The First Thing You Must Do Before Licensing Rights to an IP

A video game company bought the trademark IP rights to a bankrupt video game company but failed to research the legal rights before buying it.  After they started producing and selling the game, they received a cease and deist letter claiming they were infringing on the IP. Turned out, the bankrupt company didn’t own the IP rights.  It was in was in litigation with the IP owner.  The video game company was forced to stop production and redesign their video game.

due diligence

When you find an IP to license, the first thing to check is who owns it.  There’s nothing more frustrating than spending lots of time trying to negotiate a deal only to discover at the last-minute the IP isn’t fully owned by the “IP Owner”.  Sometimes they are sub-licensing rights.  In other situations they are brokering a deal.  And in the worse case, they are trying to license an IP they don’t own. I had that situation happen with a company claiming to own a large collection of celebrity photographs.  Turned out, they were in a legal dispute with the owner over their rights to use and license out the photos.

As a licensee, you are making a real investment to time, money and resources to bring the licensed IP into the market. Your due diligence is one of the best steps to help ensure your best chance of success with the IP.

Don’t make the mistake of overlooking this critical step in evaluating an IP to license. It includes getting information about the IP ownership, rights availability, whether the IP is ready to go to market,  and most importantly, will it be profitable.

Your first step is to find out whether the IP rights are available. You can wind up wasting a lot of time and money if you enter negotiations only to learn the rights are not available or licensed to someone else.

The next step is to do a quick search to verify if the IP is properly registered. For patents and trademarks, you can search any number of the public databases such as the USPTO or Google Patents.

If the licensor has other licensees, you’ll want to verify that there are no conflicts with the rights already granted to other licensees. If the rights are non-exclusive, you’ll want to find out if there are other licensees with the same or competing products.

Depending on the type of IP, you will need to decide the strength of the IP. Does it stand out, or is it a short-term fad? For example, movies are very short-term IP opportunities and may only have a short lifespan in the market.

It’s also important to check the IP owner’s reputation or stability and how it’s viewed in the marketplace. Are there any licensees whose actions have damaged the image of the IP? For example, sports figures and celebrities are often prone to problems from things they say or do which lessen their standing with the public.

The last step is to verify the commercial viability of the intellectual property. In some cases, such as a technology IP, requires more time.  An unknown or untested IP  will also take more time and resources to get into the market then one that is already in the market. Interest and demand by the buyers IP will determine the potential upside. One example is licensing well-known brands which are less risky than up and coming brands.

Finding a good IP to license takes time and resources.  The key is knowing what you are looking for, where to find it, and most important, how to verify that you found the right IP. But the payoff can be significant.  A good IP can reduce internal product development costs, launch a new product into the market faster, and increase the stature of a business based on its association with the licensor.

Due diligence is just one of several essential tools for successful licensing deals.  Click here to learn more about the other essential tools you need to manage and make money with any type of IP.

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