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Once the toy company agrees to license a new toy idea, the parties must then enter into an agreement specifying how the company is to acquire rights to the idea. Agreements between inventors and toy companies generally fall into two categories: licenses and assignments. License agreements are used when an inventor wishes to retain all intellectual property rights (such as copyright, patent, and trademark rights) in his or her invention, while allowing a manufacturer to produce, market, and sell the new product. Assignments, on the other hand, convey all the inventor's intellectual property rights in the invention to the assignee.
Licenses are by far the more common arrangement between inventors and toy companies. Such agreements take into account the inventor's desire to retain rights in his idea, and the company's desire to exploit the product without having to pay for ownership. Licenses can further be broken down into two categories: exclusive and non-exclusive. The former grants a toy company the sole and exclusive right to exploit the new product idea in the defined territory for the defined period of time. The latter license also grants the toy company the right to exploit the new product idea; however, other toy companies may also have been granted a similar right. The exclusive grant is clearly desirable for the toy company, as each additional licensee dilutes the potential markets for the company.
The licensee/manufacturer might also wish to consider whether it desires the right to grant sublicenses. For example, a multinational manufacturer might be equipped to exploit a grant of a worldwide license. Smaller, domestic manufacturers, on the other hand, would be hard-pressed to do so. If the toy company feels that it is incapable of capitalizing a certain territory or is unable or unwilling to manufacture the new product itself, it might wish to avail itself of another company in a position to do so. However, many licensors do not desire to grant such a right. They might be concerned about the quality of the sub licensee's product or the accuracy of its accounting. The licensee must be prepared to allay any of the licensor's fear by granting to the licensor the same rights with respect to the sublicense that the licensor has with the licensee.
The term of the license is also an important factor that toy manufacturers must consider in drafting or negotiating a license agreement. Toy companies would be foolish to assume the risk of developing a new product idea without the ability to minimally recoup their development costs. Ideally, the toy companies want to have the exclusive rights to the product for its entire commercial life. Accordingly, most inventor agreements are of an unspecified length, granting a license for as long as the toy company continues to use the property.
The aforementioned points are merely a few of the considerations that a toy company must be aware of before entering into a license arrangement with an inventor. The following list illustrates some additional factors a licensee may wish to consider when drafting or negotiating a license agreement with the owner of a new product design:
- feasibility of the license arrangement in light of licensee's business practice
- infringement proceedings handled intelligently, allowing the licensee the
opportunity to pursue infringers if licensor does not
- audit and inspection provisions should not be unduly burdensome
- no limits on the permitted deductions and returns as long as they are
adequately documented
- no prevention of, nor royalty on, below cost sales by the licensee
- rational process for obtaining approvals from licensor to allow certain actions
- licensor representations of licensed rights must be given with reliable indemnity
- if the license agreement is exclusive, the exclusivity should be meaningful
- licensor's promises of support must be enforceable
- guarantee, royalty rate, and term adjustments if licensor defaults
The bottom line in any situation involving two parties with competing interests is that what can be negotiated is dependent upon the relative bargaining power of each party.
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