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Patent Licensing: A Guide For Licensor's Point of View

What is Patent Licensing?

Licensing is a procedure through which the inventor gives authorization to a manufacturing entity (be it a company or an individual) permitting them to extract the benefit out of the licensed product.[1] In other words, it is by licensing that a patent holder grants permission to an individual or an organization to make use of his patented invention in exchange for royalties.

Questions to Ask Oneself Before A Licensor Decides to License His Patent

Since it is assumed by many, that producing goods by making use of one's own invention will prove to be more profitable to an inventor in comparison to licensing it[2], hence one important question that a patentee needs to ask himself before licensing his patent, is, whether he has enough capital to involve himself in the business of production? Because it is important for a licensor to know that licensingis often opted by those inventors, who do not have enough capital to manufacture their invention at an individual level.[3]Though royalties arriving in exchange for a licence are negotiable, the licensors might be paid lesser than manufacturing costs incurred by licensees.

Hence a patentee should ask himself whether licensing will earnhim deserving royalty payment?

Other crucial questions include as to what commercial role does his invention fulfill, like, is it an invention that improves products already existing in the market, or is it completely novel? It is also vital to ask, if one would be willing to work with several partners (non-exclusive licensing) or not (exclusive licensing or rights transfer). Once these questions are answered, a licensor would have a comprehensible framework and can go ahead with further steps.

Different Types Of Patent Licenses

There are eight types of patent licenses:

Exclusive License:
Exclusive patent license agreements propose the most protection to licensees but also come with the most accountability and expectations. An exclusive patent license is an agreement among the licensor and the licensee stating that the licensor will not practice under the patent himself or grant other exclusive licenses to other parties. [4]

Non-exclusive License:

n this contract, the licensor agrees to give some specific rights to the licensee but also reserves the right to grant licenses of the invention and rights concerned to third parties or use it themselves.[5]

Sub Licenses:

It is a category of license issued by the licensee to various organizations to make the products. Sublicense is a procedure of granting of certain licensed rights on a product to a third party by the licensee.[6]

Cross Licensing:

A cross-licensing agreement is a contractual arrangement between two or more parties (company or an individual) in which every party is granted rights to piece of technology, invention, research, or other subject matter. Cross-licenses usually take place between companies that hold patents over various aspects of the same invention. By entering into an agreement, each company involved can avoid litigation over infringement matters.[7]

Compulsory License:

In straightforward terms, compulsory licenses are authorizations granted to a third-party by the Government to formulate, use or sell a particular product or use a particular process which has been patented, without the requirement of the consent of the patent owner. Under Indian Patents Act, 1970 the provisions of ‘compulsory license' are explicitly given under Chapter XVI, and the terms and conditions that need to be fulfilled are given is Sections 84-92 of the said Act.[8]

Voluntary Licensing:

Also applicable for pharmaceutical patents, voluntary licenses are an act of goodwill towards the world. Patent holders may at their prudence, license to other parties, on an exclusive or nonexclusive basis, the right to manufacture, import, and/or dispense a pharmaceutical product. Based on the terms of the licence, the licensee may act completely or efficiently as an agent of the patent holder; or the licensee may be free to set the requisites of sale and distribution within a prescribed market or markets, contingent on expense of a royalty.[9]

Carrot License:

This licensing approach is apt when the potential licensee is not in practice of the patented invention and does not fall under any compulsion to take a license. This type of licenses is a marketing strategy where the patent owner gives the licensee a glance of what could be achieved by acquiring a license for their patent.[10]
Stick Licensing-Stick licensing is the absolute contrast of carrot licensing. This tactic of licensing can be utilized when the prospective licensee is already in use of your patented technology and, thereby, infringing your patent.[11]

How one should go about patent Licensing:

  1. Locate manufacturers: In order to find a potential Licensee, a licensor should conduct research and identify manufacturers who operate under relatively similar technology[12] and should make sure that he licenses out his patented product to a manufacturer, who not just incentivizes on improvising but also on innovating the technology of products that he manufactures.
  2. Negotiating with the potential manufacturers: According to WIPO, it is important that the rate results in good business proportion for both parties, and so negotiation of the royalty rate is fundamental to the success of the agreement.[13]
  • Due Diligence: Before initiating any kind of negotiations with the Producers, the licensor should investigate and exercise reasonable care in gathering information about the producers' history in business and their goals and objectives towards marketing, because it helps them realize their common goals. Since significance of information relies upon different factors and varies with varying circumstances, it becomes highly impossible to suggest a specific information as important information, for a licensor to prioritize while exercising due diligence.
     
  • Convincing the manufacturer to license to the patent product: While presenting his invention to the manufacturer, the licensor should incorporate the Pain Points strategy and point out at the technical glitches and the drawbacks of the current products in the market and explain on how his invention is superior, by focusing on how it fixes those issues[14].This way of presenting one's patent will make the potential licensee realize the value of the licensor's invention.
     
  • Getting the manufacture to sign the confidentiality agreement: Sometimes it so happens that, in order to get the manufacture license to the patented product, the licensorsdisclose sensitive information about their invention to the manufacturers, and since all negotiations do not necessarily wind up into a successful license agreement, there is always a good amount of chance for the disclosed information to get misappropriated by manufacturers. Hence in order to safeguard their patent from getting infringed, the licensors should enter into a Non- disclosure agreement also known as confidentiality agreement with the manufacturers.
     
  • Essential elements that are to be mentioned in the License agreement: Once the search initiated to find a potential licensee for the patent is over, the next step would be to enter into an agreement with clauses that stipulates each and every obligation to be performed by the licensor and the licensee. Clause considered essential in a patent licensing agreement includes the time period for which the license is granted, the compensation that is to be paid for making use of the patented product, which can be either in lump sum or royalties, a clause on whether a licensee can sublicense to other manufacturers andmake changes to the patent product should be included because it aids the licensor to prevent his invention from being exploited.

    Advantages of Patent Licensing

  • Licensing out cuts off the licensor from bearing the production costs, supply costs, delivery costs and sales cost by transferring the risk to the licensee[15]
  • Finding a potential licensee who is successful and stable in his business, will aid the licensor in swiftly moving his products into the marketplace including foreign markets.[16]
  • Licensing out helps in bringing the products to the market that the public is in dire need of, hence a patentee should license out his invention rather than preserving it.[17]
  • By licensing out his patent, the licensor in addition to retaining his title over the patent can earn huge income.
  • Since there is always a scope for the licensor to license out his patent to multiple licensees, he can earn huge incomes from multiple sources at the same time.


Disadvantages of Patent Licensing

  • Though the licensor retains his legal title after licensing out, it deprives him from having enough control over the patented product.[18]
     
  • A novice licensor not familiar with licensing activities often end up granting licenses to an incompetent licensee, who becomes a cause for the failure of the invention.
     
  • In the process of licensing out, increased exposure can result in theft and misuse of the patent costing the licensor to lose his ownership over the invention.
     
  • Manufacturing is the process that transforms an idea into product and hence poor commercializing skills and manufacturing skills of the licensee might result in the failure of the patent holder's invention. Therefore success of the licensor's patent is highly dependent upon the skills and efforts put in by the manufacturer.[19]
     
  • The licensor should excessively investigate about the reputation that manufacturer holds for his production, because manufacturer's inferior reputational remarks might hinder the licensor from succeeding in the market.


Conclusion
Licensing of Patents can turn out to be a huge benefit for both the licensor and the licensee as it will earn them huge returns on the investments made by them on the technology. No matter how much one spends on inventing or marketing it, if it is not good enough to fulfil a consumer's requirements, then it won't be good enough to earn royalties or profits to the inventor and manufacturer respectively.

Also, licensing of patents should be encouraged because, it acts as a boon for the public at large, because a person's invention might be beneficial for the society like machinery equipment which reduces the burden of peopleby using them in their daily life, and sometimes it might be an essential requirement for the public like medicines.Hence patent licensing should be encouraged by providing necessary aid and protection to the patentee in the process of licensing his patent.

End-Notes:

  1. https://www.wipo.int/patents/en/faq_patents.html
  2. https://www.greyb.com/patent-licensing-101/
  3. https://www.klinckllc.com/patents/6-questions-to-ask/
  4. https://patent.laws.com/patent-protection/exclusive-licensing
  5. https://www.priorilegal.com/intellectual-property/intellectual-property-assignment-agreements-and-licenses
  6. https://www.mondaq.com/india/Intellectual-Property/805902/Patent-Licensing
  7. https://www.gapslegal.com/articles/what-is-a-cross-licensing-agreement/
  8. https://blog.ipleaders.in/concept-compulsory-license-patents-act-1970/
  9. https://apps.who.int/medicinedocs/en/d/Js4907e/3.5.html
  10. https://www.technologyreview.com/s/403932/what-you-need-to-know-about-patents-and-their-value/
  11. ibid
  12. https://www.greyb.com/patent-licensing-101/
  13. WIPO (2005,P.57).
  14. https://www.heerlaw.com/patent-licensing-steps-strategies
  15. https://www.iiprd.com/all-you-need-to-know-about-patent-licensing/
  16. https://www.tcii.co.uk/2012/10/26/licensing-arrangements-the-pros-and-cons/
  17. https://www.mondaq.com/india/Intellectual-Property/767148/Patent-Licensing
  18. https://www.iiprd.com/all-you-need-to-know-about-patent-licensing/
  19. https://www.greyb.com/patent-licensing-101/

Written By:

  1. Kavya B - Gujarat National Law University
    Email id: [email protected]
  2. Aditi Jaiswal - Gujarat National Law University
    Email id: [email protected]

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