PATENT LICENCE AGREEMENT TOPICS
Paul J. Sutton
When considering whether to pursue patent protection
for an invention, an inventor will often dream of
the benefits afforded by patent protection. This may
include the possibility of licensing the patent and its
underlying invention to one or more parties committed
to commercialising products incorporating the subject
The possibility of licensing is certainly one of the motivating
forces that will drive inventors towards pursuing a patent.
The law requires the licensing of an invention and its patent
protection to be in writing. Attempts to reach a licence
agreement verbally will do nothing but frustrate those who
do so. It is a goal of the present article to present a sampling
of such factors and to identify why they are important.
Of course, an agreement of any kind will have two or more
parties to that agreement. The agreement will constitute an
understanding between the parties with promises made
by each, as well as a remedy for the breach or violation of
that understanding. Factors to consider and the reasons
for their inclusion within patent licence agreements are
Assignment of agreement
Whether a licensor wishes to permit an assignment or
transfer of the agreement itself must be decided and
provided for. The licensor wishes the agreement to be with
a specific company or person, rather than any company or
This may be so where great trust has been developed with a
particular party and the party transferring rights does not
want these rights to get into the hands of a competitor or
untrustworthy company. This is easily provided for within
It is essential that the licensed products covered by the
licence agreement are carefully defined. A licensee will not
want to be obliged to pay royalties on the sales of products
that are not covered by the patent or intellectual property
that is being licensed.
It is for this reason that a licensee will want the term
“licensed products” to relate directly only to that which
comes within the lawful scope of the patent under which
rights are being granted. To ignore this detail creates peril.
The invention that is the subject of a licence agreement
should be carefully defined. Drawings or detailed
descriptions of the invention’s features may be attached to
the body of the agreement as an appendix or exhibit.
There will be an interrelationship between the definitions
of invention, licensed product, patent applications, and
patents, since each and all of these terms will relate directly
or indirectly to the invention itself.
Where a patent has not been allowed or issued on licensed
patent applications, there will be a degree of uncertainty as
to the scope of patent claims that may issue.
In such a case it is possible for the parties to agree on a
two-tier royalty arrangement where a higher royalty will
be paid by the licensee for a specified period of time, after
which the royalty will be reduced to a lower value unless
and until a patent covering the invention is granted.
Patents covering the invention may or may not have been
granted at the time the licence agreement is consummated.
Several continuing types of patent applications may be
filed based upon a parent application, such as divisional
or continuation in part applications. These should be
Some may question why there will be a definition of ‘sold’
within a patent licence agreement, but this can be one of
the more important definitions.
Since the licensee will be paying royalties on the number
of licensed products that it has sold, the time when that
payment for the sale takes place for purposes of calculating
the licence royalty is important.
Net sales price
Royalties payable by a licensee are usually paid as a
percentage of the net sales price of the licensed products
sold by it. This will not include, for example, shipping
costs, commissions and taxes.
A licensee will usually be granted rights for a very
specific territory. A licensed territory may include an
122 IP Pages 2020 www.worldipreview.com