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Licensing
Tags:Collaboration, Commercialization, MarketingThe owner of intellectual property often looks for others to commercialize his or her technology. Licensing refers to a situation in which a business partner or company may produce a product developed for a specific period of time. The licensing agreement is an agreement wherein the owner of the intellectual property waives their right to sue the licensor for patent infringement under specified the terms.
There are two facts that are important to consider when seeking licensing partners. First, the potential financial return from licensing or selling is much less than if you decide to manufacture and sell the device yourself. When you license your invention to a company, they are agreeing to take on the financial risk of getting your product to the marketplace. They will reap the bigger benefit from the sales of the product. If you decide to license your technology, remember that the terms of any deal must satisfy both partners.
Second, it is often difficult to find a commercialization partner interested in university technologies. For many reasons, companies prefer to develop products in-house through their own research and development departments, and may be reluctant to work with an “outsider.”
Sales agreements vs. licensing agreements
There are two ways to work with a commercialization partner to develop your idea. In a sales agreement, the company pays a lump sum for the idea and anything else that may be of value to the company (e.g., prototypes, descriptions, documentation, trademarks). The amount of payment is an estimate of market potential. Generally, the inventor receives about 10% of the total expected profit to be made from the product. Often, the inventor will get less than 10% because there is no guarantee there will be any profit, and in this situation it is the company taking the risk. Selling technology implies that you are releasing all rights and claims of ownership to a business partner or company.
It is the more common for companies and investors to develop a licensing agreement. A licensing agreement is an agreement whereby the owner of the intellectual property grants another entity the right to make or use the IP. It is usually preferred by both parties because the payoff is based on actual sales rather than expected profit. The terms of licensing agreements are highly variable, but they usually include royalty, up-front payment or milestone fees, due diligence, an exclusivity clause, and a term.
Licensing Agreements
A license is a legal agreement between two parties that grants the right to use intellectual property for a specific amount of time and under specific conditions and terms. It involves the transfer of rights from one party (”the licensor”) to the other (”the licensee”). These rights commonly control the use (for copying, manufacture, sale, etc.) of intellectual property rights (a patent, copyright material, confidential know-how, etc.). In short, licensing implies that a business partner or company may produce, make, use, or sell the product you developed for a specific period of time.
The licensing agreement, wherein the owner of the intellectual property grants another entity the right to make or use the IP, specifies the terms. Although more and more people are using licensing agreements, it is a complex process and it is important to hire a good business lawyer who is knowledgeable about licensing and can help sort through the issues.
Key Elements of Licensing Agreements
The terms of licensing agreements are highly variable, but they usually include clauses about royalties, payments or fees, due diligence, exclusivity, and term. Information about each of these terms is provided below.
Royalties
Royalty percentages that are paid based on the sales of patented products vary from 1% to 20% (or even more). The percentage may be less if the invention is a component of a product, depending on how much your invention adds to the value of the total product. Many deals are not made because the inventor or intellectual property owner overvalues the worth of his invention. A manufacturer bases royalties on the future profits of the product for them. Many inventors feel they should be paid back for any investment they have put into their invention thus far and ask for unrealistic licensing fees and royalties. Many universities want to recoup patent costs they have expended on the invention, and often ask for large upfront payments. Above all, don’t over-price,this is the worst deterrent to successful licensing. As a rule of thumb, royalties range from 1% to 5% of net sales although there is a huge variance among products and markets.
Recognize that you are trying to combine your rights and the licensee’s resources in a way that will benefit both of you. The licensee is looking at profitability. The general feeling is that the licensor should get about 25% of the pre-tax profitability and the licensee about 75%.
Licensing and royalty agreements can be treacherous areas of contract law,not only must the terms of the license or royalty agreements be clear and understood by all parties, but the mechanism for securing payment must also be fully understood and implemented so that the licensor or royalty holder is assured of payment. It is also imperative that the agreement is clear, concise, user-friendly, and easily understandable to a non-lawyer. This is helpful in the event that there are later disputes that may arise between the parties. If at all possible, it is wise to involve a lawyer to help you navigate this part of the process.
Payments
The licensing agreement should clearly state any up-front payments and any periodic payments that are required to maintain the license. A particular use of the license may also require an increase in payments. (For example, software licenses often require greater payment as the number of users increases.)
Payments can be structured in many ways: an upfront one-time payment; periodic payments based on sales of the patented product; annual payments; or formula payments based on aggregate products developed over time. The licensing agreement should clearly state any up-front payments and any periodic payments that are required to maintain the license. Further, the creation of a license can often be the genesis for funding of the manufacturing or the marketing of a product or service as the funding force of an entire project.
An up-front payment may range from a few hundred to several thousand dollars. It will depend on the value of the property to the licensee and what profits the licensee can make from licensing the technology. Often the up-front payment is in the form of an advance on future royalties. Licensing can also be a very strategic and creative endeavor that allows the licensor to achieve funding opportunities as well as achieve the traditional royalty goals.
Due Diligence
Due diligence requires that a company (the licensee) make an honest effort to bring the product to market within a reasonable time frame and to promote sales of the product. Licensing agreements often require the licensee to take specific actions, such as defining a time period for first commercial sale to occur. Failure to satisfy due diligence requirements can be reason enough to terminate the license, causing all rights to the invention to revert back to the inventor, who may also be entitled to collect financial penalties.
Exclusivity Clause
A license can be exclusive or nonexclusive. An exclusivity clause (which is usual, but not necessary) gives the company sole rights to commercialize the invention. You may opt to sign licensing agreements with more than one company, particularly if the market you are working in can be divided into exclusive parts. These agreements would be non-exclusive or exclusive to a certain field or industry. For instance, a technology such as an adaptable keyboard could be licensed by a company for the exclusive rights to the computer industry. Another company could license the rights exclusively to the mainstream consumer market.
A license can be given for a certain field of use (e.g., for military application, healthcare, research uses) or for certain territories (U.S., North America only, Japan only, etc.). Defining the field of use and territories can reduce the fees paid by the licensee. Some licensees may not want an exclusive, worldwide license for all uses.
Sublicencing. Another option with exclusive licensing arrangements is to include a sublicensing clause. This allows the company you are working with (the licensee) to re-license your technology to other companies to increase sales and royalties. Depending on the agreement, the licensee may be able to assign or sublicense the license. An assignment typically means a transfer of all of your rights in the license, while a sublicense involves giving someone the right to use a portion of your rights in the license. Most licensing agreements prohibit assignment or sublicensing without the licensor’s approval. Licensees may want to negotiate for broader rights if their business necessitates sublicensing the product.
Terms
The licensing agreement should explicitly spell out the length of the license, plus any renewal rights. The term of the agreement refers to the length of time the licensing arrangement remains in force and how long royalties are paid. Many companies prefer the agreement to last the length of the life of the intellectual property, usually 17-20 years or less depending on when the IP was issued. Others prefer a shorter term with option for renewal each year thereafter. Most terms include the reimbursement of past and assumption of future patent fees by the licensee.
If you are planning to license your technology as an independent inventor, keep in mind you should not spend a great deal of time creating iterations of the prototype. When you license the technology to a company, they will likely request additional changes, leading you to spend time and resources to add different features and functions. The licensor at the minimum will want to have acknowledgement in the new work that the licensed material is the copyrighted work of licensor. The licensor may also insist on quality standards or a right to review and approve the new work incorporating the licensed material.
Negotiations
Negotiating the licensing agreement is as important as creating the licensing agreement. Successful negotiation of a licensing agreement is largely a matter of experience. Poor negotiations will not (a) achieve the greatest benefit for the client, (b) protect the client in actually being paid, nor (c) place the client in the most advantageous position in dispute problems.
A successful negotiation should make the parties want to do business with each other more than they wanted to before the negotiation began. The key to successful negotiation is thorough preparation. Know your own (reasonable) goals, and understand, as best you can, where the other party is coming from.
Use of Form Agreements
Some people think that all they have to do is purchase a form of a license on the Internet, fill it in, and they will have an effective licensing agreement. However, due to the complexity of licensing agreements, it is difficult to know which form would be most appropriate for your situation and could result in numerous problems. For example, you would need to know which paragraphs and language apply to the matter at hand, what is left out of the form that is essential to full protection, and whether this is the best form for this situation (often the forms do not apply though they look like they may apply). Rather than purchasing a form agreement from the web, it is more appropriate to seek the help of a lawyer who is knowledgeable about licensing agreements to support you through the process.
For a sample standard licensing agreement, see Yale University and the Association of University Technology Managers web sites.
