Written by Corinne Day on 26 July 2010« Return to Reading Room
In summary, a patent licence enables a third party to exploit an invention, giving that third party the legal right to manufacture, use, sell or import the patented invention. Licensing a patent can be an important source of revenue for a business.
An inventor who chooses to license his patent or know-how can impose whatever terms he chooses, but if the licensee is a much larger entity it will be the licensee that can substantially dictate the terms.
There are three types of licence:
- Exclusive. The inventor agrees not to grant any other licences and not to operate the licensed technology himself.
- Sole. The inventor agrees not to grant any other licences but may still operate the licensed technology himself.
- Non-exclusive. The inventor can grant as many other licences as he wishes and may operate the licensed technology himself.
The value of a licence depends on the degree of exclusivity conferred: a licensee will not be willing to pay as much for a non-exclusive licence as for an exclusive or a sole one.
Licensing can allow the licensor both to exploit the technology directly himself and at the same time have licensees that are also exploiting it and paying royalties. It is also in some circumstances possible to divide licensed rights between different fields of application.
Usually, a one-off payment is made when the licence is signed. For an exclusive licence, this generally reflects the level of investment that the licensor has made in the patent, such as professional and official fees.
Royalties are payable on products in respect of which the technology is used. In addition to the degree of exclusivity conferred by the licence, there are many factors to be taken into account in negotiating the royalty rate. For example, the anticipated commercial benefits which the potential technology confers on the licensor: If it is possible to calculate the likely profits attributable to the use of the patented technology, it is common to fix a royalty rate that gives the licensee, which takes the greater risk, the larger share of such profits. Additionally, royalty rates vary from one sector to another: those in the pharmaceuticals sector are the highest and those in the electronics sector the lowest.
Other matters which should be considered include:
- the duration of the licence;
- whether the licensee is entitled to sub-license;
- termination, e.g. what happens if the licensee fails to pay royalties?
- infringement - which party is to take action against an infringer of the patent?
- validity: licensors should decline any request for a warranty that a patent is valid; the fact that a patent has been granted is no guarantee that it is valid.
- competition law considerations.
Legal advice from a solicitor or patent attorney should be sought before entering into a patent licence.
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