Patent Licensing: What Is It?

Patent licensing is part of how to patent an idea and is a revocable agreement between a patent owner and a licensee to transfer interest in a patent to a licensee, who can benefit from and enforce the intellectual property rights.

A patent owner can license or transfer interest in a patent. The licensor gives up the right to the intellectual property, usually for a certain period. During this time, the licensee can make or sell the invention or design. The licensee can also profit from the intellectual property during the license period.

There are two types of patent licenses:

  • Exclusive Licenses: These transfer all ownership rights to a licensee. The licensor still owns the title. All patent owners must agree to an exclusive license.
  • Non-Exclusive Licenses: These allow the licensee to produce the invention or design. The licensee doesn't gain exclusive rights. The licensor and other parties can also produce the invention or design. Only one patent owner has to agree to a non-exclusive license.

Advantages of Patent Licensing

Not all inventors want to make or sell products or designs. Patent licensing lets you profit from the rights to your invention. You can collect royalties from sales.

  • Limited Risk

Manufacturing a product or design can be expensive. It can also have a high level of risk. Patent licensing lets you transfer the risk to another party.

  • Global Distribution

Not all inventors can produce a product or design on a large scale. Patent licensing can introduce your invention to a bigger market. It can also lead to distribution around the world. This tactic is popular for entrepreneurs and startup companies.

  • Limited Time Period

You don't have to sign away the rights to your intellectual property forever. You can include a time period in the license. When the period expires, you regain the exclusive rights.

  • Eliminating Patent Infringement

If someone infringes your patent, you can sue. Suing can get expensive, and it might not provide the results you want, either. Instead of suing, consider patent licensing. This option gives a competitor the right to your intellectual property, and it gives you the right to profit at the same time.

Disadvantages of Patent Licensing

  • Soliciting Manufacturers

As a patent owner, you might want to profit from the rights to your intellectual property. Patent licensing might be part of your business plan. You have to find a licensee or a manufacturer first, though.

  • Low Success Rate

Finding an interested licensee isn't easy. Negotiating a license agreement that will help you make money is also hard, and many inventors who want to license their patents are unsuccessful.

Examples of What Happens When You File a Patent License v. a Patent Assignment

  • When You File a Patent License

The patent owner transfers rights temporarily. Most licenses include a time period. When this expires, the owner regains exclusive rights. Licensees can sometimes license or assign their rights, but this process makes ownership of the intellectual property more complex.

Patent owners often charge royalties for a patent license. This usually includes payments throughout the license period.

  • When You File a Patent Assignment

The patent owner permanently transfers exclusive rights. This transfer is part of the official patent record.

Some patent owners give away rights of ownership. Others charge a one-time fee. An assignee usually pays this lump sum up front. Then, the assignee receives future profits from the rights to the intellectual property.

Common Mistakes

  • Taking Action Before Filing a License Agreement

The licensee should make or sell the product or design after signing a licensing agreement. Doing this before filing an agreement could be patent infringement.

  • Licensing a Patent to the Wrong Company

Some inventions have the potential to make a lot of money. If your patent is worth a lot, choose your licensee carefully.

  • Not Asking for Enough Royalties

Many patent owners charge an advance in royalties. Many also ask for a minimum annual royalty. Standard royalty rates range from 2 to 20 percent of net revenues.

  • Not Requiring a Performance Obligation

A performance obligation requires the licensee to meet specific milestones. If the licensee fails, the patent owner can end the license. This helps patent owners profit from licenses.

  • Not Getting Insurance Coverage

Licensors still own their patents. That means they can be held liable for their inventions during the licensing period. Ask the licensee to insure you during this period.

  • Not Taking Full Advantage of the Grant Clause

This part of an agreement explains which rights the patent owner is licensing. You can also use it to explain which rights you aren't licensing. This clause lets you keep some rights to your patent.

  • Not Hiring a Patent Attorney

Filing a patent application is difficult. Licensing a patent can be even harder. Hire a professional patent lawyer to do due diligence to protect your rights. This can also help you increase your profits.

Approaches to Patent Licensing

One analogy that can be helpful is to look at licensing approaches in two ways: "carrot" licensing and "stick" licensing.

  • Carrot: This is when the person you want to do business with is not practicing the patented invention. They do not have to take a license. You must convince them that your patent technology is better than what they are using. Show them how licensing your product or services will help them make money. It's all about how you market your invention.
  • Stick: This is when the person you want to work with is infringing your patent. They are already using your patent technology. In this case, you must threaten them with a court case. They will license your product — or else.

In reality, both situations involve the threat of a court case. In the carrot approach, an inevitable court case is just implied. In the stick approach, it is directly stated.

If you manage to get a large company to license your patent, you will get a lump sum payment that covers their past use of the product. You will also receive money based on future use.

Frequently Asked Questions

  • Can I License a Pending Patent Application?

Yes, but not in all cases. Talk with a patent attorney about your particular case.

  • How Can I Find Potential Licensees?

You can meet manufacturers and potential licensees in many places:

  • Trade Shows: You will meet people or company representatives who might be interested in your product at these events.
  • Advertisements: The best places the buy ad space for this would be trade publications and inventors' magazines. The USPTO puts out a publication called "The Official Gazette" that contains ads for products. You can purchase ad space for about $25.
  • Patent Website: There are lots of internet sites where you can advertise your inventions. It's best to check the United Inventors Association website for scams before you do this.
  • Venture Capital Partners: Find people who would be willing to be a partner. They can provide money to help you fund your project.
  • Brokers and Submission Companies: Brokers can market your invention to manufacturers for a cut of the sale. It's important to pick a broker who will only charge you if they sell your invention successfully. Submission companies are more of a risk. Sometimes, they cost thousands of dollars and don't earn the inventor any profits. There have even been lawsuits and fraud involved. Check anyone you might work with at the Better Business Bureau and United Inventors Association.
  • Direct Contact: Make a list of people or companies who might want to use or manufacture your invention. Good resource for this endeavor include:
    • The Thomas Register
    • Yellow Pages
    • The internet

This works best if you already have your patent. If you don't have a patent, bring along a non-disclosure agreement to have people sign before you talk about it.

  • Can I Sublicense a Patent License?

Yes, sometimes the licensee can sublicense the rights. The grant clause explains whether this is possible.

  • What Is a Hybrid License?

In some cases, patent rights are only part of the deal. A hybrid license includes a patent license and other rights. This allows the licensee to make use of intellectual property rights as much as possible.

  • What Is a Development Agreement?

This agreement covers any pre-existing intellectual property that a person or company has. It extends rights to using pre-existing intellectual property as you develop a new invention.

  • What Does It Mean to Have Joint Ownership?

In the U.S., joint patent owners can use the patented invention however they want. They don't have to ask the other owner for permission. They also don't have to share the profits. They can even grant licenses to other people. However, those licenses cannot be exclusive.

This varies by country. Some countries require that the owners share profits. Others require that both parties have to agree on all decisions about the patent. It is important to check joint ownership laws on a per region basis. To avoid conflict, you need to know everything you are allowed to do in relation to the other owner.

It is vital to come to a legal agreement if one partner wants to give exclusive rights to a company.

One benefit of a joint ownership is that you can work together to enforce your patent rights. You can both team up to sue an infringing company. However, both parties must agree on the enforcement in order to move forward.

You can ask the other owner to waive their consent when it comes to enforcing your patent. This must be done in contract form. Once the process is complete, you can enforce your patent without asking the other owner for permission.

Steps to File a Patent License

1. Locate Manufacturers

Identify potential licensees.

2. Sign a Confidentiality Agreement

Ask potential licensees to sign a confidentiality agreement to protect rights to your intellectual property.

3. Negotiate Patent License

Work with the licensee to agree on licensing terms and conditions.

4. Complete a Patent License Agreement

A patent assignment agreement can be exclusive or non-exclusive. It outlines the conditions, time period, and royalties. Both the licensor(s) and the licensee(s) must sign this document.

If you need help with patent licensing, you can post your question or concern 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, Stripe, and Twilio.