Profit From Your Idea
How to Make Smart Licensing Deals
Richard Stim, Attorney
December 2010, 7th Edition
License your invention without the risk -- protect your idea!
You've invented a great product and it's time for the next step. However, if you present an invention to a prospective buyer or licensee, it's no secret that your idea can be stolen. How can you draft an agreement that protects your interests?
Turn to Profit From Your Idea to help you create, modify and understand nondisclosure agreements specifically for inventors. In addition to providing sample agreements and practical advice, this all-in-one guide helps you:
- understand the licensing process
- determine ownership rights
- work with agents effectively
- find potential licensees
- publicly show inventions without the risk
- negotiate a fair licensing deal
- draft a comprehensive licensing agreement
- deal with international licensing
Disclosing your invention requires a balancing act: Presenting the best aspects of your invention while protecting the confidential aspects of your work. Use Profit From Your Idea to help you effectively maintain the necessary balance and minimize the risks of disclosure. The fully updated 7th edition comes complete with the latest licensing case law and includes brand new FAQs, many from the author's popular blog, Dear Rich: Nolo's Patent, Copyright & Trademark Blog.
“Tells prospective entrepreneurs how to move an idea ‘from thought to bought’—and roughly what inventors can expect to get in a licensing deal.” - Los Angeles Times
“Tells inventors everything they need to know to enter into a solid licensing agreement.” - Electronic News
“Gives detailed instructions on working with manufacturers, marketers and distributors...” - Baton Rouge Advocate
- Agreement Worksheet
- Assignment of Rights: Patent
- Assignment of Rights: Patent Application
- Assignment of Rights: No Patent Issued or Application Filed
- Letter Confirming Employee's Ownership of Intellectual Property Rights
- Joint Ownership Agreement
- Agent Letter Agreement
- One-Way Nondisclosure Agreement
- Mutual Nondisclosure Agreement
- Contract Worksheet
- Letter of Intent
- Option Agreement
- Terms Sheet
- License Agreement
- Escrow Agreement
- Checklist for Reviewing a License Agreement
- License Dates Chart
- Audit Request Letter
*Audio files are not available with the ebook
Attorney Richard Stim specializes in small business, copyright, patents, and trademark issues at Nolo. He is the author of many books, including Music Law: How to Run Your Band's Business Patent, Copyright & Trademark: An Intellectual Property Desk Reference, and Profit From Your Idea. Stim regularly answers readers' intellectual property questions at Dear Rich: Nolo's Patent, Copyright & Trademark Blog. You can also find Rich on Google Plus.
1. Gearing Up to License Your Invention
- The Licensing Process
- Avoiding Conflicts Among Multiple Agreements
- Challenges to Your Ownership
- Transferring Ownership of Your Invention to Your Business
- Disclosing Information About Your Invention
- Keeping Your Records
- No False Hopes! Reviewing Your Invention’s Commercial Potential
2. Intellectual Property Protection
- General Rules for Legal Protection of Inventions
- Utility Patents
- Trade Secrets
- Design Patents
- Copyright Law
- Sorting Out Nonfunctional Features: Design Patents, Product Configurations, and Copyright
3. Ownership Issues for Inventor Employees
- What Type of Intellectual Property Is Involved?
- Employer/Employee: Patent and Trade Secret Ownership
- Inventions Covered by Copyright
- Special Employment Situations
- Working Out Ownership Issues With Your Employer
4. Invention Financing and Joint Ownership
- How Much Money Do You Need to License Your Idea?
- Sources of Funding
- Joint Ownership
- How Payments, Loans, or Investments Can Create Joint Ownership
- The Joint Ownership Agreement
5. Licensing Agents and Representatives
- Completing the Agent Agreement
- Attorneys as Agents
- Invention Marketing Scams
6. Soliciting Potential Licensees
- Before You Begin Your Search
- How to Find Potential Licensees
- How to Overcome a Licensee’s Bias Against Submissions
- What’s the Best Way to Solicit a Potential Licensee?
- Product Presentations
- Should You Solicit Foreign Licensees?
7. Protecting Confidential Information
- Confidential Information and Nondisclosure Agreements
- Proceeding Without an Agreement
- Waiver Agreements
- When You Have Sufficient Bargaining Power
- Disclosing to Employees and Contractors
- Disclosing to an Attorney
8. The Key Elements of Your Agreement
- From Handshake to License
- Identifying the Parties
- Describing Your Invention and the Licensed Products
- Specifying Which Rights Are Granted
- Defining the Territory
- Setting the Length (Term) of the Agreement
9. Money: It Matters
- Some Basic Royalty Definitions
- Ways to Get Paid
- The Mysteries of Net Sales and Deductions
- How Much Do You Get?
- Royalty Provisions
10. Negotiating Your Agreement
- What, Me Negotiate?
- Documenting the Important Contract Elements
- Letter of Intent
- Option Agreements
- What If the Licensee Wants to Proceed Without a Written License Agreement?
11. Sample Agreement
- License Agreement
- Optional License Agreement Provisions
- Modifying the Sample Agreement for Your Needs
12. Warranties, Indemnification, and Proprietary Rights Provisions
- Promises, Promises … Warranties, Representations, and Covenants
- Indemnity: The “Hold Harmless” Provision
- Licensee Warranties and Indemnity
- Proprietary Rights
- Commercialization and Exploitation
- Samples and Quality Control
13. Termination and Posttermination
- Termination and Posttermination
- Termination Based Upon a Fixed Term
- Termination at Will
- Termination Based on Contract Problems
- Termination and Bankruptcy
- Posttermination: What Happens Afterwards?
- Survival of the Fittest
14. Boilerplate and Standard Provisions
- Paying the Lawyer’s Bills
- Dispute Resolution
- Governing Law
- Entire Understanding
- Attachments and Exhibits
- No Joint Venture
- Force Majeure
- Establishing Escrow Accounts
15. Service Provisions
- Service Provisions Versus Separate Service Agreements
- Training the Licensee’s Personnel
- Installation of Equipment
- Technical Support for the Licensee or for End Users
- Improving, Modifying, and Delivering the Invention
16. Handling the Licensee’s Agreement
- Dealing With Suggested Changes
- Evaluating an Agreement Presented to You
- Evaluating the Provisions and Suggesting Changes
17. After You Sign the Agreement
- Create Your Contract Calendar
- Dealing With Royalty Statements
- Resolving Licensing Disputes
- Avoiding Patent Misuse and Illegal Agreements
- The Taxman Cometh
- Quality Control
18. Help Beyond This Book
- Licensing and Intellectual Property Resources
- Working With an Attorney
Appendix: How to Use the CD-ROM
- Installing the Files Onto Your Computer
- Using the Word Processing Files to Create Documents
- Listening to the Audio Files
- Files on the CD-ROM
Gearing Up to License Your Invention
Eureka! You’ve developed an invention and believe it has commercial potential. What’s next? For many inventors, the best way to profit from an invention is to have someone else—usually a company that already specializes in similar products—develop, manufacture, or market the invention. However, since an inventor holds ownership rights (sometimes called title) in an invention, another company cannot do these things unless the inventor gives permission. Broadly speaking, this permission is called a license.
This chapter will give you an overview of the licensing process and help you screen out potential problems that could hinder your ability to license your invention. Review this chapter if you answer “yes” to any of the following questions:
• Would you like an explanation of the difference between a license and an assignment?
• Do you want a brief description of the legal rights related to your invention?
• Have you signed any documents regarding your invention?
• Would you like a clearer understanding of who might own your invention besides yourself?
• Have you shown your invention to—or discussed it with—anyone?
• Do you want some help in keeping track of your business transactions?
• Would you like more information about how to assess what your invention may be worth in the marketplace?
What We Mean by an Invention
The term “invention” as used throughout this book refers to any innovation, device, or process that can be commercially used or developed. Although the strongest form of protection for your invention is a patent, this book does not deal solely with patented or patentable inventions. Many inventions may not qualify for patent protection but can be protected under some other legal principle, such as trade secret or copyright. If your invention has commercial potential and is protectable under some form of intellectual property law, you can use this book to help you license it to others. See Chapter 2 for an overview of the different ways your invention may be protected.
A license is an agreement in which you let someone else commercially use or develop your invention for a period of time. In return, you receive money—either a one-time payment or continuing payments called royalties. Your power to make this kind of agreement is based on the premise that you control the right to make and sell your invention. Your right to make and sell your invention depends upon whether your invention is protected under intellectual property laws. (See Chapter 2.) If your invention cannot be protected under intellectual property laws, it is unlikely you will license your invention. Why? Because if your invention is not protected, anyone can make and sell it. Therefore, why should they pay you?
If your invention is protectible, you can stop others from making or selling it. In other words, a company can only make and sell a “protected” invention if you give them permission. By negotiating a license, a company can make, sell, or use your invention without fear of a lawsuit. In other words, a license gives the company a right to do something it would otherwise be prohibited from doing.
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You Are the Licensor, They Are the Licensee
For purposes of this book, you, as owner of the invention, will always be the licensor and the party receiving the license for your invention is called the licensee. In law, the person who is the source of the activity gets an “er” or “or” suffix (such as employer, lessor, discloser). The person who is the recipient of the activity gets an “ee.” So, an employer provides employment, while a person who is employed is called an employee. Similarly, a lessor leases property to a lessee and a discloser discloses information to a disclosee. Since you’re licensing your invention, you’re the licensor and the party receiving the license is the licensee.
When You License, You Are Leasing Your Legal Rights
A license for an invention is similar to a lease for a house or an apartment. A tenant makes periodic payments to an owner of property for the right to use it. If the tenant fails to honor the terms of the lease or rental agreement, the owner can reclaim possession and make the tenant leave. Similarly, a licensee pays you royalties (similar to rent) for the right to manufacture, sell, or use your invention for a period of time. If the licensee fails to pay you or otherwise breaches your agreement, the agreement may terminate and you can license your invention to someone else (provided the license is drafted properly).
It is also important to realize that you do not license your invention, per se. Rather, you license your legal rights to the invention. This distinction causes confusion for some inventors. Legal rights—patent, copyright, trademark, or trade secret rights—are what give you title or ownership of the invention, much like a deed to a house gives you title to the property. When you license your invention, what you are really transferring to the licensee are your legal rights, such as your rights to manufacture, sell, and use the invention. These legal rights will be explained in more detail in Chapter 2. However, it is beyond the scope of this book to assist you in securing intellectual property protection. In Chapter 18, Help Beyond This Book, we refer you to other resources for protecting intellectual property.
For now, keep in mind that the primary goals in licensing are to determine what legal rights you have, acquire the appropriate protection for those rights, and license those rights to others who can make you money.
Licenses Can Be Flexible
A license agreement can be drafted according to the specific needs of the licensor or licensee. For example, you can limit the license of your invention for a period of time, such as one year. You can limit the license to a certain area, such as Canada. You can even license your invention to more than one manufacturer at one time.
Joe invented a patented flotation device. Two companies are interested in it: a toy company and a company that makes boating products. Joe can sign two license agreements and earn royalties for both uses.
Because a license can be as flexible as the parties wish it to be, the task of drafting a license typically involves much more than simply agreeing to standardized language often found in legal agreements. That is what this book is all about—teaching you how to draft a license agreement that is just right for you. Drafting a license agreement is covered thoroughly in Chapter 8.
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Forms of Intellectual Property
Since licensing basically involves lending your legal rights to someone else, it’s crucial that you know precisely which legal rights are associated with your invention. These rights are sometimes referred to as proprietary rights or intellectual property rights. Below are examples of the common forms of intellectual property rights associated with inventions. Chapter 2 provides more information on intellectual property.
Utility patents protect inventions that are new and unique. When you have a utility patent, you can stop others from making, selling, or using your invention. You must apply for and receive a patent from the federal government before you have patent rights in the United States.
Design patents protect decorative designs that are used on inventions. You must acquire a design patent from the federal government before you have design patent rights. As with utility patents, you can’t stop illegal copying of your design until your design patent has been issued.
Trade secret law protects confidential information that gives you an advantage over competitors. You must treat the information with secrecy and disclose it only to those who agree to keep it secret. No registration is necessary, as registration would defeat the confidentiality requirement. A trade secret is sometimes an alternative or complement to patent protection, particularly for inventors who don’t wish to make their methods or processes public. Trade secrets are also used as a form of protection during the period after
an inventor has applied for a patent but before the patent is issued.
Copyright protects the artistic expression contained in writing, software, art, music, and movies. Copyright does not protect functional objects, such as clothing or furniture, only the artistic elements, such as fabric designs or ornamental furniture legs. You get a copyright as soon as you create the work. You don’t have to register your work to get copyright protection, but we advise doing so to strengthen your rights.
Trademark law is in a family of laws known as “unfair competition” (see below) and protects your right to exclusively use a name or symbol to signify your goods or services. Trademark law also protects certain designs or features of your goods, such as the uniquely shaped Absolut vodka bottle. You get trademark rights once you use the trademark in commerce (that is, once you sell the goods to consumers). You don’t have to register your work to get trademark protection, but we advise doing so to strengthen your rights.
Unfair competition law protects the way you sell your product. There are a number of state and federal laws prohibiting business practices that unfairly hinder marketplace rivalries, such as making fraudulent (false) claims about a competitor’s invention. Generally, however, with the exception of rules about trademarks, unfair competition does not pertain to the rights that you are licensing.
More information on the different forms of intellectual property protection is provided in Chapter 2.
Licenses Can Be Written or Oral
Most licenses involving technology are written. However, a license doesn’t have to be written to be valid. An oral license may also be enforceable as long as it qualifies as a contract under general contract law principles. However, there are limits on oral agreements. For example, in most states, an oral agreement is only valid for one year. Because of these limitations and because it is usually more difficult to prove an oral agreement than one set out in writing, we strongly recommend against relying on an oral licensing agreement.
Unlike a license, an assignment is a permanent transfer of ownership rights. When you assign your invention, you are the assignor and whoever purchases the rights is the assignee. An assignment is like the sale of a house, after which the seller no longer has any rights over the property. As the assignor, you may receive a lump sum payment or periodic royalty payments.
Even though they have different legal meanings, the terms assignment and license are sometimes used interchangeably. Indeed, these two types of agreements sometimes seem to have the exact same effect. This is true in the case of an unlimited exclusive license, in which a licensee obtains the sole right to market the invention for an unlimited period of time. Since in this situation the licensor is not keeping any rights that could be made the subject of another license, the license really has the same effect as an assignment. Because the two terms may overlap, it’s important to examine the specific conditions and obligations of each agreement rather than simply to rely on terms such as assignment and license.
See “Assignments, Licenses, Termination, and Reversions,” above. The categorization can affect tax treatment of income from the agreement. See Chapter 17 for more information on taxes and licensing agreements.
Assignments, Licenses, Termination, and Reversions
If you’re handed an agreement and told it’s a license, the key to determining whether it really is a license—regardless of the title—is whether you get the rights back to your innovation once the agreement terminates. (This return of ownership is sometimes referred to as a “reversion” or “reversionary rights.”) If the agreement provides for you to get the rights back in the event that (1) the agreement terminates, (2) the company stops selling your work for a fixed period of time, (3) the company doesn’t start selling your product by a certain date, or (4) the company materially breaches the agreement, then most likely you’re holding a license and the company only retains exclusive rights for a limited period of time. This issue—whether rights are returned to you—is crucial to licensing, so if you are in doubt as to your rights under an agreement, contact an intellectual property attorney for advice.
The Licensing Process
Licensing is a union between the inventor (the licensor) and the company that licenses the right to manufacture or distribute your invention (the licensee). It begins with a meeting and disclosure period followed by a proposal and negotiation stage. If you agree on the major principles, a formal relationship is created. After entering into the agreement (often called executing the agreement), there is a continuing review by both parties called monitoring. If either party breaches (fails to honor) the agreement, the agreement may be terminated.
The following sections describe the various stages in the licensing process.
Meet and Greet the Potential Licensee
The most difficult step you will face is finding a company to license your invention. For a shy, introverted inventor, meeting marketing people and displaying work at trade shows can be a jolting and frustrating experience.
Sometimes, an inventor who is so relieved to find a receptive company fails to properly evaluate the opportunity. Once you find a prospective licensee, you should thoroughly research it; this book will explain how. Every business opportunity is not a great opportunity. Sad as it may seem, you may be better off with no license at all than a license with a company that has a reputation for acting unethically. In addition, you must be careful during the disclosure process to properly protect confidential information. Disclosing your invention requires a balancing act: presenting the best aspects of your invention while protecting the confidential aspects of your work. We’ll discuss confidentiality and disclosure in further detail in Chapter 7.
It is beyond the scope of this book to inspire you to make great sales pitches or presentations, although we will offer some tips and guidelines in Chapter 6. We will also help you locate appropriate trade magazines and trade shows at which you may find prospective licensees. (See Chapter 6.) And we’ll help you identify and avoid scam marketing companies that will rip you off.
Should You Manufacture and Market Your Invention Instead of Licensing It?
Before considering licensing, it’s important for an inventor to consider the two other basic options to licensing: assigning your rights or manufacturing and selling the invention by yourself. Although a license allows you to retain ownership of the invention, some inventors prefer to assign all rights in return for a large one‑time payment. As for manufacturing and selling the invention yourself (referred to as a venture), most inventors do not have the funds or experience to create ventures or to market their own products. Manufacturing and marketing require money, knowledge about the industry, connections with distributors, and a lot of hard, hard work. In addition, many inventors cannot afford the significant expense of pursuing infringers. For this reason, most inventors choose licensing instead of ventures. However, if you are inclined to sell your invention on your own, we provide some resources for venturers in Chapter 18, “Help Beyond This Book.”
Negotiating the License
Negotiation skills are learned, not inherited. The simple rule is that the best approach to negotiating your licensing contract is to educate yourself and to set goals. Good negotiators are well prepared and have a realistic knowledge of the marketplace. Chapter 6 provides information about researching industries and markets. Also important in any negotiation is flexibility, being willing to adapt your goals to match the situation. We will provide an overview of common negotiating strategies in Chapter 10.
Execution and Monitoring
The signing (execution) of the licensing agreement is usually accompanied by an advance payment and an exchange of information or technology. For example, upon executing a licensing agreement, an inventor may receive an advance payment and have to provide the specific methods of efficiently manufacturing the invention.
The execution of a licensing agreement is the climax, but not the end, of the licensing process. It may also be the beginning of a services or consulting agreement between you and the licensee. For example, you may be hired to supervise the making of the initial molds or manufacturing prototypes. Service agreements are covered in Chapter 15. Plus, as a licensor you have to monitor your payments and the performance of the licensee. Chapter 17 offers information on post-signing activities.
Avoiding Conflicts Among Multiple Agreements
As an inventor, you may enter into various agreements, each of which may have an impact on your ability to license in the future. Before you license your invention, review your current signed commitments to make sure that none of them conflict with your ability to license. The easiest way to manage this review is to create and maintain a record of all signed documents. For the most part, you should be concerned with documents that affect your ownership, financial interest, or control over the rights to your invention.
The Real World: How One Inventor Had a Good Hair Day
Many inventors have used this book for licensing, and one of the most interesting examples is David Silva, founder of Localoc, Inc. (pronounced lock a lock), a company specializing in hair accessory products. David invented and received two patents for his Vidal Sassoon Twist ’n’ Clip Headband—a plastic headband combined with hair clips aligned along its top. His invention allows women to easily twist small sections of hair into rows. Before his device, women had to twist sections of hair into rows around their face and fasten them with a clip, a process that, according to Silva, required “ten hands.” Below is the story of Silva’s licensing odyssey.
Question: How did you find Helen of Troy, the company to which you licensed your products?
Silva: Helen of Troy is one of the leading manufacturers of hair appliances and hair accessories in the world and owns many popular trademarks, such as Vidal Sassoon and Revlon. When I invented the Twist ’n’ Clip Headband, I went to the hair aisles of the major retailers and looked at the back of the popular hair accessory packages to see who the distributors and owners of the popular hair accessories were.
Question: What was it like pitching your products? Any tips you can give others about making a product pitch?
Silva: Pitching something you believe in and worked hard to create is always nerve-racking.
My advice is to not only prepare exactly how you will present the invention, making sure it can be understood in a short period of time (a few minutes or forget it), but to also learn the history of the company you are pitching to, including the names of the people who run it, and the industry itself (in my case, hairstyling and hair products).
For example, if you invent a pizza cutter, know everything there is to know about making and selling pizza. Also, know the history of the pizza company you’re pitching to; know the names of the people who run it; and, most important, pitch the product in person. The difference between sending the item in the mail (which usually results in an immediate rejection) and pitching in person would amaze you. There is something about putting a face to the product that makes all the difference.
The “twisting-rows” hairstyle was popular when I invented the Twist ’n’ Clip Headband; however, it took a lot of persistence to convince Helen