Patent Licensing – Negotiations

Patent Licensing – Negotiations

Date: October 13, 2008

Patent Licensing Negotiations

Now that you have a patented invention and are ready to license it, you still have to contend with the thorniest obstacle of all: the patent license negotiation. This is when you and the prospective licensee hash out what you believe a fair license agreement to be. However, this is not something you should rush into. In this article we’ll offer tips and suggestions for making sure the negotiation goes smoothly – and hopefully in your favor!

Patent Licensing Negotiations Tip #1:

Determine your objectives

Why are you trying to license your patent? What are you hoping to get out of it? The obvious answer is “Because I want money”, but it has to go deeper than just that. Do you want to wash your hands of the patent altogether? Do you still want some day to day interaction and a say on how it gets marketed? If so, these are things you need to specify and take into account during the negotiation, and it helps greatly if you go into it with your priorities fresh in mind.

Patent Licensing Negotiations Tip #2:

Assemble a team with the right players

According to a very detailed scholarly article called “Best Practices in Patent Negotiations”, you must enter into negotiations with the right “team” behind you.

“Whatever the reason, your team should include a business development executive, a scientific-technical expert, a decision maker and a licensing attorney. The business development executive (sometimes the CEO at smaller firms, or a technology transfer professional at a university) usually finds the deal, brings the parties together and keeps the process moving. The scientific-technical expert provides scientific and technological expertise and conducts due diligence research relating to the technology at issue. And the decision maker must have authority to commit your party to particular deal terms. In our opinion, document drafting is often easier when an attorney has the benefit of participating in negotiations and understands the positions of both sides. Once the team is in place, it’s important to meet and reach an understanding of the motivation for the deal and to go over each member’s responsibilities.”


We should note that it is not always necessary to have a separate person handle each task. For example, in your situation, you might be the businessman and the technology/scientific expert. If so, you don’t need to go out and bring in a separate businessperson. However, the point remains that all of these considerations must be accounted for by someone, and you should know exactly who is responsible for each one before negotiating to license your patent.

Patent Licensing Negotiations Tip #3:

Determine the value the licensee will add to the patent

Typically, the reason you are licensing the patent include not having the resources to market and capitalize on it yourself, or not wanting to. It is important, therefore, to assess how qualified the potential licensee is to capitalize on the patent. What assets, strengths, and abilities do they bring to bear that increase the value of the patent, over and beyond what it would be if you just held onto it? The article elaborates:

“Your team should evaluate and determine your own marketing, technical, sales and services strengths as well as the strengths of the other party in the field of the patented technology—all are relevant to licensing fee amounts and royalties to be paid back to the patent holder. These and other contract provisions will help the parties define the scope of the licensed technology and their competitiveness as potential licensing partners.”

Another step you should take leading up to negotiation time is exchanging a term sheet with the potential licensee. This helps establish a starting point so that both parties can get straight to business when the actual negotiation begins. Here are some of the things you might want to include or look for in a term sheet:

“The term sheet typically outlines the major issues in a potential deal. These include the following: the licensed product or process; licensed territory; preliminary thoughts on fees and royalties; technical information and training required to develop and manufacture, sell and service the licensed product (and who will be responsible for the same); sales and service support; degree of exclusivity; and duration of the license.”

As for the negotiation itself, the primary sticking point will how broad the licensee’s rights are (ie, how much it can do with the patent) and how much they will have to pay you. While this is inherently a somewhat speculative process, you can and must aim to create a license agreement both parties can live with. Here is one approach, using specific numbers, recommended by “Best Practices in Patent License Negotiations”

“A rational approach is to develop a win-win scenario by looking at the actual investment return of each party. If the licensor has spent $10 million to develop the compound, and the licensee will spend an additional $100 million to commercialize it, negotiating a deal in which the licensor receives 10% of the return may be realistic, although the licensee may want a greater return based on assuming a greater risk (greater investment). Alternatively, where a licensed compound is ready for commercialization or is on the market, more standard accounting techniques may be used because the risk/return ratio can be more directly calculated.”

As the licensor, you will want to grant as narrow exploitation rights as you possibly can. While the licensee will want as much leeway to capitalize on the patent as possible, it is in your best interest to be able to license it out to others if you see fit. One way to provide for this is to only license the patent out for specific uses, leaving you free to license it to other people for other uses.

Here are some other ways to get your licensee to accept narrower exploitation rights:

“There are compromises: you may grant a broad field of use with the right to retract fields if you present a use to your partner and your partner elects not to pursue it, or you may grant a narrow field of use and give your licensee the right of first refusal on other uses. Alternatively, your licensee could convince you to restrict any future licensees from particular uses that fall within the licensee’s specialty or area of expertise.”

As you can see, being focused before the negotiation and creative during it lets you grant a patent license that puts money in your pocket and leaves you free to pursue other options.

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