Royalties on Patents

Royalties on patents allow the person paying the royalty to use the invention of the patent owner. A patent owner has the right to prevent other people from using their invention, and they also have the ability to license their invention for a fee known as a royalty. Patents granted in the United States apply only to the country and its territories and will last for a period of 20 years after the filing of the patent application.

The Bayh-Dole Act, which was passed in 1980, provides universities the ability to profit from research performed by geniuses on campus. In 2013, the top five universities in terms of patents submitted were:

  • The University of California
  • MIT
  • The University of Tsinghua
  • Stanford University
  • The University of Texas

The top five patent submitting companies of 2013 were:

  • IBM
  • Samsung
  • Cannon
  • Sony
  • Microsoft

Three Types of Patents

The most common patent is known as a utility patent, which is used to protect articles of manufacture, matter compositions, machines, and processes.

A design patent is used to protect designs for articles of manufacture that are ornamental, original, and new.

You would use a plant patent to protect the discovery of a new type of plant.

How to License a Patent & Royalties?

A patent is one of the most valuable forms of intellectual property rights. Thanks to federal patent laws, having a patent provides you with the sole rights to produce, use, and sell your invention. Federal patent laws also give patent owners the ability to license the production and use of their invention for a royalty.

You can use a licensing agreement to give an investor certain rights to your invention in exchange for their investment. Patent licenses can be used to resolve a patent dispute after you've already manufactured and marketed your invention. If you want to determine your ability to license your patent, it's best to consult with an experienced business professional that understands the complexity of licensing agreements.

It's important to establish how negotiations will proceed before you begin negotiating a licensing agreement for your patent. When licensing a patent, you should consider whether you should use nondisclosure and confidentiality agreements. Having these agreements in place will discourage the potential licensee from violating your patent rights.

Essentially, when you license your patent, you are promising not to sue the licensee for using your invention in exchange for royalty payment. Other than promising not to bring litigation, the most important part of negotiating your licensing agreement is determining the amount of royalties you will charge. It's best to consult an attorney when calculating this figure.

Typically, you would use the gross sales of the whatever product is made from your patent to calculate your royalty payments. While licensing agreements and royalties on patents should be evaluated on a case-to-case basis, most royalties are 3 to 6 percent of gross sales. The amount of certain patent royalties is mandated by law. For example, with standard-essential patents, the rate for royalty payments must be fair and should not discriminate based on the licensee.

How Big Are Royalties From Inventions?

When someone turns an idea into an invention, they usually dream of receiving royalty payments. To receive these payments, an inventor can enter into a licensing agreement with a company. With a licensing agreement in place, the company has the right to sell the patented invention, and the inventor will receive a percentage of the sale of each product.

The following factors can determine the percentage of sale the inventor will receive:

  • Novelty of the invention.
  • How fully their patent protects their invention.
  • The profitability of the product resulting from their invention.

The average royalty for licensing an invention is 3 to 6 percent of the product's wholesale price, which is the price the company charges the consumer. If you have a profitable product and choose the right manufacturer, a licensing agreement can be a great way to make money from your invention.

Should You License Or Produce Your Invention?

The majority of inventors follow a three-step process:

  1. Develop their invention.
  2. Decide if their invention is marketable.
  3. Apply for a patent for their invention.

Most inventors are known as “inventors-for-royalties,” which means they want to invent something solely for the ability to collect royalties. However, if you have a competitive mindset, you may want to produce your invention yourself. While this will be more difficult, it may end up being more financially rewarding.

If you need help negotiating royalties on patents, you can post your legal needs 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.