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Licensing Your Patent: Steps and Strategies
- to manufacture and market the patented invention independently;
- to sell the patent to another entity; or
- to license the patent to one or multiple entities.
This article deals with licensing. As an initial point to clarify terminology, when should you use licence vs. license? In the United States, license is both a noun and a verb while in Canada and other English-speaking countries, licence is used as the noun and license as the verb.
Is licensing a good option for me?
The licensing approach is often taken by those who do not have access to enough capital to independently manufacture and market their patented invention or simply have no interest in doing so themselves. Licensees pay licensors for the rights to manufacture and market the invention themselves, however, the rights still ultimately belong to the licensor. This is what distinguishes licensing from a sale. 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 that which would result from manufacturing and marketing the patent invention independently. Licensing, thus, is an avenue for monetization which mitigates risk but may simultaneously limit return.
In considering whether to license your invention, you should be thinking about whether you have the capital, know-how and desire to bring your invention to market, and whether retaining the rights in the patent is important to you. Licensing provides a means of bringing your invention to market despite a lack of business know-how and capital. While the ultimate return is lower than that which might be attained by making and selling the product independently, the trade-off is that both your financial investment and the demand on your time and energy are substantially reduced. If retaining rights in the patent is not especially important to you, you may wish to consider selling your patent rights outright to see an immediate lump sum return and dispense with any ongoing obligations with respect to the product and patent.
Another essential question to ask yourself is 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? The answer to this question may help identify profitable licensing opportunities and business partnerships. For example, if your product improves and is intended to be used with an existing product, the manufacturer of that product may be a perfect partner. 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.
Exclusive licensing means licensing rights in the invention to a single licensee to the exclusion of everyone else including you. Licensees like exclusive licensing because they obtain a monopoly in respect of the invention and can therefore, in the absence of competition, demand a higher price. The flipside of this is that you too can demand a higher price in exchange for the licence as you are taking a risk on a single licensee and giving up, at least temporarily, a valuable asset.
There is, however, also a place for non-exclusive licensing. This type of licensing is more common with products which don’t entail as high an investment to begin production and sale, or which can be profitably marketed and sold by multiple licensees simultaneously. An advantage of non-exclusive licensing is that your return doesn’t depend solely on the successful marketing of the product by a single licensee.
Exclusive patent rights can also be divided such that multiple exclusive licences may be granted. For instance, a Canadian patent could be licensed to one licensee for Western Canada and another for Central and Eastern Canada.
Licensing can give your invention a competitive advantage. Sales of your product may be considerably higher when marketed by a dominant player in the market than they would be were you to bring the product to market yourself as a new company. Some licensing agreements include provisions that allow the licensor to terminate the agreement if licensees are not meeting certain targets set out therein. These provisions can help ensure that a licensor sees a certain degree of return on the licence. To ensure a profitable and equitable licensing agreement, consider speaking with a member of our team.
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 most significant 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, and therefore do not have a valuable asset for which others are likely to want to pay. You will likely find it difficult to persuade a potential licensee to pay you for a product which can be legally copied by any number of competitors as soon as it’s made public. Ideally, you have a patent and therefore exclusive right to make, use and sell your invention. Although a patent application, prior to issuing to a patent, does not come with any exclusive rights to the product, it can be a valuable card to play because it shows a potential licensee that you are serious about your invention, have invested in its protection, and may one day have exclusive rights to licence.
To obtain a patent for your invention, the invention must constitute patentable subject matter and be novel, non-obvious and useful. Not all subject matter is patentable, for example, subsection 27(8) of the Patent Act states that no patent can issue for any “mere scientific principle or abstract theorem”. Methods of medical treatment are also not patentable in Canada. An invention must also be new, meaning the same thing has not previously been publicly disclosed anywhere in the world, and non-obvious, meaning that even if the same thing does not exist, the invention cannot be an obvious improvement to something that does exist. Finally, the requirement that an invention be useful is almost always met and requires only that the invention work. Fulfilling these requirements is also important for creating a commercially feasible product. Further requirements include having kept your invention confidential or, in certain countries, applying for a patent within twelve months of the date of your earliest public disclosure of the invention.
Secondly, the marketability of your invention needs to be evaluated. Ideally, your product will have unique features that will appeal to consumers and be directed 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 enable you to 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 and market the invention. To find licensees for your invention, consider doing the following:
- 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 some 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 sometimes lengthy, it is beneficial to begin seeking a licence after your patent application has been filed rather than waiting until a patent issues. Before disclosing still confidential details of your invention at this stage, however, you may want to consider requiring that potential licensees sign a non-disclosure agreement. Although your disclosure won’t affect the patentability of your invention since you’ve filed a patent application, public disclosure of your invention may prompt others to produce your invention while your patent application is pending or innovate such that your invention is no longer the newest and most desirable product on the market.
When approaching potential licensees, it is crucial to have a presentation strategy that will demonstrate to potential licensees how 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% although some industries, such as the pharmaceutical industry, 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 help you attract a licensee. Equally important is having an accurate estimate of the value of your patent to both rely on during negotiation 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 paying any required maintenance fees as they come due. 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 for both sides.
If you would like to discuss options for licensing your patent or patent application, please do not hesitate to contact us for a complimentary and confidential telephone appointment with a member of our team.
