Intellectual property is a valuable asset for any company. Sometimes, it is even most profitable when IP rights are licensed to a third party. Patent license agreements allow you to temporarily transfer patent rights to other companies while still profiting off their use. If you are looking to draft a patent license agreement, a patent lawyer from the Priori network can help you create a contract that will accomplish your business goals while keeping your IP safe.
Understanding Patent License Agreements
After you patent a new invention with the United States Patent and Trademark Office, you get the exclusive rights to make, use, sell, export, import, manufacture, or offer that invention in the U.S. Once conferred, these rights are under full control of the patent holder, which means that the patent holder has the authority to temporarily transfer some or all of those rights to another person. This is done through a patent license agreement. You can review a free template Patent License Agreement with attorney-drafted comments in Priori Legal's Document Center.
A patent license agreement (or a patent license or patent licensing agreement) is a contract that transfers some or all of your patent IP rights to another person or persons (called licensees) for a specific amount of time for a fee or royalty. Under a patent license agreement, you retain full ownership of the patent. As the licensor, you can terminate the licensing agreement at the end of the contract term or under certain circumstances, at which time you can license the rights out to another person or exercise them yourself—or even do both.
Types of Patent Licensing Agreements
There are several types of licensing agreements. The following three are the most common:
Exclusive License. Under this agreement, you contract not to grant any other licenses of the patent or to use the technology yourself.
Sole License. Under this agreement, you contract not to grant any other licenses of the patent, but you can use such rights yourself.
Non-Exclusive License. Under this agreement, you agree to give the licensee certain rights to the patent, but also reserve the right to grant other licenses to third parties or use them yourself.
In practice, many patent licensing agreements combine elements of each of these. For example, licenses can be exclusive in a certain geographic area only or rights can be licensed separately, with one licensee allowed to sell the invention and others only allowed to use them.
Key Provisions of a Patent License Agreement
A patent license agreement is generally a fairly straightforward contract, but it requires a number of key provisions in order to be both valid and effective. The following are some key provisions of a patent license agreement that must be addressed.
Identification. The identification section names the parties involved in the agreement. Identification clauses are especially important in patent license agreements, because they dictate who has which rights.
Fee and Payment. All patent license agreements must have some form of consideration or payment. This generally will be in the form of a monthly, quarterly, or annual fee. In some cases, the licensee will also owe the licensor royalties on any profit made due to the licensed product.
Grant. Grant clauses set out the scope and extent of patent rights granted to the licensee, as well as any limitations on those rights.
Approval of Licensed Goods. If a patent is transferred in addition to an associated trademark, the licensor often retains the right to inspect and approve the quality of goods before they are sold.
Sub-licensing. This section dictates whether the rights licensed can be conferred to third parties and, if so, under what conditions.
Intellectual Property Rights. This clause reiterates that the agreement is a license only and that no part of the agreement should be construed as a transfer of ownership.
Term. This sets the time period during which the contract will be valid.
Termination. This sets the conditions under which a contract can be terminated and how.
Patent License Agreements vs. Patent Assignment Agreements
In practical terms, patent license agreements, especially exclusive licenses, accomplish the same goal as as patent assignment agreements. Both transfer patent rights to a third party. While licenses are temporary, however, assignment is permanent. Licensing patent rights is like renting property. Ownership does not transfer, no matter how much is paid in fees. Patent assignment agreements, on the other hand, permanently transfer ownership for a one-time lump sum fee. For most IP holders, licensing is a more attractive and lucrative option. You can review a free downloadable template of a patent assignment agreement here.
What does “percentage of sales” in a patent license agreement and is it a common term?
In a patent license agreement, percentage of sales is a common way to decide upon how much a licensee owes in royalties. This can be calculated as a set percentage of net profits or proceeds, depending on the language of the agreement.