How to License a Patent

Licensing an invention is the easiest, most legally secure way, to commercialize a product and turn a profit. The idea goes like this: you come up with the idea, and patent that idea. Then someone else takes your invention, turns it into a product and manages the day-to-day work of manufacturing, marketing, and selling it.

Essentially, licensing is the sale of intellectual property to a person or business who wants to produce it for  profit. In fact licensing may very well be the most lucrative way to make a living today.

U.S. Patent Outlook

In 2013, there were 347,142 patent applications published – largely to utilities. That’s over 26 thousand more patents than in 2012 – a jump of nearly 10%.




Steps to License a Technology Patent

What follows are the typical steps to licensing an invention:

  1. Identify target companies – companies typically only license inventions that fit their current or future business plans. Finding the right target is as important to the success of the product as the patent.

  2. Confidentiality agreement – this agreement is the most basic tool for protecting an inventor’s intellectual property, including designs, prototypes, equations, pictures, and much more. It essentially allows the inventor to disclose intellectual property without losing their rights to control the property.

  3. Negotiation – this is where there are common guidelines, but no absolute rules. Ideally, you will have a lawyer with experience negotiating licensing agreements in your industry. The terms of the license agreement reflect the allocation of risk between the parties – it also reflects the payment terms. A typical license will include a signing fee, reimbursement and ongoing payment of patent costs, milestone payments, minimum annual royalties and a percentage of sales.

  4. Patent Assignment Agreement – a licensing agreement includes the duties of each party and the mechanism by which the parties can dissolve their agreement.

Both sides of the agreement must do their due diligence when entering a licensing agreement.

Top Reason People License Patents

You might be asking yourself, “Wouldn’t I make more money if I made the patented invention myself?” Well, perhaps but then there is reality – handling the manufacturing domestically or abroad requires a huge investment in time and money. It also takes a significant amount of knowledge.

You have to have a solid business plan, inventory financing, liability insurance, etc. You have to work with engineers, designers, agents, and more to design a manufacturing and sales team from the ground up.

While some people do succeed, the real question you should ask yourself is, “How can I limit my risk, maximize my resources, and earn the highest profit possible and still stay sane?” The short answer is that unless you already have the business, the network connections, and all the rest, the best bet is found in licensing your product instead.

10 Key Terms in a Patent License Agreement

The following are the key elements that comprise a license agreement. In general, a patent license agreement will follow a logical progression with the key terms used throughout the license defined in the beginning.

  1. License Grant – these are the specific terms of the license arrangement and the grant to a business to transfer intellectual property to the licensee.

  2. Royalty/Compensation – the amount paid by the licensee for exercising the license rights, including a ‘minimum per’ rate, a percentage of gross sales, and minimum dollar amount per year.

  3. Commercial Diligence (Milestones/Reporting) – these are the reporting milestones the licensee will give to the patent owner to verify that the product is being manufactured and sold at expected rates.

  4. Termination – outlines the right to terminate if the licensee isn’t performing as well as expected (e.g., getting enough sales).

  5. Patent Issues – addresses patent marking, patent litigation and assertions by the licensee that the licensed patents are not valid, enforceable or infringed.

  6. Other Laws and Regulations – other legal issues created by Federal law including those related to the potential exportation of licensed technology (export control laws)

  7. Warranties and Disclaimers – identifies representations and warranties that each party is and is not making.

  8. Risk Allocation (Indemnification and Insurance) – specifies indemnification and insurance maintenance provisions.

  9. Miscellaneous Provisions – the license may address a host of miscellaneous provisions like marketing or other terms.

  10. Confidentiality – the terms of confidentiality the licensee will work within.


Be Extra Careful with these Elements of a Licensing Agreement

A licensing agreement seeks to establish fair terms between the inventor and patent holder and the entity purchasing the license to build that patented item. The following is a short list of the elements that the patent holder should be cautious with in their licensing agreement:

  • Royalties – it is common for the licensee to pay an advance on royalty fees

  • Performance requirements – the production volume should steadily increase to retain exclusivity

  • Insurance – the licensee typically carries the insurance protecting the inventor from lawsuits

  • Audits – the patent owner has the right to perform an audit if the royalty checks seem to be wrong in some way

  • Termination – without this section, the patent owner is stuck if the licensee can’t for any reason get the product manufactured, sold, and earning

See the top things to consider when entering into a licensing agreement for more information.

About the author

Matt Faustman

Matt Faustman

Matt is the co-founder and CEO at UpCounsel. Matt believes in the power of online platforms to change antiquated ways of life and founded UpCounsel to make legal services efficiently accessible. He is responsible for our overall vision and growth of the UpCounsel platform. Before founding UpCounsel, Matt practiced as a startup and business attorney.

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