A patent does not necessarily mean you will make money. You must market your invention, sell your patent, or transfer the rights in order to make a profit. Although selling your patent right away may pay you a quick return, licensing is typically a more profitable route for inventors.
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Patent Licensing: What is it?
Patent licensing is a revocable agreement between patent owners and licensees to transfer patent rights to licensees who can then benefit from the intellectual property rights and enforce them.
As a patent owner, you can license or transfer interest in a patent. The intellectual property rights of a patent owner or licensor are usually given up for a specified period. The licensee has the right to make or sell the invention. During the license period, the licensee can also make or sell the invention or design.
There are two types patent licenses
- Exclusive Licenses: all ownership rights are transferred to the licensee. Titles remain the property of the licensor. All patent owners must agree on an exclusive license.
- Non-exclusive Licenses: These licenses allow the licensee the right to create the invention or design. The licensee does not have exclusive rights. Other parties and the licensor can also produce the invention or design. A non-exclusive license can only be granted to one patent owner.
A typical agreement will include:
- The subject of agreement- i.e., a patent process, product, or innovation that has been patented.
- The scope of the license – i.e. the country or area to which the license applies
- The royalties– can be either a percentage or a fee.
- The term of the license – renewal and termination terms
- Any limitations-e.g. minimum annual royalty or limit on the number of products that can be sold
- Obligations and warranties – which include responsibility and costs associated with protection renewal, maintaining, and enforcing the patent rights.
Other factors to consider include: product or quality control standards, the ability of the licensee to sublicense rights, compliance with regulations, and any costs in addition to royalties.
Approaches to Patent Licensing
Two main approaches to patent licensing are available: the carrot approach and the stick approach.
This “friendlier” approach requires the patent owner (and possible licensor) to persuade potential licensees to license the patent. The potential licensee must prove that they have not violated the patent in question. In such cases, they may refuse to license the patent. The patent owner must convince potential licensees that the product, design, or technology covered under their patent will be of benefit to them in some way. Usually, this is by making money.
This is a more serious approach. It has been established that the potential licensee has violated the patent at issue. The licensee is also using the technology in patent in some manner. This approach involves litigation. The basic message is that potential licensees must either license the patent or face legal action.
How do you find potential licensees?
Before you rush to look for potential licensees for your patent, it is important to understand your patent. You cannot guarantee revenue from your patent just because you have it. Before you invest in a patent, make sure to assess its marketability. Here are some questions to ask yourself in order to license a patent profitably:
- What is your patent’s uniqueness?
- Is your patent an irreplaceable feature for the market?
- Which type of licensee might be interested in patent protection?
Once you have determined that your patent is licensed, the key to revenue generation is finding the right licensees.
You should follow these steps to find potential licensees:
- First, analyze your patent portfolio. You can identify the most valuable patents in the portfolio and filter out patents of low quality or value.
- Second, consider the forward citations to your patents. Potential targets could be companies that have cited your patent as a reference. It is important to make sure your target is practicing in the country you hold the patent. If you don’t have the authority to practice there, it is impossible to stop other people from using your technology.
The benefits of patent licensing
The following benefits are available to patent owners through the licensing model:
- It doesn’t take much money to market your product. The licensee will pay for the manufacturing, distribution, marketing, and sales costs.
- Your innovation will get to market fast- if you issue a license to an established business, you can leverage their expertise, infrastructure, and involvement. They will be able to get your product onto the market faster and more efficiently.
- You can enter new markets – It all depends on the licensee and the deal. You can have access to markets that are closed to imports and avoid export taxes.
- You can generate revenue- The licensee will pay you for the right to use your patent. This payment can be one-time, ongoing payments, known as royalties or variable, depending on the profit.
- You retain ownership of your intellectual property- Licensing allows you to give suppliers, competitors, or other businesses certain rights over your patent while still receiving royalty income and retaining ownership.
The disadvantages of licensing patents
Finding the right licensee can be difficult. You should carefully evaluate potential licensees and structure your licensing agreement to maximize your product’s chances of success.
There are also potential downsides and risks to patent licensing:
- Loss of control, either partially or completely, over your invention
- Rely on the licensee’s ability and willingness to commercialize your patent effectively
- Poor strategy and execution could result in product failure
- Poor quality management can damage your brand and product reputation
- You are also creating competition by licensing your product. To avoid giving your competition an unfair advantage on the market, you might limit the scope of the license.
Remember that your relationship with the licensee will be important. You may end up in legal trouble or in dispute if things go wrong. It is worth conducting due diligence on potential licensees before you give up any patent rights. This will help to determine their track records and suitability.
Keep detailed records of all agreements and contracts you make if you plan to license or sell your patent. Seek legal advice if in doubt.
A royalty is a mode of payment made to an owner or licensee of a particular property or asset for the continued use of their property or asset.
How much royalty can come from a licensing agreement? How is it calculated?
Each industry has its own royalty rates. There is no standard. The rates for most patent licensing agreements can vary from 0.1% up to 8% depending on the industry or product. The rate can sometimes reach 25%. The rates for high-margin products like software are usually higher. However, rates for mass-produced items such as household goods or food will be lower at 2% to 4%. There are several factors that can influence royalty rates:
- Patent technology significance
- If the patent is ready to be produced/marketed
- Patent technology uniqueness
- Risk of success
- Potential profit margin
- Size of the market
- Industry competition
How to File a Patent License
1. Find Manufacturers: Identify potential licensees
2. Sign a Confidentiality agreement: To protect your intellectual property rights, ask potential licensees for a confidentiality agreement.
3. Negotiate Patent License: To reach an agreement on licensing terms and conditions, you should work with the licensee.
4. Complete a Patent License Agreement: An assignment agreement for patents can be either exclusive or non-exclusive. It describes the terms, time period, and royalties. This document must be signed by both the licensee and the licensor.