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3 Key Terms of a Patent License

Congratulations! You’ve filed your patent application. The next step is for the inventor to commercialize the newly created intellectual property. The three primary options are to completely assign the patent rights to another party, license the patent rights, or to manufacture, market, and sell the product disclosed in the patent application. Frequently, inventors wish to maintain some level of rights in the invention and do not wish to manufacture, market, and sell the product or process described in the patent application. For this reason, inventors often choose to license their technology. While the inventor is creating a list of potential licensees and creating a marketing plan for those potential licensees, he or she should also start thinking about the terms of a patent license. There are many options to think about for a patent license but three key terms include:

1. Payments – The most well known approach for payments are royalties. Royalties are typically agreed upon as a percentage of net sales, but there are also other methods of compensation. For example, the royalty may be a fixed amount for the term of the license, a fixed amount per year,  or a fixed amount per unit sold. The royalty rate varies and is influenced by factors such as:

  • The industry of the product
  • Whether the technology is a complete self-contained product or an improvement to an existing product
  • Whether the technology is patent pending or the patent has issued
  • Current market penetration of the product
  • The number and nature of competing products

2. Termination – What causes the license to come to an end?

  • Time – The license may be for a fixed term.
  • Time Period – For example, as long as the patent is enforceable.
  • Ongoing Performance Metrics – Minimum annual net sales, minimum annual royalties, minimum unit sales
  • Milestones – Where the product is a pharmaceutical, the license may be valid for a certain period after FDA approval

3. Geography – The licensor may wish to grant  licenses on a country by country basis (or other regional divisions).

4. Field of Use – Field of use licensing permits the technology owner to divide license rights among various market segments. For example, the licensor of a chemical patent may grant an exclusive license to one party for use in the field of human medicine and a second exclusive license to a second party for use in the field of veterinary medicine.

Bonus – Other valuable assets may be licensed in addition to the patent or patent application. Commonly, proprietary information, trade secrets, know-how, or trademarks may be licensed in addition to the patent rights. For example, a patent application may disclose the best manner of making a composition that was known at the time it was filed. Later, the chemists might have determined a more cost-effective method or environmentally friendly of synthesizing the composition. Software patent applications might have related source code. That other valuable proprietary information may be part of the technology transfer.

There are many other terms to consider, but the above terms should be helpful in the early stages  of planning for terms in a patent license.

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