Inventors should plan for agreements to go wrong!

Few inventors can get their inventions to market without some kind of contractual agreement with a business partner. That might be a manufacturer, a marketing company or an investor.

The agreement often takes the form of a licence transferring control of key aspects of the invention – perhaps including physical assets such as equipment. That can leave the inventor with much to lose if the agreement isn’t honoured.

And such agreements often are dishonoured. In fact, we’ve rarely heard of an agreement between an inventor and a licensee that hasn’t gone wrong.

To be fair, we know of agreements that were breached by the inventor. And because we specialise in invention advice, we’re perhaps more likely to find out about rocky agreements than stable ones.

Nonetheless, our view is that agreements broken by the licensee are a routine hazard of invention development. It’s not an inevitability, but it happens too often for comfort.

No money and broken promises

The terms of each agreement will obviously vary, but the inventor should broadly expect to be treated fairly, consulted on major decisions, sent regular performance reports, and paid whenever payments are due.

The two most common slippage areas are the licensee’s failure either to pay up on time, or to keep promises on performance.

Both are symptoms of an agreement that the licensee either didn’t respect in the first place, or has now had second thoughts about.

Frequently, the inventor’s concerns are met with a reluctance or even refusal to communicate. If problems can’t be sorted out quickly, trust collapses and the agreement is effectively dead in the water. It’s then a matter of how much effort it takes to legally terminate the agreement and start again – if that’s possible.

The licensee can usually carry on with its other business as normal, but the inventor may be left in damaging limbo if he or she can’t easily rescue the situation. Whoever controls the IP and other key assets has the upper hand for all practical purposes, and that’s usually the licensee.

What can be done?

It takes two to create a licensing agreement, so our advice to inventors is to assume from the start that the agreement won’t last long.

That sounds cynical and pessimistic, but it’s intended to ensure that the inventor thinks self-protectively in case things go wrong.

One reason agreements go bad, we think, is that there is often an imbalance of trust between inventor and licensee. The inventor wants to see something good happen with the invention, the licensee looks like a white knight, relationships start out amicably, and the inventor quickly becomes over-trusting.

As a result, he or she ends up accepting terms that invite disaster. For example, one agreement we know of required the inventor’s entire stock of product and all its tooling to be transferred abroad to the licensee’s premises. The agreement duly fell apart but the now ex-licensee still holds the stock and tooling. There can be no further sales or production until it’s all returned, and that may not be soon.

With hindsight, the inventor should have kept the tooling and supplied stock only as justified by orders. But hindsight is a wonderful thing.

Keep it short, keep it clear

The lifetime of an agreement can be another accident waiting to happen. Inventors should look for the shortest possible agreement period. Even a year can seem a long time if the agreement is looking sick after six months.

The same caution should apply to exclusivity and control of the IP. And any non-payment should be unequivocal grounds for termination.

The licensee may appear well resourced, competent and confident, but appearances can deceive. If you’re the inventor, you don’t want to put all your eggs in one basket and then hand the basket to someone who drops it.

You will, of course, take professional advice on the terms of the agreement. But that may not be enough. The written words may be fine. It’s the way they’re put into practice that makes or breaks the agreement.

That’s why we suggest that your sturdiest defence may be a conviction that the agreement will come to a sticky end, and sooner rather than later. So make sure its terms and conditions reflect the fact that you’ve got your eyes wide open, and will act quickly to protect your interests if the licensee lets you down.

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