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Intellectual Property Legal Services
IP / Marketing Intelligence-Driven Business Strategy

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I. INTRODUCTION

One way of succeeding with an invention is by making and selling a lot of them at a profit and being the only one allowed to do so, as exemplified in Inventor Successes.  Another way is to have someone else do it, and simply pocket some proceeds.  In practice, technology exploitation is shared, sometimes involving a number of vertically- and/or horizontally-oriented licensors and licensees.  To make the most of it, technology owners should understand the mechanics of a license, that is, the appropriate subject matter thereof and typical contract terms employed therein, strategic considerations in crafting those terms, and a process that increases the likelihood of achieving a beneficial licensing arrangement.

 


 

I. INTRODUCTION
II. LICENSING MECHANICS
  A. SUBJECT MATTER
  B. TERMS
    1. Background
    2. Definitions
    3. Grant
    4. Grantee's Obligations
    5. Grantor's Obligations
    6. Rights in Improvements
    7. Royalties
    8. Right to Bring Action
    9. Transferability
   10. Term, Termination and Bankruptcy
   11. Patent Validity
III. LICENSING STRATEGY
  A. Become Informed
    1. The Mechanics
    2. The Controlling Commercial Factors
       a. Existing and Related Technologies
       b. The Players
    3. Subject Technology Value/Strength
  B. Formulate Objectives
    1. Nature of Licensing Relationship
       a. Manufacturing Only
       b. Sales Only
       c. Use Only
       d. Exclusivity vs. Nonexclusivity
          (1) Exclusive Licenses
          (2) Nonexclusive Licenses
          (3) Staging-In
       e. International Exploitation
          (1) Individual Companies Overseas
          (2) International Entity
    2. Royalty Rates
IV. LICENSING PROCESS
  A. Prioritize Candidates
  B. Contact Prioritized Candidates
  C. Research Interested Candidates
  D. Advance a Term Sheet and Confidentiality Agreement
  E. Issue Letter of Intent
  F. Prepare Formal License Agreement
  G. Offer Formal License Agreement to License Candidate
  H. Negotiate Differences
  I. Execute and Record the License Agreement


 

II. LICENSING MECHANICS

   A. SUBJECT MATTER  

A patent license agreement controls the relationship of people with respect to one or more patents and/or patent applications.[1]  A patent is a bundle of rights that a government grants with respect to an invention as defined in a claim.[2]  At least in the United States, the bundle includes the rights to exclude others from making, using, selling, offering for sale and importing a patented invention.[3]  

Each of the rights of the grant bundle is separately transferable.  Irrevocable transfer of all of these rights is deemed an assignment; an agreement that transfers anything less is deemed a license.  For example, a patent owner may license to one party the right to make an invention and to another party the right to sell it.  

Patent applications do not afford enforceable rights, but rather only claims to rights.  Once the application is granted and issues into a patent, then the claimed rights become enforceable, hence valuable.  

While some established businesses will not consider licensing technology until a patent issues, a patent is not required to license technology.  Considering the time needed to research and locate appropriate licensees and get an agreement inked, licensing activities should be at least contemporaneous with the patent application prosecution processes.[4]  Indeed, high-tech business that push the edge do not want to risk losing the market opportunity waiting for a patent to issue.  

  B. TERMS  

Following are substantive terms generally found in a license.  Not all may be needed or even apply, depending on the nature of what is licensed and/or the relationship among the parties.  For brevity, many typical formal terms that are crucial to any kind of agreement, such as notice, choice of law, severability, etc. are not discussed.  For these and other reasons, parties to a license or any agreement should have a licensed attorney review the agreement prior to execution.  

    1. Background  

While not necessary, the background section of an agreement is where the parties can express the intent of the agreement or relationship intended to be established.  Statements in this section can be used to construe other terms in the agreement in a way that the parties may have intended, but failed to express.  

    2. Definitions  

Issues among parties typically derive from ambiguity or misunderstandings.  Therefore, the definitions section of any agreement should command special attention.  In particular, special terms, like "AFFILIATE," "IMPROVEMENT," "OTHERWISE DISPOSED OF," "SOLD," etc. (typically in uppercase to indicate special meanings)  should be clearly explained to avoid potentially irreconcilable problems down the line.  This also is a good section in which to list all of the intellectual property the grantor owns and define what from that list is the subject of the license, e.g. LICENSED PATENTS.  

Registered intellectual property, such as patents, trademarks and copyrights are readily identifiable.  Related know-how or trade secrets often included in a deal to help the licensee make the most of what is licensed and hopefully promote greater royalty payments are more difficult.  Nevertheless, trade secret identification perhaps is  even more important to pin down along with a promise not to disclose same.  This is because once a trade secret becomes known, it no longer is a trade secret and cannot be recaptured.[5]  

    3. Grant  

The grant should clearly identify:  (1) to whom rights are granted; (2) what rights are granted; (3) to what intellectual property assets the rights pertain; and (4) whether the grant is exclusive.  Keeping this highly-charged expression simple and clear may derive from employing terms defined in the “Definitions” section discussed above or elsewhere in the agreement.  For example, the grant may be expressed as:  

                            GRANTOR grants to GRANTEE respecting the AUTHORIZED SUBJECT MATTER for the TERM throughout and only within TERRITORY, an exclusive license regarding rights to practice, make, HAVE MADE, use, offer to sell, sell, lease, import or OTHERWISE DISPOSE OF embodiments of or that operate in accordance with AUTHORIZED SUBJECT MATTER.

 

 

In the foregoing grant expression, to whom rights are granted is a specially defined term, GRANTEE, which may include one or many parties.  The grant expression may include multiple grants, one for each of any number of parties to whom rights are granted.  

In the sample grant expression, the rights granted are listed out, but also include a couple of specially defined rights (HAVE MADE and OTHERWISE DISPOSE OF) for the sake of example.    

In the grant, the intellectual property assets involved are specially defined as AUTHORIZED SUBJECT MATTER, as is when the grant is effective (TERM).     

    4. Grantee's Obligations    

In addition to the most basic consideration of most license agreements, the promise to pay royalties, the grantee often is expected to uphold other promises, such as the promise to:  use best efforts to promote the distribution and sale of royalty-bearing products within the licensed territory; conduct all operations, including manufacturing, marketing, distribution, and sale of royalty-bearing products, in accordance with the highest standards of business customs of the industry; associate grantor's trademarks or trade names with the authorized subject matter as appropriate, etc.    

    5. Grantor's Obligations    

In addition to granting rights, the grantor also assumes certain responsibilities to facilitate the grantee's taking advantage of those rights.  For example, the grantor may promise to provide the grantee with technical and other qualified experts for developing the authorized subject matter and for assisting grantee on any problems or matters that require on-the-spot assistance.    

    6. Rights in Improvements    

No matter how good the licensor’s technology may be, it will be improved over time.  The “improvements” provision should address:  (1) what constitutes an improvement; (2) whether the license controls rights in improvements; (3) whether the grantee is entitled the grantor’s improvements; and (4) whether the grantor is entitled the grantee’s improvements.    

    7. Royalties    

The main attraction of many license agreements typically is how the grantor is to be compensated for rights in the grantor’s technology.  Sometimes royalties are based on a per-unit sale, and almost always based on the sales price.  Certain exceptions may be added, like for returns and credits.    

Especially in exclusive licensing arrangements, this term typically will include performance-related provisions, such as minimum sales quotas or royalty payments to sustain exclusivity or other advantages.  In consideration of the ramp up associated with growing sales, the minima often increase with time.    

This term also may require an up-front fee payable upon execution of the agreement.    

    8. Right to Bring Action    

This term establishes who retains the right to bring action against third party infringers. In exclusive arrangements, the licensee may be better suited and have greater incentive to sue an infringer for the loss of sales and income.  This term also may provide for giving the licensor part of any proceeds from the litigation that exceed the costs thereof as a quasi royalty that the licensee otherwise would not have been able to attain but for the licensed the technology.    

    9. Transferability    

This term establishes whether the licensee can turn around and give the technology to someone else.  Transfers can be complete as an assignment, or partial as a sublicense.    

Where transfers of any sort are permitted, generally the licensee must secure the licensor’s written consent.  Consent cannot be unreasonably withheld, but certainly should be balanced with the repercussions of allowing the licensed technology to disperse, such as the risk that it may become useful to hostile parties or ultimately diminish in value.     

    10. Term, Termination and Bankruptcy    

This term should cover as many ways as conceivable that the relationship or critical elements of the agreement could change with potential for diminishing the technology or usefulness of the agreement.  A typical provision is that the agreement is effective until the last of the licensed patent rights expire.  Other common provisions allow the licensor to terminate the agreement if the licensee:  (1) breaches any provision of the agreement, including missed royalty payments; (2) goes out of business; or (3) files for or is forced into bankruptcy.     

Rather than allowing the agreement to terminate automatically on the occasion of a specified event, licensees may be able to invoke a right to cure any problems that arise, which could save an otherwise profitable arrangement.    

Where the license involves a patent application or other inchoate rights, another common provision that licensees want is for the license agreement to terminate if no patent issues within a specified time.    

    11. Patent Validity    

“Validity” refers to whether a patent lawfully issued, that is, whether the application claims were examined in consideration of everything in the world that came before it and found to be useful, new and not obvious.     

Anyone can petition the US Government to re-examine a patent in light of unexamined prior art.  Such procedures are time-consuming and costly, and frequently reduce claim scope.  It is possible that a patent with diminished scope may no longer be able to cover for what a licensee needed the licensed technology, thereby relieving the licensee of royalty payment obligations.     

Accordingly, since licensees may have a high incentive to invalidate a licensor’s patent, this term typically requires that the licensee acknowledge that the licensed patents are valid and forgo contesting same.    

 III. LICENSING STRATEGY    

  A. Become Informed    

Knowledge is key to a good licensing strategy.  The more that is understood about the mechanics of a technology license, the controlling commercial factors and the people involved, and the value of the subject technology, the more efficiently and effectively the licensor can act and with greater likelihood of success.    

    1. The Mechanics    

Sections II.A and II.B above cover the appropriate subject matter for a license and common terms for controlling it.  Having a good working knowledge of the interplay between the terms of a license and any industry-specific typicality, such as royalty rates, allows for greater flexibility.  Flexibility increases the likelihood of reaching an overall agreement because, not only can a party’s specific needs be met, but flexibility also fosters cooperation and, ideally, more of a partnership mind set, rather than a master-slave relationship.    

    2. The Controlling Commercial Factors    

       a. Existing and Related Technologies    

As a starting point, the licensor must determine whether demand exists or could exist for the licensor’s technology.     

One approach to doing this is discussed in IP/Marketing-Driven Product Development.  IP intelligence can show whether others have been working on the technology, the direct and potential applications therefor, and the markets in which they fall.  Marketing intelligence can reveal the success potential for each of the applications.    

Knowledge of the relevant industries, how the technology fits within them and how those in each industry might regard it aids determining licensing objectives.  Cross-industry research also aids in understanding whether to pursue a single licensee in one field or if the technology should be sold through different sales channels and markets.    

An important aspect of understanding the markets for a technology is appreciating the breadth of its appeal and/or applicability.  Generally, products by small businesses tend to start with a small demand, a niche, commensurate with the promotion resources allotted therefor.  As demand grows, the product becomes more of a commodity.  For example, the protocol for identifying and storing documents on a small network of computers that initially satisfied a group of academics evolved into the world wide web that much of the world now cannot live without!    

       b. The Players    

For each of the markets in which the technology has good potential, the licensor should know the various players in those markets, including those who are advancing the arts and, perhaps more importantly, those purchasing rights in the arts, regardless of whether they exploit or suppress them.  Art advancers are of interest because they may want the licensor’s technology as a stepping stone to other advances.  Art purchasers are of interest, naturally, because they may want to buy the technology for whatever the reason.  However, art suppressers ultimately will limit or slow the advances in or popularity of the technology.     

Complementary marketing intelligence can reveal others who may be important despite IP inactivity.  Knowing potential licensees well, including short term and long term goals, can help in developing proposals with convincing explanations of the benefits of the invention and how it would increase their profits.    

    3. Subject Technology Value/Strength    

A licensor must know in excruciating detail the Strengths, Weaknesses, Opportunities, and Threats (SWOT) of the subject technology.  Any serious licensee will do their own SWOT analysis before initiating any dialogue with the licensor.     

At a minimum, the licensor must be ready to address the potential licensee’s SWOT concerns.  But even before drafting initial terms, such as royalties, the licensor should complete a SWOT analysis to get a sense of how favorable the terms may be.  SWOT background information also permits the licensor to demonstrate knowledge of the trade, which may assure the potential licensee that the licensor is an expert in the field.    

A SWOT analysis helps to determine the viability of the subject technology.  It can prepare the licensor to anticipate the potential licensee’s objections and, ideally, explain how an apparent weakness or threat actually may be a strength.    

From the licensee's perspective, if IP protection is weak and/or a competitor may design around the technology, then the potential licensee may see little value in the licensing opportunity.    

Some licensing experts recommend preparing anecdotal research, qualitative research and expert testimonials to demonstrate value in the licensing opportunity.  Otherwise, the licensing candidate may be unwilling to pay royalties on a new concept that may put the licensee at a market disadvantage.    

In consideration of the controlling commercial factors described in § III.A.2 above, a licensor should qualify:    

 1. The value and potential of the technology
 2. The commercial product or products and sustain ability thereof
 3. Any trademarks that could evolve into a popular brand
 4. The feasibility of gaining consumer awareness
 5. The existence of demand, directly or indirectly
 6. Why the timing is right
 7. The edge that the subject technology has over competing technology    

  B. Formulate Objectives    

The most important consideration in formulating the objectives of a technology license strategy is doing what is best for the future of the subject technology.  The better it does, the better the licensor will do.  Part of this is setting aside personal preferences and predetermined ideas.    

Technology licenses can achieve many objectives, such as obtaining royalty payments, cross-licensing technology transfers, establishing a standard, and temporarily removing technology from the marketplace.  The objectives should be tailored to the licensor’s and licensee’s needs and capabilities.  Although every term of a license agreement is important, probably the most significant are the nature of the licensing relationship and the royalty structure.    

    1. Nature of Licensing Relationship    

       a. Manufacturing Only    

A manufacturing-only license allows a manufacturer to sell a product covered by the licensor’s IP rights to an authorized licensee, typically a sales-only licensee.  Ordinarily, a manufacturing-only license derives from a sales-only license, as described below.  The exception is when the manufacturer bills for the product sold or sales made by the sales-only licensee.  In this case, the manufacturer pays the royalties to the licensor.    

A manufacturing-only license may be needed to add production capacity to another licensed manufacturer.     

The nature of some inventions may be such that it can only be licensed to the manufacturer or the end user, such as a method of making an article or the use of certain software.  However, in the former case, licensing may pertain to the product of that method, such as the pancakes that may derive from a proprietary method of making them.    

       b. Sales Only    

A sales-only license allows a retailer or representative to market and sell a product covered by the licensor’s IP rights.  The licensee is expected to pay royalties to the licensor based on these sales.    

Like a manufacturing-only license, a sales-only also may be needed to add sales capacity to another licensed seller.    

When purely licensing out for sales, the licensee’s marketing capabilities should carry greater weight than manufacturing might.  This is because, with good marketing, the licensor or licensee can always hire more manufacturing capacity; a stellar manufacturer with poor marketing capabilities will not likely maximize the customer outreach needed to fully exploit the invention.    

If a sales-only licensee can purchase product only from an authorized manufacturer, each manufacturer will need a manufacturing-only license.  Either, but typically not both of the sales-only licensee or the manufacturing-only licensee would be required to pay royalties in this type of licensing arrangement.  Responsibility for paying royalties usually rests with the licensee that bills for merchandise delivered to customers.    

       c. Use Only    

A use-only license allows only use of the technology.  Such limited rights grants are common in computer software sales.  Typically, the software purchaser enters into a license agreement upon installation of the software into a computer.  This license agreement states that the software is for personal use only and may not be copied, manufactured, or sold to anyone else or for the use of any others.    

Use-only grants also are prevalent in the life sciences, which rely on a variety of enzymes, antibodies, carriers and many other elements to obtain a desired result.    

       d. Exclusivity vs. Nonexclusivity    

Whether to grant an exclusive versus nonexclusive license depends on the nature of and demand for the technology.  The narrower the niche for the product, the more likely the license will be exclusive.  Technologies with high adaptability or high demand tend to be nonexclusively licensed.  If the former without the latter or vice versa, then exclusivity will tend to kill the sales and may promote designarounds and patent infringement.    

          (1) Exclusive Licenses    

An exclusive license provides rights to only a single licensee.  For example, an exclusive manufacturing-only license means that no other licensees may manufacture the innovation.    

Exclusive licenses are generally best for niche market products.  The exclusivity tends to create licensee incentive to invest its time and money because it protects the licensee's interests and investment.  A dedicated, exclusive relationship for a certain time frame can aid in creating a commodity niche. The narrower the niche, the longer the exclusive time frame may be required, up to the life of the patents.    

On the other hand, an exclusive license creates a risk of non-profitability, such as where the licensee is not inclined to do the hard work needed to fully exploit the technology.  In such case, the license agreement should include performance-based clauses, such as guaranteed sales volume, minimum royalties, time frame for introducing the licensed technology to market, etc.  Often, exclusive licenses will require up-front money as well.    

It is common to grant exclusive licenses that are limited to different fields.  This aids in preserving quality where implementation of the technology requires special care.  For example, implementing an impeller in a fuel pump for an automobile draws on different considerations and capabilities than implementing the same concept in medical equipment.    

It also is common to grant exclusive licenses based on different geographic regions.  This may be necessary to prevent high shipping costs from negatively affecting sales potential across the nation.    

Exclusive licenses also may be limited temporally to give a licensee a head start on competitors.  This often is a helpful incentive to the licensee to agree to the license in the first place.    

If an exclusive license is deemed appropriate, then the next step is to identify the appropriate candidate for such an arrangement.  Below are some criteria to evaluate.    

           (a) Size    

The potential exclusive licensee's present sales and marketing network should be appropriate to the anticipated or proposed needs.  If the license is intended to be long-term, then the prospect should have the ability to expand sales.    

           (b) Commercial Capabilities    

The potential exclusive licensee’s marketing approach should be appropriate to the innovation.   First, the licensee’s marketing abilities should be attuned to the intended markets.  Second, the licensee’s manufacturing ability should be capable of rendering the product in the quantity and with the quality needed.  Finally, the candidate should be competitive with similarly-situated companies.    

           (c) Financial Strength    

If the ongoing operations are acceptably inadequate, then the exclusive license candidate should at least have the financial ability to invest in machinery, dies, molds, etc. to meet the future needs in the targeted field.    

           (d) History and Reputation    

The exclusive license candidate’s track record with launching innovations should be studied, especially if in the context of licensing or product development relationships with other companies, can help anticipate potential issues and give a good sense of how things may go.  The licensor also should know whether the candidate ever sold an infringing product or has a reputation for ethical dealings.    

           (e) Development Capabilities    

Where the technology has not yet been embodied in a commercial product, the exclusive license  candidate must have the aptitude for commercializing and testing the product according to industry norms or the product will fail and not get a second chance.    

          (2) Nonexclusive Licenses    

Nonexclusive licenses permit several licensees to exercise comparable rights respecting the licensed technology.  Nonexclusive licenses typically are used for commodity-type products that experience high demand, such as the VHS or Blue Ray video display technologies found in so many VCRs on the market.    

While the market may support multiple licensees’ products, manufacturers tend not to be supportive of sharing technology with competitors.    

With nonexclusive licensing relationships throughout an industry or field, licensees typically enjoy greater liberty to do with the technology as much or little as they want.  While this type of licensing arrangement may provide less incentive for a producer to maximize exploitation of the licensed technology, increasing the volume of licensees should increase competition for it and cumulatively make up for the sacrificed revenue.    

              (a) Adjunctive Licensing    

Adjunctive licensing is a nonexclusive licensing arrangement where the licensee retains and exercises some or similar rights as the licensor.  For example, the licensor may have a strong presence on the West Coast, but nowhere else, and despite strong demand for the licensor’s products, does not want to set up shop elsewhere.  In this case, the licensor may do well to license a would be competitor in the region to exploit the licensor’s proprietary products.    

Another example is where the licensor has a presence on the Internet, but no presence in the commercial/industrial marketplace.  Nowadays, virtually all brick-and-morter businesses have an internet presence, so such a licensing arrangement should be undertaken with care not to become swallowed up.     

One reason that has become popular in many industries, but especially the telecom industry is to standardize the industry.  The lower per piece royalty given up is more than made up for by the sheer volume due to the entire industry adopting the standard.  Naturally, being associated with the development of a standard does wonders for the reputation and future business.    

              (b) Joint Development Agreements    

A Joint Development Agreement (JDA) is another type of nonexclusive licensing that can be an excellent arrangement, particularly for smaller companies in need of additional development or other capacity or support of larger entities in an industry.  For example, one business may be expert at engineering the various mechanical components of a furnace, another may be expert at software and electronic controls for running the furnace, and yet another may have vast experience and unique talents at installing furnaces, which lend insight into the mechanics and electronics design.    

JDAs usually endure for a specific time period.  After the period expires, one or more of the parties is entitled to own the intellectual property derived from the joint effort, but the remaining parties retain license rights thereto.  For example, the mechanical partner may come up with a concept for electronic control of a certain feature, which the electronics partner reduces to practice.  Since the electronics partner did not come up with the concept, but merely rendered technical assistance in its implementation, it may not qualify as an “inventor.”  Nevertheless, since the electronics partner added to the commercial value of the furnace product, the electronics partner should enjoy a license to whatever patent rights are drawn to that control feature.    

          (3) Staging-In    

One way to overcome objections to nonexclusive arrangements is to stage when licenses become effective.  For example, a first licensee may begin this year, another next year, and a third the year after that, and so on.     

Staged licensees can create competitive issues that might be of concern to an intended or yet undiscovered licensee.  Within an industry, some competitors may abide each other, while others will not.  The licensor must understand the industry chemistry and how licensing technology would impact it.  Misunderstood or badly managed, the licensing arrangement can create more of a standoff rather than general acceptance.    

Another concern is whether non-exclusive licensing relationships will cause antitrust problems.  This is a highly fact-specific matter that merits detailed discussion with a trusted IP attorney.    

       e. International Exploitation    

In our global economy, what has demand domestically may enjoy similar demand abroad.  While technological advances have made maintaining an international presence easier, initiating and sustaining international operations takes some time.  Until things are up and running, it may be important to rely on third party licensees, especially where profitably exploiting the licensed technology depends on local manufacturing capabilities or face-to-face sales activities.  Two approaches are available with very different short- and long-term consequences:    

          (1) Individual Companies Overseas    

Without reliable contacts, this approach definitely will be more costly in the early phase, but probably more lucrative in the operating phase.  This is because the responsibility and expense of finding the licensees, and then negotiating and getting agreements up and running is up to you.  However, once they are in execution, the license should make more money because the royalties do not have to be shared with an international partner.  Foreign licensees also may be made responsible for securing and maintaining appropriate IP protection for the technology, and policing the marketplace for any violations thereof at the cost of a reduced royalty rate, but with the benefit of having savvy eyes and ears and a vested interest keeping watch locally.    

          (2) International Entity    

Locating a trustworthy overseas licensee can be costly and frustrating without local contacts who can help.  Much of this may be alleviated by enlisting a business that already has international exposure and capabilities.  Naturally, one must sacrifice royalties in exchange for benefitting from that experience.  This approach may provide opportunities for sublicensing the established business’ contacts abroad, which may afford revenue streams that otherwise would not have flowed.    

    2. Royalty Rates  

A royalty is a cut of the licensee’s profits.  Determining a royalty rate for a patented invention is difficult.  The overriding factor is what the market, that is between licensor and licensees, will bear.  However, the supply side (the licensor) and the demand side (licensee) typically value the invention differently, typically with the licensor believing the technology is worth more and the licensee believing the technology is worth less.   

On one hand, the licensee dedicates significant resources, money, time, people, etc. to create a market and build sales and inventories; the licensee ultimately assumes all of the risk of failure.  Accordingly, the licensee is reluctant to give away all of its hard earned profits to a relatively safe inventor.  On the other hand, but for the inventor, the licensee would not have the technology to sell, hence the opportunity for profit.  So, the trick is balancing the value of the risk against the value of the opportunity.  

Royalty rates tend to vary according to the industry and type and number of intellectual properties being licensed as tabulated below:  

            Industry             Royalty Rate    
toy industry 5-15%
housewares, appliances, electronics, and hardware 1-7%
                                  Packaging

  1-5% 

 

Tools and sporting goods 3-10%
automotive aftermarket

 3-8% 

 

pet supply industry and baby goods 5-10%
Computer software 15-25%


Some of the driving factors include the window of opportunity, volume and innovator reputation.  Where the window of opportunity is small, for example where the product is trendy or likely to be rendered obsolete, like the pet rock or Ronco® Pocket Fisherman, the rates will be higher.  Where the volume is quite high, like for tennis balls or tires, the rate tends to be lower.  Where the technology is associated with a well-known creator, like Apple, it will command a higher royalty.

Another very significant factor is the ease of designing around the licensed technology, that is engineer something that performs the same function, but in a different way.     

Another factor is whether the licensed technology is secured with broad patent claims.  If the technology is secured with many patents, then the royalty rates should be higher.  If the claims are broad, thus able to preclude insubstantial design-arounds, the royalty rates should be higher.     

If few patent claims secure the technology and the claims are broad, there is a risk that they may not be valid.  Validity, a topic unto itself that is beyond the scope of this work, basically depends on the existence of other prior inventions or disclosures and how close they come to defining the licensed technology or making it seem obvious.    

Another factor is what the market, that is between the licensee and the ultimate consumer, will bear.  If competition is fierce, thus profit margins slim, then a licensee will be unlikely to give up any of that margin.  However, if the licensed technology would create a greater margin, then the licensee might be more open to paying for the privilege.    

Many royalty payment schedules are variable and based on performance.  Such arrangements can include both the higher rate that the licensee may want and the lower rate that the licensor may want, and ultimately wind up somewhere in the middle.  For example, the rate may provide for a higher rate for lower volumes and a declining rate as the sales volume increases.  Such a sliding scale can motivate the licensee to use best efforts to exploit the technology an maximize the return on investment.    

Another factor is whether the licensee agrees to a one-time, up-front payment.  This type of fee arrangement ordinarily affords the licensee lower royalty payments going forward.  Licensors that command up-front fees typically have past successes that induce licensees to accept such risks.  Multiple patents and broad scope also can support up-front fee arrangements.  However, where implementing the technology requires significant investment, up-front fees typically will not be paid.    

Rather than cash, the agreed payment may take the form of funding research and development, including securing IP rights to the technology, with or without a promise to grant back any rights in improvements.    

 IV. LICENSING PROCESS    

The strategies discussed above should determine the plan for carrying it out.  The plan should include a systematic way to prioritize and engage potential licensees; the basic structure of the license agreement desired; and strategic considerations respecting essential terms of the agreement.    

  A. Prioritize Candidates    

Potential licensees will have strengths and weaknesses vis-a-vis meeting the licensing objectives formulated for the subject technology.  For some cutting edge technologies or those drawing on expensive equipment for their commercialization, few able candidates may be available.  Most of the time, the licensor will have to winnow out a great many of able potential licensees.    

A successful way to identify and prioritize licensing candidates is presented in License Development.    

  B. Contact Prioritized Candidates    

No particular way to reach out to a potential licensee works for all technologies, but rather depends on the people in those technologies.  For example, businesses that specialize in medical devices may not respond well to an off-the-cuff telephone solicitation, preferring instead a formally-produced, glossy package containing as much information regarding all aspects of the subject technology.  On the other hand, a small business that makes commercial construction hardware may be more responsive to an informal call or note.  Initial impressions are important, so must be tailored according to the expectations of the field.    

  C. Research Interested Candidates    

The licensor should do extensive research on interested prospective licensees to determine whether it really qualifies as a prospective partner.  The Internet often is a good place to start, but should not be the exclusive research tool.    

The licensor should request and review the potential licensee’s annual report.  These reports should give a sense of how the business is doing and what plans it has for the future.  Make sure that the notes at the end of the report do not contain surprises that a business may be obligated to report, but may not want front and center.    

The licensor should obtain the potential licensee’s 10Ks and 10Qs, the annual and quarterly reports required by the Securities and Exchange Commission (SEC).  Usually you can find these on the companies website or through the SEC itself at www.sec.gov.    

  D. Advance a Term Sheet and Confidentiality Agreement    

A term sheet outlines the basic details of a license agreement as guided by the strategies and objectives discussed above.  A Confidentiality Agreement basically is a promise not to disclose or benefit from whatever the licensor discloses to the licensee candidate.    

Rather than sending a licensing candidate an entire licensing contract, which will contain many terms that, while important, are not particular to the subject technology or nature of the relationship thereto, providing a term sheet that addresses these essential elements aids in streamlining discussions and quickly determining whether a relationship is possible.    

A typical term sheet includes at least:    

    1. Executive Summary, including basic expectations.
    2. List of technologies (patents, applications, trade secrets, etc.)
    3. Field or applications of the license
    4. Territory
    5. Term
    6. License fee
    7. Royalties    

The licensor should decide ahead of time whether the Term Sheet should be maintained as confidential.  Although most US patent applications are published, some are not.  Keeping this information secret from competitors is a strategic business issue that is outside the scope of this work.  If negotiations proceed and require disclosure of the content of the unpublished applications or other sensitive materials, then the licensor should insist that the prospective licensee sign a confidentiality agreement.    

  E. Issue Letter of Intent    

Many times, a potential licensee will express interest, but a need for more time to decide.  On one hand, the licensor may want to encourage the potential licensee in the hope that the delay will in fact lead to a license.  On the other hand, the licensor does not want to take the technology invention off of the market and miss perhaps an even better opportunity.    

One way to handle these situations is by issuing a letter of intent.  Similar to an option, letters of intent are means of securing rights to a technology temporarily.  Basically, the letter of intent allows the potential licensee to continue evaluating the licensing offer until a specified date.  On or after the date, the potential licensee must agree to the license or compensate the licensor for the time during which the technology is kept “off of the market.”    

  F. Prepare Formal License Agreement    

Once the potential licensee accepts the terms outlined on the term sheet, the licensor should have an attorney draft a formal agreement embodying those terms.  The formal agreement should not deviate materially from the term sheet or else it will create mistrust between the parties.    

  G. Offer Formal License Agreement to License Candidate    

How a licensor sends the formal license agreement to the license candidate is a matter of style or custom.  How the transaction occurs will establish the tone during the negotiations that typically follow, as well as the relationship that ensues should the parties ultimately execute an agreement.    

  H. Negotiate Differences    

Negotiating differences respecting contract terms skillfully will make the difference between a favorable contract, let alone one that is executed.  Additionally, the parties’ negotiating styles will set the tone for whatever relationship comes to pass.  While a well-drafted contract may be helpful in apprising the parties as to their benefits and burdens under the contract, maximum profitability may derive from what is not in the contract:  mutual interest in working together.  This is largely due to how the parties work with each other at the start, whether they negotiate fairly.     

  I. Execute and Record the License Agreement    

Intellectual property is a business asset.  Accordingly, transactions effecting ownership in the IP fall under the provisions of state commercial transaction laws.  Therefore, licensors and licensees should have licensed attorneys attend to the execution of the agreement and recordation thereof with the appropriate record keepers in the appropriate jurisdictions.  

 

© 2010 Emerging Strategies, LLP ☎ 301.915.0950

 

1.Typical license agreements also may address other intellectual property rights that may be related to commercial embodiments of the licensed patent(s), such as rights to use associated trademarks or copyrighted materials, like software. These kinds of licenses draw on considerations and require provisions not discussed herein, and should be discussed with a knowledgeable trademark licensing attorney.

2.For more information about patents, see Patents.  

3.See 35 U.S.C. § 271.  

4.Any third party discussions should be covered by confidentiality agreements drafted by a knowledgeable IP attorney.  

5.For more information on trade secrets, see Trade Secrets.  



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