Licensing

Licensing Is About Generating Return On Investment For Our Client

Once a patent application is filed, the client will usually begin to seek a licensee, as getting an established licensee is typically a more effective way to commercialize the invention than starting a new business.  Corporate licensees are reluctant to sign Non-Disclosure Agreements (NDAs) viewed as a lawsuit trap, and generally require that an unsolicited submission be accompanied by a waiver, agreeing that there is no confidentiality except to the extent the licensor owns valid patent rights.  Although licensing of trade secrets or technical knowhow is possible, patent, trademark and copyright rights are the currency of licensing.  

Rule-Of-Thumb For Royalty Rates

Royalty rates and other terms are subject to negotiation between a willing licensor and licensee.  A rule-of-thumb for patent royalty rates, for a single patent product, is that a starting point for negotiations for a generous royalty is the licensor should retain 25% of the profits whereas the licensee gets 75% for making it all happen.  Ideally the licensor will also get an advance to recoup his or her expenses to date, and some commitment to pursue future infringers because if the new product is successful it is likely it will be “knocked off” even if there is a patent.

Trademark Licenses Must Include Quality Control

Trademarks, copyrights, publicity rights and the like are subject to license.  When trademarks are licensed, necessarily included must be actual quality control.  That is, the licensee cannot allow its mark to be used without some at least minimal level of supervision over the licensee.  This is because of the public interest that consumers are entitled to expect consistent quality from all users of a mark.  Licensees typically wish to minimize outside influence their management of the enterprise, but for a valid license, and associated trademark rights, actual quality control is mandatory. 

Auditing of Royalty Payments Becoming More Common

Nearly all license agreements include the ability to send in accountants to check the licensees’ books and records once per year, and if a significant enough discrepancy is found the licensee must pay for the audit.  With the overall economy struggling, many accounting firms are recommending such audits and report they nearly always show unreported royalties sufficient to justify the effort.  Some clients are reluctant to audit fearing souring relationships with the licensee, although doing such a check every few years would not seem unreasonable. 

Licensors Should Be Wary Of Validity Challenges

In Medimmune v. Genentech, the U.S. Supreme Court held that licensees may seek declaratory judgment challenging the licensor’s patent rights.  In order to avoid the expense and inconvenience of licensee-based declaratory judgment actions, licensors should take care when drafting license agreements.  Under Medimmune, a licensee may claim the benefit of the license while at the same time challenge the validity of the underlying patent.

By including terms in a license addressing a patent challenges, licensors can lessen the effects of the new rule.  Among the provisions Licensors should have in place include a clause reserving the right to terminate the license in the event of a patent challenge, a requirement for advance notification of any intended invalidity claim, a forum selection clause, and termination clause preventing the licensee from challenging the patent after termination of the license.