Patent licensing agreements are commonplace in many industries. On the surface, they may seem to be a simple contract; however, there are numerous factors that business owners, entrepreneurs, and patent owners should consider when entering a patent licensing agreement. As the adage goes: “The devil is in the details.”
We highlight some of the common elements of licensing agreements and why they may be relevant to you.
A patent license agreement is a legal contract between a patent owner (the licensor) and a party that wants to use the patented technology (the licensee). The license agreement typically contains provisions defining the invention(s) covered, the duration of the license, the field of use for the licensed technology, and the license terms, which include details of the conditions under which the licensee can make, use, and sell the patented invention, and the royalties required to be paid to the patent owner for doing so.
To be valid and enforceable, a patent license agreement must be in writing, signed by both parties, and include all essential terms and conditions, such as the license’s scope, duration, royalty rates, and the field of use.
There is no one-size-fits-all “template” for a patent license agreement. Every situation is different due to the specific relationships between the parties entering such an agreement.
Exclusive vs. Non-Exclusive.
Will the patent license be exclusive or non-exclusive? Each has its advantages and disadvantages.
An exclusive patent license means nobody other than the named licensee can use the patented invention, and no other licenses will be granted for that invention. This provides a competitive advantage to the licensee. A non-exclusive patent license allows the licensee to use the patented invention; however, the patented invention may also be licensed to other licensees as well.
Minimum Royalties.
Many patent license agreements include a minimum royalty, often on a basis of a time period. For example, a patent license agreement might call for a minimum royalty of $50,000 in a calendar year, which the licensee must pay, regardless of the number of units sold or produced. This ensures that the licensee makes good-faith efforts to commercialize the product, while providing a guaranteed return for the licensor.
Royalties as a Percentage or Per-Unit of Sales.
Patent license agreements often include a royalty as a percentage of sales or on a per-unit basis of sales. For example, a percentage of sales may be characterized as 5% of net sales per quarter. On a per-unit basis, it may be characterized as $1.50 per unit sold. The per-unit basis gives both licensor and licensee certainty as to the royalty amount; however, the per-unit basis does not necessarily account for future price fluctuations, potentially causing one party to realize an effective royalty percentage that differs from what they had anticipated. From an accounting or auditing perspective, the per-unit royalty basis is easier to calculate and track.
License Term.
Patent license agreements may not extend beyond the expiration of the licensed patent, thus allowing the licensor to monetize its patent rights only for the life of the patent.
License Territorial Scope.
Patent license agreements may be territorial in scope. For example, a licensor may allow one licensee to use the patented invention in the southeast and another licensee to use it in the northwest. Furthermore, if patent rights exist in foreign countries, then the territorial scope may be country-specific.
License Field-of-Use Scope.
Patent license agreements may be limited or specific to a particular field-of-use. For example, a patent license agreement may allow one licensee to use the patented invention for commercial installations and another licensee to use it for residential installations. In the medical field, the field-of-use may be in diabetics for one licensee and orthopedics for another.
Allowing Assignment or Sublicensing of License.
A patent license agreement should specify whether the license may be assigned and/or sublicensed to another party. An assignment may occur either as part of a business deal or as part of a sale of the licensee to another party. A sublicense may occur as part of a business deal or further efforts by the licensee to commercialize the patented technology.
Improvements to Technology.
Generally, improvements to patented technology will be covered by a patent license agreement unless the agreement specifically excludes such improvements. A patent license agreement should specify whether improvements are covered, and who owns any such improvements.
Royalty Stacking.
It is quite possible that a single product is covered by multiple patents owned by numerous unrelated parties. A licensee should be careful to ensure that they do not end up owing stacked royalties on multiple patents. For example, if a party agrees to license one patent from Party A for 5% of revenue and a second patent from Party B for 4% of revenue, then the licensee will be on the hook for 9% of their revenue, and neither of the separate licensors have much incentive to negotiate the royalty rate down.
At NK Patent Law, we help our clients leverage their intellectual property assets to grow their businesses. If you are interested in learning more about patent license agreements or other license agreements, please Contact Us today to learn more about how we can assist you.