Licensing a Patent

Licensing a patent is much more complicated than a simple assignment. In fact, a Patent License Agreement could be one of the most complex agreements any company has to negotiate. But a well-planned and executed patent license strategy can provide the owner of a patent with the best of all worlds: the ability to receive substantial revenues from a patent without having to build extra manufacturing, distribution and sales capacity, while at the same time maintaining ownership and control. Licensing also allows the patent owner to select more than one licensee based on their ability to exploit a given territory and/or type of patented product.

What makes a patent license so complex is also what makes it appealing: subject to competition laws, it begins with a clean slate upon which any conceivable form of deal can be negotiated. Some of the open-ended issues that can be discussed include whether all or only a portion of the parts/rights covered by the patent will be licensed, what territory will be covered, what field of use (e.g. product or type of product sold) will be covered, what level of exclusivity will be granted, and how royalties will be determined.

To illustrate the complexity of a Patent License Agreement, here is a list of the issues that are often covered:

  • Details of Licensed Products
  • Licensed Use of Know-how
  • Field of Use
  • Territory in which patent can be used
  • Exclusive or non-exclusive rights to use patent
  • Royalty rates
  • Method of calculating royalties
  • Minimum royalties (if applicable)
  • Definition of net sales price
  • Technical assistance to be provided by licensor
  • Quality control and marking of patented products
  • Marketing obligations of both parties
  • Ownership of improvements to the patent
  • Confidentiality obligations
  • Protection of the patents and licensed know-how>
  • Representations and warranties about the patent
  • Liability, indemnity and insurance
  • Sub-licensing of patent
  • Subcontracting rights
  • Term of the license
  • Termination of the license
  • Effect of termination of the license
  • Further assurances from the Licensor
  • Dispute resolution
  • Governing law and jurisdiction
  • Tax issues
  • Transfer pricing

Typically, many of these provisions are negotiated in some part in a Patent License Agreement, and the outcome will depend on the relative strengths of what the licensor and licensee bring to the table.

One of the first issues that must be decided is whether the patent will be licensed for all possible uses or for a particular use. For example, if your company was issued a patent covering a new drug that could relieve the symptoms of the common cold as well as help heart attack victims recover quickly, you may want to license one “field of use” to one distributor and the second to another, because the skills involved in marketing a cold relief medicine versus a heart-attack recovery drug, as well as the customer base, may be completely different.

The licensed territories included in a Patent License Agreement may be similarly divided. If one company has a strong manufacturing and distribution presence in the EU, while another is formidable in Japan, you can grant separate licenses for each territory.

You can also decide whether the license for a particular field of use and/or territory will be exclusive or non-exclusive. If exclusive, the royalty rate will be much higher, but it will then be a good idea for the licensor to negotiate minimum royalty payments in order to ensure the licensee is using its best efforts to market and sell the product. If the minimum royalty amounts are not met, then the licensor may want the right to either terminate or make the license non-exclusive at a lesser royalty.

The most common method of calculating royalties is based on the net sales price. However, a fixed amount per product sold is often used as well. It is possible to base royalties based on net profits, but this involves much more complicated accounting and tracking issues.

When negotiating an exclusive license for a particular territory, both parties need to make sure they don’t violate applicable competition laws. In general, the license should be confined to the term of the patent and not extend beyond the time it lapses, and the combined market share of the two parties should not exceed statutory maximums for an exclusive license. In addition, there should not be any tie-in arrangement, where the licensee is required to buy a non-patented product from the licensor.

Finally, it may also be necessary or desirable to license trade-secrets and know-how along with the patent in order to allow the licensees to fully exploit the invention. A mixed patent and know-how license may also be appropriate where there are doubts as to the strength of the patent and the parties wish the license to continue if the patent is declared invalid. This only works, however, if the know-how is not publicly disclosed (i.e. there remains something of value to license).

Often, a patented product will be licensed together with company trade marks that will be used to effectively market the product and maintain brand identification with the licensor. We will know look closely at how to register and protect a valid trade mark, as well as how to maximize its value.

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