The Secret of Obtaining a Licensing Agreement
You already know you have a great idea, invention, or have developed a new technology. Knowing this inspired you to find a company interested in taking your idea further. And now, through your hard work, you have found a company that also thinks your invention is great! They are in the right industry, so not only can they appreciate the value of your idea, but they are also in a position to make it happen! Congratulations - this is a fantastic place to be. And at this point, you are probably asking: “Now what?”
The next step is to make some type of agreement between you and the company. The purpose of the agreement would be to give them the right to manufacture and sell your invention, in exchange for them paying you royalties. This type of agreement is commonly called a “licensing agreement”, and it is an essential part of getting paid for what you have created.
Precisely because it is such an essential step, it is also a step that must be taken very carefully.
There are many traps or pitfalls that can occur when making a licensing agreement, that we can help you avoid. In this article, we discuss one of the most common traps, so that you are ready to enter this phase of commercializing your invention with the proper amount of caution.
There are two main types of licensing agreements: exclusive and non-exclusive. In other words,. If the company you are dealing with will be the only one you allow to produce your invention, then you are talking about an exclusive licensing agreement. On the other hand, a non-exclusive license agreement means that when you are finished making a deal with this company, you can turn around and look for other companies to also make deals with.
Non-exclusive license agreements can really help a product spread. For example, when Phillips invented the compact disc, they licensed their technology to many different companies who were then allowed to produce compact disc players. This allowed the compact disc to virtually replace phonograph records within a few short years.
For an individual, however, it will usually be the case that the company you are dealing with will want an exclusive license. For this reason, you must be aware of the biggest trap that inventors fall into: what if the company to whom you have given an exclusive license decides to “shelve” your idea?
Consider this example. You are talking to XYZ Corp. about licensing your invention. They love the idea, and they project $10 million in sales over the next three years. It all sounds great, so you enter into an exclusive agreement with XYZ Corp. to manufacture your invention. The term of the agreement is for the life of the patent. They agree to pay you a 10% royalty on all products they sell. This seems great. If all goes according to plan, you will rake in a cool million dollars in royalties!
But what happens if a year goes by and XYZ hasn’t produced or sold your product. How much do they owe you in royalties? Two years go by? Five years go by? The answer in all cases is zero. They don’t owe you anything unless they produce the invention. If they never produce it, they never owe you a single dollar.
Now if years go by and they never do anything with your invention, you are free to find another company to work on your invention or to do it on your own, right? Wrong. If you made the agreement described above, you would be effectively stuck. All of the rights to produce your invention would belong to XYZ, for the life of the patent – which is forever in the world of an invention. And XYZ would never have to pay you a penny for it!
To avoid this trap, there are several things you can do:
1. Limit the term: This is the most basic defense against a company that doesn’t follow through with producing your invention. If the contract is for a limited term, at some point the rights will revert back to you.
2. Get money up front: Sometimes money obtained upon signing the contract is called “good faith money.” That is because it tends to show that the company is serious, and acting in good faith. If they weren’t serious, they probably wouldn’t be willing to pay money up front. The only way for them to recoup their investment will be to actually produce your invention (which would begin generating royalties for you anyway). So the money they pay you is a strong motivation for them to get things moving forward, and usually demonstrates their genuine intent to do so.
3. An anti-shelving clause: Putting such a clause in the agreement will give you the right to cancel the contract if the company doesn’t perform certain agreed upon actions. Sometimes a timetable is created for moving the invention into production. Other times this clause is structured as a “minimum royalties guarantee” – requiring the company to either pay you a minimum royalty in a certain time period, or default on the agreement.
Clearly, the most important thing you can do is to have an attorney experienced with licensing agreements on your side! There are many more details that ought to be addressed in the licensing agreement that are beyond the scope of these article. A professional will make sure your best interests are considered.
And remember, when it gets to the point that a company is seriously considering entering a licensing agreement, they will have their own attorneys research your invention to determine whether you are likely to get a patent, and how strong such a patent would be.
If you don't have a good sense of what they will find out in their research, not only could this be a deal-breaker, but also give them reason to move on with the idea without you! This is yet another reason why having done your homework ahead of time, with a proper evaluation, will help prevent surprises later.
Call us at 800-728-8166 to set up an evaluation with a member of my team now.