It’s not unlikely that an inventor will eventually come across the topic of patent license agreements. Patent license agreements are commonly used to help develop and commercialize patented items and can be a great source of revenue for the patent owner, spurring further innovation. This article discusses why somebody would enter into patent license agreements and presents some items that one may want to consider in drafting one.
Patent License Agreements: Why?
Why would someone do a patent license agreement? The simple answer is that not every inventor is in a position to develop and market products based upon their inventions. That means that it is often smarter to find a partner with the capability and know-how to commercialize valuable patents rather than try to build up the infrastructure on your own.
Keeping in mind that patents only have a limited life span, there is extra incentive to enter into appropriate patent license agreements so that products can come to market faster and thus provide more value over the life of the patent.
Patent License Agreements: How?
Patent license agreements are typically structured so that the licensee (the party commercializing the patent) pays the licensor (the patent owner) some combination of flat fees and royalties.
I am not going to be able to do a breakdown of every element commonly found in patent license agreements, but I do want to introduce some special issues. Naturally, an agreement like this is one where a lawyer’s advice will be invaluable as there are many variations on the basic concept.
Here are some things to consider:
- Minimum Royalties: Patent license agreements will often provide for exclusivity for the licensee. Because the agreement is exclusive, that means that there can only be one source of revenue from the patent during the term of the agreement. At the outset, licensees will often make optimistic sales projects in order to close the deal and a minimum royalty provision sets a floor on the amount of money that the patent owner will earn from the license. That way, if the licensee is less than diligent in their efforts, or fail to meet projected sales, the licensee assumes the risk of loss rather than the licensor.
- Commercialization Standards: This goes with the minimum royalty provision, above. A patent license agreement can define what steps the licensee must take in commercializing the patent. There is a lot of flexibility in how that’s defined. The licensee might need to make a formal commercialization plan and then meet the goals set forth in that plan, or they might just need to spend a certain amount of money in their efforts.
- Infringement and Litigation: Who takes the lead if somebody infringes upon the patent? Both the licensee and licensor have something at stake if a third party infringes. Either party can take the lead, and most patent license agreements will outline who has the right to file suit, who has to pay for the litigation and who gets any judgment as a result of the litigation. Often, this part of the agreement varies depending upon the resources of the parties.
These are just a few of the things to consider when putting together patent license agreements; naturally, there are many others. If you want to know more the American Association of Corporate Counsel offers some advice on patent licensing.
