Key Takeaways

  • Licensing a patented product allows inventors to retain ownership while earning royalties.
  • There are two primary license types: exclusive and non-exclusive.
  • Conducting market research and identifying the right licensee are critical steps.
  • Patent owners can license even patent-pending inventions under specific conditions.
  • Licensing agreements must include key terms like scope, royalties, and duration.
  • Different licensing models (e.g., cross-licensing, sublicensing) suit different business goals.
  • An attorney can help structure a strong, enforceable license agreement.

Licensing patents is the process where patent owners give a third-party permission to use their patent rights. The owner retains the title of the patent and still has ownership of the invention, but they license rights in exchange for monetary gain.

How to License a Patent

If you are an inventor, you might consider licensing your patent, or the patent rights, to a manufacturer. In return, you collect royalties. You're only licensing the rights and not your actual invention. It is unusual for manufacturers to consider licensing ideas that aren't already patented or have a patent pending.

You'll have to go through four steps to license your invention:

  1. Find manufacturers.
  2. Put together marketing material.
  3. Present that material to manufacturers.
  4. Negotiate a license.

To begin the process of licensing a patent, start compiling a list of manufacturers who have strong distribution channels. You can find suitable prospects by going to trade shows, looking at online databases for entities that make products like yours, or looking in stores or magazines that carry or advertise similar products.

If you want to make it public that your patent license is available, you can publish a notice in the United States Patent and Trademark Office (USPTO) gazette for a fee.

It's best to have an intellectual property attorney draft and negotiate a licensing agreement for you. The agreement should detail the following:

  • Upfront payments, if any
  • Royalty amounts
  • Potential infringement issues

You have the ability to grant an exclusive license to one party or a non-exclusive license to multiple parties.

In an exclusive license, the patent holder keeps the title of the patent but transfers ownership to the licensee. The title holder also transfers the right to sue if the licensee is infringed upon. You can create limits on an exclusive license by promising that you won't license the patent to another party or by limiting its use to a specific field.

When you grant a non-exclusive license, you're agreeing not to sue a licensee for infringing on your patent. In a license agreement, you should spell out any time limits on the negotiated license.

You might choose to assign patent rights to a third party as an alternative to licensing a creation. If you choose to assign rights, it's a permanent transfer or sale. You'll be the assignor, and the party who buys rights is the assignee. After the assignment is finalized, you have no more rights to that patent.

Licensing a Patent-Pending Product

You don’t need a granted patent to start licensing. Many inventors license patent-pending products, especially if they can prove commercial viability. However, be transparent with prospective licensees about the patent’s pending status.

Tips for licensing a pending patent:

  • Include a clause specifying rights become active upon patent grant.
  • Highlight the invention’s unique benefits and potential market.
  • File a provisional or utility patent application before disclosing details.

Note that licensing a pending patent may carry risks if the patent is ultimately not granted or the claims are significantly narrowed.

Key Terms to Include in a Patent Licensing Agreement

A strong agreement outlines the expectations and protects both parties. Essential components include:

  • Scope of License: Clearly defines what rights are granted—make, use, sell, distribute, etc.
  • Term and Termination: Specifies duration and termination conditions, including breaches and non-performance.
  • Royalty Structure: May include upfront payments, milestone payments, and ongoing royalties based on units sold or revenue.
  • Performance Milestones: Clauses to ensure the licensee commercializes the product within a set timeframe.
  • Infringement Handling: Identifies who is responsible for detecting and pursuing infringement claims.
  • Improvement Rights: Determines who owns improvements or modifications to the original invention.
  • Confidentiality and Non-Disclosure: Protects trade secrets and proprietary information exchanged during the relationship.

Types of Patent Licensing Agreements

Patent licensing agreements come in various forms depending on the level of control and exclusivity desired:

  • Exclusive License: Grants one licensee the sole right to use the patent. The licensor cannot license the patent to anyone else during the term.
  • Non-Exclusive License: Allows multiple parties to license the same patent. This can increase revenue but reduces control.
  • Cross-License: Two parties exchange licenses for their respective patents, often seen in tech-heavy industries.
  • Sublicense: The licensee is allowed to grant licenses to third parties. Useful in scenarios involving distributors or subsidiaries.
  • Field-of-Use License: Restricts the use of the patent to specific markets or industries.
  • Territorial License: Limits use to certain geographic regions.

Choosing the right model depends on your goals, industry, and the scope of your patent.

Steps to Prepare Your Patent for Licensing

Before initiating licensing negotiations, ensure your invention is patent-protected or at least has a pending patent application. Then, take the following steps:

  1. Assess Market Potential: Conduct a market analysis to confirm that there’s sufficient demand for your product. Research your competition and target audience.
  2. Evaluate Patent Strength: Ensure the patent has enforceable claims and covers key aspects of the invention. A weak patent can deter licensees.
  3. Develop a Licensing Strategy: Decide whether you want an exclusive or non-exclusive agreement, and whether you’re open to sublicensing or cross-licensing arrangements.
  4. Create a Business Plan: Include projected royalty streams, licensing fees, manufacturing needs, and marketing plans to make your proposition more attractive.
  5. Prepare Technical and Marketing Materials: Visuals, working prototypes, and technical documentation help licensees understand the invention’s functionality and potential.

What to Know for Selling a Patent

When you sell a patent, you are likely to be able to get cash for your invention quickly. While people patent thousands of inventions every year, only a small number of these creations generate any profits.

If you sell your patent, you can get money that helps finance other ideas that you have as well as pay off some bills. You also eliminate the huge financial commitment involved in starting up a new business based on your invention.

It's profitable for inventors to license rights to their patent, allowing third parties to then make, use, or sell the product. If you license a patent, you still have ownership of your invention, but you can earn royalty payments on sales. Licensing can prove to be most lucrative if you partner with a company that's already well-known and trusted by consumers. The licensee holds the liability for mishaps related to the product, not you.

While you'll collect all profits if you market your own invention, you may wind up spending most of those profits on legal fees, startup costs, and accounting fees. There's also the stress to deal with from running your own business.

If you want to sell or license your patent, start out with professional marketing efforts. Design formal letters and brochures that show your creation in its best light. Find manufacturers you'd like to work with, including potential users of your invention. Go to invention or trade shows where you can network with businesses or individuals who may be interested in your invention.

While holding a patent may be useful, you can generate a good deal of money if you opt to license or sell your patents. This could give you the important financial help you need to pursue other interests or live a more comfortable lifestyle.

Common Mistakes to Avoid When Licensing a Patent

Avoid these pitfalls when learning how to license a patented product:

  • Insufficient Research: Not vetting potential licensees can lead to unfulfilled agreements.
  • Weak Agreements: Generic or vague contracts lead to confusion and legal risk.
  • Failure to Protect IP: Sharing technical details without an NDA could compromise your invention.
  • Overvaluation: Expecting unrealistic royalties can scare off serious licensees.
  • Ignoring Legal Help: DIY contracts may miss important protections. Always consult with an experienced intellectual property attorney.

If you need assistance navigating the licensing process, you can find a qualified attorney through UpCounsel.

Pros and Cons of Licensing vs. Selling a Patent

Both licensing and selling offer different financial and strategic benefits:

Licensing Pros:

  • Retain ownership of your intellectual property.
  • Generate long-term, passive income.
  • Control how and where your invention is used.

Licensing Cons:

  • Royalty income can be inconsistent.
  • Requires monitoring licensee compliance.
  • Legal costs if disputes arise.

Selling Pros:

  • Receive a lump-sum payment.
  • Avoid ongoing legal or contractual responsibilities.
  • Useful if you lack the resources to commercialize yourself.

Selling Cons:

  • You relinquish all future rights and income potential.
  • Less control over how the invention is used.

Carefully evaluate your long-term goals and resources before deciding.

Frequently Asked Questions

1. Can I license my invention before the patent is granted? Yes, many inventors license their patent-pending inventions. Just ensure licensees understand the status and include contingency clauses.

2. How much can I earn by licensing my patent? Earnings vary widely depending on the industry, exclusivity, and product value. Royalties can range from 2% to 20% of sales.

3. What happens if my licensee doesn’t commercialize the product? Include performance milestones or termination clauses to prevent your patent from sitting unused.

4. Should I choose an exclusive or non-exclusive license? It depends on your goals. Exclusive licenses offer more control and higher fees, while non-exclusive ones reach broader markets.

5. Is licensing better than selling my patent? Licensing provides ongoing income and retains ownership. Selling offers a lump-sum payout but no future rights. The best choice depends on your situation.

If you need help with licensing patents, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.