The Most Important Thing to Have in Every Licensing Agreement
Founder of Invention City
Recently an inventor hired Invention City to review a licensing agreement from a business perspective. Her invention idea was incredibly simple, so simple it was shocking that it hadn't been done before. In getting to the negotiation stage she had been advised by a patent attorney. No patent had been filed yet, but she did have a one year Confidentiality Agreement in place. The licensing agreement was a first draft written by the company. It was a product of prior discussions between the inventor and company. The inventor's attorney told her he wasn't experienced in licensing. That turned out to be an understatement.
Before even looking at the agreement we spent time online trying to find prior art. A few things came close, but nothing really hit the nail. A deeper search might find something, but on the surface it was easy to see why the company wanted to do a deal.
Over the past 25 years we've had the benefit of doing many negotiations and writing and reviewing agreements with big and small companies and great and incompetent lawyers. The worst mistakes we've seen concern the questions of what happens when things go wrong. Answering that question, "What happens when things go wrong?" is the most important thing to have in a licensing agreement. It's actually a series of things:
- What happens if the licensee fails to pay the royalty agreed upon?
- What happens if the licensee just sits on the invention and doesn't make it and sell it?
- What happens if the manufacturing quality is poor? - What happens if there's a knockoff - who enforces the patent and how?
- What happens if the contract is terminated - what happens to inventory, sublicenses?
- What are the details of dispute resolution?
The contract we were asked to review failed to answer any of those basic questions. Even worse, the company was going to file for the patents on the inventor's behalf and the patents would be assigned to the company. In other words, the company would own the inventor's patents. This could be a huge issue if the inventor needed to enforce her rights. It's much better for an inventor to own patents and license them rather than assign them.
There were barn door sized holes in the agreement that would have enabled the company to knock off the inventor with impunity. Lastly, the basic terms of contract enforcement were murky. Even though binding arbitration was specified as a means of dispute resolution, many disputes would have ended up in court.
One of the biggest difficulties in this particular case was that so many key points had been already agreed upon by the inventor; there wasn't a lot of room for her to negotiate if she wanted to make the deal happen. It doesn't work to agree that the company can own the patents and then come back a week later and say, "only kidding, I need to own the patents and license them to you." Negotiating a licensing deal is an act of building trust, analogous to getting married. Going back on your word destroys trust and can kill the deal. After detailing all of the problems we saw, our advice to the inventor was to present the problems as concerns that needed to be solved and ask the company to suggest solutions. We don't know how the story will end.
The most frustrating thing is that the inventor's contract problems were self-inflicted. She has a fantastic invention and a perfect licensee. A fair deal that would make everyone happy, for many, many years to come, was well within her reach. But because she began discussions without an experienced adviser, it's likely that her deal will be deeply flawed - if her invention is a big success she might earn only 10% of what she might otherwise have earned.
My first serious contract negotiation was alongside my WorkTools partners Brad Golstein and Joel Marks. We did a deal with Black & Decker. All of us were "certified smart" and had graduated from UCLA with degrees in Economics (me), Law/MBA (Brad) and Chemical Engineering (Joel) - but the smartest thing we ever did was seek good advice. We were incredibly fortunate to have two amazing advisers - Jess Rifkind, founder and then director of Xerox's Advanced Development Lab who'd gone on to become a CEO for hire and Ralph Kamon, a former head of Paramount Studios legal department. B&D never had a chance to get the better of us. We ended up with an excellent contract that served us very well, especially when it ended. I should add that one of the best features of that contract came from an offhand comment made by a UPS driver. Upon seeing a prototype of our forward action staple gun he said, "that would make a great desktop stapler." We put an exclusion in our licensing agreement to retain rights to desktop staplers and that led to PaperPro desktop staplers and another healthy royalty stream.
The lesson in all of this is that anyone doing a licensing agreement, regardless of how experienced, can benefit from outside advisers. If you or your attorney lacks experience in licensing, you would be a fool to try and do a deal without expert advice. Moreover, you should never try and do a deal on your own. Having another perspective and another set of ears is incredibly helpful. Finally, you should get advice before you start negotiating.
Invention City offers adviser services. Contact Dan Fulford to learn more at 320-584-2055 or email: firstname.lastname@example.org
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