Licensing Your Product Grow by granting others permission to utilize your concept.

If you attended or watched the Olympic Games in Atlanta lastsummer, you noticed plenty of T-shirts, hats, coffee mugs and othersouvenirs bearing the distinctive five-ring logo. The AtlantaCommittee for the Olympic Games sold to the manufacturers of thoseitems the right to use that logo, reaping huge revenues for theCommittee and the U.S. teams it supports.

Your business doesn't have to be a gold-medal winner toprofit from the sale of your products or ideas. You can trade totalcontrol for profit if you have a proprietary technology (such as asoftware program you developed and to which you own the exclusiverights), or a unique product or process that has value to anothercompany. "You have this little treasure-trove of value, andlicensing is the key to unlocking it," comments RichardHarris, an attorney in the Intellectual Property Group at Day,Berry & Howard, a law firm in Hartford, Connecticut. Yourone-of-a-kind formula for modeling clay, for instance, or thatgreat idea for a video game, can be your company'streasure-trove.

To find a licensee, consider the niche your product fills in aparticular industry, and think about which companies might benefitfrom holding a license to use it. But before you begin your searchto find an appropriate licensee, ask yourself the three questionsbelow, heed our experts' advice, and listen to how a successfulstart-up tapped into a gold mine of its own.

Stephanie Hainsfurther is a small-business columnist andfreelance writer who lives near Hartford, Connecticut.

Whats In It for Me?

Licensing can be an alternative to finding investment capitalfor further product development. Your company might require alicensee who has the finances and facilities to manufacture yourproduct. It can be a way to have others sell your invention, test anew product, or try an overseas market without financial risk toyou. Before you start looking for a suitable licensee, though, knowwhat you want to get out of the arrangement.

"What we got was a significant market presence and instantmarket share," recalls Frank Sentner, co-developer of theCreative Information Systems Co. Ltd. (CISCO) Agency ManagementSystem, computer software for independent insurance agents.Operating from the sun porch of his home in Milburn, New Jersey,Sentner began to develop the software for one particular client. Hewanted to create an automation system for insurance agencies thatwas superior to anything in the current marketplace, have theclient help him test it, and then sell it directly to individualagencies.

His vice president of sales had even bigger ideas. "Hisvision of how we should sell the package was as the secondgeneration of an existing agency-management system," Sentnerremarks. "He wasn't interested in onesy-twosy sales toagents, or in spending ten years building the company." Whenthey heard through industry sources that Aetna Life and CasualtyCo. was looking for a replacement for their Gemini agency system,the small start-up called on the insurance giant. The rest, asSentner says, is history.

Aetna helped CISCO develop and package their system, then handedover an established list of customers. "We were licensing toan existing distributor of software (Aetna). They significantlyenhanced the product, and we received capital fordevelopment," Sentner states. "They not only put up thefront-end money, but put two years of development into the product.We reaped the benefit of Aetna's significant expertise in thatthey were skilled at the deployment process, the packaging,distribution, implementation and support of the package on a largescale, for which we had no experience. And we got an immediateaccess to a marketplace of agents who were clamoring for areplacement system, along with the financial wherewithal to addressthe marketplace with some level of confidence." CISCO went onto form a strategic alliance with Aetna, creating a new company,CISGEM Technologies Inc., that was eventually acquired by acompetitor.

Can I Keep a Secret?

In its early days of business, only two people at CISCO knew thepassword to access their program. That secrecy was vital to thedevelopment of their product because it kept their proprietaryinformation away from prying eyes.

Protecting the rights to your own product begins long before yousign a licensing agreement. Often, BIZ Experiencess protect theirproducts or proprietary information by securing a patent orcopyright. But these methods of protecting your rights havebuilt-in time limitations: patents expire in 14 to 20 years,depending on the type of patent issued, and copyrights last for aslong as the author lives, plus 50 years. Once those limits expire,so do your exclusive rights, and your brainchild becomes publicproperty.

There's another way to safeguard your rights that's assimple as keeping a secret. A trade secret--such as an idea, designor formula that makes your product unique--is valuable information.Telling that secret nullifies your product's value. Keeping itsecret maintains its value to you, and its salability to any futurelicensee.

Harris uses Coca-Cola as the classic example of the trade secretprinciple. "There is no patent on the formula forCoca-Cola," he says. "It's a trade secret, and theykeep it under lock and key. Very few people in the company knowwhat the formula is; it's very carefully protected. Undercurrent law, if Coca-Cola had tried to patent that formula, 20years later everybody would have had Coca-Colataste-alikes."

To call your product design or formula a trade secret, you musttreat it as such within your day-to-day operations structure."Trade secrets need to receive special treatment within thebusiness," cautions Harris. "Otherwise, you can'treally claim them as trade secrets." Design a comprehensivesecurity plan and stick to it. Here are Harris's tips forkeeping your "secret recipe" under wraps:

• Limit access to your trade secret information. Noteveryone in your company should have a working connection to yourtrade secret. Don't give everyone permission to view it or useit. Institute appropriate security measures, whether that meanssecuring your database or simply keeping the information in alocked drawer. Mark any documents regarding your trade secret withwords like "Proprietary," "Do Not Copy,""Confidential," and "Top Secret."

• Set up the proper legal restraints to prevent employeetheft. Have everyone in the company, regardless of his or heraccess to the information, sign a non-disclosure agreementand a non-compete agreement. A non-disclosure agreementstates that the person signing it will not divulge proprietaryinformation to others; a non-compete agreement prevents theemployee from taking that information to a competitor or using itto launch a competing business. "The non-disclosure and thenon-compete agreements deal with the fact that, while you can makeemployees give back all the paper, you can't make them giveback all the memories," Harris comments. Don't forget thatemployees also include temporaries, contractors and consultants whoperform work for you on an interim basis.

• Protect yourself during negotiations. Potentiallicensees will, of course, want to examine your trade secret beforethey buy. Have them sign a confidentiality agreement, wherein theyagree to keep the information private, as well as a non-competeagreement.

Carrying out these routine security procedures will help keepyour trade secret confidential and make it more attractive to apotential licensee.

Which Rights Will I Transfer?

Restricting the terms of the licensing agreement can help orhinder you from reaching your goals. Use the granting clause of thelicensing agreement to lay out the restrictions you will put on theactions of the licensee. "Basically, now that you know whatyou want to get out of licensing, how much are you willing to giveup?" asks Harris. Setting limits on such details as use,geographical area, markets served, and time frame can free you tosell your product again to future licensees.

For instance, the Olympics Committee licenses its logo tocertain manufacturers, but places restrictions on the use of thatlogo. "You can write these licenses to say that they can onlyuse it on the left pant leg of the sweat suit, then you can givesomebody else the right to use it on the other pant leg,"Harris says. "Which means that, if you're the licensor,you need to be very careful about how you write this agreement. Thenegotiation of these limitations and protections is the licensing`mating dance' you go through."

Be careful, though, of how tightly you choreograph the dance.Over-limiting your licensing agreement can impair thelicensee's ability to turn a profit, thereby defeating youroriginal purpose. "If you're depending on royalties, forexample," Harris points out, "it may not be to yourbenefit to place a lot of restrictions on the licensee."

Royalties comprise a stream of payments to you from the sale oruse of your product. There are different ways to determine thecalculation of those royalties. Your income from a licensingagreement could be based on:

• the number of products sold by a licensee;

• the number of times the licensee uses your idea;

• gross revenue of the licensee from sales of your product;

• net revenue of the licensee from sales of your product; or

• a combination of two or more of these arrangements.

Sometimes, negotiation of a lump-sum payment is possible, but arevenue-producing flow of royalties is the more common arrangement."What kind of cash flow do you want?" asks Harris."Do you want an immediate cash infusion, so you can take thatmoney and develop the product further? Are you looking for a steadystream of cash?" Any payment arrangement included in thelicensing agreement should dovetail with your overall business planand estate-planning issues.

Because it is nearly impossible for you to monitor theday-to-day activities of the licensee in regard to your product,work a written schedule of audits into your licensing agreement,and designate who will pay for them. "Audits are doneroutinely, but at a cost. Decide up front who's going to bearthose costs," Harris cautions.

As with any important contract, seek advice from an attorney--inthis case, one who specializes in intellectual property law and canhelp you draft a licensing agreement that protects your claim toyour particular pot of gold. One final caveat from attorney Harris:"I always use the Beatles as an example. When they werestarting out, they signed a contract that basically gave away thecopyright to all their early songs, for a pittance. At the time,they had no idea they were going to make it big. If they had beenthinking about it from the very beginning, they could haveprotected themselves by limiting the scope of thelicense."

Worth Reading

The Inventor's Handbook, Second Edition, by RobertPark, Betterway Books, $14.95 retail, or order directly for $5.95(plus $3.50 S&H). To order, call (800) 289-0963. Limitedsupply.

The Layman's Law Guide to Patents, Trademarks andCopyrights, Second Edition (from the Layman's LawGuide series), by David G. Rosenbaum, Career Press, $8.95 (plus$4 S&H). To order, call (800) 227-3371.

For More Information

On the current and proper uses of patent and copyrightinformation:

• U.S. Patent and Trademark Office, Department of Commerce,Washington, DC 20231, (702) 557-7800.

On help with strategic planning:

• U.S. Small Business Administration (SBA) Online at (http://www.sbaonline.sba.gov)

• Business Resource Center at (http://www.kciLink.com.brc/)

• MIT Enterprise ForumR, Inc.; ask for information on theirStart-Up Clinics, (617) 253-0015.

To find an attorney who specializes in intellectual propertylaw:

• call your local Bar Association; or

• consult the Martindale-Hubbell Law Directory at your publiclibrary, in which attorneys are listed by state and specialty.

Contact Source

Day, Berry & Howard, 1 City Place, 25th Fl., Hartford, CT06103, (860) 275-0294.