How Do Patent License Negotiations Work?

By David Carnes

A patent is a bundle of rights representing a temporary legal monopoly on a work of technology that is novel, useful and inventive. A patent owner may keep his patent to himself, or he may assign or license it. While a patent assignment represents an outright sale of patent rights, a patent license represents the transfer of partial, temporary or nonexclusive rights.

A patent is a bundle of rights representing a temporary legal monopoly on a work of technology that is novel, useful and inventive. A patent owner may keep his patent to himself, or he may assign or license it. While a patent assignment represents an outright sale of patent rights, a patent license represents the transfer of partial, temporary or nonexclusive rights.

Patent Term

The patent owner may be in a hurry to profit from the invention, because patents normally endure only 20 years. Since patents are granted retroactive to the original filing date – which may be years before final approval – many patent owners seek to license the patented invention between the date the application is filed and the date it is approved, while it is still in "patent pending" status. During patent negotiations, the potential licensee should demand a discounted price for a pending patent license, to compensate him for the risk that the application will eventually be denied.

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Restrictions

A licensor may want to restrict a licensee's use of patented technology in four ways – exclusivity, field of use, time and geographic scope. A patent license may be exclusive or nonexclusive, meaning the licensor may grant a license to only one manufacturer or to more than one. A licensor may also wish to restrict the licensee's permitted field of use; for example, the owner of a coolant patent may insist that the licensee use it only in air conditioning units and not in refrigerators. A licensor may also wish to license the invention for a period of time that is shorter than the remaining term of the patent. Finally, a licensee may wish to restrict the areas in which the licensee may exploit the invention – only outside the United States, for example. A licensee should insist on a discounted fee in exchange for accepting any such restrictions.

Fees

Three main fee structures are popular – lump sum payment, royalties and advance against royalties. A licensor should insist on advance lump sum payment if he harbors serious doubts about the licensee's ability to sell the invention. Royalties are calculated based on a certain percentage of sale volume or profits, and are appropriate for risk-taking licensors. The advance against royalties fee structure requires the licensee to pay a certain amount in advance, which is then subtracted from later royalties due to the licensor.

The Final Agreement

The negotiation process culminates in the execution of a patent licensing agreement. When drafting a patent license agreement, you must address every relevant issue – the licensee may want the licensor to indemnify him in case he is sued by a third party for patent infringement, for example. The final agreement should be drafted with the assistance of an attorney, who can provide appropriate legal wording for peripheral issues such as dispute resolution, warranties and governing law clauses. The final agreement should be signed by the appropriate representatives of each party.

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Patent Licensing Issues

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