Patent Licensing – The Ultimate Guide

Patent licensing is considered one of the most viable means of commercializing a patent. In short, a patent holder seeking to license his patent will not exploit it himself. That is, he will not try to create, market, and sell anything based on the patent. Instead, he will market the patent itself to those who do wish to take those steps. Any variation of this is known as “licensing a patent.” However, it is best to know some facts about licensing patents before one rushes to do so, or assumes that licensing is a “set it and forget it” means of cashing in on their intellectual property.

What is Patent Licensing?

Legally speaking, you have licensed your patent when you (the licensor) grant exploitation rights over your patent to a licensee (the person you are licensing it to.) “Exploitation rights” simply means the right to create, market, and/or sell something based on what that patent protects. A license of this nature is also a legal contract, and that contract is what will spell out in concrete terms precisely which exploitation rights are being granted. These include any performance obligations the licensor might demand of the licensee. This means that if any performance obligations are included in the contract (ie, “You must produce X number of sales by the year X.”), and they are not met, this could lead to the patent licensing being terminated in its entirety. In this context, a license is also revocable – ie, cancellable – if certain terms and conditions are not met. This is a common characteristic of legal contracts in general, with special ramifications for patent licenses. The only way to grant someone irrevocable exploitation rights, it should be added, is to assign them the patent. Assignments, however, are permanent. They entail the sale or outright transfer of the patent by the assignor to the assignee. An in-depth exploration of patent assignments is beyond the scope of this article, but just know that they are an option if irrevocable exploitation rights are something you seek.)

Patent Licensing: How to Capitalize

Now that you know what patent licensing is and what it involves, we can move on to a discussion of how to capitalize on them financially. The primary means of doing this is to seek royalties from the licensee in exchange for using your patent. Royalties, typically, are paid over the life of the patent. The amount and frequency with which royalties are paid from licensee to licensor must also be spelled out in the license agreement. In this way, the licensor is protected. If the licensee fails to pay the royalties that were agreed to, the licensor can revoke the patent license and retain sole exploitation rights over it.

Patent Licensing Structures

Here is an example of how this might work in practice. Let us say you licensed your patent to someone in exchange for royalties amounting to 20% of all sales resulting from your patent on a yearly basis. If your licensee creates something from the patent that results in a profit of $100,000, you would be entitled, by the terms of your license agreement, to $20,000 of that profit. If the licensee failed to disburse those funds to you, he/she would be in violation of the agreement and you could then proceed to revoke the license. (Again, the danger with using patent assignments over patent licenses is that failure to pay royalties will not revoke the rights you have already assigned. You will be free to litigate for the lost royalties, but this is often an expensive and lengthy process. With a patent license, the matter is more or less open and shut. Failure to pay royalties means revocation of the license.) Now, some more elaboration on performance options is in order as well. Performance options are a form of protection for the licensor. They are a way to ensure that the licensee does not “sit on” the patent, ie, do nothing with it and thereby starve the licensor of the ability to capitalize on it elsewhere. There are two basic types of performance options that can be written into a patent license agreement.

Patent Licensing Performance Options

The first kind is pre-market entry milestones. In short, these are obligations that the licensee is expected to achieve or meet. They could include things like bringing the invention under a trial or validation process, creating a working prototype, satisfying pertinent regulations, progressing through any clinical trials that exist, and so forth. These performance obligations ensure that things move along at a steady pace without any income-killing lag in activity. It prevents the licensee from become inactive as a rights holder. The second kind of performance obligations are post-market entry sales targets. These take effect once the invention is out of the development stage and available for sale on the market. Very simply, such obligations include sales targets, profit margins, or any other measurable goal tied to the performance of the idea in the free marketplace. These obligations give the licensee concrete goals that he must attain and give the licensor a bare minimum of royalties that he can expect to reap.

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In closing, licensing a patent is one of the most reliable ways to capitalize off of one’s intellectual property. By working with a patent lawyer to draft a patent license agreement and choosing your licensee(s) carefully, you will greatly increase your chances of successfully licensing your patent. If you have any questions, feel free to email me at ericcorl@ideabuyer.com.