What Is Patent Licensing?

Jo Dunaway
Jo Dunaway
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Businessman giving a thumbs-up

A patent protects an invention against infringement — anyone but the patent holder making, making use of, selling, or distributing for sale the item or process. No one but the patent holder may incorporate the invention into another product already for sale, either. To bring the invention to market, however, an inventor may negotiate to license the invention to a licensee who will then make the product, distribute and sell it. When the patent owner or pending patent owner enters into patent licensing, the licensor and licensee will make a formal contract, known as a patent licensing agreement, stipulating and granting the use of the invention for exclusive or nonexclusive use. This agreement will also require certain payments, performance obligations and reporting of earnings from the licensee.

Patents can be owned individually, owned jointly among several inventors, or partially assigned to investors or the patent owner’s employers. The laws that govern the process of obtaining a patent, patent licensing, and the requirements of both parties in a license agreement vary from country to country. Patent licensing can grant usage rights on an exclusive basis wherein the licensee receives all the benefits of ownership and only the title itself is still retained by the patent owner. This gives the licensee the ability to sublicense the product to others or cross-license it to others to be used in the same or similar products in the marketplace. An exclusive license allows the patent owner to negotiate for higher royalty rates, as the licensee’s competition won’t have the access and usage rights to the invention unless the licensee so assigns the rights to others.

Nonexclusive patent licensing can be to one or more parties and may restrict usage in certain geographical areas of the globe or to specific time frames. International patent licensing restrictions vary from country to country, although some are governed generally by continent. A nonexclusive license is, generally, just a promise to the licensee that the licensee will not be sued for usage by the patent owner within certain geographical or time parameters. Locating those who may be good licensees takes educating oneself about manufacturers, researching online, attending trade shows and querying prospects carefully. Unless negotiations are preceded by a confidential agreement between the parties who wish to enter negotiations, the query can give the prospective licensee grounds for an infringement suit of his or her own, and this tactic has been used to avoid the expense of obtaining a patent license. “Patent trolls” make prompt use of these types of openings to obtain usage rights.

In patent licensing agreements, the licensor may require the licensee to meet performance obligations. These obligations may include qualifying for certain certifications such as passing Food and Drug Administration (FDA) requirements or regulations, or the obligation may be to attain to certain sales targets by certain dates. The licensor not only wants to make sure the licensee will perform these, but also wants to make sure the licensee isn’t licensing the patent just to sit on it. These performance obligations, if not met, would cause the license to revert to the original patent owner for resale or patent licensing once again due to breach of contract. The licensor wants to be sure that the licensee invests in pre-market preparation and strong marketing practices, and that the licensee will be likely to meet a minimum obligation of royalty payments.

Patent licensing is an agreement most often entered into when the inventor is looking to reap rewards for the invention by means of regular royalty distributions. Royalty distributions are specified in patent licensing agreements for certain time frames and backed by an ability to audit. Some inventors prefer not to receive royalties over a long period of time, but desire a lump sum for the usage rights. These patent owners don’t want the uncertainty and risk of awaiting royalties, but want a one-time only immediate price for the rights and privileges they are conveying. The lump sum calculations may undercut the amount received over time in royalties, but it will be for a specified amount, and certain.

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