If your idea is commercially viable and you have the intellectual property (IP) rights you need to enter the market, it is time to decide how to take your idea to the market. You can decide to do it alone or work with others through licensing, franchising or partnering. You can also make money from your IP by selling your IP rights.
On this page
- Partnering / Strategic alliance
- Assignment (selling the IP)
You may sell your goods and services directly to customers. Alternatively, you may decide to sell your goods and services indirectly by working with an intermediary like an online shopping platform. The intermediary can be in Canada or placed in the destination market and can sell goods and services, on the company's behalf.
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A licence is used to give others ("licensee") permission to use your ("licensor") IP rights. This is a contract that lets a licensee use the rights holder's IP for certain commercial activities, in exchange for some form of payment.
There are 3 different types of licences.
A non-exclusive licence grants the licensee the right to use the IP, but the licensor can still use the IP and may further license other parties to use the same IP. When entering into the contract, the licensee may want to include terms that prevent the licensor from licensing the IP to the licensee's competitors. The licensee should also consider whether they want to receive information about other potential licensees, either during contract negotiations or at some point in the future.
An exclusive licence refers to a contract in which only the named licensee can exploit the IP rights. Even the licensor is excluded from exploiting the IP rights. If the licensor wishes to continue to conduct any activity covered by the IP, then the licensor would have to make sure to retain the right to do so in the contract.
Sole licences are rarely used in IP agreements. In this arrangement, the sole licensee shall be the only party to use the licensed IP, aside from the licensor. The main difference between an exclusive licence and a sole licence is that, in a sole licence grant, the licensor also reserves the right to commercially exploit the IP.
What IP rights can be licensed?
A licence most often involves IP rights that can be registered—trademarks, patents, copyrights, industrial designs and plant breeder rights. However, it is possible to license IP that is not yet formally registered, such as patent applications, or IP that cannot be formally registered, such as trade secrets.
What is in a licence?
The licence will specify what IP is included and how the licensee can use it. For example, the licensee may be restricted in terms of:
- which products/services the IP can be featured in
- where the licensee can sell these products/services
- what specific purpose ("field of use", market segment) the IP can be featured
- how long the licence is valid
In addition to defining what the licensee can do with the IP, it is also important to consider, for example:
- if, how and when a licence contract can be terminated (if, for example, the licensee declares bankruptcy, sells competing products, changes industry, etc.)
- whether the licence is transferable (if, for example the licensee is sold to another company)
- who will own future improvements
- who is responsible for maintaining and enforcing the IP rights (for example, who should identify and report infringement, who is responsible for defending the IP rights if a 3rd party claims the IP rights are invalid or infringing on someone else's IP rights)
Common forms of payments
Licences often contain a range of financial terms setting out when and how much money will be paid by the licensee.
The licence may include an initial fee, followed by annual, minimum fees. Often these fees are a way to encourage the licensee to perform or exploit the IP as defined in the contract. For example, the fees may be low during an initial time period and then increase until the licensee generate sales.
Similar to licence fees, the licence contract may include milestone payments tied to specific events that prove that the IP works and has market potential (e.g. a successful test, regulatory approval of a product, market introduction). This often coincides with further investment in the licensee's company, and can be a way for licensors and licensees to share the financial risk during the development phase.
Royalties are often a pre-defined amount (fixed or % of sales) that the licensee will pay the licensor. Often the royalties will reflect the licensee's risk and investment cost until it is possible to make money from the IP. For example, royalties for an early stage pharmaceutical drug candidate can be under 1%, whereas royalties from distributing software can be significantly higher. For simplicity, royalties are often based on net sales since a licensee's cost of sales and operations also depend on other products, local tax rules, transfer pricing, etc.
Equity in the form of an ownership share in the company is an alternative form of payment when licensees have little capital.
Sometimes a licence can allow the licensee to further license all or some of the licensor's rights. The licensor may want to control these activities by:
- retaining the rights to approve the terms and conditions of a sublicense, and maintaining control on the standards of sublicensing, or
- requiring that sublicences be granted on the same terms as the original licence agreement
Franchising is an agreement in which an individual or group ("franchisee") is granted a licence to use a business owner's ("franchisor") proven business model, plus associated IP, and is often given training and support, in exchange for fees. Franchising involves a special type of IP licensing arrangement.
What IP rights can be licensed?
Your franchise business may rely on several types of IP, such as trademarks, copyrights, industrial designs, patents and trade secrets.
Trademarks play a significant role because a franchisee typically wants to benefit from the goodwill associated with a recognized brand that has already been established. A franchisor can lose their rights to their trademark if the quality or character of the mark is not maintained. Moreover, in many countries trademark owners have a duty to monitor and take action when a 3rd party may be infringing on a trademark. For that reason, the franchise agreement often sets out how the franchisor can monitor the overall use of the licensed IP.
Partnering / Strategic alliance
Partnering includes any form of collaboration such as forming a partnership, a joint venture or receiving grants and contributions from another party.
This can be a very effective way to tap into another company's capabilities and their local presence. But, it can also mean increased complexity because you'll have to accommodate different corporate cultures, and local IP laws and policies may have an impact on IP ownership. For example, in some countries, new IP may be owned by the government if the collaboration is paid for by public funds. It is important to understand who is going to own which IP rights, who's bringing what IP into the partnership, how will the new IP be owned and shared and for how long, etc.
Clearly define at the outset the ownership of existing IP (background IP), and of the IP to be created (foreground IP) and the parties' rights with respect to that created IP.
Assignment (selling the IP)
Selling IP means that the IP rights are transferred from the owner (assignor) to the buyer (the assignee).
Unlike licence agreements which grant permission to use IP under certain conditions, assignments usually do not involve any ongoing obligations once the transfer is complete.
What happens if the seller still wants limited use of the IP after selling?
Since any subsequent use of the IP rights by the assignor will be considered an infringement of the assignee's IP rights after the transfer, the assignee may allow the assignor to use the IP rights after the transfer. For example, a research organization may want to continue to use the IP for research. In that case, the assignor and assignee will need to negotiate specific terms for that "license back" arrangement.
Record the transfer
It is important to have the assignment details in writing and to make sure that the related IP offices' records are updated when IP rights are transferred to another party. It is recommended that you consult an IP professional for assistance.
Consider the following resources:
- Transfer Canadian copyright ownership
- Canadian patent transfer record
- Canadian trademark transfer
- Canadian industrial design assignment or licence
A spin-off is when a separate company is established to bring IP developed by another company (parent company or research organization) to the market. The new company can be set up from scratch or through acquisition of an existing entity.
The spin-off then has access to the IP either through assignment or licensing.