Licensing, Negotiations, and Agreements

• Author: Russell L. Parr
• Profession: President of Intellectual Property Research Associates
• Pages: 213-236

CHAPTER 15

LICENSING, NEGOTIATIONS,

AND AGREEMENTS

Licensing is a popular means for monetizing intellectual property, and it has a unique char-

acteristic in that more than one party can simultaneously use the licensed property. A car

dealership can lease a car to only one person or entity. Once the car is leased, it generates

economic benets from only the one source. Intellectual property, however, can be licensed

to more than one party. Infact, the same property may be licensed to many parties that are in

erce competition with one another. Alternatively, only one party may exclusively license

intellectual property. Combinations are also possible for property that is useful across sev-

eral industries. In some cases, nonexclusive licenses may be granted for a specic industry

while an exclusive license is granted for another industry.

BUNDLE OF RIGHTS THEORY

Because of the uniqueness that may exist in intellectual property licenses, that is, the coex-

istence of usage by both licensor and licensee, analysis focuses on the income streams that

are associated with these shared and unshared rights. By way of background, think about

real estate. The bundle of rights theory refers to the concept that ownership of real property

is embodied in a number of separate privileges. These include the right to occupy it and

use it; the right to sell, merge, donate, mortgage, or bequeath it; and the right to transfer by

contract some of the benets for a period of time.

Exhibit 15.1 compares the ownership of intellectual property with a pie wherein each

slice represents a distinct and separate right or privilege of ownership.The value of the prop-

erty is represented by adding together the values of the rights of the licensor and licensee.

In other words, all of the rights of ownership are represented by those of the two parties,

but they can be divided among the parties in an innite number of ways. In the same way,

the total income produced is the sum of that produced by the exploitations of both licensor

and licensee, and the terms of the license can divide the total income in many ways. This

is an important consideration in licensing.

The economic division of the rights bundle (and total income) sometimes can be inad-

vertent. A poor understanding of the market or rent escalation clauses can result in an

unintentional allocation of the rights of building ownership. Incautious licensing can result

in the same inequity. As noted, there are endless permutations to the lessor/lessee relation-

ship. These would include (using the real estate example) consideration of:

• Rights to sublease

• Lessor right to move or consolidate tenants

213

214 Ch. 15 Licensing, Negotiations, and Agreements

Owner

Renter

EXHIBIT 15.1. BUNDLE OF RIGHTS THEORY

• Purchase options

• Renewal options

• Allowances for improvements

• Escalation of rent

• Use restrictions

• Payment of utilities, operating expenses, and taxes

All of these factors can affect an economic analysis of the relative value of the rights in

real property transferred by the lessor to the lessee. One can almost substitute the words

licensor and licensee for lessor and lessee in this example so as to immediately put the same

facts into an intellectual property licensing situation.

LICENSING. In a license, the owner of an IP transfers some of the total bundle of

rights to another (the licensee). The licensee pays for those rights by means of a royalty.

(See Exhibit 15.2.) Adding the value of the rights of the licensor (those retained by the

owner) to those of the licensee equals the total value of all of the rights of the property or,

as in Exhibit 15.2, all of the pieces of the pie. Adding all income streams together equals

all of the income that the intellectual property can produce from its exploitations.

An earlier chapter noted the similarity between a valuation by an income approach

and a royalty rate analysis. When using an income approach to value an IP that has been

licensed, the process must capitalize both the income realized from the licensor’s (owner’s)

exploitation of the mark and the income attributable to the trademark from the licensee’s

exploitation. This latter is not necessarily the amount of royalty being paid by the licensee

and in fact would rarely be. Why is this? The licensee normally would not be willing to

hand over to the licensor all of the income generated by the use of the IP. The licensee

enters into the transaction in order to realize some economic benet and so must keep some

of the income attributable to the IP. As a result, the licensing transaction may appear as

shown in Exhibit 15.3, with the relative width of the arrows representative of the amount

of income owing.

The value of all of the rights in the IP would be obtained by capitalizing the income

streams A and B. What is C? It is only a portion of income B, and a capitalization of it