- Patent Licensing
The journey of a patent application does not end with its grant as a patent, rather it continues until it is commercialized. A good invention offers economic rewards to its inventors, e.g., earning returns by selling of the manufactured products in the market or licensing the patented technology to interested parties. However, if the invention is not good or useful for the public or is unable to work in a country due to technological limitations, the inventor or patent holder might be unable to make a profit out of it. 1 Thus, a patent is a business asset that provides a protective shield, enabling a patent holder to use the patented invention commercially and reap its commercial benefits.
A patented technology may be commercialized in the following ways:
- Developing new products or improving existing ones based on the patented technology.
- Selling or licensing the patented technology to interested parties.
- Asserting patent rights against infringers by the patent holders or the patent assertion entities that do not invent or produce products themselves.
This indicates that the real outcome of a patent lies in its commercialization, however, the responsibility of commercialization rests with the rights holder.2
- Ways of Commercialization
A patent may be commercialized either by transforming it into an end product or by transferring rights therein to an interested party. The former requires a patent holder to transform a patent into market-relevant products or services, whereas in the latter case, the rights are transferred as a sale or a license. A patent holder can decide on how to monetize a patent by assessing and enforcing competencies such as availability of capital and resources, know-how, and technical expertise for transforming a patent into a final product or service. However, a patent can also be commercialized by entities that are not directly involved in the development of the patented technology, generally known as Patent Assertion Entities (PAE).
In direct sales, all rights, including the ownership right, are permanently assigned to a buyer on a mutually agreed-upon one-time lump sum amount. Conversely, in licensing agreements, all rights except the ownership right are temporarily given to a licensee on a fixed or variable royalty percentage.
2.1 Direct Sales
Direct sales are preferred where patents no longer facilitate the core business of a company and are unable to generate adequate returns, as patents are expensive to maintain and can be contested by competitors on various grounds, leading to costly maintenance fees and high litigation costs. In contrast, licensing is preferred where patents are developed in an industry-academia collaboration environment or business transactions such as mergers and acquisitions, joint ventures, etc., take place. Sometimes, patents are made open to the public without any direct sale or licensing through a patent open-source mechanism, e.g., Tesla released its electric vehicle technology patents to the public under the open-source patent in 2014.3
2.2 Licensing
In licensing agreements, rights such as rights of manufacturing, selling, sub-licensing, etc., in a patent or a pool of patents, are assigned to one or more licensees on a fixed or variable royalty-sharing mechanism. The royalty rates may be based on a percentage of total sales or per unit sale, as the participating parties mutually agreed upon. Moreover, while determining royalties, parties can also consider the profitability of the products or services based on the patented technology. Generally, a patent technology is licensed using the classic 25% rule, wherein the profit earned from the sales of products or services based on the patented technology is divided in a 25:75 ratio among the licensor and licensee respectively.4 However, the recent trend of the last 15 years tends to be diverted from the classic approach of 25% due to various reasons, for example, US courts denied considering the classic rule for calculating royalties in intellectual property infringement cases by citing that it is a fundamentally flawed tool for determining a baseline royalty rate in a hypothetical negotiation.5 Also, studies and analyses have supported this trend where the reported royalty rates fall between 25% of gross profit margins and 25% of operating profit margins, diverging from the classic 25% rule.6
- Due Diligence
It is always advisable to conduct due diligence by both parties, especially by the licensee to evaluate the true potential of patents before entering into licensing agreements. The due diligence may include reviewing pending contests such as infringement or invalidation proceedings in the courts, predicting demand and sale of the product in relevant markets, and the scope covered in the patent document. The scope of granted claims can be a major factor in determining the true value of a patent, for instance, a patent with broad claims is considered more valuable as compared to narrow claims. A broad claim covers more scope of the patented technology and prevents competitors from circumventing the patent by making minor improvements.7
- Business Strategy: Offensive or Defensive
A patent may be commercialized by generating revenue by selling products or services based on the patented technology or licensing the same to business partners or infringers by adopting either the offensive or defensive strategy.
4.1 Offensive strategy
Offensive strategy helps patent holders to aggressively enforce their rights in the patent to gain competitive advantages in the relevant market that may create barriers (not leading to antitrust or anticompetitive practices) such as pursuing legal actions against competitors engaged in infringement activities by refraining competitors to produce or sell products based on the patented technology and collecting compensation and/or damages in respect thereof. Further, the patent holder may also compel infringers to take licenses once the litigation proceedings are over. Moreover, a patent pool or fence may also be created in a specific technical field to restrict competitors from entering such fields, forcing them to take licenses for all or selected patents. It has been observed that patent holders or companies prefer an offensive strategy to enforce their rights in those patents which cover proprietary technology developed indigenously.8
4.2 Defensive strategy
A defensive strategy includes patents covering technological improvements or gaps left in a competitor's product or patent, which the competitor may be employing soon in its existing products. This approach not only helps to save litigation costs by avoiding possible patent infringement where a patent holder is engaged in promoting similar or improved products as those of the competitors, but it also gives a bargaining edge in those cases where a competitor plans to launch improved products related to existing products, which may infringe the patents of the patent holder. The defensive approach not only strengthens the market presence but also offers additional sources of revenue.
- Licensing Opportunities: Pre-Grant & Post-Grant
A patent holder or assignee may initiate a licensing procedure either during the pendency of a patent application or after the grant of a patent. During the pendency of a patent application, the applicant may enter into a condition precedent licensing agreement with a licensee where the terms of the agreement become effective only after the grant of a patent. However, parties can also agree on the terms of the agreement before the grant of a patent, but difficulty may arise if the patent is never granted or the granted claims are too narrow.9 Pre-grant licensing may be considered once the patent application enters the examination phase so that the licensee can review the prosecution history, including the examination reports issued by the patent office and replies submitted in response thereto by the applicant to assess the patentability of the patent application. In such cases, licensees may seek pre-grant patentability assessment by analyzing the prosecution history to determine the scope of the possible claim amendments and chances of grant.Once a patent is granted, it may be licensed in three ways:
- an agreement between a patent owner and one or more interested parties (licensees) on mutually agreed and negotiated terms, i.e., exclusive or non-exclusive licence;
- an agreement between two or more patent owners to license one or more patents to one another by cross-licensing or to third parties by creating a patent pool of essential and non-essential patents; and
- a compulsory license granted by the government to someone other than the patent owner to produce the patented product without the owner's consent.
5.1 Exclusive and Non-exclusive Licenses
An exclusive license is a one-to-one agreement between a patent owner (licensor) and a licensee wherein all rights except the title in a patent are transferred to the licensee for a limited time. During said license period, no other party can use the patented invention. As exclusive license bars the participation of the patent owner, a higher royalty percentage is charged from the licensor, whereas the licensor has more commercialization control over the patent. Exclusive licenses are preferred in cases where the patent owner has certain limitations in commercializing a patent, for example, universities and research institutions prefer executing technology transfer agreements with industries with technical and marketing expertise in commercializing the patented technology. Moreover, a licensee can further sublicense the patent use to another sub licensee(s), if allowed in the main licensing contract. In contrast, the patent owner has more control over the patent in a non-exclusive license contract. The patent owner retains ownership and can grant licenses to multiple licensees, allowing every licensee to use the patented invention simultaneously. However, royalties are lower due to non-exclusivity, as licensees may compete with each other in the same market. The exclusive or non-exclusive licensing agreements differ in respect of specific clauses contained therein. Samples of exclusive10 and non-exclusive11 licenses are available on publicly accessible Internet resources.
5.2 Cross-License and Patent Pools
Cross-licensing occurs when two or more interested parties are allowed to use each other's patents among themselves, mainly for two reasons, firstly, to prevent any potential infringement, and secondly, to gain an advantage from each other's patents. Cross-licensing aims to avoid litigation, encourage collaboration among companies working on similar technology, and provide cost savings on research & development of shared technology and royalty fees on its use. A royalty-free cross-licensing happens when the exchanged patent(s) are equally valuable for each participating party, therefore, a fair exchange of valuable patents is essential in cross-licensing.
In patent pooling, two or more entities create a patent resource pool of patents concerning a complex technology, which can be cross-licensed among the pool members or individually licensed to non-contributing potential users or manufacturers of the industry. The contributing members license their patents to a pool, and in exchange, they are permitted to use any other member's technology on a royalty-free basis or after paying license fees according to patent pool license agreements. Patents in a pool may be licensed to members or subscribers either as normal patents available to use without paying any special royalty fee or as exceptionally valuable patents provided for use on a special royalty fee.12 The license fees collected from members and non-members are allocated among contributing members according to the proportion of their patent's value in the pool.
Moreover, while forming a patent pool, patents in the pool must be assessed for essential and non-essential patents. A non-essential patent is licensed according to negotiation and mutually agreed terms between a patent owner and a licensee, and may be licensed on different terms to other licensee(s). Conversely, essential patents are licensed on similar rational terms to all licensees. Essential patents are necessary to implement a specific technical standard, and if not licensed on reasonable terms, may lead to anti-competitive practices. An essential technology is standardized by a Standard Setting Organization (SSO) as a standard essential patent (SEP) that complies with a technical standard and is required to be licensed on a fair, reasonable, and non-discriminatory (FRAND) term.13 This commitment ensures that standardized technology will remain accessible on reasonable licensing terms to all who are willing to implement an essential patent in their products or services.
Thus, the licensing fees or royalty rates for SEPs are different from non-essential patents, thereby resulting in three types of possible pool licensing fees:
- normal patents – royalty-free patents for members and low-cost licensing fees for non-members;
- non-essential valuable patents – mutually agreed royalty fees for members and high-cost licensing fees for non-members; and
- essential patents – non-discriminatory and reasonable fees for both members and non-members.
5.3 Compulsory License
A compulsory license allows a country to use a patented technology or authorize other enterprises to manufacture or produce products based on the patented invention without any pre-negotiated agreement with the patent owner in exchange for a pre-determined compensation or royalty fixed by the government.
A compulsory license may be granted in three circumstances:
- Non-working: non-working of a patented invention from at least three years of grant without any reasonable cause.
- Negotiation blocking: if a voluntary license is denied on reasonable terms and/or for a reasonable time, the proposed user may file for a compulsory license.
- Emergency: during an emergency, negotiating rights of a patent owner are waived-off and a compulsory license is issued by the government. Compulsory licenses are nonexclusive, non- assignable, and are granted for a reasonable time in which the purpose is served.14
- Conclusion
Patent licensing agreements involve granting permission to third parties to use patented inventions, processes, or designs in exchange for royalties or other compensation. These agreements are essential for monetizing intellectual property while maintaining ownership and control over the technology. Various licensing models, such as exclusive, non-exclusive, and cross-licenses, can be adopted by the parties, which not only provide the freedom to operate in a territorial market but also equip them to deal with infringement or unauthorized use of the patented technology. However, care must be taken while dealing with essential technologies, and any exclusive deal or restricted licensing terms may lead to anti-competitive practices. Licensing agreements can either be mutually terminated or due to any breach of licensing terms. If a licensee breaches the agreement, the licensor can terminate the agreement and also sue for patent infringement if the licensee continues to use the patented technology. Moreover, if the licensor fails to keep the contractual obligations of the license, such as over-licensing or use of the patented invention without the licensee's permission in the case of an exclusive license, the licensor may be sued for breach of license terms and infringement. Therefore, whether you're seeking protection for your patent or exploring licensing opportunities, due diligence, patent landscaping, and compliance with the patent and competition or anti-trust laws are required.
Footnotes
2 https://worldscientific.com/doi/epdf/10.1142/8734
3 https://www.tesla.com/blog/all-our-patent-are-belong-you
4 https://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=1220&context=dltr
5 https://www.royaltyrange.com/home/blog/what-is-the-25-rule-in-intellectual-property-valuation
6 https://assets.kpmg.com/content/dam/kpmg/pdf/2015/09/gvi-profitability.pdf
8 https://www.wipo.int/edocs/mdocs/innovation/en/wipo_ifia_bue_00/wipo_ifia_bue_00_9-main1.doc
9 https://founderslegal.com/can-i-license-my-patent-pending-invention
10 https://otd.harvard.edu/uploads/Files/Sample_Basic_Patent_Rights_Exclusive_License_Agreement.pdf
11 https://otd.harvard.edu/uploads/Files/Sample_Non-Exclusive_License_Agreement.pdf
12 https://www.law.berkeley.edu/files/pools%281%29.pdf
13 https://www.wipo.int/export/sites/www/competition-policy/en/docs/patent_pools_report.pdf
14 https://ssrn.com/abstract=1922803
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