Patent Licensing. Episode 88

Understanding Patent Licensing

In this episode, I’m going to talk about patent licensing. The whole purpose of having a patent is to have exclusive rights—meaning that you have the right to exclude others from making or using your invention.

If someone wants to make your invention, they must get permission from you. There are two primary ways to grant that permission:

1. Assignment – This is when you sell your patent outright.

2. Licensing – This is when you retain ownership but grant permission to someone else to use the invention under specific terms.

Assignments vs. Licensing

If I were to use a real estate analogy, an assignment is like selling your house—you no longer own it. A license, on the other hand, is like renting out your house—you still own it, but someone else has permission to use it under agreed-upon terms.

Licensing can be structured in different ways, but the two most common types of licenses are:

• Exclusive License – The patent owner grants a license to one entity and agrees not to license it to anyone else.

• Non-Exclusive License – The patent owner grants a license but retains the right to license the patent to others as well.

If you want to obtain a license to use someone else’s invention, an exclusive license is generally more valuable because it means you won’t have competitors using the same patent. However, if you are the patent owner, you likely prefer a non-exclusive license, so you can license your patent to multiple companies and maximize your revenue.

The Value of Exclusive vs. Non-Exclusive Licenses

An exclusive license is typically more expensive because it offers the licensee more value by eliminating competition. A non-exclusive license, on the other hand, is usually cheaper since the licensee knows others may also obtain rights to the invention.

To use another real estate analogy:

• If you are renting a house and the landlord tells you that you must share it with other tenants, you probably wouldn’t want to pay full price.

• However, if you are guaranteed exclusive use of the house, you would be willing to pay more for the security of knowing it’s yours alone.

The same principle applies to patent licensing.

Hybrid Licensing Agreements

Licensing agreements can also be geographically exclusive. For example, a patent owner might:

• Grant Company A an exclusive license for the Western United States.

• Grant Company B an exclusive license for the Eastern United States.

Common Licensing Terms

Licensing agreements typically include terms regarding:

• Duration – How long the license remains valid.

• Payment Structure – This can vary, including:

• A flat fee paid upfront.

• A royalty structure, such as 10% of the revenue from each sale.

• A minimum annual payment—for example, a licensee may owe the patent owner $50,000 per year, regardless of sales.

• Sub-licensing – Whether the licensee can grant sublicenses to third parties.

Free Licensing and Open Patents

In some cases, patent owners may license their patents for free. Tesla famously did this by announcing that they would not enforce their patent rights on certain electric vehicle technologies. This is essentially equivalent to telling the world that you won’t sue for patent infringement. Whether to enforce your patent rights or freely license your technology is entirely up to you as the patent owner.

Cross-Licensing Deals

A cross-licensing deal occurs when two companies each hold patents that would be beneficial to the other. Instead of paying licensing fees, they exchange rights so that each can use the other’s patented technology. This is common in industries where innovations often build upon existing patented technologies.

Key Considerations in Licensing Agreements

Licensing agreements can be complex and may include provisions regarding:

• Liability – Who is responsible if the licensed product causes harm?

• Improvements – If improvements are made to the patented technology, who owns the rights to them?

• Ongoing Patent Prosecution Costs – If the patent is still pending and additional costs arise to secure approval, who will pay those costs?

Final Thoughts

Patent licensing is an excellent way for inventors to monetize their patents without having to manufacture or market the products themselves. Whether you’re the patent owner looking to license your invention or a company looking to license someone else’s patent, a well-drafted agreement is crucial to protect your interests.

I’m Adam Diament, and until next time, keep on inventing.