Justin R. Muehlmeyer
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Exclusive or Non-Exclusive? Understanding the Best License for Your Business
Your intellectual property licensing arrangement is one of the most important decisions you will make concerning your business. The first big question about the licensing deal is whether it will be exclusive or non-exclusive. Each category has its advantages and disadvantages. In the end, the decision turns on what is the best fit for you given the nature of the intellectual property, the market you operate in, and your capabilities.
An exclusive license grants the licensee singular permission to exploit the intellectual property in question. No other entity, including the party granting the license (the licensor), is allowed to use the intellectual property covered by the license unless specific carve-outs are included in the agreement.
Non-exclusive licenses grant the licensee rights in the intellectual property but also allow the licensor rights to exploit the intellectual property in question – including granting licenses to other entities. In general, non-exclusive licensees face competition from other licensees.
By nature, exclusive licenses grant more rights than non-exclusive licenses and usually address a number of contractual obligations regarding the IP, including registration/prosecution, defense, and enforcement of the intellectual property rights. To accommodate the risk the licensor takes on in giving up their right to commercialize the intellectual property, exclusive licenses tend to also obligate the licensee to meet certain development milestones, commercialization milestones and/or sales minimums. Exclusive licenses are appealing to most licensees because they are essentially operating a monopoly on the intellectual property, and appealing to most licensors because they can command premium compensation for granting such licenses because they are typically giving up the right to commercialize it themselves.
However, non-exclusive licenses may ultimately be more lucrative and advantageous for the licensor in the long term. Non-exclusive licenses allow more latitude in the number of licenses granted while allowing the licensor to retain the rights to further develop and exploit its own intellectual property. Non-exclusive arrangements tend to go well for intellectual property that can be exploited happily by many parties and/or that do not require serious investment to market.
Non-exclusive licenses may also be beneficial to end users of products developed around the licensed intellectual property – through competition. Competing entities are naturally motivated to modify and refine products and services for improved performance, with those products and services perceived to be superior enjoying an advantage. The licensee that beats its competitors to market enjoys a head start on other competitors.
Ultimately, there is no one-size-fits-all approach to the question of licensing exclusivity. Each business must determine whether an exclusive licensing agreement is worth paying a premium price for, or whether it would be sufficient to obtain guarantees of limited competition within a specific geographic area or industry often at a much lower price tag.