On July 2, I posted Investor Due Diligence Should Go Both Ways. The thrust of that post: Founders should conduct due diligence on prospective investors just as investors conduct due diligence on founders.
In a similar vein, I just read Make Sure Your VC Isn’t A Jerk by Mark Peter Davis of DFJ Gotham Ventures. Well-written, succinct and worth reading.
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.
A fundamental tenet of patent law is that the owner of a patent can preclude others from using or manufacturing inventions that the patent covers. Few people realize, however, that there is a major loophole regarding the U.S. government.
Section 1498(a) of Title 28 of the U.S. Code says, in part, “Whenever an invention described in and covered by a patent of the United States is used or manufactured by or for the United States without license of the owner thereof or lawful right to use or manufacture the same, the owner’s remedy shall be action against the United States in the United States Court of Federal Claims for recovery of his reasonable and entire compensation for such use and manufacture.”
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After months of effort, you have successfully negotiated a nonexclusive license under an important patent. The license agreement allows you to make, use, sell, offer for sale, and import products that are covered by the patent. Much to your horror, your arch-competitor starts making and selling competing products that use the licensed technology, pricing its products substantially below your planned price. When you inquire, the licensor says that the competitor does not have a license. What can you do to stop this “third-party” infringement of the patent?
You examine the license agreement but see nothing about third-party infringement of the licensed technology. Can you stop your competitor from using the technology? Can you force your licensor to stop the competitor? The short answer is “no”.
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One of the challenges my clients often face is how to determine royalty rates for licensing their inventions or other intellectual property. I start by offering the following fundamental observation:
The licensor needs to know the licensee’s business model and profit margin, because the royalty must be less than the licensee’s profit.
An article in the September 2006 issues of les Nouvelles, a quarterly publication of the Licensing Executives Society International, agrees with and expands upon this observation. “Fair And Reasonable Royalty Rate Determination – When Is The 25% Rule Applicable?” was written by Ove Granstrand, Professor of Industrial Management and Economics at Chalmers University of Technology (Goteborg, Sweden).
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I am pleased to make the article “The Top Ten Legal Mistakes of Startup and Early-stage Companies” available as a Free Download using the Sign Up button in the sidebar.
Here are the ten mistakes that are discussed:
- Failing to comply with corporate formalities
- Pretending that employees are independent contractors
- Neglecting to provide and update an employee handbook
- Failing to establish or adhere to discipline or termination procedures
- Failing to ensure that the company owns its intellectual property
- Believing that “open source” means “no restrictions”
- Thinking that all NDAs have the same terms
- Believing that websites can unilaterally change their terms of use
- Using another company’s standard-form agreement
- Giving “family jewels” to an overseas supplier
Related post: Top Ten Intellectual Property Mistakes of Startup Entrepreneurs
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.
Over the past few years, several of my clients who had obtained patents wanted to license their rights to third parties. Only one client succeeded. The reason: The successful client was intimately familiar with the industry where his technology had its greatest value, having worked in it for many years. He knew highly-placed executives in the most important companies and was familiar with their product development plans. It took a year and a half, but ultimately we negotiated the first license agreement: A six-figure sum up-front, and up to several million dollars in royalties before the patent expires.
The other clients, in contrast, had to guess at the best companies and the right individuals to approach. Not knowing the companies’ plans, these clients never gained traction. They spent time, energy and money but did not achieve a positive return.
Here are my recommendations for inventors and entrepreneurs who are pursuing patent licensing:
- You are likely to achieve the best return by patenting inventions in an industry that you know well.
- If you don’t know the industry well, work with someone who does.
- Be prepared to invest several years and many thousands of dollars in the effort. If you do not have that much time and money, look for a lower-risk investment.
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.
Dana Shultz is a business-savvy lawyer located in Northern California's San Francisco Bay Area (in the East Bay, near Oakland) who has in-depth knowledge of law, business, technology, and the needs of startup and early-stage companies.