10 Tips for Patent Licensing

10 Tips for Patent Licensing

Date: April 25, 2008

10 Patent Licensing Tips

Are you looking to license your patent? If so, these 10 Tips will help you move through the process faster and with less headaches. In this article, our founder will walk you through what patent licensing is, what it requires, and the critical elements that need to be included and avoided in your agreements. Whether you are looking to license your patent to a manufacturer or sell it outright, this article can help you navigate the often confusing world of patent licensing.

1) Understand What Patent Licensing Is and What it Requires
There is no doubting the lucrative potential of patent licensing, but you should be aware that it is a different animal than selling your patent. Licensing is not always the “set it and forget it” deal that many licensors hoped it would be. Typically, you will need to exercise diligence in making sure that your licensee(s) are performing the way they agreed to. If they are not, you will need to take action and revoke the license. This should not scare you away. Rather, it is only being mentioned so that you approach the process with realistic expectations.

2) Avoid General “Best Efforts” Clauses
One benefit of licensing a patent is being able to stipulate things a licensee must do to retain his license. However, there is one type of stipulation that you should avoid: a vague “best efforts” clause. As an article called “Patent Licensing” explains, courts tend to interpret these clauses in problematic ways:
“Both parties should avoid this clause in favor of more objective standards. The courts may interpret such a clause to require the dedication of all of the licensee’s resources towards exploitation of the licensed patents, when realistically most licensees will have a number of other significant business endeavors to support.”
The way around this dilemma leads us to tip 3.

3) Use Specific Milestones and Obligations
What you want to do is set specific, numeric goals and milestones that the licensing agreement will be contingent upon. As the aforementioned article states, the key is to be objective in setting these requirements.
“The milestones can be anything definitive that the licensee feels it can realistically meet in the stated time frame. For example, the licensee may be required to obtain an approved New Drug Application with the Food and Drug Administration by a certain date. Licensees should be aware that there is an implied obligation to exploit the licensed patent on the part of an exclusive licensee.”

4) Set those Milestones for a Reason
While it is important to have specific milestones, they must also not be arbitrary. It may sound nice to tell a licensee “You can only keep your license if you do a million in sales the first year”, but this is probably not realistic. Instead, do some market research on what it would be reasonable to expect. You want to make sure both you and the licensee feel comfortable with the performance obligations being written into the agreement. After all, the goal is to capitalize on the patent, not one-up each other.

5) Set Royalty Requirements
One alternative to, or supplement of, performance obligations is to use royalty requirements. Simply put, these are stipulations that say “I can revoke this license unless you pay me X dollars in royalties.” The royalties can be paid monthly, annually, or semi-annually, but the idea is that unless you get the dollar amount stated, you can revoke the patent license. This can be useful if you want further assurance that your financial needs will be taken care of. It is a way of ensuring that no matter how the patent licensee performs, he is responsible for paying you a certain amount.

6) Clearly Spell Out how and When Those Royalties will be Paid
Just as important as specific and non-arbitrary obligations is ensuring that you both know how and when they are to be fulfilled. Few patent licensing issues are thornier than when there are misunderstandings about payment schedules. Therefore, you should take special steps to avoid these hassles. The earlier quoted article continues:
“The agreement should clearly specify when reports are required to be made and when royalty payments are due. Payment needs to be made in conjunction with a quarterly or semi-annual accounting report on the royalties received by licensee. Licensors usually reserve the right to annually audit the records, at their expense, to be sure they are receiving the proper amount of royalties. Licensors are advised to also include a provision to audit for a period of time after termination of the license to be sure they have received all the royalties that are due and owing to them.”

7) Get Legal Advice for Your Agreement
As you can see, all of these performance obligations, milestones, and royalty requirements can seem a bit overwhelming if you are new to the field. A patent attorney is the best person to consult when this happens. They can ensure that your contract is on the up and up, that it can be enforced down the road if necessary. While you may balk at paying their high fees, consider it a worthwhile investment. You need to know that you can enforce your agreement if you have to and only a patent attorney can provide this assurance. They can warn you if the terms in your deal are heavily favorable to the licensee.

8) Don’t get Greedy
This rule applies to both patent sales and licensing. If you are in a position to get some nice, life-supporting residual income from a licensing deal, don’t kill it by being excessively greedy. The idea is to score some nice income from your patent, not suck the other party dry. Remember: pigs get fat, but hogs get slaughtered.

9) Specify a Length that you are Comfortable With
Patent licensing agreements can be as long or as short as you and your licensee want them to be. Therefore, you should take the time to think of a length that suits you. If you want to someday take the reins and capitalize on your patent, an agreement length of 5 years or less might be what you want. On the other hand, if you want to just sit back and cash the royalty checks, you might want to go for as long a term as the other party will agree to. The key is to set this length consciously based on your true goals.

10) Decide on an Exclusive or Non-Exclusive License
There are two different types of patent licenses: exclusive and non-exclusive. An exclusive license is what most licensees will prefer, since it grants them “exclusive” rights to capitalize on the patent. It ensures them some protection against competition and also allows them to enforce violations of the patent. Non-exclusive licenses, then, let you, the licensor, keep the right to license the patent to someone else. Decide which of these two licenses you are most comfortable with and try to get the licensee to go along with it.

If you would like hands on help with licensing or selling your patent, feel free to contact us via email at info@IdeaBuyer.com or by phone at 832-683-1527.

Eric Corl is the President of Idea Buyer LLC, a new product development company that owns and operates IdeaBuyer.com- The Online Marketplace for Intellectual Property.  The site gives inventors the opportunity to showcase their intellectual property to consumer product companies, entrepreneurs, retailers, and manufacturers. You can email him at EricCorl@IdeaBuyer.com.