HOW TO LICENSE YOUR PRODUCT
Preparing to License Your
Product
Before considering licensing an invention, an inventor needs to have the following steps completed before approaching a licensing agent or attempting to license a product yourself.
Source: Don Boshears, Boshears &Boshears
Consulting
Licensing
Basics
A license
is a grant of permission to allow another to make use of intellectual property
rights. The intellectual property right may be for a patent, trademark, trade
secret, or copyright. The license may even be for technical or business
"know-how". A license differs from an assignment of intellectual
property rights. An assignment conveys title of the intellectual property. In a
license, title of the intellectual property usually stays with the owner
(called the "licensor"), rather than being conveyed to the
license holder (called the "licensee"). Licenses may be
exclusive or nonexclusive.
A nonexclusive
license means that the intellectual property rights conveyed may be granted
to more than one licensee.
An exclusive
license does not necessarily mean that there is only one licensee. It may
mean that the scope of the license is exclusive to a certain geographical area,
to a specific product area or to a limited field of use. For example, a
licensor may grant an exclusive license for a product for sale in the United
States and may grant another exclusive license for the product sales outside
the United States.
A patent
license is a grant of permission to make, use or sell a patented product,
design or process. A nonexclusive licensee normally does not have the right to
sue an infringer, while an exclusive patent licensee can sue for infringement.
By being granted the license, the licensee can sell or use the patented
invention without being sued for infringing the patent.
A
trademark or service mark license is a grant of permission by the owner of
a trademark to allow another to use the mark. A trademark license differs from
other types of licenses because the trademark owner must exercise some degree
of control over the nature and quality of the goods or services on which the
licensed trademark is used. This is because a trademark is used to indicate the
quality of the goods and the source of the goods. Therefore, the licensor of
the trademark must exert control to be sure that the public is not deceived
into buying goods or services, thinking they have a certain quality or are from
a certain source when they do not. If adequate quality control is not present,
the trademark license may be deemed a "naked license" and invalid.
Even worse, the mark may cease to indicate the quality or source of the goods
or services, and therefore may be considered abandoned or lost. Quality control
usually means that the licensor has supervised the goods or services
sufficiently to guarantee their quality.
A trade
secret license is a grant of permission to make, use or sell a product,
design or process made using a trade secret. In order to keep a trade secret
confidential, there must be plans and controls in place to keep the information
secret. So a key part of the trade secret license is specifying and monitoring
the controls and protection put in place by the licensee so that the trade
secret is kept confidential.
In a know-how
license, the licensor has usually developed or has access to key technology
that is sought by the licensee. Sometimes the know-how is a trade secret, but often
it is not. In a license for know-how, the licensee is willing to license and
pay for the transfer of the licensor's technology knowledge.
Like other
types of intellectual property, copyrights can be assigned or licensed
to others. However, there are some differences in the rights of both the
licensor and licensee. Any copyright transfer executed after January 1, 1978
may be terminated by the author of the copyright or the author's successors,
unless the work was for hire or transferred by will. Congress provided for this
termination to provide authors with a second chance at licensing their work
after it has been published and perhaps more valuable of the work able to be
ascertained. The termination may occur at any time during a five-year period beginning
thirty-six years after the date the assignment or license was executed. This
right to terminate may not be waived or relinquished by any agreement. Only
after the date of termination, can the author make a new agreement.
In order
to be successful, a licensing agreement should mutually benefit both parties.
There are obviously many reasons why the parties may want to license. One of
the benefits to the licensor may be maximizing income by expanding market
opportunities without large capital expenses. A benefit to the licensee may
include rapid entry into a market using technology developed and tested by
others. Whatever the advantages are, the license agreement should be structured
so as to maximize the benefits to each party. In order to do so, the
compensation paid by the licensee to the licensor must be fair to both sides to
have a really successful long term licensing arrangement. While the licensor
wants to maximize income from the license, the licensor must balance that need
with making sure the licensee makes an adequate profit after payment of the
license fees, to give incentive to the licensee to maximize the market.
In
determining the value of the intellectual property to be licensed and hence the
value of the license, one needs to look at the economic advantage of the
intellectual property, any barriers it raises to competition with others and
whether it can open up or maintain a strong market position. Determining a fair
amount to pay for license has a number of approaches, three of which are the
market, cost and income approach.
1. Market Approach
In the
market approach, the value of a license is determined by looking at comparable
licenses and products in a similar market area. For example, if the license is
for a patented electronics product, other license arrangements in this
electronics area would be examined to see how others value similar products.
This type of approach may work well in an area where this type of information
is commonly known and available.
2. Cost
Approach
In the
cost approach, the vale of a license is based upon on the costs of developing
the intellectual property. For example, in valuing a set of patents to be
licensed, the cost of developing the technology and the patent costs would be
considered in setting the license fee. If the license is for a trademark, the
cost of obtaining the trademark and the costs associated with publicizing the
trademark would be considered. This is probably one of the least effective ways
of adequately determining a fair license fee. One major pitfall with the cost
approach is that while certain technology or products may be very expensive to
develop and may even be superior, buyers may not be willing to pay the cost if
a less expensive alternative is available. Another problem is that inventions
that are simple and inexpensive to develop, yet have huge market appeal would
have too low a licensing fee with the market approach.
3. Income
Approach
The income
approach to determining license fees focuses on what the intellectual property
can earn in the open market. Inherent in this calculation is an assessment of
the amount of income that can be generated, over what length of time, and the
risks associated with collecting that income over time. A problem with this
approach is that it is often very difficult to accurately determine these
factors.
Taylor
Russell & Russell, P.C.
Article
Appearing in October 20, 1997 Austin Business Journal
http://www.russell-law.com/Licensng.htm
How to License Your Product
Most individual inventors should
consider licensing their "patent rights" to an existing manufacturer
and simply collect a quarterly royalty. It is important to understand that you
license the "patent rights" and not the invention. In other words,
you must either have a patent or have applied for a patent ("patent
pending"). No manufacturer is going to seriously consider licensing your
idea without a patent or patent pending (see our Patent Protection section).
Licensing your invention is
basically a four-Step process:
1. Locate Manufacturers
2. Prepare Marketing Material
3. Submit Marketing Material to Manufacturers
4. Negotiate License
Of course reaching Step 4
depends upon how well you do Steps 1 - 3. You will first want to locate 20 to
100 manufacturers who make products similar to your invention. You will then
want to prepare a professional looking marketing letter and possibly even a
professional brochure of your product. You may even want to start your own
product WebSite showing your invention in further detail for the manufacturers
that receive your marketing letter.
After you receive some responses
from manufacturers, the next step is to negotiate the licensing agreement, which
you should hire an experienced attorney for. If you are unable or unwilling to
take the time for the four-step process, then you should consider seeking the
help of a licensing agent or attorney.
Adapted from: http://www.inventorfraud.com/license.htm
LOCATING MANUFACTURERS
Step 1 involves searching for
manufacturers that might be interested in your invention. When locating
manufacturers to send your marketing letter to, you should search for companies
who already make products similar to your invention. You should attempt to
locate at least 20 to 100 manufacturers in the field of your invention. You can
search your local library for information about manufacturers throughout the
United States. Below is a listing of free databases that you can search for
manufacturers:
CompaniesOnline
Search http://www.companiesonline.com/
Harris Info Online
http://www.harrisinfo.com/welchio.htm
Industry.Net
http://www.industry.net/buying_guide/
Industry Search
http://industrysearch.com/
MRO Explorer Search
http://www.mro-explorer.com/
The Original Yellow Pages
http://206.141.250.39
Thomas Register of American
Manufacturers http://www.thomasregister.com/
Trade Easy
http://www.tradeeasy.com
Oklahoma Alliance for
Manufacturing Excellence http://www.okalliance.com/
Oklahoma Manufacturer's
Directory http://www.odoc.state.ok.us/oknet/mandir99.nsf
Also, check out http://www.inventorfraud.com/companies.htm
for companies interested in new products.
After locating 20 - 100
manufacturers that would potentially buy or license your patent rights, you
should then rank the manufacturers into a list based upon which manufacturers
you want to approach first. You should also contact the companies and ask if
there is a specific person or department you should mail you marketing letter
to.
MARKETING MATERIALS
The next step is to prepare a
marketing letter that you will send to all of the companies you located with
the above databases. The marketing letter should be as brief and professional
as possible. (See the guide on the next page). You should not utilize a
handwritten letter or any other unfinished material. You may want to include
some of your professional patent drawings with the marketing Letter. You should
also attempt to have the manufacturer sign a Confidentiality Agreement prior to
disclosing your full invention.
After locating manufacturers and
preparing your marketing letter, you should then send the marketing letter
individually addressed to each manufacturer on your list (speak with a patent
attorney prior to sending the letter regarding confidentiality issues). You
should attempt to tailor each letter according to the company you are
contacting. Companies typically have a chain of command to process your letter,
so you may not hear a response for 2 to 3 weeks. If you have not heard anything
from a company after approximately 4 weeks has passed, you should directly
contact the company by telephone to see if they are interested in purchasing or
licensing the patent rights to your invention.
The IAS is providing web space
for qualified inventors and that address can be given to potential licensees.
The IAS also has a limited capacity to help you develop a brochure. Call for
more details.
You
should seek the assistance of an experienced attorney prior to submitting any
invention information to a company whether or not you have a patent application
filed.
Submit Marketing Material to Manufacturers
-Sample Marketing Letter
[YOUR
NAME]
[YOUR ADDRESS]
[YOUR PHONE #]
[DATE]
[CONTACT
PERSON'S NAME]
[MANUFACTURER NAME]
[MANUFACTURER ADDRESS]
Re:
[NAME OF YOUR INVENTION]
Dear
[CONTACT NAME or MANUFACTURER NAME]:
I am the inventor of an invention
entitled "[INVENTION TITLE]." I filed a utility patent application
for my invention on [FILING DATE] through the law firm of [NAME OF LAW FIRM].
I selected your company because you
manufacture [IDENTIFY THEIR PRODUCTS THAT ARE SIMILAR TO YOUR INVENTION]. I
believe the [INVENTION TITLE] will benefit your company in many different ways.
[IDENTIFY HOW YOUR INVENTION FITS WITHIN THE MANUFACTURER'S PRODUCT LINE].
Briefly stated, my invention comprises
[BRIEFLY IDENTIFY MAJOR COMPONENTS]. The unique features of my invention are
[UNIQUE FEATURE]. The advantages of the [INVENTION TITLE] are [STATE
ADVANTAGES].
I have enclosed a brochure of my
invention, which briefly displays the key components for your review. You may
also visit my web site at [ADDRESS OF WEBSITE] for more detailed information
about the [INVENTION TITLE].
I am willing to consider selling or licensing
the patent rights to my invention. If you are potentially interested in the
[INVENTION TITLE], please contact me anytime at [YOUR PHONE NUMBER].
I look forward to your response.
Very truly yours,
YOUR NAME
Enclosure: Brochure
NEGOTIATING
THE LICENSE
After
you receive communications from one or more manufacturers interested in your
invention, you then will need to negotiate the "license agreement."
Before you start discussing numbers with the manufacturer, you should
immediately hire the assistance of a reputable attorney or agent who has
negotiated license agreements before. The license agreement will have important
provisions in it regarding how much you are paid up-front, the percentage of
royalties, infringement issues, and other important issues that only a skilled
attorney or agent can properly negotiate and draft.
Contact
the IAS office for a list of attorneys or agent that assist you.