Maybe you’re seeking new revenue streams. Perhaps you’re hoping to enter new markets. Or you feel that your best path at growth is through a strategic partnership. Whatever the reason, there are many times when entrepreneurs look to license their intellectual property (IP). These licensing agreements often are more complex than a simple sale. After all, there’s now an ongoing relationship between the licensor (the owner of the IP) and the licensee (the party given access to the IP).

Let’s look at some key considerations when building a successful licensor-licensee relationship. At times we’ll examine it from the perspective of the licensor, other times the licensee. The lessons apply both ways.

Licensing with Service Providers

You may seek to hire a third party to perform certain functions you’re not looking to do in house, such as manufacturing. When negotiating an agreement with a service provider, your attorney will likely seek to include certain license grants as part of the terms.

With respect to these types of licenses, terms usually run along these lines:

• Background IP: IP that is owned by a party prior to the relationship.
• Arising IP: IP that is generated during the relationship.
• Work Product: IP that a person has paid another person to generate.

As you can imagine, the service provider may need to license your IP to perform the services. For example, a contract manufacturing organization will often need a license to your IP—the formulation, certain manufacturing techniques, etc.—in order to manufacture that product to your specifications.

Conversely, your service provider may develop new IP when performing services for your company. That arising IP may be an entirely new invention even if it’s generated from your background IP and that of the service provider.

In these situations, it’s smart to consider three “buckets” of IP:

• Your background IP.
• Your service provider’s background IP.
• Arising IP.

The terms of the services agreement should specify who initially owns each bucket and who will ultimately own each bucket after the services have been completed.

Ideally, the service provider will fully transfer all the rights inherent in the arising IP to you, as it is the work product that you paid the service provider to generate. There are, however, a few situations where the service provider will only provide a license to the arising IP, rather than forfeiting a right of ownership.

For example, what if the service provider incorporated some of its own background IP into that arising IP? It will want to retain rights to that background IP so that it can continue to use it to serve other clients. In this case, the service provider will usually offer you a non-exclusive license to their background IP.

With limited exceptions, you should make sure that you retain your background IP. These exceptions might include, for example, the right to use your de-identified data for research purposes.

A License to Commercialize

You may wish to commercialize IP that is owned by another party. If the owner doesn’t want to sell their IP to you outright, they could license the IP to you while retaining ownership rights. Now you’re about to become the licensee.

These are often written as stand-alone license agreements with terms used in the following contexts:

• Territory: The geographic scope of the permission, for example, “the United States of America.”
• Field of Use: The use for which the permission is granted, for example, “products to treat chronic myeloid leukemia.”
• Term: The time period for which the permission is granted, for example, “five years from the effective date of the license.”
• Exclusive: The owner of the IP will only grant permission to that licensee.
• Non-Exclusive: The owner of the IP can grant permission to that licensee and anyone else.
• Royalty: The amount that the licensee will pay to the licensor for the continued privilege of using the IP.

There are two main commercial areas on which the licensee and the licensor need to agree.

• The scope of the permission being granted. This scope is usually defined by the territory, the field of use, the term, and whether or not the license is exclusive or non-exclusive. As a licensee, you should also agree with the licensor whether the license can be sublicensed or assigned to another.
• The royalty amount. Royalties may be based on revenue, profits or another economic metric. Royalty amounts may adjust depending on many factors, including the achievement of milestones, certain time periods, or for different territories or fields of use. Each criterion used to quantify the royalty should be as objective as possible and the licensor will likely seek to confirm or audit those criteria to ensure they’re being paid the proper amount.

Your attorney will typically recommend that you and the other party start the licensing process by agreeing on these commercial terms in a non-binding term sheet.

In addition to these commercial terms, a license agreement should include remedies for breach, infringement, and indemnification.

Lastly—and particularly important in the life sciences industry—you’ll usually want to ensure that the license agreements include built-in flexibility. For example, as the licensee you may discover a more profitable commercialization plan that addresses a different indication or seeks drug approval in a different jurisdiction that the parties originally anticipated. It is in both parties’ best interests to work collaboratively to maximize the potential value of the asset.

Licensing Lessons Learned

Licenses are a flexible legal tool that parties can use to efficiently and effectively transfer and control the use of IP without compromising their ownership of the IP. As an IP attorney team that routinely works on building these kinds of successful relationships for our clients, we at Procopio recommend the following:

• For a services relationship, capture the scope of each bucket of IP in clear and concise language and then ensure that the right buckets of IP end up in the right hands.
• For service providers, make sure to retain rights to your background IP so that you can continue to use that IP for other clients and purposes.
• For licensors, make sure to receive all of the rights you will need to exploit the work product that the service provider produced for you.
• For commercialization, in which one party intends to commercialize the IP of another party, include objective language that defines the license’s scope, the method of royalty calculation, and any other milestone that impacts how the royalties are calculated.

As a parting thought, it’s a good practice as a licensee to treat your licensors the way you would any other important stakeholder, by communicating regularly and personally. This will generate trust and a solid working relationship that cannot be captured in legal documents. It’s in your best interest to minimize conflicts and maximize collaboration if you’re to reach the utmost potential of your IP.