Originally Posted January 15, 2019
Updated March 13, 2023
5 Key Provisions when Licensing Your Patent
by Intellectual Property Attorney Bill Honaker, the IP Guy
Patents provide many benefits.
Your patent can provide many advantages beyond being a ticket to litigation. Patent license agreements can provide additional benefits. For example, a patent license agreement can provide:
- Additional revenue streams through royalty payments.
- The ability to cross license to avoid litigation.
- The ability to cross license to increase your intellectual property portfolio.
- The ability to control infringers without litigation.
What does patent licensing mean?
A patent license is a patent owner’s grant (the licensor) of permission to another (the Licensee) to some or all of the patent owner’s rights to the patented technology. To say it another way, the patent owner agrees to not sue the licensee for patent infringement, as long as the licensee doesn’t breach the terms of the agreement.
A patent license is not a patent assignment.
A patent owner retains an interest in the patent with a patent license. That retained interest is that the licensee not breach the license agreement. A patent owner can demand a return of the patent if the agreement is breached.
A patent owner sells his patent rights with a patent assignment. The patent owner gives up its rights to the patent and the patented invention. Typically, no rights are retained.
5 key provisions in a patent license.
- Payment Terms
This provision defines how you get paid for giving up your 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 your 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. These agreements also typically 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 is easier to determine the appropriate payments and reduces arguments as to how the “profit” was obtained. Remember to include a definition of net selling price in the patent license to exclude for example rebates, returns, taxes paid and shipping.
- Scope of Rights
United States patent law provides the patent owner with 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. This gives the patent owner a number of alternatives to license others and still maintain the benefits of the patent.
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 risking the loss of the patent, and to control the market, the owner decided to license, rather than sue potential infringers. This allowed the owner to remain in control and receive payments from licensees. The licensed party was limited to selling product in Canada, and not permitted to expand beyond it. This was a true win for both with no 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 more provisions in a patent license agreement. These 3 are the most important. Focusing on these 3 in your business plan and the many benefits of patents can lead to the discovery of unexpected value.
Is the license for the life of the patent, or a shorter period of time? Also, what happens when the term ends? A related consideration is whether either party can terminate the agreement and what happens when the agreement terminates.
Patent licenses are usually for the life of the patent, but this is not required. A client was able to negotiate a license with a term of 3 years with a competitor that was infringing its patent. The product was a material delivery system. They reached an agreement allowing the infringer time to sell off inventory and exit the market. A win for both.
You must decide whether the licensee will get access to your improvements.
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.