Types of Patent Licensing

An exclusive patent license transfers all ownership of the invention to the licensee; the patent owner surrenders all rights to the invention. The licensee is effectively the new owner and can sublicense the invention as well as sue for infringement. Typically, the patent owner agrees not to license the invention to anyone else within a specific field of use.

With a non-exclusive license, the patent owner allows the licensee to make, sell, and market the invention and agrees not to sue that individual or company for patent infringement.

License on Transfer

Patent trolls are businesses that earn money by buying inexpensive patents and pursuing others for infringement to recoup royalty fees. These companies are also called non-operating entities because they do not intend to use the patents they purchase. License on Transfer is a strategy developed to prevent patent trolls from obtaining and profiting from patents.

With a License on Transfer agreement, a group of patent holders forms a club. Each time one of them sells a patent to someone outside the group, everyone in the club gets a free license. Because every member must be an operating company that produces and sells products, a frivolous infringement suit will then automatically be met with a countersuit from within the club.

Methods of Patent Licensing

Tech companies use three main strategies when licensing their intellectual property.

  • Many companies in the tech industry license products for royalties to earn money rather than profiting by manufacturing, marketing, or distributing products. For example, Stanford University licensed its PageRank technology to Google.
  • Some companies have attempted to bolster public relations by announcing that they would not pursue frivolous patent lawsuits. Twitter did so, disregarding the fact that it doesn't currently own any patents.
  • License to create a standard is a strategy in which companies open their patents to encourage wider adoption in the market. This technique has been successfully used by Tesla and Intel.

Licensing Model

With the licensing model, the inventor first protects his or her creation through trademark, copyright, patent, or trade secret, thus becoming the owner of the IP. He or she can then licensing the rights to another party who will be responsible for producing, marketing, and selling it.

The licensing model may be used when:

  • The invention in question is covered by IP protection.
  • One party owns valuable IP that another party needs to solve a specific problem.

The terms of the arrangement are spelled out in a legally binding document called a licensing agreement. Advantages of the licensing model include:

  • The inventor does not need to work to finance and complete commercialization of his or her creation.
  • He or she can instead focus on creating a new invention.
  • He or she does not need to establish or run a company.
  • Marketing will be handled by a company with experience in that realm.
  • The invention will likely spread to further markets.
  • The inventor will not have to hire and manage a marketing team.
  • Execution risk is avoided.
  • The inventor still owns the invention.
  • The licensing agreement can be crafted to protect the inventor from product liability.

Grant-Back Provisions

The patent license agreement should provide for situations in which the licensee makes improvements on the invention. In some cases, this can make the original patent obsolete and prevent the original inventor from using the new model to improve the creation. A grant-back provision solves this problem by granting the licensor rights to all improvements.

Types of grant-back provisions include:

  • Assignment clauses in which any improvement patent obtained by the licensee is automatically assigned to the licensor. The licensee is given the non-exclusive license rights to the improvement in question. Licensees often require a lower royalty fee in exchange for this type of provision.
  • Exclusive grant-back clauses give the licensor the exclusive right to sublicense or otherwise use the improvement in question. These provisions may list royalty rates or allow the parties to negotiate a royalty rate in good faith.
  • A non-exclusive clause keeps the title and rights to the improvement with the licensee but allows the licensor to use the improved invention. This type of provision may or may not include a royalty. This is the most common type of grant-back provision.

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