A patent license is a contract between an inventor and a company that allows the company to commercially use or develop your invention for a specified period.
A patent license contract can be a landmine for newbie and experienced inventors alike. And it helpful to know the lay of the land.
Here are the key terms that you should be aware of:
Key Terms:
Licensor and Licensee
Understand who the "licensor" (owner of the patent) and the "licensee" (entity being granted rights to the patent) are.
Example: If you invented a new kind of energy-efficient LED bulb, you would be the "Licensor." A lighting manufacturing company like Philips could be the "Licensee" if they agree to manufacture and sell the bulbs based on your patent.
Grant Clause
This specifies the exact rights being granted to the licensee. It can be exclusive, non-exclusive, or solely for a specific geographical location or duration.
Example: An exclusive grant clause might read: "The Licensor grants the Licensee the exclusive right to manufacture, sell, and distribute the patented LED bulb in North America."
Scope of License
This defines what the licensee can and cannot do with the patent. It may include restrictions on the type of products, geographical limitations, and sublicensing rights.
Example: The scope might limit the licensee to only produce residential lighting solutions and not industrial lighting products using your patented technology.
Term and Termination
Understand how long the license will last and under what conditions either party can terminate the agreement.
Example: A 5-year term with options to renew, and a termination clause if the licensee fails to meet specific performance milestones.
Financial Terms
This includes royalty rates, upfront fees, and any minimum guaranteed payments. Often there's also a schedule for payment.
Example: An upfront payment of $10,000 plus a 5% royalty on net sales.
Royalties
Details regarding the percentage of sales revenue to be paid to the licensor, how it is calculated, and when it is to be paid.
Example: 5% of net sales, payable quarterly.
Performance Milestones
Requirements that the licensee must meet by certain dates, such as the development of prototypes or reaching sales goals.
Example: The licensee must achieve $1 million in sales within the first two years.
Intellectual Property (IP) Ownership
Clarifies who owns any improvements or modifications to the patent.
Example: Any improvements to the LED technology made by the licensee will be jointly owned.
Confidentiality
Specifies what information is confidential and how it should be handled.
Example: Neither party may disclose the financial terms of the agreement to third parties without written consent from the other.
Indemnity
Addresses liability issues, specifying who is responsible if the product infringes on another's rights or causes harm.
Example: The licensee indemnifies the licensor against any lawsuits related to product defects.
Audit Rights
Provisions that allow the licensor to audit the licensee's sales to ensure accurate royalty payments.
Example: The licensor reserves the right to audit the licensee's sales records annually.
Dispute Resolution
Defines the means by which disputes will be settled, often specifying arbitration or mediation as preferred methods.
Example: Any disputes will be resolved through arbitration in a mutually agreed upon location.
Pitfalls and Terms to Watch Out For:
Too Broad or Narrow Grant Clause
Be wary of granting too many rights or, conversely, limiting your invention's potential by accepting too narrow a scope.
Example: A too-broad clause might give the licensee the right to produce any kind of lighting product, even beyond residential lighting, depriving you of other lucrative markets.
Unfavorable Royalty Rates
Low rates can undervalue your invention, while high rates can discourage the licensee from investing in the product.
Example: A less-than-favorable rate of only 1% could mean you’re not adequately compensated for your invention.
Lack of Performance Clauses
Without milestones, a licensee might sit on your patent without actively marketing or developing it.
Example: Without a milestone like achieving a minimum of $1 million in sales, the licensee might not have much incentive to actively market your invention.
Exclusive vs Non-Exclusive
Be careful when granting exclusive rights, as this can limit your ability to license the patent to others. Make sure to include performance milestones if you opt for an exclusive license.
Example: If you grant exclusive rights without performance milestones, the licensee could essentially "sit" on your patent, preventing you from licensing to others who might be more active.
Ambiguities in IP Ownership & Improvements
If not clearly stated, confusion over who owns improvements can lead to disputes.
Example: Without a clear clause, the licensee might claim sole ownership of improvements they made, which could later become a contentious issue.
Lack of Audit Provisions
Without the right to audit, you have no way of verifying royalty payments.
Example: Without the right to audit, the licensee might under-report sales, leading to lower royalty payments.
Indemnification Traps
Make sure you're not assuming all the risk, especially if the licensee has control over manufacturing or marketing.
Example: If the agreement places all liability for infringements on you, the licensor, you might find yourself legally responsible for issues caused by the licensee's actions, like improper manufacturing methods.
Vague Termination Clauses
Ambiguous or unfavorable termination clauses can lock you into an undesirable relationship with a licensee.
Example: An ambiguous clause might not provide a clear way to terminate the agreement, even if the licensee is not meeting their obligations.
Renewal Terms
Be cautious of automatic renewal terms that could extend a less-than-ideal licensing agreement.
Example: Automatic renewal terms could lock you into an unfavorable agreement for another cycle without prior notice.
Cross-Licensing Requirements
Some licensees may require you to license back any improvements they make. Understand the implications of this before agreeing.
Example: If the licensee makes an improvement and requires you to license it back, you could end up paying for improvements to your original patent.
Strict Confidentiality
While protecting your IP is essential, overly restrictive clauses can make it difficult to engage with other potential partners or stakeholders.
Example: Overly restrictive terms might prohibit you from discussing your invention with potential investors or other interested parties, limiting your options for future partnerships.
Non-Compete Clauses
These can restrict your ability to operate in your own market, so be extremely cautious if these are included.
Example: If the clause prevents you from developing related lighting technology during the term, it could hinder your ability to innovate in your field.
We hope this list has been helpful to you in getting oriented with a patent licensing agreement. Understanding these key terms and being aware of potential pitfalls will put you in a stronger position during negotiations. However, we encourage you to consult a legal advisor experienced in IP and licensing agreements because, as you may already appreciate, patent licensing agreements can be very complex.