Simplified Guide To Patent Licensing
In this post, we answer the following questions:
- What does it mean “to license” a patent?
- What kinds of patent licenses are there?
- Who are you trying to license?
- Are you licensing one patent or many?
- Which approaches are available for licensing?
- What does a patent license agreement contain?
- Does the licensing process stop there?
1. What does it mean “to license” a patent?
Before addressing the question of “what is patent licensing” and “how to license a patent” it helps to address the terminology used in this industry. In simplified terms, a license to a patent is a permission to use the technology covered by the patent. We say “simplified” because patent licenses vary greatly in type and scope, as discussed in more detail below. When it comes to licensing, your creativity sets the bounds. However, despite their great variety, most patent licenses give at least some rights to the license holder. And in terms of vocabulary, licensing “someone” typically means providing a license to that “someone.” The licensor is the patent owner and the licensee is the “someone” receiving the license.
2. What kinds of patent licenses are there?
An early part of any patent licensing strategy involves determining what kind of license the patent owner is seeking to provide. As an initial matter, a patent license can be “exclusive” or “non-exclusive.” Not to be confused with “the right to exclude,” an “exclusive license” gives the licensee the sole right to use the technology covered by the patent. This means that if Company A receives an exclusive license to a patent, then Company B cannot also have a license to that patent. Exclusive licenses are not typical because although they can be lucrative for the patent owner, they are also highly restrictive—with only one licensee the patent owner has almost no way to grow licensing revenue. Thus, most patent licenses end up being “non-exclusive,” meaning that more than one licensee gets the right to use the technology covered by the patent.
A patent license may also be limited by time or have “temporal” limitations. For example, a patent license can last for a specified number of years; until expiration of one or more patents; or longer. The choice is up to the parties negotiating the license. A patent license can be limited to a set number of years—such as 5 or 10 years. Parties enter into these limited-time licenses because (1) the licensee is not sure that they will still be using the patented technology at the end of the time period; or (2) the parties may not be sure about the value of the technology after the time period ends, such that the parties expect to renegotiate the terms of the license if it is still needed. A patent license can also last until the expiration of one or more of the licensed patents, or of the entire portfolio. In that scenario, the licensee is buying peace as to the patents included in the license. In certain circumstances, a patent owner may be adding patents in the future, and the licensee may want a license that ends at the expiration of all patents acquired by the licensor entity.
A patent license may be limited to a specific geographic area. For example, it is fairly common to see licenses that cover only the United States, and not extend to any other countries. On the other hand, the licensing parties frequently want complete peace in which case they will want a worldwide license. In some specific circumstances, parties may even subdivide a country by territory. Parties have previously limited licenses to the “Northeast” or “Southwest” United States, and defined those territories to recite the specific covered states.
A patent license may also be limited to a specific industry, portion of a supply chain, or field of use. Patented technology sometimes has applicability in various industries and fields. Thus, while some patents can only be used in one industry, other patents can be used at various levels of the supply chain or industry, from manufacturers of components up to the end-users. Thus, depending on the patents, licensees sometimes do not want to give a large multi-national company a license for any possible use of their technology and instead limit the license to a particular “field of use.” This gives the licensee an opportunity to work with other licensees in other fields of use or industries. Additionally, licensees sometimes wish to restrict their licensing efforts to only one part of the supply chain, to maximize potential revenue.
3. Who are you trying to license?
The structure of a patent license can depend on who the potential licensee is. An operating company is different from an R&D lab, which itself is different from a start-up. Most of the time, operating companies want to eliminate their liabilities and are less interested in ongoing royalty payments. On the other hand, start-ups and R&D labs are more sensitive to license payments or may simply have no funds for a one-time license payment. Thus, if a start-up is interested in using patented technology in its products, start-ups will often negotiate a royalty-based approach. This approach can make sense for both parties—if the product is successful, then the patent holder will be entitled to greater revenue, but if the product is not successful then the patent holder does not get paid for its unused technology.
However, the success of the product is seldom in the hands of the patent owner—it may be that the patented technology is solid, but the licensee bungles its marketing or technical efforts, to the patent owners detriment. Such considerations are part of every licensing negotiation and the type of licensee plays a big role. Naturally, the scenarios described above are not universal and parties are free to tailor their own agreements.
4. Are you licensing one patent or many?
Whether you are trying to license one patent or many typically impacts the price of the patent license. Although single patents can be very valuable, in general licensees pay more to license portfolios with multiple patents. However, there have been many jury verdicts that results in high dollar amounts based on infringement of a single patent. The takeaway here is that a single patent will typically fetch a lower premium if it has not been tested, but once a patent survives validity challenges and goes through claim construction then it can outweigh the price of multiple untested patents. Of course, this fact may be tempered by market factors: a patent may be infringed and valid, but if the sales of the infringing device are low or the patent covers a very small portion of the infringing device, then obtaining a high dollar recovery may not be possible.
5. Which approaches are available for licensing?
As a general matter, a patent can be licensed out of court or via litigation. While most patent owners prefer to license their patents out of court, they quickly realize that most companies will refuse to license without litigation. Although it may be preferable to send a notice letter to a prospective licensee and invite them to a licensing discussion, in some instances filing suit first is a better option. For example, because patent owners may recover up to six years of damages prior to filing suit, if the patents are close to expiration then the potential damages amount reduces with passing time—and letter negotiations sometimes take years. Similarly, if a potential licensee has a reputation for not entering voluntary patent licenses, then sending them a letter may be a waste of time based on experience. The correct approach to licensing depends on the specifics of your portfolio. Keep in mind that the prospective licensee has its own considerations in mind. In the case of large companies that are experience in patent licensing, they are less concerned with the question of “how to get a patent license” than with the specific financial and legal terms of the agreement. Similarly, patent licensing companies are typically experienced in these transactions and are well positioned to maximize the value of your patents. Sometimes patent licensing overlaps with invention licensing, such as situations where in addition to the license itself the patent owner licenses certain know-how or other technology, such as source code. However, licensing of inventions outside of the scope granted by the patents is not a requirement to patent licensing.
6. What does a patent license agreement contain?
A patent license agreement is a contract. While there is no page limit or formatting requirements for patent licenses, they typically span from 8-30 pages. Patent licenses may include various attachments and exhibits, such as a listing of the licensed patents, covered subsidiaries, press release language, or other information. Certain provisions, such as the definition of licensed patents and licensed products are common, while other provisions that may be specific to an atypical situation are less common. While sample patent licensing agreements are available online and in bookstores, please treat them with caution. The patent licensing agreements that appear in books and guides are generic and may fail to take into account features important for your patent transaction. On the other hand, sample patent license agreements that were executed by other parties were tailored to their specific situation and may be harmful to your transaction.
7. Does the licensing process stop there?
Once the patent owner signs a patent licensing agreement with a licensee, the licensing process does not stop there. Unless the license is “exclusive,” there are other potential licensing opportunities. In addition, the licensing agreement may include steps that are required of both the patent owner and the licensee. For example, in a running royalty agreement, a licensee typically has to provide revenue reports to the patent owner that support its payment of the royalty. The patent owner then checks the royalty report for abnormalities. Other conditions that the parties impose on each other may require additional follow-ups. Thus, depending on the licensing agreement, the transaction may be the last time the parties speak to each other or it may be the beginning of an ongoing relationship.
We welcome questions relating to patent licensing and are happy to evaluate patent portfolios for interested parties.