January 1, 2007 (Vol. 27, No. 1) Show Larry A. Roberts Avoid Misunderstanding by Making Sure Your Agreement Is Clear and Accurate So, you’ve got a patent but you don’t have the resources to market the patented invention. Or you have the manufacturing and marketing infrastructure in place but you are looking for a novel new product to expand your product line. Maybe you’re involved in a patent infringement dispute and are looking for a way to resolve it. A patent license may be the answer to your problems. What is a patent license? Generally speaking, a license is a document or agreement giving permission to do something. However, a patent is only a right to exclude others from making, using, or selling your invention. A patent does not give its owner the affirmative right to make, use, or sell the patented invention. It is entirely possible to have a patent that cannot be used without infringing another person’s patent. For example, a patent on a chair having four legs, a seating surface, and a back cannot be practiced without infringing an earlier patent on a four-legged stool. Thus a patent license is not an affirmative right to exploit the patented invention, only an agreement by the licensor (the patent owner) that he will not enforce his right of exclusion against the licensee (the party wishing to utilize the patented invention). The licensee must always be aware that there may be other patents that cover the product. The licensee should exercise caution, either in the form of clearance studies conducted prior to entering into the license agreement that seek to identify other patents that might form a barrier to exploiting the licensed technology, or in the form of warranties from the licensor that practicing the licensed technology will not infringe any third-party patents. The goal of any license agreement is to obtain a clear, unambiguous document that accurately describes the transaction. There are three basic functions of a license agreement: • defining each party’s rights under the agreement; • defining each party’s obligations under the agreement; and • defining each party’s remedies if the obligations are breached. Threshold Issues In granting rights under the agreement, a threshold issue is whether the license should be exclusive or non-exclusive. From the licensee’s perspective an exclusive license is usually more desirable, as it eliminates competition. On the other hand a licensor might tend to favor a non-exclusive license so as not to put all his eggs in a single basket. Another threshold issue is “field of use,” i.e., is the licensor granting the licensee the right to exploit the invention in any technological field or only in a limited field? In a license for a patent pertaining to a new type of engine, for example, the licensor might grant the licensee the right to exploit the licensed invention only on lawnmowers, keeping the right to himself to take advantage of the invention on cars, boats, motorcycles, etc. Geographical territory might be another way to limit the scope of the grant, for example giving the licensee the right to exploit the licensed technology only in certain areas of the country. If there are going to be restrictions on the field of use or geographical territory, there must be express language in the license so providing, because such restrictions will not be inferred. Royalties Payment of royalties is usually the most important obligation of the licensee. The manner in which royalty payments are structured is limited only by the imagination of the parties. The license obligation might be a one-time paid-up license, a percentage of sales, a fixed amount on a periodic basis, milestone payments, a cross-license of the licensee’s technology to the licensor, or a combination of one or more of these arrangements. The licensor must avoid the situation where he has exclusively licensed the patent and the licensee is not marketing the invention and therefore not generating any royalties for the licensor. Conversely the licensee wants to avoid a situation where he is obligated to pay royalties but cannot sell enough of the licensed product to be profitable. Another issue is deciding who has the duty of enforcing the licensed patents against infringing third parties. While an exclusive licensee can usually enforce a licensed patent against a third-party infringer, a non-exclusive licensee cannot and must rely on the licensor to police the market. But the licensor is not obligated to sue third-party infringers unless the license so provides. An otherwise profitable license can quickly turn unprofitable for the licensor if he is required to enforce his patent against multiple third-party infringers. Conversely, a non-exclusive licensee obligated to pay royalties cannot compete in price against infringers and may have no recourse unless the licensor has agreed to police the market. In the event of breach of the licensing agreement, what remedies are available? A requirement in the license agreement that any litigation be brought in the home venue of one of the parties can be a distinct disadvantage to the other party. Because contract laws vary from state to state, the choice of which state’s law will govern the license may favor one party over the other. The license agreement can provide for alternative dispute resolution, such as arbitration or mediation. A “liquidated damages” clause may be included to fix the amount of damages in the event of a breach. There is no one-size-fits-all license agreement. More often than not, the negotiated license agreement will be biased in favor of one or the other of the parties. Whether the favored party is the licensor or the licensee will depend largely on the relative bargaining positions of the parties. A party with the better bargaining position should be careful not to abuse the position, however. It may be possible for a potential licensor to use a superior bargaining position to negotiate an excessively high royalty rate, but he may soon find that the licensee cannot sell any licensed products at the price commanded by the high royalty rate, with the net effect that there are no sales (and therefore no royalties) at all. Considerations Parties should consider several subjects when entering into a license agreement: • What is being licensed—patents, trademarks, copyrights, trade secrets, know-how • Exclusivity, right to sublicense • Duration of license • Field of use • Territorial limitations • Consideration: upfront fee, running royalties, minimum payments • For royalties based on sales, what kind of records is the licensee required to keep? What audit rights does the licensor have? • How often must the licensee make reports to the licensor? • Who owns improvements made by the licensee to the licensed product? • Who will be in control, and who will bear the cost, of any pending patent applications? • Which party has the obligation of bringing infringement actions against third parties? • Under what conditions can the parties terminate the agreement? • Requirements for the licensee to place patent marking on licensed product • Indemnification • “Most favored licensee” provision, in which the licensee gets the benefit of any more favorable terms negotiated by another licensee • Warranties and representations • Alternative dispute resolution: mediation, arbitration • Are the terms of the license to be kept confidential? • Which state’s law will govern disputes over the license? • To whom should notices concerning the license be sent? • Integration: are all previous oral and written agreements voided by execution of the license? • Force Majeure: what happens in the event of breach of the license because of circumstances beyond the control of the parties, e.g., flood, war, etc.? This list is by no means intended to be comprehensive but it should give an idea of the breadth of issues posed by a potential patent license. Larry A. Roberts is partner in the IP section of Kilpatrick Stockton. Web: www.kilpatrickstockton.com. E-mail: .
Patents are valuable assets. They can be bought, sold, and licensed. In this article, we will take a closer look at patent licensing, first with the basics, then patent licensing from a patent owner’s perspective. Table of contentsWhat is Patent Licensing?When a patent is licensed, an agreement is made between the patent owner (or the licensor) and the person or company that wants to use and benefit from the patent (the licensee). It permits the licensee to make or sell the product, design, or technology in the patent. The patent then creates income for both the licensee and the licensor through revenue and royalties for the duration of the licensing period. Arm Ltd., a British CPU developer is an example of a patent licensing powerhouse. Their main business is in developing processors (CPUs) and licensing their patents and technologies to other companies. Currently, ALL of Apple’s devices — such as iPhones and iPads — use Arm chips. Nearly all of Arm’s revenue comes from licensing. Other examples include the tech giants like IBM and Qualcomm which even have their own licensing programs, inviting businesses to license their patents. Qualcomm, owning over 140,000 patents, has an approximate average of 1 billion dollars in licensing revenue per quarter! Approaches to Patent LicensingThere are two main approaches to patent licensing — the carrot approach and the stick approach. Carrot ApproachIn this “friendlier” approach, the patent owner (and potential licensor) must persuade the potential licensee to license the patent. In this case, the potential licensee has not infringed the patent at issue, and they can simply refuse to license the patent. So, it is up to the patent owner to convince the potential licensee that the product, design, or technology covered by their patent will benefit the potential licensee in some way, usually by helping them to make money. Stick ApproachIn this more “serious” approach, it has already been determined that the potential licensee has infringed the patent at issue and is using the technology in the patent in some way. The “stick” in this approach is litigation, and the basic message is that the potential licensee must license the patent or face a lawsuit. As one IP attorney once said, every licensing offer is in fact a potential lawsuit — it’s just that in the carrot approach, litigation is implied, and in the stick approach, it is stated directly. Most often than not, the carrot approach is just a stick approach in disguise. Types of Patent LicensesThere are basically three types of patent licenses — exclusive, non-exclusive, and partially-exclusive licenses.
The types of license agreements are not limited to the three listed above. Others may include the co-exclusive license where the licensor only licenses to a limited number of licensees or where licensees must meet certain criteria. Another type of license would be a sole license in which the licensor only licenses a patent to a single licensee but still keeps the rights to exploit the patent. There is even the compulsory license where the patent owner is forced by the government to allow others to use their patent for a set fee, mostly seen in the pharmaceutical industry. Also, sub-licenses are often mentioned in licensing agreements. The right to sub-license technology to a third party will be stipulated in the original license agreement. Exclusive license agreements are more likely to include sub-licensing rights. Check out The Story of Intel, Apple, and Qualcomm: The Apple and Qualcomm Lawsuit for a real-life example of licensing involving high-profile companies. How to Find Potential Licensees?Before rushing out to find potential licensees to license your patent, you will need to know your patent. Owning a patent does not mean that you are guaranteed to generate revenue from it. Therefore, it is crucial to evaluate your patent’s marketability and know your position in the marketplace before any investment is made. To fulfill the goal of licensing a patent profitably, here are a few questions you can ask yourself:
After you have confirmed that your patent has licensing potential, the key to generating revenue is to find the right licensees. To find potential licensees, you should: First, analyze your patent portfolio. You can first pinpoint the valuable patents in your portfolio and filter out the patents with low quality and value. Second, look into the forward citations of your valuable patents. Companies that have cited your patent for reference may be potential targets. One important thing to remember is that you must make sure that your target is practicing in the same country that you have the patent in, if you do not have the authority to practice in that country, you cannot stop others from using the technology. Another point worth noticing is the time frame of the citation. If a company was actively citing your patent, but had not been doing so for an extended period, it is quite possible that that company is no longer leveraging this technology. From the chart below, we can presume that Sonics Inc. is no longer using Oculus’s technology, and Apple has been actively using it in recent years. Therefore, Sonic Inc. might not be a great licensee candidate. If you have the budget and would like to seek professional assistance, it is always a great idea to enlist the help of a patent brokerage or a patent attorney with experience in patent licensing. Why Should or Shouldn’t I License My Patent?Let’s take a look at the pros and cons of licensing your patent. Why you should:
Why you shouldn’t:
ConclusionLocating potential licensees can be time-consuming, and negotiating the best terms for a patent license is not always easy. This may include requiring the licensee to meet specific milestones and prepare periodic performance reports after licensing, all of which need to be negotiated before signing the agreement. We strongly advised that due diligence be conducted thoroughly. Maintaining clear channels of communication with the licensee is also important, as disputes may lead to legal fees and hassles in the future. When it comes down to it, every patent owner’s situation is unique, and the question of whether to license one’s patent to others must be considered carefully. In the next part of this article, we will delve further into this topic and take a closer look at licensing from a licensee perspective, licensing royalties, and some good-to-know information. Want to take a look at your patent portfolio and find potential licensing targets? Sign up now for a 7-day free trial of Patentcloud’s Due Diligence! *No credit card required |