[Jim’s four-part series tells entrepreneurs and investors what they need to know about licensing a product through a discussion of the terms that drive the license’s value. Today’s focus is three common types of license.]
Licensing is the most popular method used to commercialize and profit from patents, yet few inventors are aware of the realities of licensing. In fact, I find there are many misconceptions about licensing. Since I talk to inventors and companies about licensing patents and products every day, I thought I would clear up some questions and point out some misconceptions and try to give you a realistic perspective on licensing.
Most books about licensing are written by attorneys. While attorneys are knowledgeable concerning the legal matters of licenses, I have found most to be unfamiliar with the realities of the marketplace, especially as it relates to consumer products, which is the category most inventors patent in.
You can find generic license agreements in books and on the Internet these days. Again, while these agreements cover the basic legalities of a license agreement, they don’t cover, in my opinion, all the terms needed to memorialize the relationship between the licensor (you) and the licensee (the company licensing your product). I often use the term patent and product interchangeably, so you can take them to be the same thing.
The Terms That Drive Value
I will briefly discuss what I feel are the terms of a license that drive value. Although this isn’t a comprehensive list of the terms required in a license agreement, they are the terms that drive the value of a license. Disclaimer: I am not an attorney. I am, however, a successful licensing executive and I have negotiated hundreds of licenses.
1. Licensing—It’s all about exclusion
The license grant determines what rights you grant to the licensee. You should only grant a licensee the rights they can execute on. There are several types of licenses, but I will focus on three here: exclusive licenses, non-exclusive licenses, and limited exclusive licenses.
Most inventors understand what an exclusive license is. You are licensing all the patent rights to one company. An exclusive license even prevents the inventor from using the rights. Most companies will want and try to get an exclusive license on your patent. They want to lock it up. While this may make sense in some cases, you want to be certain the licensee can execute on all of the rights you are granting.
A non-exclusive license gives a licensee the rights to your patent but allows you to license the patent to other companies on a non-exclusive basis. It also allows you to use the patent rights.
A limited exclusive license grants exclusive rights to a company with certain restrictions or limitations. An exclusive license can be limited in various ways. Some common limitations are: field of use, territory, time and patent components. A limited exclusive license is the type of license I most commonly recommend. Let’s discuss some of the common limitations on an exclusive license.
The field of use describes in what field a patent can be used. For example, let’s say you have a patent on a laser technology. Lasers are used in many fields. They are used in consumer products, medical products, and commercial products, just to name a few. So you can license your patent exclusively to one company in each field of use. That is three license agreements.
Territory describes the geographic territory in which a license is granted. Let’s say you have obtained a patent in the US, Europe, Japan and China on a laser technology. You can now license your product exclusively to a different company, in each field of use within each territory. Now you have 12 license agreements (assuming a licensee doesn’t obtain a license in multiple territories).
You can also limit a license using time. This is often called the term of a license. You might grant a company an exclusive license for five years because the product requires a large upfront expense to get to market. After five years, the exclusive expires and you can license the patent to other companies while allowing the original licensee also to maintain a non-exclusive license.
A patent actually grants the holder the right to exclude others from making, using, offering for sale, selling and importing the invention. Some licenses (usually only exclusive licenses) may also include the right to sublicense the right granted. You can limit a license using the components as well. For example, if a technology requires a significant amount of research and development and investment in production facilities to commercialize, no company is going to invest the time and money to commercialize the technology unless they feel they can make their money back plus a profit. So you might grant the exclusive right to make the product to one company who agrees to commercialize the technology. Then you might grant several companies the right to import and sell the product in various territories. This scenario works well because the manufacturer has the incentive to invest in bringing the technology to market and also has established companies ready to sell the product.
In the next part of the series I will discuss royalty.