Jill Gilbert Welytok is the managing attorney for Absolute Technology Law Group LLC, which is a team of Registered Patent, Trademark and Transactional attorneys.
Licensing is a topic that comes up week after week at the Northshore I&E Club as our inventors progress down the path of turning concepts into products. I'm especially pleased to see so many of our local inventors successfully negotiating and procuring licensing agreements. But I caution that expectations must be realistic, and I've yet to see any of our members become a millionaire overnight by landing a licensing agreement.
That said, licensing can be a good way to turn a tidy profit on a product if your expectations are realistic, and you take the time to learn the ropes. It is an arrangement where a company pays you a royalty in exchange for the right to make, sell and use a product which you have patented. Companies rarely license un-patented ideas. On the other hand, the patent is worth only as much as the market and development research that underlies it.
Licensing can be a great way for an individual inventor to profit from an invention without risking a lot of funds up front to develop manufacturing and distribution capability. However, it is almost always less profitable than manufacturing a product. The real rewards generally go to the party that has the financial wherewithal and is willing to assume the risk of actually bringing the product to market, as opposed to merely conceptualizing it. When you enter into a license agreement, you generally agree to take a small share of the profits from a product you let someone else produce using your patent rights. Manufacturing often yields profit margins in the 50% range. A typical royalty is 2-5% of the sales price per unit.
The discussions you have with a prospective licensor in the early stages of negotiating a licensing agreement should center on the market for the product, and how close the product is to being ready for market.
Usually, at the initial stages the inventor and licensee (e.g., manufacturer or distributor) review the projections of profits to be made and come to a sort of shared vision of the market. Remember, the manufacturer is taking a financial risk, in deciding whether to market this new product at all. At this stage the inventor should build a sense that the economic interests are aligned and that this is too good an opportunity for the prospective licensee to pass up. Bringing a visible, verbal lawyer in too early sends the wrong message. It can play into something we call the "greedy inventor" scenario, which can kill a deal.
The inventor should be careful to form a good relationship and come off as someone the manufacturer will want to work with at this stage, and possibly on future products. However, the inventor should not give up important legal rights by disclosing too much too soon. The inventor should be careful to check with an attorney before providing copies of patents, patent numbers, etc. at this stage. Unfortunately, some manufacturers lull inventors into a sense that a license offer is forthcoming, when really all they want to do is get information to design around the invention or get the inventors' market concept down. It is by no means the norm, but it happens.
Licensing is basically contract law, and the specialized aspect of a license is not so much the contract law itself, but rather the overlay of specialized practices to each particular industry. I am not aware of rigid or standard royalty rates in any industry for products, but I am aware of ranges. There are ascertainable ranges for royalties based on industry comparables, but royalty rates within these ranges truly depend on a variety of industry, competition, market and other factors unique to each product. It is the job of the inventor (or agent) to know and address these factors well in pitching their product, and to research comparable products. Advances and minimums (i.e., up-front payments before actual product sales) are negotiable but not standard, since these things depend on the leverage of the inventor and the risk the manufacturer perceives they are taking. Many license agreements do not offer them at all, and sometimes it is quite reasonable they do not.
With the understanding that all products, markets and stages of development are different, here are a few more tips for negotiating a license for an invention that is near-ready for market.
Consider leveraging interest expressed by one manufacturer to contact others. There is no prohibition on this. Don't drop off communications with the rest of the industry just because one prospective licensor has started a dialogue with you. In fact, rev it up. Generating a sense of competition at this stage, when done appropriately, can help an inventor negotiate a higher royalty. Plus not every deal goes through; it's a good idea to be in contact with multiple prospects. Consider non-exclusive and territorial licenses, and do not rule out the possibility of manufacturing yourself later, which means that the manufacturer will have to view you as a source of potential competition as well. (Manufacturing yourself, when possible, inevitably leads to higher profits.)
Once the parties have a sense of the market, hopefully the inventor has done their homework. At this stage the inventor should:
Know rates of royalty for similar products in the industry.
Be prepared to argue why their product justifies a royalty at the
high end of the range.
Work with an attorney to identify additional points for negotiation
such as actual payment terms, rights retained by inventor, etc
As the inventor, you should be prepared to make good, logical arguments based on facts and market analysis as to why their product justifies a royalty at the high end of the range. The Licensee/Manufacturer/Distributor will then make a counter offer, etc. Once the parties have reached a general agreement, a lawyer can look at the terms or draft an agreement to ensure that expectations are met and there are no clauses which will surprise the inventor unfairly down the road. Sometimes, there is an advance payment to seal the deal, but many times not. Inevitably, attorneys will look closely at the method for verifying the sales on which royalty payments are made and exclusivity issues.