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Intellectual Property Newsletter

Inventor Protection in Licensing Agreements

Inventors frequently lack the resources to develop and market their inventions. Others with the necessary capital and resources sometimes approach inventors to offer funding to license patents and technology (at times before an actual patent is granted). The inventor, theoretically, will then receive a share of sales profits as defined in the license agreement. Such arrangements may be beneficial to all parties.

Problems may arise, however, because the inventor:

  • Lacks the sophistication to evaluate the license agreement
  • Is anxious to exploit the new invention and start enjoying some of the economic benefits or proceeds and therefore may not pay as close attention to the provisions of the license agreement as advisable
  • May be in an unequal bargaining position with the potential licensee

Often licensees offer “up-front” money, as an added inducement, but the license agreement may be so one-sided that the inventor later regrets entering into the licensing agreement.

An optimistic, sometimes naive, inventor, offered substantial advance royalties, may assume that the license agreement represents a partnership with a licensee that believes in the invention and its marketability. However, the licensee may only want to keep competitors from licensing the invention or want to develop a similar product “around” the patent and thereby avoid a patent infringement suit by the inventor. The licensee may have no intention of ever actually producing the invention, yet may insist on an exclusive license (i.e., prohibit others from obtaining a license for the product), with no obligation to actually produce and sell the invention.

Licensing Agreements May be the Key to Protection

It is not unusual for the licensee’s attorney to draft the license agreement, however the inventors may retain their own legal representation in negotiations, or at least have an attorney review the license agreement, to ensure that their interests are properly protected. Typical provisions of license agreements may include:

  • Definitions (of what is being licensed, etc.)
  • Statement of rights assigned to the licensee
  • Warranties about ownership and status of patent rights
  • Actual granting of the license
  • Payments to the inventor – fixed amounts or percentage of net profits
  • Formula for calculating net profits, if necessary
  • Ownership of rights being licensed
  • Provisions for termination or cancellation of the license and consequences

As noted, licensees frequently want the license to be exclusive, while it may be more advantageous for the inventor to retain the power to contract with others. The scope of the license may be negotiable.

Cancellation Clause

It may also be possible for the inventor, depending on the circumstances, to insist on a clause in the agreement to allow cancellation of the license, if certain minimum sales and production requirements are not met. Such a provision may be helpful in the event the licensee does not produce and sell a specified number of the inventions within a set period of time. This may seem like common sense; however, this detail is often overlooked by trusting inventors with an unrealistic perspective of the process. As stated earlier, the involvement of an experienced attorney in negotiations and/or reviewing the agreement is advisable. It may prevent an inventor from bargaining away crucial rights.

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