Boss Moves: How founders can future-proof IP licensing contracts

In this series, we tackle some of the thorniest questions facing business leaders today.

The Question:

Dear Anxious,

Our startup is developing an AI-powered product using third-party data. We have licensing agreements in place, but as our tech evolves, we’re worried those agreements might become liabilities. Is there something we should be doing now to future-proof our IP agreements?

— Anxious in Ancaster

Dear Anxious,

If you’re concerned about reliance on third-party data, you’re not alone. As AI products mature, licensing agreements are undergoing real-time scrutiny and reassessment.

A current case in the legal tech space illustrates this well. Toronto-based startup Alexi licensed U.S. case law from Fastcase to power its AI-generated legal memos. This partnership ran smoothly until Fastcase was acquired by Clio. During due diligence, a concerning clause benefited a future Alexi acquirer, resulting in a lawsuit for breach of contract due to alleged commercial data use.

This situation highlights the urgency to critically assess your agreements; what seems stable today can quickly become contentious tomorrow.

Anthony de Fazekas, a partner at Mintz with expertise in IP strategy, offers strategies to solidify your data agreements for the long haul.

1. Secure Your Rights to Use Information

Valuable AI products often derive from a combination of licensed data and proprietary inputs, yet many contracts narrowly focus on access to raw data without granting commercial rights on the output of that data. As de Fazekas suggests, founders may find they lack the legal rights to monetize their innovations, leading to significant barriers in defending their developed products.

2. Clearly Define "Internal Use"

In AI contexts, the boundary between internal and commercial use can be ambiguous. If your product improves customer value or revenue, it may be treated as commercial use, even if the data itself remains internal. Ensure contracts incorporate language addressing this duality to avoid potential legal disputes.

3. Protect Your Know-How

Valuable assets often lie not in traditional IP but within proprietary workflows and methodologies. Ensure these elements are documented and treated as trade secrets. Without proactive measures, such know-how may be deemed unprotected under the law.

4. Lock Down the Fundamentals Before Signing

When entering data agreements, focus on three critical areas:

• Precise Licensing: Specify data quality and compliance requirements, not just volume.
• Data Flow: Track contributions from all parties and ensure contracts support those needs.
• Commercialization Alignment: Clearly define your rights in accordance with your business plan, even if that involves joint ownership.

5. Regularly Revisit Agreements

Aligning your IP strategy with your evolving business model is crucial. Regularly reassess your agreements—de Fazekas recommends every two months—to ensure they align with current value creation. Failing to do this may result in contentious negotiations or reduced valuations as needs evolve.

Are you a business leader with a conundrum? Write to us at media@marsdd.com.

Photo illustration: Stephen Gregory; Images: Unsplash