by Intellectual Property Attorney Bill Honaker, the IP Guy
You may think of patents as a cost you pay to protect your technology and/or service, and that would be true, but patents also can—and some- times should—do more than that. They can be revenue generators, which is why companies should consider whether patent licensing makes sense.
There are several ways this can be realized: additional revenue streams through royalty payments and the ability to cross-license to avoid litigation and/or increase your intellectual property portfolio.
So, how does this work? A patent owner (the licensor) can grant another party (the licensee) to some or all of the patent owner’s rights to the patented technology. In other words, the second party can use the covered aspect without fear of being sued as long as the licensee doesn’t breach the terms of the agreement.
A patent license is not a patent assignment. A patent owner still retains an interest in the patent and can demand a return of the patent if the agreement is breached. A patent owner, however, can choose to sell all his patent rights.
You can ask for a lump sum payment; an upfront payment with continued payments, i.e. royalties; nothing upfront but regular royalty payments; or something else of value to you. For example, it may be valuable to cross-license a patent to avoid litigation with a competitor or to improve your intellectual property portfolio.
Upfront payments are typically found in exclusive license agreements because the patent owner is giving up the right to monetize the invention. Of- ten, such deals require minimum royalty payments.
Royalties are typically based upon sales. For example, with products, the royalty rates can be a fixed dollar amount per sale, a percentage of the selling price, or a percentage of profits. If a fixed dollar amount, you should include an inflation adjustment in your patent license agreement. If a percentage, it is best to base the rate on the net selling price rather than on profits. Net selling price makes it easier to determine the appropriate payments and reduces arguments as to how the “profit” was determined. Include a definition of net selling price in the patent license to exclude for example rebates, returns, taxes paid, and shipping.
Scope of Rights
U.S. patent law gives the patent owner the right to exclude others from making, using, offering to sell, selling or importing what the patent covers. These rights can be granted in many ways, for example, by geography, product, service, use, purpose or combinations of these as well as other rights. They give a patent owner ways to license others yet keep the benefits of the patent.
For example, a client had patent protection on a very successful retail product. The product was a stand that could be used for moving products around a work area. It was a unique improvement on existing products. To avoid patent litigation and control the market, the owner decided to license, rather than sue potential infringers. This allowed the patent owner to remain in control and receive payments from licensees. The licensed party was geographically limited to selling the product in Canada, and not permitted to expand beyond it. This was a true win for both parties as it avoided litigation.
Exclusive, sole, or non-exclusive licenses
An exclusive patent license is an agreement by the patent owner not to grant other patent licenses that have the same rights. A sole license is a license that allows the patent owner to keep its rights and license the same rights to one other party. A sole license is between an exclusive license and a non-exclusive license. A non-exclusive license allows the patent owner to keep its rights and grant patent rights to any number of licensees. The patent owner can have unlimited potential licensees.
There are many provisions in a patent license agreement. These three are the most important. By focusing on them, and the flexibility of patent licenses, you might find some hidden value in your patent portfolio.
About the Author:
Bill Honaker, “The IP Guy” is a former USPTO Examiner, a partner with Dickinson-Wright, and author of the forthcoming book, Invisible Assets – How to Maximize the Hidden Value in Your Business. To download a sample chapter, click here.