Two Advantages of Extending a License
When it comes to licensing patented technology, there are two compelling reasons why patent owners may choose to collaborate with other companies through cross-licensing:
Expanding Market Share: Sometimes, despite initial marketing efforts, inventors struggle to penetrate the market fully. In such cases, partnering with another company that boasts a superior distribution model or specialized knowledge can be beneficial. By allowing others to license the patented technology, inventors can leverage their partners’ expertise to broaden their market share. This win-win situation enables multiple licensees to generate revenue while the inventor focuses on their niche field.
Exploring New Niches: If a potential licensee intends to employ the patented technology in an unrelated niche, it presents an opportunity for the inventor to expand the scope of their patent protection. By building a portfolio of patents that covers diverse fields such as laptops and smartphones, the inventor can collect royalties from various licensees, all while continuing to sell in their own niche.
The Importance of Negotiating License Termination Provisions
Now that we’ve explored the reasons for extending a license, let’s delve into the critical aspect of reviewing the license agreement: the “exit” strategy. While there isn’t a specific exit clause, it is vital to establish clear termination provisions that allow the patent holder to terminate the agreement and exit the deal. After all, neither party would want to be bound by an agreement that fails to provide mutual benefits.
During negotiations, both the patent owner and the licensee may exaggerate their respective capabilities, leading to unrealistic expectations. Such overpromising sets the stage for disappointment and the potential desire to exit the deal. Therefore, it’s crucial to consider the worst-case scenarios when reviewing the license agreement.
Building an Exit Strategy into the License Agreement
To ensure flexibility and protect their interests, patent holders should pay close attention to the termination or term of the license provisions. These provisions outline the conditions under which either party can terminate the agreement.
Suppose a license agreement spans five years, but the licensee fails to meet expectations during that period. In that case, it’s essential for the patent owner to evaluate whether it is acceptable to be bound by the agreement for the entire duration. Exclusivity can further complicate matters; if the licensee performs poorly, the patent owner remains tied to an underperforming license without the ability to grant exclusive licenses to other parties.
Overcoming the Limitations of Non-Exclusive Agreements
Opting for a non-exclusive license might seem like a solution to avoid being bound by a nonperforming license. However, this approach has its limitations. Suppose the patent owner identifies another prospective licensee who demands exclusivity. In that scenario, the patent owner is unable to secure an exclusive license due to the non-exclusive agreement’s restrictions.
In essence, non-exclusivity only permits the patent owner to grant additional non-exclusive licenses.
Negotiating an Exit through Performance Milestones and Minimum Yearly Royalties
To ensure they are satisfied with the licensee’s performance, patent holders can include two critical provisions in the license agreement:
Performance milestones serve as measurable markers of acceptable performance within the agreement. These milestones can consist of concrete steps that the licensee must complete within specified time frames. Initially, these steps may include preparing a business plan, establishing a website, or setting up manufacturing for the patented technology. As time progresses, the milestones can transition into minimum yearly sales requirements.
If the licensee fails to meet the performance milestones or sales requirements, the patent holder should have the ability to give notice and terminate the contract. This provision ensures that the patent holder can exit the agreement if the licensee neglects essential activities or fails to meet agreed-upon objectives.
Minimum Yearly Royalty
The second provision is the inclusion of a minimum yearly royalty. By stipulating a minimum dollar amount, the patent holder ensures that they receive compensation even if the licensee’s sales fall below expectations. Paying the minimum yearly royalty compels the licensee to fulfill their obligations, allowing the patent holder to remain in the agreement. This provision protects the licensee from losing rights due to temporary setbacks or missing performance milestones.
The patent holder should determine the minimum yearly royalty amount that would be satisfactory. In the event that the licensee cannot generate sufficient sales to surpass the minimum yearly royalty, they must still pay it. Failure to do so gives the patent holder the option to terminate the license and exit the agreement. The minimum yearly royalty serves as the minimum benefit the patent holder is willing to accept.
When reviewing a license agreement, there are numerous provisions to negotiate. While lists of specific provisions and clauses can be found online, it is crucial to prioritize performance milestones and minimum yearly royalties. These provisions safeguard the patent holder’s ability to exit an agreement that fails to meet expectations, ensuring maximum value and flexibility. Remember, Garrity Traina can assist you with any licensing needs you may have.