Patent Valuation - Licensing - Avoiding a Common Pitfall

Licensing - Avoiding a Common Pitfall	printer friendly version

© 2002, Gallagher & Dawsey Co., LPA
July 2002

Many inventors believe that any licensing agreement is a good licensing agreement. Actually, nothing could be further from the truth. In fact, there are companies that prey on the naivety of novice inventors.

Optimistic inventors are often duped into signing one-sided licensing agreements that do not guarantee the inventor anything. Frequently inventors are so enamored that someone is interested in licensing their invention that the inventor cannot see the fire behind the smoke. This is why inventors should rarely do their own negotiating in a potential licensing agreement.

The situation typically starts with a potential licensee that focuses on a willingness to pay royalties. The optimistic inventor starts seeing dollar signs float around the room because they are certain that every household in America needs one of their devices. Then a "standard" licensing agreement is signed, often giving the licensee an exclusive right to make and sell the invention while not requiring the licensee to actually sell a single unit. Inventors should always be wary of a potential licensee that proposes a "standard" licensing agreement because there is no such agreement.

Inventors need to closely understand the motivation of the licensee. Often companies will license inventions without any intent to sell the invention. A company may simply wish to keep a competitor from licensing the invention. Similarly, the license agreement may serve as an inexpensive insurance policy against damages for patent infringement if the company later decides to design around the inventor's patent. Either way, an inventor cannot collect royalties on an invention that is not sold.

A few simple sentences in the licensing agreement can avoid such unnecessary risks to the inventor. Typically, a clause known as a "dead horse" clause sets forth requirements ensuring that the inventor's expectations are met by the licensee. For example, the clause may set forth a minimum number of units that must be sold. Additionally, the clause may include a provision voiding the licensing agreement if specific sales quantities are not met..

While such "dead horse" clauses may be remarkably simple and "common sense," they are commonly overlooked, with devastating consequences, once inventors start dreaming of the summer home they are going to purchase with their soon to be had riches. Inventors should always have their patent attorneys review licensing agreements before signing them.