Introduction

The distinction between licensing and selling often becomes important if you have intellectual property such as a patent, design, know-how etc (IP). Such IP often underpins rights to manufacture a product, item etc (the Product). An individual or small business may not have the resources to manufacture and commercialise the Product so has to decide on how to get the Product to market.

The difference between licensing and selling (or assignment) is essentially one of ownership. Selling involves exchanging the ownership of the IP for a price, normally money, whereas licensing involves retaining ownership but giving permission, again for a return, to use the IP and commercialise the Product.

Payments for the sale or use of IP can be in the form of royalties or one-off payments with both parties’ rights placed into a commercial agreement. By selling or licensing, you are able to realise a return on your IP without incurring the expense involved in manufacturing, marketing, distributing, and selling the Product.

To License or To Sell?

Many individuals are reluctant to part with ownership as they see it as retaining wealth or value. However, it might be better to look at the risk and/or returns for both licensing and selling before making a decision. That is, it might be preferable to calculate the potential returns from both licensing and selling and then weigh against risks for both.

One of the advantages of licensing over selling is often the on-going returns in the form of royalties. Whilst the upfront payment is likely to be less than you would get for selling, you are more likely to secure recurring payments over a period of time (even indefinitely). A disadvantage is that you (as the licensor) are, to some extent, dependent upon the licensee to maximise sales and to be honest in reporting the sales revenue. You can protect yourself by establishing certain sales goals within the contract that the licensee must meet in order to keep the licence and you can include audit rights to ensure that the licensee is accurately reporting its sales revenue. You will also be dependent upon the licensee to make quality Products with the IP. To the extent the public knows that it is your IP underpinning the Product, you will want to ensure that the licensee adheres to certain quality standards so that your reputation is not damaged.

Whilst there is no reason that the purchase price for the sale of IP should not be in the form of ongoing royalties, it will often involve a one-off payment or payments in a few instalments. This generally means a larger upfront payment but all rights are transferred and you lose all the benefits and burdens of retaining ownership.

This should not be relied upon for legal advice. If you would like any further information or advice please email richard@clariclegal.co.uk.