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Licensing Your Patent: Steps and Strategies

By: Christopher Heer, Daryna Kutsyna | Last updated: August 14, 2018
Obtaining a patent ought not be the last step in commercializing your invention. Unless you plan to hold on to your patent as a deterrent for industry competitors, you may choose one of several paths available to commercialize your patented invention or monetize your patent. The three most common methods available to patent owners are:
  1. to manufacture and market the patented invention independently;
  2. to sell the patent to another entity; or
  3. to license the patent to one or multiple entities.

This article deals with licensing.

Is licensing a good option for me?

The licensing approach is often taken by those who not have access to sufficient capital to independently manufacture and market their patented invention or simply have no interest in doing so themselves. Royalties received in exchange for a licence are negotiable but are likely going to result in a return on the patent that is lower than manufacturing and marketing the patent invention independently. Licensing, thus, is a trade-off that mitigates risk but may decrease return.

Other essential questions to ask yourself are what commercial role your patented invention fulfills. For example, is it an invention that improves products already available on the market, or is it entirely novel? It is also important to ask yourself whether you are willing to work with multiple partners (non-exclusive licensing) or not (exclusive licensing or rights transfer), and which approach would best suit your vision for your invention.

Determining the feasibility of getting a licence

The next step in the licensing process is to determine whether your patented invention would be desirable to potential licensees. There are several criteria that should be considered to establish feasibility of licensing, with the significant ones being patentability, marketability and profitability.

The first consideration to be assessed is patentability. Owning a patent or pending patent application is usually a condition for licensing. Without legal ownership rights to an invention, you do not have the right to stop others from making, using or selling the invention.

In order to obtain a patent for your invention, the invention must constitute patentable subject matter and be novel, non-obvious and useful. Fulfilling these requirements will also help your product become commercially feasible. Further requirements include having kept your invention confidential or, in certain countries, applying for a patent within twelve months from the date of your earliest public disclosure.

Secondly, the marketability of your invention needs to be evaluated. Ideally, your product will have unique features that will appeal to consumers, and be oriented at a demographic that would be willing and able to purchase it. Inventions that are not marketable risk being unappealing to consumers, which would result in low sales and thus low profits, making them a bad investment for potential licensees.

It is key for your invention to be in some way different from similar offerings on the market to incentivize consumers to switch to or begin purchasing your product. Even if your invention is novel, there are likely substitutes available on the market that perform the function that it is intended to fulfil. Your invention, thus, must have a distinct feature, a better cost to benefit ratio, or another way of positively differentiating itself from market alternatives.

Finally, the invention needs to be commercially feasible. In essence, revenue made from selling the patented invention must exceed the licensee's costs of producing and selling it, which includes royalties that are paid to you as the patent owner. If there is no profit for the licensee in selling your patented invention, it is unlikely that you will be able to find a licensee. The profit margin is also likely to be a key factor in the royalty rate you can negotiate.

There are other factors that play a less significant role in deciding whether your invention is licensable. Among such factors is the composition of the industry market of your invention (i.e., how much market share companies hold on average, and whether there are dominant players that want to retain their advantage or smaller players that want to expand their market share) and the current demand for the need that your product fulfills. However, assessing whether your invention is patentable, marketable and profitable will largely let you determine whether there is potential for licensing.

Seeking out potential licensees

After you have determined whether your invention has licensing potential, you must seek licensees who are willing to purchase a licence and manufacture the invention. To do so, it is useful to conduct research based on the following criteria:

  • Assess the current market and the stakeholders within it, and ask yourself the following questions: Who is currently manufacturing competitive products or market alternatives? Are there any large entities looking for an avenue to enter this market? Are there existing players that want to strengthen their foothold?
  • Assess currently available market alternatives by reviewing publications of trade associations or trade shows, library databases, business directories, and patent databases.
  • Advertise your patent for sale or licensing.

It may be helpful to create a prospective list with 40-50 potential targets to ensure that, despite rejection, you will be able to secure a licensee or licensees. Triage your list of potential targets in order of likelihood of investment. Helpful criteria to rank your list may include: geographical location, size of the company, company policy on entering into new licence agreements, whether the company is already producing similar products, and whether it is possible to contact the company's decision-makers.

Approaching licensees

As the patent application process is lengthy, it is beneficial to begin seeking a licence after your patent application has been filed rather than wait until a patent issues. Before disclosing still confidential details of your invention at that stage, however, you may wish to require potential licensees sign a non-disclosure agreement.

When approaching potential licensees, it is crucial to have a presentation strategy that will demonstrate why your invention will help improve their market standing. Your pitch should include the following:

  • The issues with currently available products and the methods by which your invention fixes those issues. This strategy, often referred to as addressing the "pain points" of a business or product, will immediately help investors visualize what function your invention can play in their operations.
  • How your invention differs from currently available products, and what unique and marketable features it possesses.
  • The cost vs. benefit analysis of your product that details the additional benefits of your invention, and an approximate cost matrix of production and distribution.
  • The legal status of your invention, such as whether you have a patent pending or an issued patent.
  • Information about yourself: who you are, why you think your values and future goals for the invention will be a good fit for the company, and why you have decided to contact this specific company for producing your invention.

Once a licensee has agreed to purchase a licence to your invention, the payment scheme will need to be determined. In many cases, licensees pay the licensor an advance payment before the manufacturing and distribution of the product begins. The amount of royalties paid must also be determined. The typical range of royalties is between 2-5% whereas many industries, such as pharmaceuticals, often pay royalties of 1%. Finally, the type of licence, whether exclusive or non-exclusive, must also be discussed. Licensees will be willing to pay a higher licensing fee to obtain the exclusive rights to sell the patented invention.

Presenting a clear and accurate conception of the benefits of your invention and its contribution to the current market will aid you in attracting a licensee. Equally important is having an accurate estimate of the value of your patent to both have an effective negotiation strategy and to obtain the most suitable payment scheme for your needs.

After licensing

After a licensing agreement has been secured, it is important to ensure that your patent is maintained in force by timely paying any required maintenance fees. Failure to maintain your patent could result in termination of your licensing agreement. It may also be necessary to monitor whether your patent is being infringed, as enforcing the patent against infringers may continue to be your responsibility as a condition of the licence. Ensuring that your patent is not being infringed protects the value of your patent rights to your licensees and ensures that the licensing relationship continues to result in ongoing profits on both sides.