Licensing: How to slice the pie


INTRODUCTION:

Rights in intellectual property can be transferred by sale, i.e., “assignment” or by granting a limited interest, e.g., a “license” or “licensing”.  See my article on assignments.  To use the analogy of land, title or ownership can be conveyed in land via a written deed recorded with the appropriate government agency.  Similarly, a limited right to use or have access to land can be conveyed via a written easement.  For intellectual property, a limited right to use a patented technology may be created via a license.  I have somewhat in-artfully terms this “slicing the pie”.  A license can also be used to allow a third party to use your trademark or copyrighted work.

DISCUSSION:

Focusing on patents or patent applications, there are several broad types of licenses.  A license may convey sole, exclusive or non-exclusive rights to the patented invention.

A common form of licensing is an exclusive license.  This type of license grants a third party, i.e., “licensee” the right to make use or sell the patented product.  Such a license excludes the actual owner of the patented invention from competing activity.

A sole license differs from the exclusive license in that it allows the patent owner to continue to exploit the patent, but prohibits the patent owner from granting others the right to practice the invention.  This can be an important distinction.

The third type of license is a non-exclusive license.  This type of license allows the licensee to practice the patented invention, i.e., make use or sell products or services subject of the patent, but does not prohibit the patent owner to grant similar rights to others.

SCOPE OF LICENSE:

In addition to the question of whether the license being granted is exclusive, non-exclusive or a sole license, it is important to note that the patent owner, i.e., “licensor” may convey only rights to certain aspects of the invention.  A very simple example is if the patent covers “wheeled self-propelled devices” e.g., bicycles, tricycles, unicycles, the license may be limited to tricycles only.

Another example is that the license might be limited to the right to manufacture the patented item only.  The manufacturing licensee could be required to sell all the product to the patent owner for resale by the owner (licensor). In this case the licensee would merely be a product supplier.  Obviously there can be other variations.

LICENSING GEOGRAPHIC SCOPE:

The license may also be limited to certain territories or sales channels, markets West of the Mississippi River or via specified Internet sites.  Note this type of limitation may be applicable to licenses for the use of a trademark.  (This might be part of a franchise agreement.)  Since a US Patent only pertains to the geographic boundaries of the US, e.g., it prohibits the manufacture or sale in the US or importation of products covered by the patent into the US, a Chinese manufacture would need a license from the patent owner to import covered product into the US.  

LICENSING COMPENSATION:

The licensee typically pays for the rights to utilize the patent invention.  These payments are typically called “royalties”.  Royalties may be based upon the profit the licensee achieves from the sale of patent products or may be a fixed amount during the term of the license.  The royalties may be a combination of both concepts.  The amount of the royalties may be tied to the term of the license agreement.  For example, if the licensee fails to achieve adequate sales to meet a minimum amount of royalty based on profit, the licensor may have the right to terminate the license.

In other examples, the license may vary upon the amount of sales.  There are almost endless methods of calculating and assessing a royalty.  In some circumstances, the licensee may pay an upfront fee and the license is thereafter royalty free.  The US government typically retains a perpetual, world-wide, royalty free license to utilize inventions (limited to governmental purposes) that have been created via government funding, even if the inventing entity retains ownership and may exploit the commercial market for the patented product or method.

LICENSING TERM:

As suggested above, the term that that the licensee obtains the right to use the patented invention may be limited in time.  Obviously, the license term expires at the end of the patent term (20 years after the patent application is filed) and the invention thereafter becomes available to everyone.

MISCELLANEOUS:

In other cases, the licensor may be required to provide limited technical support to the licensee to allow effective use of the patented technology.  In other cases, the licensor maybe required to share further developments made in the subject technology with the licensee.  Conversely, the licensee may be required to share rights in improvements it makes in the licensed technology.

CONCLUSION:

This is only a simple explanation or introduction of the topic of licensing.  However it is intended to provide an idea of the variety of types and scopes of license agreements.  A license agreement must be carefully drafted in writing, signed by both parties and may be recorded in the US Patent and Trademark Office.

Copyright David McEwing, 2020