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 known as royalties. A license of patent rights can be either an exclusive license (only the licensee is entitled to exercise the rights set out in the license) or a nonexclusive license (the licensee may exercise the rights set out in the license but cannot prevent others from exercising the same right under a different license).
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 requires 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.
A license for an invention is similar to a lease for a house or 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.
A license agreement can be drafted according to the specific needs of the licensor (you, the company that owns the invention and is granting rights) 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.
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.
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. Plus, as a licensor you have to monitor your payments and the performance of the licensee.
Portions of this article are derived from Profit From Your Idea How to Make Smart Licensing Deals by Richard Stim.