An assignment involves the transfer, or selling, of IP. When owners assign their intellectual property, they transfer the IP ownership to the purchaser and keep no ownership rights for themselves.
In return for an assignment, the owner may receive:
- A lump sum payment;
- A royalty; or
- A combination of both.
An assignment differs from other commercialisation mechanisms considered so far, as the others involve the owner retaining ownership of the intellectual property and licencing its use to a licensee.
The essential feature of a licence is that commercialisation rights granted to the licensee may terminate, resulting in the commercialisation rights reverting back to the owner. This reversal of commercialisation rights is not possible if the owner actually assigns title to the IP to a purchaser.
A licence, particularly an exclusive licence, will usually place performance obligations on the licensee. These will be pre-market entry commercialisation milestones and post-market entry performance targets. The failure to meet these performance obligations may result in the licence being terminated, with commercialisation rights reverting to the owner, who may then licence the IP to another party.
In contrast, while performance conditions are possible with assignment there may need to be formal reassignment if they are not met. Even with the complete loss of IP ownership, assignment is worth considering as an alternative commercialisation strategy. For example, an owner may prefer to receive a substantial up-front lump sum payment for the assignment, instead of smaller royalty payments throughout the commercialisation period, which is the case with a licence.
This lump sum payment should be regarded as a purchase price which has a different tax treatment than royalty fees payable by a licensee. The owner should factor into that purchase price all the costs of taking the IP to its state of development at the time of the assignment. These will include all the direct costs of research and development, all indirect costs, out of pocket expenses such as the cost of materials, the cost of any outsourcing, and the cost of protecting the IP. The lump sum amount should also incorporate a profit component.
The IP purchaser, however, may seek to pay royalties instead of a lump sum amount in return for the assignment of title to the IP in question. In this way, the purchaser’s initial capital outlay is less, and payment for the IP in the form of royalties becomes conditional on the IP product being successful in the market place. In this case, if there is no success there is no payment.
Of course, a lump sum payment and royalties are not mutually exclusive ways of structuring an assignment. A combination of both is possible. For example, a deal could be struck where the higher the royalty rate, the lower the lump sum payment or vice versa. It is up to the IP owner to decide after assessing the risk of low or no performance in the market place. http://www.IPMLogic.ie
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