Licensing is one method of commercializing copyrighted material. A license is an agreement which permits another (“the licensee”) to use the intellectual property of the owner (“the licensor”) in a certain manner, typically to sell products based on the intellectual property. A license can be a lengthy document with many options to negotiate, but three key terms will be discussed in this post:
1. The Grant – What is being licensed?
The first step is decide what is being licensed. This may not be as simple a questions as it seems. Take the scenario where a “song” is being licensed. The valuable components of a song might include music, lyrics, artwork, video, and the name of the band. If a licensee only seeks to “sample” the song, the license may only grant rights to use a derivative of the music. If the song is being used in a commercial, the license may only grant rights to the chorus of the music and lyrics. In a complex software system with multiple APIs and interfaces, perhaps a license might grant rights in a single interface.
2. Terms of Payment – Who, What, When, How?
The terms of payment should vary with the situation. The most commonly discussed approach is royalties, where the amount remitted to the licensor is based on sales of a product based on the licensed material. This may make sense where the subject of the copyrighted subject matter is simply being resold, such as the song of an artist. Even then further details need to be addressed, such as the frequency of payment and allowance for returns.
A royalty may not be appropriate for some situations. If the license involves use of part of a song in advertising, a royalty . Perhaps the terms of payment require the licensee to pay the licensor based on the number of times the advertisement is broadcast.
3. The term of the license – When does it end?
Many a content author has been disappointed by failure to consider this term. Those authors have entered in an exclusive license with a perpetual term and were unable to pursue alternate means to monetize their intellectual property when no sales (and thus no royalties) were being generated. For this reason, a licensor may use alternate approach to terminate the license. Perhaps the license may be for a certain time period or if net sales drop below a threshhold amount for a certain period of time, the license is terminated.
There are many other terms to negotiate, such as the scope of use, territory of use, warranties, and choice of law. However, these three terms are an excellent starting point for discussion between a potential licensor and licensee.
