Patent Licensing: Benefits, Pitfalls and Types
What is Patent Licensing?
“The process of patent licensing includes a patent holder that legally allows another party to sell, import, or use his invention for a particular period of time in a particular geographical region and in return for a license fee. A license is a written contract and may include whatever provisions the parties agree upon, including the payment of fees whether one time or royalties. It is a way for the commercialization of a patent. Licenses are revocable since it is a contract with performance obligations, the failure to comply with them may lead to the termination of the license, and the patent exclusive rights coming back to the licensor. Several companies such as IBM and Microsoft and Universities around the world generate large amounts of revenue via patent licensing.”
Licensing a Patent
In License (obtaining a license for a patent) - Legally allows a company to obtain IP rights without risks and costs involved in the R&D process. More added benefits to this are :
Widening of a company’s IP Portfolio
Easy access to new products and processes
Enables a company to obtain rights in platform technologies to assist in internal R&D activities
Helps to avoid infringement action
Out License (granting a license for a patent) - Inventors license out their patented origination to a company that has the capability and the desire to develop the technology for commercialization.
Earns ROI for product development
Revenue generation from obtained patents or for acquiring early returns from technology not meeting criteria for investment/development
Freedom to operate in new industries and job opportunities
Entry in an export market niche through specific geographic regional licensing
What are the Types of Patent Licenses?
Exclusive Licensing - There is the transfer of ownership by the patent holder and the only thing which the owner has is the title. The only thing which the licensee cannot do is that she/he cannot license the patent to anyone else, and it is exclusively granted to her/him and she/he cannot further license it to anybody else. In this type of licensing the risk of infringement is less as it is being less exploited and the licensee will have a monopoly over the market, so the cost of the product will be higher than the usual price and the revenue will also be higher.
Non-exclusive Licensing - This licensing is the one that says that one licensee may exploit the invention but along with him others who have been given the license for the same product may be eligible for equal exploitation. In this layout, more than one person/entity can exploit the patented product. But the product is of such a nature that to generate more revenue you have to license it to as many entities as possible.
Sub-Licensing - This is a process where the licensee has the right to issue a license to different organizations for the making of the product. However, the profits will be dependent on the contract between the primary licensee and third party.
Cross-Licensing - This is a process when there could be an exchange of licenses between different organizations and creators. This is required when the invention requires the support of other products to make its place in the market.
Compulsory License - Compulsory licensing is when the government allows someone else to practice your patented invention – even against the will of the patent owner – for a set amount of money.
Voluntary Licensing - In this, patent holders may at their discretion, license to other parties, on an exclusive or non-exclusive basis, the right to manufacture, import, and/or distribute a pharmaceutical product. Depending on the terms of the license, the licensee may act entirely or effectively as an agent of the patent holder; or the licensee may be free to set the terms of sale and distribution within a prescribed market or markets, contingent on payment of a royalty. Either option or arrangements in between would allow for substantial price reductions.
Carrot License - This licensing approach is suitable when the potential licensee is not in the practice of the patented invention and does not fall under any obligation to take a license. This kind of license is a marketing tactic where the patent owner gives the licensee a glimpse of what could be achieved by acquiring a license for their patent.
Stick Licensing - This approach of licensing can be used when the prospective licensee is already in use of your patented technology and, thereby, infringing your patent. The proposition of value here states that “go for the license or else… (I will see you in court).”
6 Important Patent Licensing Pitfalls
A lot of effort and determination is required to find the right licensee. To evaluate the potential licensees and proper structuring of license agreements, a detailed thought has to be given for the 100% success rate of the patented technology.
Some potential risks and pitfalls to patent licensing include:
Risk of poor strategy or execution damaging the product success
Loss of control (partially or fully) over your invention
Relying on the licensee's ability to effectively commercialize patent
Poor quality management damaging the company’s brand or product reputation
There can be uninvited competition between the licensee and the licensor. The licensee may exploit the sales of the licensor, causing the latter to gain less from royalties than it loses from sales. The licensee may be more effective or get to the market faster than the licensor because it may have fewer development costs or may be more efficient.
The licensee may suddenly ask for technical assistance, training of personnel, additional technical data, etc. All this may simply prove too expensive for the licensor. It is important that the license agreement clearly defines the rights and responsibilities of the parties, so that there are solvable disagreements in the foreseeable future.
It is also important to keep in mind to manage the relationship with the licensee carefully. If things go wrong, there might be disputes or need to cover legal costs. Before signing over any rights to the patent, it's worth conducting proper checks on any potential licensees to assess their suitability and track record.
What are the Benefits of Patent Licensing
The benefit and purpose of licensing is binary. On one hand, well-established companies have access to capital, expertise, and experience in an already established market. Secondly, a much larger, much profitable company will be able to manufacture in greater quantities and market the product on a much larger scale – to a much bigger audience which independent companies are not as equipped to do.
No requirement of money to commercialize the product - The licensee will be responsible for costs of manufacturing, distribution, packaging, marketing and sales, etc.
Faster movement of innovation to market - If you issue a license to an established business, you will be able to leverage their experience, infrastructure and involvement. They will typically be more able to move your product into the marketplace more easily and quickly.
Better access to new markets - Depending on the deal and the licensee, you may be able to access markets that are closed to imports, avoid export taxes or mitigate risks associated with international expansion.
More revenue generation - The licensee will pay for the right to hold the license to your patent. This can be a one-off payment, continuous payments known as royalties, or variable payments depending on the profits.
Ownership of IP - Licensing allows you to give suppliers, competitors or complementary businesses certain rights over your patent while receiving royalty income and still retaining ownership of your asset.
By earning rights to a patent, a licensee can create new products, services and market opportunities for themselves, reduce costs to acquire new technologies without having to develop their own, save time getting a new product to market, gain a competitive advantage over rivals especially if their license is exclusive.
Copperpod provides portfolio analysis services that help clients to make strategic decisions such as In-licensing/Out-Licensing of patents, new R&D investments, or pruning out less critical patents. Our qualified and dedicated team of patent engineers provides strength parameters for each patent in a portfolio based on their technical quality, enforceability, offensive/defensive strengths & business value. Please contact us at email@example.com to know more about our services.
Chandan provides procedural advice and assistance to the attorneys and corporations in connection with matters related to patent infringement and IP litigation. He has a Bachelor's degree in Electronics and Communications Engineering.
Chandan has worked in the patent search and analytics domain for 6 years and has worked extensively on providing patent strategy solutions to Fortune 50 corporations.