In Australia, it is important for any business that wants to create, develop, licence or sell intellectual property to ensure that they have an intellectual property agreement in place. An intellectual property can make or break a business deal.
With one, your business has a right to deal with the intellectual property in the way the agreement describes. But without one, your business might face some unintended and devastating consequences.
In this article, we’re going to look at why your business needs an intellectual property agreement. To answer this question, you’ll hear from an experienced Australian business lawyer and learn:
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.
Author: Farrah Motley, an Australian intellectual property lawyer.
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 a 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, overlook those important legal ‘must haves’, like an intellectual property agreement.
If we take the business examples above, here are some of the kinds of intellectual property that those business may create or use:
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, trade marks, patents, circuit layout rights or all of them)
Clothing store: the clothing (which may be subject to design rights), the business’s logo (trade mark) and the clothing catalogue (copyright)
Software company: the software source code (copyright) and the business’s logo (trade mark)
Professional consulting firm: the deliverables produced by the consulting firm (copyright, trade marks, 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 bi-product of the business.
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 trade marks 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 their name, the way they do business and the other countless number of factors that make up their brand, their 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 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 give 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 an 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 gets 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. 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 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 and 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:
Clearly describing what each party can and cannot do
Recording the agreement reached at a point in time where there was low conflict
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:
you want to continue to give someone the right to use your business’s intellectual property; or
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 into 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.
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 complimentary goods or services and there is something to gain from conveying a strong business relationship.
Both parties can take the benefit of reciprocal rights to 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:
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
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 – you don’t get something for nothing – and 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:
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);
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 business and some want to eventually sell their business. When a business is bought, it’s stock (if it has any), liabilities, goodwill and other assets is valued and the total amount becomes the purchase price.
If you don’t have the right to transfer the intellectual property rights you have paid for (or, for instance, you need the consent of the seller to undergo a change in control and thereby assign your intellectual property rights), the value of that intellectual property agreement 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.
By ensuring you have the right to transfer, assign or even sub-licence the intellectual property rights, and recording this in an intellectual property agreement, can help to protect your business.
Liens
Intellectual property should be treated like any other asset. If the buyer doesn’t pay the seller for the rights, the seller should be entitled to exercise what’s called a ‘lien’ over that intellectual property.
By ensuring that you have the right to use the intellectual property as collateral to satisfy the debt owed to you, you have a much better chance of recovering debts.
Farrah Motley | Legal Principal
PROSPER LAW - A Commercial Law Firm for Businesses
M: 0422 721 121
A: Suite No. 99, Level 54, 111 Eagle Street, Brisbane, Queensland Australia 4000
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