What is Patent Licensing?

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Today, a company’s competitive advantage is often found in the form of formulas, patents, schematics, designs, know-how, algorithms, manufacturing processes, data (such as analytic data) and hundreds of others types of information that give your company its ability to outperform its competitors.

This competitive advantage information is the company’s intellectual property (IP). The majority of that IP is in digital format, stored on servers (cloud based) worldwide.

Licensing of intellectual property (IP) is a rapidly growing model for commercialization of ideas and innovations.

Once you obtain a patent or other form of intellectual property, one of the more popular options is to take your idea and license it to a third-party who can use it within their product or service, or that can distribute your idea to interested customers.

  • You could also license your idea to a company in exchange for stock or other remuneration.
  • You can start your own company and use the idea to make money.
  • You can charge a one-time fee for use of the idea, or you can charge an ongoing fee, sometimes referred to as a “royalty”, for use of the idea.

Licenses can be exclusive or nonexclusive. In an exclusive license, only one owner has rights to use the idea. In a non-exclusive license, there can be several owners, each having the non-exclusive right to use and/or distribute your idea.

Almost anything can be licensed if it contains a protectable property right.

A license is an asset just like your house, your automobile, or your stocks and bonds.

So, understanding the basics of IP licensing is critical for anyone working in today’s business environment.

There is no single way of developing a licensing deal. Experienced licensing professionals use a variety of approaches.

Generally the owner of the idea and the party looking to license the idea will negotiate for the right to use the idea.

Areas to cover in Negotiating for Technology are numerous and ever-changing, based on new technologies and emerging business models. This change is especially rapid for technology businesses (hardware, software, mobile, etc.).

A sample of the questions to be covered in negotiating license rights include:

  • Who owns the IP being licensed? Get proof in the form of developer assignments and/or employee verifications.
  • What is the cost of a license, both short term and over the life of the idea (maintenance, updates, fees, etc.)
  • Does your Agreement clearly define the charges to be incurred by you?
  • Does the product already exist?
  • Does it currently satisfy your “requirements”?
  • Do you understand the strategy for commercialization of these technologies, products, services, computer programs, databases and/or documentation?
  • What state, and/or country laws will control the transaction?
  • Does your Agreement establish a testing mechanism for measurement of reliability, which will guarantee the product or services will meet or exceed the necessary standards, without “excessive” interruption for maintenance and repair?
  • Is there a realistic remedy if the product or service provider fails to meet the standard performance?
  • As we noted, these are just a few of the issues to be negotiated.

Through negotiation, the prospective licensor and licensee must agree on a set of license terms and conditions which are a “Win-Win” for both parties. A license is a negotiated horse-trade. It only closes when both sides are convinced that they will be a winner by entering into the deal.

Once the parties recognize that there is a viable road to license the owners Idea, and the licensee is convinced that they can make revenues from the use of the Idea, then a license agreement needs to be created that reflects the terms and conditions negotiated between the parties.

Only three elements need to be included in the contract; offer, acceptance and consideration. In a technology contract, the parties also need to be clear about what is being licensed, the restrictions of any license granted (exclusive vs. non-exclusive, field of use restrictions, royalty fees, maintenance, etc.).

Once a license agreement has been entered into between the parties, then each party needs to put into place a monitoring system to ensure conformance to the terms of the agreement, both for payments and for the “obligations of the parties” identified within the license agreement.

The Emerging SaaS Licensing Model

The emerging software as a service (SaaS) business model should also be a concern for businesses. In this model, a SaaS provider will create a software package, place it on a server somewhere in the world and begin to provide services such as online accounting, online banking, cloud-based services for human resources from companies as large as Oracle to start-up firms working out of their garage.

These SaaS services are covered by a license. Business owners need to review these licenses, not just for their large products, but also for any product used by their employees or to make your product or service.

The courts of taken the position that license agreement entered into by a business with another business (B2B) is a valid agreement, irrespective of whether you have read the terms or not. Because the courts note that a business understands the need for attorneys and is a sophisticated entity, the license agreement terms, once accepted, will bind the company.

These license agreements outline several important issues such as where and how an issue with the service will be addressed (such as requiring arbitration rather than being able to go to court), requiring you to appear in a jurisdiction outside of the state in which you use the software, and limiting the amount of damages that you may be able to collect in the event of a breach. The license agreements should also include the SaaS provider’s deliverables regarding up-time and response time, as well as provide a realistic remedy in the event of a failure on these service-level promises. Companies need to also be cautious of the pricing model for operation of the SaaS services both short-term and long-term including understanding when prices can change and the alternatives in the event the price comes unbearable. Can the company move its data quickly? Is there custom functionality that would not be transferable to a new service? How would that impact your product or service?

More and more these SaaS services collect in many cases very sensitive company data about its products, revenues, services, employees, credit card information, and other valuable, proprietary information, and many businesses do not even bother to read the terms of the license agreements that will affect their company in the event of a breach or termination of service. Where does your data actually reside? Who owns that data? Which jurisdiction are you subject to (see US v. Microsoft 2014 decision)? What type of security measures does your SaaS provider have in place to keep your data secure from hackers and malicious or prying eyes? What agreement do you have in place to find and transfer your data in the event of termination of the agreement? Do you have tested backup and recovery procedures using an off-site facility to be sure that you are able to recover all your data in the event of a catastrophic failure or the SaaS provider goes out of business (it happened a lot in 2008 when the such as the Sarbanes-Oxley Act of 2002, which dictate that a corporation demonstrates and maintain effective corporate controls across various business functions, which in some cases will cause severe penalties which under certain circumstances include personal liability to the officers of the company. There are several other federal and state laws that control the requirement to notify shareholders in the event of a breach, or loss of data and other requirements. This is not counting the “brand damage” that ensues from a company’s loss of data or other failures to manage the on-line intellectual property assets of the company (think of Target, Home Depot, etc.). Companies should also be aware of language in the license agreement providing overbearing limitations of liability and indemnification to the SaaS provider.

Businesses may not always have the power to change the terms of a license agreement because they do not have enough purchasing power to cause the SaaS provider to change its license terms, but the company can decide not to use a particular SaaS provider because of their license terms and avoid an issue. More information about SaaS can be found here.

Intellectual Pats has intellectual property attorneys experienced in licensing technology for companies from Fortune 500 firms to start-up businesses around the world. We would be glad to offer our experienced professionals to help you license your idea. Contact us today by filling out the form on this page or calling the number on the top of your screen.