A license is an agreement between the rightful owner and one or more contracting parties about temporary, complete or partial assignment of a right. The right which is transferred by the license may be based upon different chose in possession, and in the following on patent in particular.
It is not easy to sell ideas. In the first place, it is not difficult to get in touch with possible buyers, and it is also not particularly difficult to get acceptance to present or introduce the idea. However, it may be difficult to find the possible buyer(s) that is/are best fit to commercialize the idea and complete a sales negotiation which satisfy both parties.
With regard to the sale of ideas and inventions, it is a buyer’s market. The buyers allow themselves to wait, evaluate, deny – and the seller must be aware of this. The seller must be well prepared, and the sale must be thoroughly thought-through and planned.
The sale of ideas and inventions is a serious form of business activity that is must be treated thoroughly. Any inventor who is searching for success, will soon realize the importance of a proper foundation.
There are numerous agreements available, but as a starting point, no agreements should be that general that they can be used without amendments. Any agreement must be specified on basis upon the sales situation and the specific assumptions of the agreement. But a standard agreement may form a basis for a good template in preparation of a specific agreement.
The agreements which are available to purchase and sell of ideas and inventions are Confidentiality Agreement, Assessment Agreement, Options Contract and License Agreement.
A Confidentiality Agreement should be used with caution and care. In the beginning, the information can be presented as published patent applications, market researches etc. Then, the Confidentiality Agreement can be introduced at a point in time when the buyer has shown a certain interest and when contact between buyer and seller has been better established.
The Confidentiality Agreement makes any further presentation safer. The seller can submit documentation which is not comprised by a patent application and patent applications which are not public available can be presented. It becomes easier for the seller to be a seller, and the buyer can feel confident in obtaining the required information.
If the first presentation catches the buyer’s interest, the buyer will often get sufficient time and possibility to make a more thorough evaluation. This concerns market possibilities, technical issues regarding product and production process, competitive conditions, patent situation, profitability etc. The buyer may need a few weeks or months before a decision about further involvement is taken. Then, an Evaluation Agreement can be presented, which covers the terms related to such a situation.
An Evaluation Agreement should have a simple formulation. The agreement must contain some points because it eventually may form a foundation for a License Agreement.
When the evaluations have been made, the buyer may be ready for final negotiations.
But the buyer may also be constantly interested in but not be ready for a license agreement. The buyer needs more time, and it’s time to present an Options Contract.
Another alternative is an Options Contract, which actually assumes that there is a completed license agreement available. Then, the license agreement provides the buyer with an option during a certain time limit to accept the agreement, or to refuse the agreement totally.
It is also an option to extend the evaluation agreement. However, be aware that you might be subject to deliberate temporizing.
Should the buyer after review have a desire to utilize the idea, a license agreement is made. A license agreement is usually based on the Options Contract.
Use expertise under the license negotiations. You may use a lawyer who ensures a juridical waterproof contract. You may also use a licensing expert, a person who has the know-how about license negotiations, which is a very specialized form of business.
There are more important commercial terms which the seller must prepare:
An invention may often offer many different areas of application.
The basic principle of a new safety valve, for example, may form a foundation for construction of a cardiac valve – or as a closing mechanism of a toothpaste tube. Then, there are three possible and very different areas of application, and three different licensees.
A license agreement must for that reason define the product comprised by the agreement as clearly as possible. Then, the product definition is often a lot more limited than the patent, but it is important to you as a seller that the definition is not too diffuse and not too broad.
The agreement must clarify which areas of use which are comprised by the right to the invention. You should distinguish between the market area and the geographical area.
By specifying the market area, you may distinguish between sale to consumers via the traditional retail stores, and sale to the industry. You may also distinguish between numerous ranges of use.
The geographical area may be confined to parts of a country, to larger unions such as the EU, or to entire continents. It is also important to be aware that specific EU legislations put limitations on the possibility to segment the inner EU market between different parties.
A license agreement often gives the licensee the right to produce, utilize and sell the patented product. However, it is possible to imagine an agreement which comprises only the right to use the product. This may for example concern the right to use a production process.
The right may also be confined to sale and marketing only, or to comprise production only.
Exclusive or simple licenses
The difference between exclusive and non-exclusive rights is substantial. Entering an exclusive agreement means that the agreement is settled with this party only. No other parties will gain access to the invention within the same geographical area. A non-exclusive agreement, however, allows contracts with several parties.
Today, it is common to enter non-exclusive agreements, usually with several parties at the same time.
In some occasions however, an exclusive agreement appears as the sole real alternative, i.e., where the licensee encounters a high risk, which usually is the case in utilization of inventions which have not been tested.
A combination of an exclusive and a non-exclusive agreement is called “lead-time”. The licensee obtains an exclusive right for a limited period of time. After this period has lapsed, the license turns into a non-exclusive license.
You should in general aim for an as short evaluation and option deadlines as possible. The buyer’s need for time to evaluate must be taken into consideration, but one should not be too generous.
Monthly fees for evaluation and option rights may accelerate the buyer’s decision, but the effect might also be the opposite.
For temporary agreements the time factor is essential. The agreement should not cover too long periods, which may result in negative consequences for the seller if the contract party fails to succeed. Moreover, the time limit should not be too short, which may cause a potential interesting party to desist from agreement.
Evaluation period: 4-12 weeks
Options Contract: 1-12 months
License: 1-10 years, or as long as the patent is valid.
This negotiation issue is a tricky one. The seller should make sure to get compensation for costs already incurred, for income from work and for future income.
The buyer shall also make money, but in order to decide price to seller, this issue will depend on the future potential, including the risk and development costs the buyer will be exposed to in the future. The balance here is fine.
A license agreement often comprises three different methods of payment: down-payment, current royalty and a yearly fixed royalty.
Down-payment is a nonrecurring payment. It is paid when the contract is signed, and is often related to the inventor’s costs in the past.
Current royalty constitutes a percentage of the net sales or a certain amount for a unit sold. A percentage is recommended because one does not have to take inflation into consideration, but assumes that the agreement subject is clearly/unambiguously priced before resale. This is not always the case, e.g., when the agreement subject constitutes as a part of a greater totality.
In a yearly fixed royalty one may establish a determined royalty amount for a year. The basis here is that the rights are assigned a fixed amount from the beginning, and the buyer has the possibility to pay annual installments.
What is a common royalty?
The rates vary, but a value from 3% to 10% is the most common. Products which are sold in large quantities may have a royalty of 0.5 % per unit, whereas very special products may have a royalty of 40 %. The royalty rate must be established with care. Both buyer and seller must be able to live with it and obtain a profit.
Minimum royalty is the lowest annual compensation the buyer must pay the inventor. Should the royalty per unit exceed this minimum amount, the common royalty will of course apply. Minimum royalty is usually included in exclusive agreements only.
The economical part of the settlement
Irrespective of how the economical compensation is calculated and distributed, the compensation requested should be related to the income which the invention is expected to provide to the buyer. That is to say, the buyer shall pay royalty based on the income. There is nothing else to take money from.
Technical documentation will strengthen any presentation, and may also make the presentation more credible. This may be obtained from a university or college for example, or from test laboratories.
A patent registration and a design registration are intended to keep the buyer’s competitors away from the market, and the rights are for that reason of vital importance. The buyer should be able to claim a higher price with support in a patent protection. Without protection, the price would become different. This income should correspond to a part of the royalty the buyer must pay to the seller.
The buyer also had expenses from development, which must be added to the price of the end product. Without a patent, the buyer may encounter competition from other companies which did not have any development costs or do not pay royalty, and which may squeeze the buyer on price.
When can the invention be sold?
Some inventions are sold in the application stage, whereas other inventions have to be fully developed before the buyer catches interest. In general, the market potential is greater the more developed an idea is. If there is a prototype available and the patent is allowed, and particularly if production and sale have been initiated, the market possibilities are good.
A good buyer is one who is interested in increasing its market share and who considers your invention as a means to obtain this. There are in particular two considerations one should take when evaluating which companies who are best fit to take care of the invention. Firstly, the company should cover a large part of the market, and secondly, the idea should fit in to the company need in a natural manner. We can ask which benefit the company will obtain by developing your idea.
It is difficult to sell ideas and inventions. Before meeting interested parties, one should ask them to sign a Confidentiality Agreement. If technical investigations, market studies and consumer tests have been conducted, this information should be presented together with the demonstration material in form of models, drawings or the like, if available. If the idea is protected by a patent application, a copy of the application should also be included.
As mentioned above, the buyer should be chosen with care. The buyer must have sufficient fervor and will to go for the idea/invention. The market knowledge is vital, and these issues are often underestimated by inventors and sellers of ideas.
Before the negotiations starts, you should, as a seller, have decided which terms you do not want to negotiate about, such as a minimum royalty fee, a minimum nonrecurring fee or geographical area.
The following is formulated from an article by lawyer Dr. Christian Hilti, Isler and Pedrazzini, Zürich.
Chose a patent strategy
One must neither overestimate nor underestimate the economical importance of a patent. Patents cost money in an initial phase and do not secure any lucrative marketing of a patented product.
The latter becomes possible first when an interested market, a functional distribution and a first class service is present. Thus, a patent only constitutes a stone in the mosaic.
A lot of actors will simply avoid patent conflicts. They avoid patented inventions and stay with their incorporated solutions or concentrate about other technical renovations. In extreme occurrences, a patent may even keep the competitors away, even though the invention has a low novelty level. In this sense, a patent has a psychological scare effect, but it is however not possible to measure this effect quantitatively.
As negotiation object and sales argument
A company which have the use of a first class product or method which is patented at home and abroad, but which lacks the infrastructure to be sold in any country, have the possibility to reach those markets through licensing. A patent and the accompanying know-how may therefore become a central issue in negotiations with potential licensees within essential fields of development at home and abroad.
Patent – an exchange trade between inventor and the society
The technical information present in patent is available to anybody in the form of patent publications, no matter if the invention is protected or not. The patenting process is therefore some sort of an exchange trade: on the one hand, society gives the inventor an exclusive right to utilize the invention. On the other hand, society expects the inventor to tell about his/her’s invention in the patent publication, in a way understandable to a person skilled in the art. In this way, the state of the art becomes enriched by information, which again promotes development.
The need for a minimum defensive strategy
It is today necessary for everyone to have a minimum defensive strategy: patent infringement, excessive competition and then consecutive costly conflicts should, as far as possible, be avoided from the beginning. This is particularly applicable to areas which involve intensive research and development, or where new products are introduced into the market continuously.
Among other things, a defensive strategy includes that patent warnings from other competitors are taken seriously from the very beginning. Regrettably, small and intermediate enterprises too often first consider such warnings only when legal steps are taken against them. The consequences are often unnecessary payment of expensive lessons.
Assessments behind an offensive strategy
Patent strategy should be included within the marketing of a product or process as a whole. Only in this way will one find meaningful answers to the questions concerning where to file patent applications, licensing and defense.
Any patent strategy should in the end not only serve as excluding and scaring competitors, but also provide possibility for licensing. The effort spent on defending rights should be balanced against the signification of the exclusive rights and products in question. Alternative ways of solving conflicts in relation to negotiations and limiting agreements are often more effective than a tedious legal conflict.
Patent politics and strategy must be re-examined continuously, in view of the actual technical development and other relevant factors.