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Patent licensing is an agreement between a patent owner and a licensee to transfer interest in a patent to a licensee and enforce intellectual property rights.9 min read
Updated September 5, 2022:
What Is a Patent License?
A patent grants its proprietor the right to exclude others from utilizing the patented invention, while a patent license reflects utilization rights obtained by an investor for that patent. By granting a non-exclusive license, the patent proprietor basically guarantees to not sue the licensee for patent infringement.
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.
- 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.
How Is a Patent Licensed?
A patent is licensed by selling utilization rights to an investor. This can be an individual or a corporation. The terms can vary from being very simple in a one-time licensing fee, to more complex where fees are determined by audits of revenue or utilization. The documentation is also quite straightforward, although it may be prudent to have a patent license agreement reviewed by a legal professional. You will want the agreement to have typical terms, such as a specific geographic location, how long the license lasts, etc.
What Are Licensing Rights?
Licensing rights provide others with the ability to utilize a patented innovation. As a patent holder, you own the invention and can earn royalties or licensing fees by selling licensing rights to investors or another company. It is possible to grant varying licensing rights to one firm, or several firms. Of course, how much revenue can be generated through your invention will also determine the licensing fees that you receive.
A larger firm may provide a greater possibility for growth than a smaller firm. The licensee assumes legal responsibility for any product issues. Before obtaining a patent, you may want to do some market research to determine the potential in your innovation, and then contact various organizations, such as the United Inventors Association, to provide you with some guidance.
What Are Some Options for Selling a Patent or Licensing?
There are various options when selling a patent or when licensing it. Thus, it is important to generate a list of possibly interested companies and customers for your invention. Your licensing doesn’t need to be limited to just one firm. However, keep in mind that each firm will want to find potential for generating revenue from your innovation.
One way to broaden the range of your contacts is through commerce or invention exhibits and trade shows. You’ll have a larger group of potentially interested businesses to talk with. Additionally, investigate new product bulletins in trade publications and inventor’s magazines to find potential customers. It may also be helpful to find angel investors or other sources of funding, such as crowdsourcing, to expand your outreach.
Several firms have websites where inventors can promote their patents on the market. A broker will market your invention to manufacturers and will acquire the fee from companies if the product is purchased. Before utilizing the companies of any broker or firm verify that they are reputable with the Better Business Bureau and United Inventors Association.
How Are Inventions Licensed?
Potential firms will evaluate your innovation based on the potential for generating revenue, which will determine how much they are willing to license your innovation. Depending on the innovation, and subsequent product, service, or other use, will determine whether you will want a one-time license fee, recurring royalties, or licensing fees based on the revenue generated.
It will be important to include both a method to audit your licensee and also to set limits for time period and geography. It is often helpful to have prototypes or sufficient materials to explain the benefits of your innovation. If your invention has shifting components which are necessary for a demonstration, make a video and duplicate it. A digital prototype can also help an interested investor perceive the value of your invention.
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, Menlo Ventures, and Airbnb.