If you have a patent for your new product or invention, you will want to decide whether to bring the invention to market yourself or to license your invention to others. By entering into a licensing agreement, you will be able to earn royalties on your patent while someone else invests the time and resources to manufacture your idea.
Patent Licenses Explained
Because of the intellectual property rights granted to you through your patent, you can transfer or “rent” these intellectual property rights to others in the form of a license agreement. Patent licenses provide the license holder with the right to make, use, or sell a patented invention in exchange for royalties.
Patent holders looking to grant licensing agreements for their patent are typically seeking the best royalty rate. These royalty rates will hinge on a number of factors, the most important of which are:
- The novelty of your patent;
- The extent of your patent rights over your invention;
- How profitable your invention is, or is projected to be.
How to License a Patent for Royalties
There are five key steps in learning how to license a patent for royalties.
Step 1: Understand Your Market
Before you start discussing licensing your patent with potential licensees, you will want to have a good understanding of the market for your patent. Take some time to research what the market demand is for your patented invention.
You may also want to explore the royalties that other patented inventions are charging to license their invention so that you can have royalty rates to compare yours to.
You probably have some marketing data you completed in the initial stages of developing your invention. Piggyback off this data, but be sure to complete additional research now that you have your patent in hand.
Step 2: Find a Licensee
The next step to license a patent is to find the right company or person with who you want to enter into a licensing agreement. While you are looking for the right licensee, make sure you enter into non-disclosure agreements or confidentiality agreements with any third party that you share your idea with while you are looking for the best fit.
Depending on what your patent is for, you will want to find a licensee who has extensive distribution channels and strong abilities to manufacture and market your product.
It’s a good idea to carry out some due diligence research on your potential licensees so you know the background of their business and the success of their operations. You’ll want to ensure they have the financial security that will allow them to pay you royalties.
Step 3: Establish License Details
The next step to license a product for royalties is to think through and establish the parameters for the license. This will probably be a negotiation process with your potential licensee. These details will eventually guide the terms of your licensing agreement.
You will want to consider whether you want to license the rights to your entire patented invention, or only certain parts of it. Will the licensee be in charge of manufacturing the product only? Or will you create the product but grant the licensee the right to sell and market your invention? These are the details you will want to discuss and know before you sign any agreement.
Exclusive vs. Non-Exclusive License
In discussing license details, one thing to consider is whether to grant an exclusive licensing right or a non-exclusive licensing right.
An exclusive licensing right means you are giving the license holder the exclusive right to use, make, and sell your patented invention. This is a very restrictive license, which provides strong rights to the licensee.
If this is the type of license you are looking to enter into, make sure the royalty rate accounts for the fact that the licensee will have such strong rights to your patented invention.
A non-exclusive license means that the license holder is just one of many other license holders who have the right to make, use, and sell your patented invention. Depending on the market for your product and the interest in by potential licensees, this may be a good fit for you.
Many patent holders can feel limited by exclusive licenses and prefer the greater flexibility that comes with a non-exclusive license.
Another important detail to consider is what type of license term you want to grant the potential licensee. If you do not want to play an active role in the patent in the future, a longer-term can be an easier route since you won’t have to negotiate a license agreement as often.
On the other hand, granting a shorter license term will allow you to reassess the market and the license terms sooner. That way, if there are changes in the market, you can take these into account. This could work to both your advantage or disadvantage as the patent holder, depending on how the market reacts to your patent over time.
Step 4: Negotiate Your License
Now that you know the parameters of the license, you can begin to negotiate the final terms with your potential licensee, including royalty rates. Have a good idea going into these negotiations which elements you are more willing to concede on and which details are deal breakers for you. Of course, the royalty rate will be an important component of this negotiation process.
It’s also a good idea to seek legal advice on your license terms. It’s often smart to have a patent attorney conduct these negotiations for you. Having an unbiased third party who is skilled in negotiation can be helpful in getting the best and most fair deal possible.
Perhaps the most important element of this step is negotiating the right royalty rate for your patent. Make sure you discuss the number of royalty payments the licensee will pay and how often. Typically, royalties are paid as a percentage of the product’s gross sales. The typical percentage for royalty payments will be 3-5%.
Royalty rates are typically calculated as a percentage of the wholesale cost of your product. That means if your product is sold from the wholesaler to the retailer at $5 per widget, and then the retailer sells the product at $10 per widget, your royalty will be based on the $5 rate rather than the $10 rate.
Your royalty rate may also be adjusted to account for other expenses such as marketing costs. It is important to make sure these terms and details are clearly established in the royalty rate section of your license agreement. This will help minimize disputes later on and hopefully prevent costly litigation.
Step 5: Draft the License Agreement
The final step is to memorialize the discussed terms in a draft license agreement. It is best to have an attorney draft up the terms of your license agreement. Attorneys will know the proper terminology to use for each clause and will include important contract clauses that you may otherwise not think about including.
It’s important to review the terms of your contract in detail. You may have to exchange multiple versions of the draft agreement before both parties will agree on the final terms.
Cost to License a Patent
At this point in the process, the costs to license your patent will be minimal in comparison to the costs you have already paid. This is because you have already invested substantial resources in developing your idea and pursuing a patent for it, including paying for the various stages within the patent prosecution process.
The greatest expense to license your patent will likely be the attorney’s fees that you pay to negotiate and then draft the license agreement. It’s important to have an attorney do these things, however, to make sure all of your rights are protected and you are getting the best possible deal for yourself.
Reasons to License Your Patent
While it can be hard to give up control of your patent to a third party, there are strong reasons to license your invention to others and receive royalties If you obtained your patent rights as an individual or as a small company, you may not have the resources necessary to manufacture, market, and sell your product.
It can be an easier solution to simply license your patent and have the license holder handle these details. If these areas are not your specialty, it may be a better use of your time to focus on pursuing other inventions you can potentially patent, rather than investing your time and resources into research and development for your patent.
License a Patent Pending Before the Patent Office
While a patent application is pending before the Patent Office, you technically do not have any patent rights that you can license out to others. That is, while your patent is pending you could not stop anyone from making, using, or selling the invention. So a company may enter into a licensing agreement at this stage, it is based on their expectation that you will likely obtain a patent for the invention.
However, when you get a potential licensee excited about your invention based on a prototype you developed or the market research and testing you conducted before filing your patent application – they might rather make a deal with you to get a jump on launching the product into the market.
Some companies will be so interested in a product or invention that they will seek licensing rights for a patent-pending invention. You can look into negotiating a deal to license these rights.
Depending on your invention, the company may be interested in beginning manufacturing or testing so that it will be further along in the process by the time the patent is approved. If this is the case, it may provide you leverage to demand higher royalties.