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Why Do Intellectual Property Agreements Have to Be So Long?

Unique Problems
Why are intellectual property agreements so long when so many other agreements are only one or two pages long? The main reason is that there are a lot more things that can go wrong in an intellectual property agreement that would never arise in a typical sales agreement. A comprehensive intellectual property agreement needs to address these unique problems to prevent one party from taking advantage of the other. One situation that often arises in intellectual property agreements is the issue of guaranteed minimum sales. Without guaranteed minimum sales being required under the agreement, the exclusive “seller” may simply shelve the product and not make any sales at all. Since the agreement is exclusive no one else can make sales either. The seller can therefore effectively take the product off the market and sell its inferior product for a larger markup. A 50% royalty is meaningless if the seller never intends on selling the product in the first place.

Unknown Contingencies
Another reason intellectual property agreements are so long is to force the parties to come to an agreement regarding various situations they may not even have considered. This ensures both the parties are on the same page when it comes to the other party’s expectations as well as the metes and bounds of the agreement. Forcing the parties to agree on these contingencies up front makes expectations more attainable, thereby reducing the likelihood the parties will ever end up going to court over these contingencies down the road.

No matter how well-written an intellectual property agreement may be, no agreement will allow you to recover money the other party does not have. The number one rule with intellectual property agreements is to not get into a deal with a “judgment-proof” party. The lack of sufficient capital raises several red flags that must be addressed. Even if you have a watertight agreement and spend all the money you have to sue the other party for breaching that watertight agreement, a multi-million dollar judgment is not worth much if the breaching party is bankrupt. Avoid getting into a business with an entity that may not have the resources to cover any damage they might cause you by breaching your agreement. In some cases you may want the intellectual property agreement to require the other party provide a bond in the amount of damage you estimate may occur.

The number two rule with intellectual property agreements is that you trust the other party. A well-written intellectual property agreement is no substitute for making sure the party with whom you are getting into business is honest and reputable. While the best case scenario is a well-written agreement AND a reputable party with a proven track-record on the other side, if you have to choose between a well-written agreement and a reputable party with a proven track-record on the other side, choose the reputable party. A little due diligence in researching the track record of the other party can save you a lot of heartache down the road. Do not sign an intellectual property agreement with a party you would not deal with on a handshake. The intellectual property agreement, even a well-written one, is simply a backup that you hope never even comes into play.

Even if you trust the other party and the other party has money to pay for a potential breach, you still need an intellectual property agreement customized to your precise deal. Unlike most boilerplate agreements, it is very rare that an intellectual property agreement written for someone else will be applicable to your proposed deal. Intellectual property, by its very nature, is unique, with unique hardships and advantages. Any agreement dealing with the license or assignment of that unique asset needs to be unique itself. By the same token, there is no reason to go overboard. The agreement need not cover every remote possibility. Adding clauses that cover contingencies that will never happen is simply padding the lawyer’s pocket and adding delay to the transaction. A tight, trimmed-down intellectual property agreement will be plenty to read and negotiate. There is no need to waste the time of either party on items that are unlikely to come into play.

A Roadmap
The primary benefit of a carefully-drafted intellectual property agreement is not that it allows you to win a case in court, which it should, but that it serves as a roadmap for the parties to follow. By confirming that both parties are in agreement on all of the unique issues relating to the license or assignment, a solid, customized intellectual property agreement dramatically reduces the likelihood of going to court in the first place. Going to court is typically only good for the lawyers. You can think of a lawsuit as you agreeing to shoot off your toe if the other party shoots off their foot. Sure, they are more unhappy than you, but you are still let without a toe. Agreeing to terms up front is much less painful than agreeing to terms after years of litigation.

Getting Everyone on the Same Page
Customized detailed agreements, especially where intellectual property is involved, make sure both parties are on the same page as to what everyone’s rights and obligations will be. Being detailed and hashing out hypotheticals right from the start may slow down the deal a little as the parties argue over things they had not considered. But resolving these issues at the beginning pays off down the road, when the parties are both making money, and not spending their money on lawyers, over what very well may be a good faith misunderstandings over who was responsible for what.

Better Contracts = Better Business
A contract is a lot like a rule book for a board game. A better rule book improves the game. Well-written rules eliminate ambiguities and allow the parties to simply play the game. A game where both parties spend all of their time arguing over rules, neither of them were clear on from the start, is no fun at all. The best written contract, like the best written rule book, is one that answers all of the questions and clarifies everything up front, so that no one ever has to look at it again and the parties can get to the business of playing the game.

Brett Trout

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