in addition to yours. Plus, if infringement is found, then you may have to pay to recall the products. That’s an expensive responsibility and one that could break your business. Doing your due diligence up front by proactively protecting what you have should give you more confidence about licensing out your IP.
So do you need to protect your IP before you can license it?
Would you be surprised to hear that the answer is technically, “no”? If someone is willing to pay you to license your idea, then technically you do not need to have protected the IP first. But why wouldn’t you protect IP in light of the reasons discussed above? Anyway, most companies do like to see that IP is protected before spending their time, money and effort on manufacturing and sales.
Ultimately, protecting IP is a business decision based on your situation, but hopefully, now you’ll have some additional reasons to consider proactive protection. The choice is yours, but as the Grail Knight said in Indiana Jones and the Last Crusade, “Choose wisely.”
Wishing you much success in your business ventures!