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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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.
Knowledgeable licensees of intellectual property (IP) seek indemnification protection to ensure that the licensed IP legitimately belongs to the licensor and not to a third party. This post explores the interplay between indemnification provisions and IP warranties.
While indemnification provisions vary from contract to contract, the following is illustrative:
Licensor will defend, indemnify and hold Licensee harmless from all costs, expenses, and damages arising from any third-party claim alleging that the Licensed IP infringes any patent or copyright or misappropriates any trade secret (a “Claim”), provided that Licensee has given Licensor prompt notice of the Claim, allows Licensor sole control of the defense of the Claim and of all negotiations for its settlement or compromise, and cooperates in all reasonable ways with Licensor’s defense or settlement of the Claim. If a Claim results in an injunction precluding Licensee’s use of the Licensed IP, Licensor will, at its option and expense, either (a) procure for Licensee the right to continue the enjoined use, or (b) replace or modify the Licensed IP so it is no longer subject to the injunction. If Licensor, after all commercially reasonable efforts, is unable to perform under either option (a) or (b) above, then Licensor will refund to Licensee an amount equal to the remaining undepreciated/unamortized value of the Licensed IP carried on Licensee’s books for U. S. federal income tax purposes as of the date that use of the Licensed IP was enjoined.
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I am pleased to make available as a Free Download using the Sign Up button in the sidebar “Licensing 101,” an article that provides information about licensing in FAQ format. Here are some of the questions that are answered:
- What is a license?
- How much does a license cost?
- Can license terms be negotiated?
- Are some provisions unique to patent licenses?
- Are there special rules where the U.S. government is the licensee?
- What should I look out for in international license agreements?
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.
I am pleased to make available on this blog’s Downloads page (use the Sign Up button in the sidebar) “A Practical Guide to GPL Compliance”, published by the Software Freedom Law Center.
In my opinion, this is a must read for anyone who is preparing or distributing software that is governed by the GPL.
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.
I was retained by a small company that had received a letter from one of its most important software vendors. The letter said the company “may have installed on its computers more copies of… software than it is licensed to use.” It then pointed out that unauthorized duplication of proprietary software violates federal copyright law and the applicable license agreement and that “potential remedies… are significant.” [emphasis added] The letter ended by requesting that my client:
- Audit all of its computers for copies of the vendor’s software and provide the audit results within three weeks
- Not destroy any installed software
- Not purchase any more of the vendor’s software until the matter is resolved
The client’s owner was concerned. She did not know of any illegally installed software; even worse, she was suspicious and uneasy about how the vendor could have such information.
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A couple of years ago, at the State Bar of California’s Section Education Institute, I delivered a one-hour program titled “What Every Business Lawyer Needs to Know about Licensing”. The target audience was attorneys who work with businesses but are not particularly familiar with intellectual property or licensing issues.
The program covered the following topics:
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.