Should I License My Patent?

Having dealt with the subject of ‘Patent Assignment’ in our previous article, we should turn our attention to ‘Patent Licensing’ now. We briefly touch upon the difference between a license agreement and an assignment agreement. The main difference between a license and an assignment is that while the former provides legal title of the property to the Licensor, the latter does not.

To comprehend the difference between licensing and assignment more clearly, it helps to think of a physical property such as a house. Just like you can rent your house to someone else, you can license your patent or patent application to someone else. The tenancy allows the tenant to have rights to your house in exchange for the rental usually paid on monthly basis. In the same way, license allows the patentee to receive the royalty income which is typically a percentage of the profits and may be paid on monthly, quarterly, annually, or on some other basis from the licensee who begins using the patent rights.

License Agreement

An Intellectual Property Licensing Agreement is a written, legally binding contract effectuating an agreement between an owner of intellectual property (“Licensor”) and a party wishing to use that intellectual property for a particular purpose (“Licensee”). One who has a license to use another’s intellectual property does not own it, but merely has the right to use it. Therefore, certain elements must be addressed in any comprehensive Intellectual Property Licensing Agreement. The following are the most important areas to address:

Structure of Patent License Agreement

1 Scope of the License

The first thing a license agreement should do is to clearly define the scope of the license. By licensing a product, you are assigning a limited right to use that property, so you must be sure to retain the ultimate ownership rights. At the same time, you don’t want to be overreaching or too limiting so as to discourage potential customers from using the product.

2 Exclusive vs. Non-Exclusive

Except for custom-made products, a license agreement would typically be non-exclusive, meaning that the licensor can sell the same rights to other users. However, this wouldn’t necessarily allow the licensee to reproduce or pirate the product and sell it to third parties. Sometimes, licenses allow reproduction within a controlled environment such as with enterprise licenses or network licenses. In other cases, a licensor may allow for a resale license, with a royalty being paid to the licensor.

3 Revenue Streams

Next in importance are provisions controlling revenue streams generated by licensed products. With most license agreements on end user software for consumers, for example, a one-time license fee is usually paid when the software is purchased. Other arrangements may include recurring payments such as royalties or monthly lease payments. License agreements may also cover maintenance charges such as ongoing maintenance.

4 Term and Termination

The length of the agreement should be designated. The parties must also agree whether or not the agreement will terminate upon a change of control of licensor or licensee. If a change of control will affect the agreement, it must be defined specifically. In addition, this provision should state whether or not the agreement may be terminated by either party for breach, and if so how.

5 Prohibited Uses

The licensor may wish to prohibit the licensee from using their intellectual property in certain ways that could embarrass or otherwise devalue the property. The licensor will want to include these provisions here.

6 Rights to Transfer and Sublicense

The licensor may or may not wish to grant the licensee the right to transfer or sub-license the property at issue. The licensor may want the right to approve or reject potential sub-licensees, or prevent sub-licenses all together.

These are the most important areas an Intellectual Property License Agreement must address. Further provisions covering the rights to source code (if software is involved), acceptance, testing and training procedures, warranties, limitations on the licensor’s liability, support and maintenance services, nondisclosure of confidential information, indemnity for infringement, enforcement of remedies, and terminating the contract may also be included, if considered necessary.

It is advisable to retain a Patent Attorney in the preparation (and negotiation) of a license or assignment agreement, i.e., one who understands the problems encountered under intellectual property law.