2. But There Are Some Essential Elements Common
to All Effective Patent Licenses.
Let’s Start With the Most Obvious Ones for Patent Owners...
Patent Licensing Agreements
Are as Varied as The Stars
3. How to Determine a Royalty Rate
Royalty Rate Example
If the product is sold for $100 and
the profit is $20, then the royalty
would be $5.00 per unit (25%),
which is 5% of the $100 sale price.
Hence, a 5% royalty on sales.
The 25% Rule
If you cannot find a standard
rate in your industry, then
start by calculating 25% of
the expected profit on sales of
the patented invention.
4. The 25% Rule is Only a Starting Point
We have to fine tune
the royalty rate
machine by adjusting
the initial royalty rate
based upon the
economic realities of
the invention.
5. There Are at Least 15 Economic Factors
that Move the Royalty Rate Needle
Don’t Panic!
We’re not going to bore you
with all 15 factors. Let’s look
at just four factors that most
often move the royalty needle.
6. 1. The Entire Market Value Rule
Does the patented invention cover the entire product?
Or does it add value only to a component of the product?
If only a component, then the royalty is adjusted accordingly.
Example 1
If your invention adds a new
CPU to a mother board, you
do not receive a royalty for
the entire computer.
Example 2
But if your new CPU is the
primary reason that computer
companies are buying the
mother board, then you might
receive a royalty on the entire
value of the mother board.
7. 2. Sales History
New inventions with no sales history
are assigned lower royalty rates
Since the licensee has to help
build the market for an
untested product, the royalty is
adjusted downward.
A new invention without a
track record is a greater risk
for the licensee to manufacture.
If the product has a proven track
record, then the royalty is adjusted
upward.
8. 3. Extent of Monopoly Power
If there are no popular substitutes
for the patented invention, then the
patent monopoly is strong,
resulting in a higher royalty rate
because of higher profit margins.
If there are popular non-infringing
substitutes for the patented invention,
then the patent monopoly is weak,
resulting in a lower royalty rate
because of greater competition.
9. 4. Exclusive or Not Exclusive
Exclusive rights are more
valuable, moving the royalty
rate upward.
Non-exclusive licenses are
less valuable, moving the
royalty rate downward.
You now know the basics for negotiating a royalty rate!
Let’s move on to other essentials for the license…
10. For Patent Law Junkies Only
The Georgia-Pacific Factors
If you want to do further
research on patent royalty
calculations, the seminal
case is…
Georgia-Pacific Corp. v.
United States Plywood
Corp., 318 F. Supp. 1116
(S.D.N.Y. 1970), mod. and
aff’d, 446 F.2d 295 (2d Cir.
1971), cert. denied, 404 U.S.
870 (1971).
11. Assignment of Improvements
Your licensee will be
making improvements to
your invention. Some may
be patentable.
Require all improvements
be assigned to you to avoid losing control
over your invention.
12. Should the License be Exclusive?
Patent owners
prefer exclusive
licenses because
the royalty rate is
usually higher.
The exclusivity should be mutual,
meaning the patent owner will not license anyone else
and the licensee will not sell competing products.
Licensees prefer
exclusive licenses
because they
eliminate competition
from other licensees.
13. Minimum Royalty Payments
If you agree to an exclusive
license, then it is essential to
include minimum royalties.
Minimum royalties should be quarterly.
Nothing worse than no sales for a year
before you can terminate.
Without minimums, the licensed
product is sometimes shelved if
the licensee has products similar
to the licensed product.
14. Auditing Provision
Every license must have an
auditing provision. The patent
owner pays for the audit.
The audit provision should include the right to
terminate if the underpayments exceed more than 5%.
If cheating is found, then the
licensee must pay for the audit,
back royalties, and interest.
15. Licensing Term & Right of Renewal
The length of the license is
usually for about 3 years,
sometimes up to 5 years.
The licensee usually has a
right to renew for a term
of 1 to 3 years if all
obligations are being met.
16. Capital Gains Treatment for Royalties
There are significant
tax advantages if all
rights of ownership
are licensed to an
exclusive licensee for
the life of the patent
with no right to
terminate…
except for non-
payment of royalties.
This strategy is best adopted with a licensee with a
proven track record of selling the licensed product.
17. Link the Trademark
to the Patent License
The patent owner
should insist on
owning the trademark.
Consumers know the
name of the patented
product by the trademark.
If the patent owner needs to move the patent license to
a new licensee, then the trademark needs to move with
the patent license to maintain marketing continuity.
18. Protect the Reputation
of Your Invention
The licensee can ruin the reputation of
your invention by providing poor quality
products or bad customer service.
Include your quality
control standards in the
licensing agreement.
19. Patent Enforcement
If the licensor is paying to
defend the patent from
infringers, then a higher
royalty should be demanded.
If the licensee will pay for
patent enforcement costs,
then the royalty may be lower.
Resolve enforcement issues in the license agreement.
21. Dispute Resolution
Whether you opt for arbitration or not,
require all disputes be resolved in your city.
Include a provision for
attorney fees and costs
for the prevailing party.
Include submission to
personal jurisdiction.
Require choice of
law of your State.
22. Congratulations!
You now know the basics about patent licensing!
If you would like to know more about our patent licensing services,
call us at 310-777-8399
or contact our web site at www.patentrademark.com
23. Disclaimer
This post is intended to help educate the public
about issues relating to intellectual property.
No specific attorney-client relationship or legal
advice is intended or created. Each person’s
individual situation must be evaluated on its
own merits by qualified counsel.
