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Why Your Business Needs an Intellectual Property Agreement

Reading time: 11 mins

An intellectual property agreement describes the rights and obligations of the parties with respect to certain intellectual property.

It is important for any business to ensure that they have an intellectual property agreement in place. This enables a business to create, develop, licence or sell intellectual property without fear of infringing rights.

Your business has a right to deal with intellectual property in the way the intellectual property agreement describes. But without one, your business might face some unintended and devastating consequences.

intellectual property agreement

Author: Farrah Motley, Director of Prosper Law and an intellectual property and contract lawyer.

In this article, we’re going to look at why every business needs an intellectual property agreement. This article addresses:

1. Why is intellectual property important for businesses?

2. What is the purpose of an intellectual property agreement?

3. How can businesses use an intellectual property agreement to maximise the benefit to their business?

If you want to learn more about intellectual property, check out our Ultimate Guide to Intellectual Property Law in Australia.

intellectual property agreement

Why is intellectual property important for businesses?

We can’t understate just how important intellectual property is to every kind of business. Whether you operate an eCommerce site, clothing store, software company or professional consultancy business, intellectual property is a big part of what you do.

Many business owners underestimate the value of intellectual property. And because of this, they overlook those important legal ‘must haves’, like an intellectual property agreement.

Here are some of the kinds of intellectual property that businesses may create or use:

  1. eCommerce site: the website, including the text and the website layout (copyright), the business’s logo (trade mark) and the products that are being sold (which may be subject to design rights, copyright, trademarks, patents, circuit layout rights or all of them)
  2. Clothing store: the clothing (which may be subject to design rights), the business’s logo (trade mark) and the clothing catalogue (copyright)
  3. Software company: the software source code (copyright) and the business’s logo (trade mark)
  4. Professional consulting firm: the deliverables produced by the consulting firm (copyright, trademarks, patents, circuit layout rights or all of them) and the business’s logo (trade mark)

Intellectual property is worth money

Put very simply, intellectual property is an asset that is worth money. And for every Australian business (and indeed, any business anywhere in the world), money is either the central focus or an intended by-product of the business.

intellectual property agreement

You can read this article here about the financial value of a brand, but needless to say – it’s significant. Businesses should regard their intellectual property just like any tangible asset, such as real estate.

Still not sold on the financial value of intellectual property? Well, let’s take branding as an example. This is comprised of trademarks and other types of intellectual property which make up the branding of a business. In 2021, brands such as Amazon, Apple, Google and Microsoft are worth billions of dollars.

If any one of those companies changed its name, the way they do business and the other countless factors that make up its brand, its value would decrease significantly.

Intellectual property differentiates your business from others

To be competitive, you have to demonstrate to customers why your business is different to your competitors. You do this through intellectual property.

Intellectual property can be valued

In Australia, the value of intellectual property for innovative businesses can be greater than a business’s physical assets. There are strict rules in Australia for valuing intellectual property and this guide gives a brief overview on the valuation of intellectual property in Australia.

intellectual property agreement

Intellectual property can create leverage

Have you ever experienced being on the wrong side of the table in a commercial negotiation? If you need to negotiate a commercial deal and don’t have leverage, your business can face an uphill struggle to get the best deal.

Intellectual property can step in and help solve the problem of leverage.

Leverage means that your business has something the other party wants or needs, and you can use that thing to make sure that you get what you want in exchange.

For example, if cash flow is important to your business and you need short payment terms, ensure that your client doesn’t get any intellectual property rights in whatever your business is supplying unless and until they have paid you in full. Without the legal right to use your services, products or deliverables, your client doesn’t get what they want unless and until they have given you what you want; timely payment.

Intellectual property rights can promote innovation

Innovation is the cornerstone of modern business. If your business doesn’t innovate, it can quickly find itself struggling to compete. By having an exclusive (no one else but you can use it) right to use whatever it is that your business creates, you have the incentive to create it in the first place.

Exclusive legal rights give your business the ability to recoup its investment and commercialise (make money!) from its inventions.

Intellectual property rights can promote goodwill

Let’s shut the door on you selling or licensing your business’s intellectual property and take a look at the importance of intellectual property from the perspective of the user of someone else’s intellectual property.

To demonstrate how intellectual property can promote goodwill, let’s take a look at sponsorship rights. Sponsorships are a particularly important part of professional sports. The sponsor pays money to the individual sportsperson or sports team, and in exchange, they are acknowledged in some way.

This acknowledgement can be through the player wearing the sponsor’s clothing, the sponsor’s trade mark being displayed on the pitch or on the stadium screen or being displayed on a racing car (you name it!).

Sponsorships are generally quite expensive because the sponsor can leverage the reputation and goodwill of the sportsperson, team or the sport in general, to promote their own brand. Sponsorships are highly valuable because of the association that is drawn between the sponsor and the other party.

Sponsorship agreements are costly because of the intellectual property rights that are exchanged. One or both parties get to promote themselves through the use of intellectual property licences and other rights and draw on the other party’s reputation in order to promote their own.

What is the purpose of an intellectual property agreement?

We’ve looked at how intellectual property is beneficial for businesses, but what about an intellectual property agreement; what’s the point?

The transfer of ownership or rights in intellectual property should be set out in writing.

intellectual property agreement

If you don’t have anything in writing and instead you are trying to rely on a conversation – good luck!

The ‘he said’ ‘she said’ scenario is all too familiar to lawyers. And it presents a challenge for businesses and their legal advisors. Trying to enforce or defend rights based on a conversation alone can lead to higher legal costs. Further, it may ultimately lead to a failure to discharge the evidentiary burden of proof on the balance of probabilities.

If you don’t have a right to use, licence or transfer intellectual property rights, then you are instead infringing someone else’s intellectual property rights and the consequences can be severe.

An intellectual property agreement can overcome these issues by:

  1. Clearly describing what each party can and cannot do
  2. Recording the agreement reached at a point in time where there was low conflict
  3. Producing something that can be referred to and relied upon later

How can businesses use an intellectual property agreement to maximise the benefit to their business?

Options

If you’re not sure whether:

  1. you want to continue to give someone the right to use your business’s intellectual property; or
  2. you want to continue to use someone’s else intellectual property,

beyond the term of the intellectual property agreement or the end date, you can negotiate an option. An option gives either you or the other party or both parties (depending on who wants to benefit) a choice to extend the intellectual property agreement for a further period.

An option period adds some additional flexibility to an intellectual property agreement because you (or the other party) don’t have to make such long-term business decisions. Instead, you can commit to a shorter time period, which enables you to evaluate and monitor your business decision, and later decide whether it is worthwhile extending that agreement.

intellectual property agreement

Reciprocal rights

Intellectual property agreements can be drafted so that both parties have the right to use one another’s intellectual property. By granting reciprocal rights, an intellectual property agreement can cement the relationship between the parties to the agreement.

Reciprocal intellectual property rights can be particularly beneficial where the parties create or use complementary goods or services. This is because there is something to gain from conveying a strong business relationship.

Both parties can take the benefit of reciprocal rights. And they can use each other’s intellectual property to springboard the success of their own goods and/or services.

Exclusivity clauses

We have written extensively on exclusivity agreements, but you can also embed an exclusivity clause into an intellectual property agreement. If it is particularly valuable to your business that:

  1. the other party does not allow anyone else (or will allow, but in limited circumstances or in different industries) to use their intellectual property rights; or
  2. you want to ensure that the only relevant intellectual property rights the other party uses are yours,

an exclusivity clause can achieve this outcome.

But exclusivity clauses are generally quid-pro-quo. Because of this, it’s important to ensure that you have a lawyer draft your exclusivity clause. And for that matter, your intellectual property agreement!

Royalties

If the nature of the intellectual property that your business has created is that it is able to be sold over and over again (such as a book or other publication), you might want to consider whether your business would benefit from a royalty arrangement.

Royalties can benefit both the buyer and the seller in the following ways:

  1. If the buyer of the intellectual property doesn’t have sufficient capital to pay the seller up front or isn’t certain whether the innovation is going to be successful, they could offer to pay the seller royalties (in addition to or in substitution for a fixed upfront payment);
  2. If the seller expects that the innovation is going to be highly successful or wants to otherwise financially invest in their own creation, they can request to be paid royalties by the buyer.

Transfer-ability

Most people want to grow their businesses and some want to eventually sell their businesses. When a business is bought, its stock (if it has any), liabilities, goodwill and other assets are valued. And the total amount of that value becomes the purchase price.

If you don’t have the right to transfer intellectual property rights, your business value may be lowered. For instance, if you need third-party consent o to undergo a change in control before assigning your intellectual property rights. The value of that intellectual property may be discounted from the business’s sale price. This can be a significant reduction to the amount of money you would otherwise have received in your pocket.

It is important to ensure you have recorded your right to transfer, assign or even sub-licence the intellectual property rights. And this should be recorded in an intellectual property agreement. Having a clear set of terms can help to protect your business.

Liens

Intellectual property should be treated like any other asset. If the buyer doesn’t pay the seller, the seller should be entitled to exercise a ‘lien’. A lien is a legal right to use intellectual property as collateral to satisfy the debt.

You have a much better chance of recovering debts if you have the right to collateral to satisfy the debt owed to you.

Farrah Motley | Director

PROSPER LAW – Australia’s Online Law Firm

P: 1300 003 077

E: enquiry@prosperlaw.com.au

W: www.prosperlaw.com.au

Like this article? Check out:

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Intellectual Property Clause Examples

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About the Author

Farrah Motley
Director of Prosper Law. Farrah founded Prosper online law firm in 2021. She wanted to create a better way of doing legal work and a better experience for customers of legal services.

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