How Do Patent License Negotiations Work?
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About Patent Licensing
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The holder of a patent or pending patent on a particular product or technology may wish to license the right to exploit the patent to an outside manufacturer or other entity, to avoid the high costs involved in developing, manufacturing and marketing the product or technology. If so, it will be necessary to engage in patent license negotiations with the intended licensee to decide on the terms of the licensing agreement.
Finding a Suitable Manufacturer
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The first step in licensing a patent is to locate suitable manufacturers who may be interested in developing and marketing your product or technology. Start by searching out suitable manufacturers who already produce similar products. A list of suggested company directories can be found at thomasnet.com or hoovers.com.
Once you have identified suitable target manufacturers, write a carefully written and formatted marketing letter and send it to the appropriate representative at each company, offering to grant them a license to manufacture your product or invention. At this stage, you may want to consult with a patent attorney or licensing agent to help you.
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The Licensing Agreement
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After you have garnered the interest of one or more manufacturers, it's time to enter the negotiation phase and negotiate the terms of the licensing agreement. The goals of a licensing agreement are basically three-fold: to define each party's rights under the agreement, to define each party's obligations under the agreement and the remedies available to each party if the obligations are not met.
The first issue to be decided is the scope of the license being granted, or whether the agreement should grant exclusive or non-exclusive rights to the licensee. A licensee may favor an exclusive agreement to eliminate any potential competition in the marketplace. However, the licensor may prefer to keep all options open and offer the license to more than one manufacturer.
Another issue to be negotiated is the geographic or other limitations of the license. The license may grant the licensee permission to manufacture or market the product only in a particular geographic location or region, for example, or only in a particular field of endeavor.
Perhaps the most important aspect of patent license negotiations is the monetary remuneration or royalties expected to be paid to the licensor for use of his idea or product. This remuneration may be in the form of up-front fees in one lump-sum payment or royalties based on future sales of the product. The parties may also negotiate an advance against future royalties to be paid to the licensor. Royalty amounts are typically figured on a percentage of the projected income generated by sales of the product.
It is also useful in patent licensing negotiation to come to some agreement about improvements. If the manufacturer makes improvements to the idea or product, which party will own these improvements and the right to profit from them?
Get Help
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This overview outlines just the basics of patent licensing negotiations. It may be advantageous to acquire the services of a competent patent attorney or licensing agent to assist you in the more advanced aspects of negotiating your patent license.
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