Every year, a whopping 650,000 patent applications make their way to the US Patent and Trademark Office (USPTO). An even more impressive number, 3.4 million patents were filed across the globe in 2021 alone. With the sheer amount of patent filings, you might be wondering: what's driving inventors to put pen to paper and secure these patents? A partial answer is that, among other benefits, a primary driver of patent applications is the potential for patent licensing. Patent licensing can be a strategy for revenue generation, protecting your intellectual property, risk reduction, and extended market reach.
So, you can license your patent for royalties, but what does that entail? If you license your patent, does that mean the licensee legally owns your patent? These are fundamental questions to patent licensing that will be explored in this article that hopefully will leave you with a comprehensive understanding of patent licensing to capitalize on your invention effectively.
Licenses are legal tools that allow for the controlled use and distribution of protected intellectual properties, including patented inventions.
What is a License?
In the context of intellectual property, licensing is a legal arrangement where the owner of a protected invention, design, or creative work (the licensor) grants permission to another party (the licensee) to use, produce, or distribute the protected asset under specified terms and conditions.
A patent gives the owner the legal right to exclude the unauthorized use, manufacture, or sale of the products or services that the patent covers. A patent license is a legal agreement where the patent holder (licensor) permits another party (licensee) to utilize their patented invention under defined conditions. This granting of rights typically involves financial compensation such as royalties. The licensee can use, produce, or distribute the patented asset without infringing on the patent owner's rights. This legal instrument is a potent way to monetize IP while retaining control over it.
Types of Licenses
There are many different types of licenses out there from product licenses to copyright licenses to joint development licenses. In the domain of patent licensing, there are primarily two kinds: non-exclusive and exclusive licenses.
This type of license is the most prevalent type in the market. They are flexible and allow multiple entities to utilize the same property. They are named 'nonexclusive' because the rights accorded to the licensee could also be granted to others.
On the other hand, an ‘exclusive’ license is only granted to a single entity, allowing them the sole right to use the licensed property. The exclusivity of this type of license allows the licensee to leverage the patented property without competition from other licensees.
Nonexclusive vs. Exclusive Example
Here’s a practical example to help illustrate the difference.
Suppose there is a startup that has patented a cutting-edge software algorithm enhancing data encryption. A company like Microsoft expresses interest in incorporating this algorithm into their software suite to improve their data security. In this situation, the startup could legally allow Microsoft and other tech firms to use the algorithm under a non-exclusive patent license. This means the startup would retain ownership of the patent, but still be open to letting other companies utilize the algorithm (in exchange for licensing fees). Or, the startup could have an exclusive patent license, allowing them to reserve the usage rights of the algorithm solely for Microsoft.
Why License an Invention?
A question in the back of your mind is likely: why do businesses and entrepreneurs license inventions?
Revenue Generation: The predominant reason for patent licensing is to allow for the monetization of IP rights. By granting permission to another party to use, produce, or distribute the patented invention, the licensor receives royalties or licensing fees in return. The revenue stream can be especially beneficial for individual inventors or small businesses that may not have the resources to manufacture and market their inventions on a large scale. (See this research article for more on tech companies).
Retained Control Over IP Rights: Licensing an invention also allows the inventor (assuming they hold a valid patent) to maintain ownership and control over their intellectual property rights. The licensor can negotiate specific terms and conditions within the licensing agreement to ensure that their invention is used in a manner that aligns with their vision and values.
Mitigated Risks and Costs: Bringing an invention to market carries commercial risks. For example, manufacturing, marketing, and distributing a new product can be a risky and expensive endeavor. Licensing an invention to an experienced licensee can help minimize these risks and costs. The licensee, often a company with established manufacturing and distribution channels, assumes the responsibility of producing and selling the licensed product.
Expanded Market Reach: Not all investors have national or international market reach. Licensing agreements can help inventors expand the reach of their inventions to new markets, both geographically and across different industries. By partnering with licensees that have existing networks and expertise in various markets, inventors can tap into previously inaccessible customer bases.
Do You Need a Patent to License Your Invention?
Although it is technically possible to license an invention without patent protection, it can be risky to do so. If you go forward with doing so, you need to establish, develop, and protect your IP rights. For this reason, securing a patent is a critical step in the process of licensing an invention effectively. Here is the key thing to remember: A patent grants the inventor exclusive rights to their invention for a specified duration, preventing others from making, using, selling, or importing the patented invention without the inventor's permission (35 U.S.C. 271). With patent protection, you will have a number of different advantages when it comes to negotiating a licensing agreement, including:
More Ability to Attract Licensees: A patent demonstrates the novelty and value of an invention, making it more appealing to potential licensees. Companies are more likely to invest time and resources in a patented invention, knowing that intellectual property rights are protected, and competitors cannot copy it easily.
Enhanced Negotiating Power: Holding a patent increases an inventor's negotiating power when establishing licensing agreements. With exclusive rights to their invention, the inventor can dictate terms and conditions more effectively, ensuring a better deal and a higher return on their intellectual property.
Real Legal Enforcement Rights: A patent provides the legal foundation for enforcing licensing agreements and addressing infringement issues. In the event a licensee breaches the terms of the agreement or an unauthorized party infringes upon the patented invention, the patent holder can take legal action to protect their IP rights.
Long-term Value: A patent can create long-term value for an invention by allowing the inventor to control and profit from it for the duration of the patent protection. This extended period of exclusivity can generate sustained revenue through licensing agreements. .
Q: How is a patent license different from the sale of an invention?
The main difference between a patent license and the sale of an invention is that a license does not transfer the ownership of the patent. The licensor retains rights to the intellectual property, while granting certain usage rights to the licensee. Some licenses, though, may grant extensive rights to the licensee, to the point where the transaction resembles a sale.
Q: Can I license my patent-pending invention?
Yes, it is possible and not uncommon for inventors to license their inventions while it's patent-pending. However, it's important to remember that until a patent is granted, your invention lacks full patent protection. You need to carefully ensure the terms of your negotiated contract to understand considerations of patent application being denied, for instance.