Patent licensing and sales are an alternative for inventors who don’t have the resources to bring their product to the marketplace. In patent licensing, the inventor completes a prototype or at a detailed drawing, acquires a patent, and then finds a buyer interested in manufacturing and marketing the invention. One patent that is still licensed today is the lateral control design of The Wright Brothers flying machine.
Government funded inventors spent tens of thousands of US dollars on failed projects, while the Wright Brothers design and testing cost around $1200. That design is used to this day in every flying machine from a child’s toy to the space shuttle. Extensive patent wars were fought over that license because of the wording and the diagrams used in the original patent. The Wright Brothers had not only patented the first viable formula that enabled flight, they had also mentioned other ideas that were subsequently covered by that patent as well. It is impossible to estimate how much that patent license would be worth today.
There are different types of licensing agreements that may be of use to the inventor who has neither the time nor the resources to manufacture and market a new product. The first is an exclusive license and is used in the case of a new useful product such as a special tool or machine. The manufacturer initially pays more because the patent holder is not going to allow anyone else to use the design. The patent holder becomes owner in name only and has no rights to lease the patent to anyone else, nor release the product in the marketplace. The licensee, on the other hand, is allowed to lease the product to other manufacturers. An example of an exclusive license is the processing chip included in computers and electronic devices.
The non-exclusive license is a little bit different. In that case, the licensee can’t be sued for selling the product but does not have the right to give others license to manufacture or sell. The owner of the patent may license the patent to other manufacturers and may also go into production. This could create competition in the marketplace. Patent wars are often fought in the courts over the wording of the non-exclusive licensing agreement.
The third type of licensing agreement is the Sole License which is a cross between the other two. The owner of the patent agrees not to license the invention or idea to anyone else, but is not prevented from using the invention or technology in their own devices. This is another area of contention between inventors and manufacturers.
The scope of the licensing agreement is an area that must also be examined. For instance, an inventor may license their idea to one manufacturer in a specific geographical area. In this case, the license may only cover North American sales, or the European market. The territory involved must be listed in the agreement. That leaves the patent owner with an option to license the patent to another manufacturer in a separate territory. This type of licensing is what prevents an item made in Japan from being sold in the US; while the US manufacturer may market a similar product here. In order to license to the world markets, the patent owner must have an international patent.
The licensing agreement may be broken down into fields of usage. In the case of a microchip, for instance, the licensing agreement may specify that the technology can only be used in phones while a separate license allows the chip to be used in another electronic device.
Permitted acts cover whether the licensee may manufacture, sell or both and the territories involved in that agreement. A license to manufacture and sell in the US does not cover sales outside of the US territories.
Licensing agreements will also cover the term of the agreement, whether that is the life of the patent or a shorter period of time. The short term licensing agreement is often used by pharmaceutical companies to prevent generics from competing before the cost of development and testing is recouped. This allows the patent to be licensed again at a later date for a generic version.
Finally the licensing agreement will cover royalties paid to the owner of the patent. This is an area best dealt with by experienced patent attorneys who have the best interest of the inventor in mind. After the initial sale of the license, the owner will receive residual income off of the royalties. The royalty is either a nets sales or gross sales percentage varies between 1% and 20% with approximately half at less than 5% and 90% less than 10%. These rates often vary based on the exclusivity of the patent license, and the up-front payment.
In short, the patent licensing agreement will include many sub categories that may confuse the layman while the manufacturers are already well versed in the contracts and legal jargon. In order to make the best deal it is important to understand the agreement or hire someone who can. Remember that in the best seller “Rich Dad, Poor Dad” Robert Kiyosaki states that one of the keys to success is to “hire people who are smarter than you” and do it. This is where a patent attorney or a patent licensing service can really be an asset. Of the ½ million patent applications filed each year, only half are approved. Out of that a small percentage comes from individual inventors. Only 1 in 5000 will make it to the marketplace in the same year, without the benefit of a patent licensing contract or sale. It is in the best interest of every inventor to get the best help available to make their dreams come true.
Robert Kiyosaki also said that “the best way to know the difference between a good expert and a bad expert is to become an expert yourself.” While entering into the patent licensing market may be so scary for some that they give up on their ideas entirely, it is wise to become informed. There is no feeling that is worse than seeing an item in the store and thinking “that could have been money in my pocket, if only I hadn’t given up on my dream.”