In short, a patent license agreement is a legal contract created to define the terms under which a licensee may create, sell, and use a patented invention from a licensor (or patent owner). This agreement also spells out how royalties will be paid to the licensor/patent owner.
Types of Patent License Agreements
Different patent license agreements fall under three various categories: exclusive, nonexclusive, and sole licenses. These different types of agreements essentially assign specific rights to the parties involved.
- Exclusive patent license agreements grant a single licensee all the rights to use, produce, and sell the invention.
- Nonexclusive patent license agreements allow the same rights to licensees; however, the patent owner/licensor still has the right to sign and negotiate agreements with other licensees.
- A sole license is a middle ground between exclusive and nonexclusive patent license agreements. With a sole license, the licensor and the licensee can use the invention. Yet, typically, the licensor will agree to refrain from granting any additional licenses.
However, it is essential to keep in mind that these definitions are broad overviews of what patent license agreements actually entail. Agreement provisions need to be as specific as possible, so the licensor and licensee know their rights regarding the invention.
Elements of a Patent License Agreement
Although the terms vary from one patent license agreement to the next, standard license agreements for utility, plant, and design patents typically include the following:
These are typically the most critical provision included in patent license agreements because they explain how royalties will be paid. Various scenarios influence how royalty payments will be set-up. For example, it is essential to consider whether royalties will be computed based on net proceeds or profits. Even more, a licensor may require a minimum or guaranteed payment.
- License Term
Because certain products last longer than others, it is crucial to spell out how long a license agreement should last based on the invention. It may also be in a person’s best interest to include a clause that permits the contract’s termination in case of specific occurrences, like low sales. Also, a licensor may only want the agreement to cover a specific period of time with the chance of renewal. Either way, license terms should be well thought out and structured according to the invention type.
- Annual License Fee
This section of a patent license agreement determines if a licensee must pay the patent owner a yearly amount to retain their license. Like the license term, this provision will differ depending on one’s needs. For example, the annual license fee can remain the same every year, or it may stipulate that the fee increases when unforeseen events occur.
- Dispute Resolution
If a conflict arises, your patent license agreement should provide information about how disputes will be settled. Some agreements call for arbitration, while others prefer litigation. Agreements should also confirm which state’s laws will govern the dispute.
Provisional Patent License Agreement
If the patent on an invention is pending, the licensor may still be able to negotiate with licensees. However, there may be reduced royalties as a result.
In any case, it would be wise for an inventor with a provisional patent to consider licensing their invention as a “trade secret,” or at least include a provision within the agreement that discusses trade secrets. Doing so will protect the licensor from sneaky licensees who try to steal their idea in the case that the patent gets denied.
Because these provisions may get tricky for licensors/patent owners to handle, they should highly consider consulting with an attorney.
Stanzione & Associates, PLLC is an intellectual property law firm with over 30 years of experience protecting corporate entities, start-ups, and individual inventors. Stanzione & Associates, PLLC stands above other Intellectual Property law firms because of Mr. Stanzione’s extensive experience working at the United States Patent and Trademark Office (USPTO) as a supervisory level patent examiner. At Stanzione & Associates, PLLC, we have the insight and long-term relationships with the USPTO to work well with patent examiners to achieve quality patents.