Creating a Patent License Agreement by Michelle Kaminsky, Esq.

Creating a Patent License Agreement

If you're a patent owner who's ready to create a patent license agreement, here's what you need to know before you get started—both about the different types of patent license agreements and how to draft them.

by Michelle Kaminsky, Esq.
updated January 07, 2021 · 3 min read

A patent license agreement is a contract between a patent owner (licensor) and a licensee that defines the terms under which the licensee may make, sell, and use a patented invention. The agreement also provides how royalties will be paid to the patent owner.

Glasses, ballpoint pen, folder, and book surrounding "patent license agreement"

Types of Patent License Agreements

The three main types of patent license agreements are exclusive, nonexclusive, and sole licenses, which assign different rights to the parties involved:

  • An exclusive patent license agreement gives a single licensee all of the rights to produce, sell, and use the invention.
  • A nonexclusive patent license agreement also transfers these rights, but it allows the licensor also to negotiate and sign agreements with others.
  • A sole license is somewhere in between these two in that it allows both the licensor and licensee to use the invention, but generally the licensor agrees not to grant additional licenses.

Keep in mind that these are the broad definitions, though, and the agreement's provisions should be as specific as possible when delineating the rights of both the licensor and the licensee.

Drafting a Patent License Agreement

While the terms of individual patent license agreements vary, a standard license agreement for a design, utility, or plant patent generally should include at least the following provisions:

  • Royalties.The most important aspect of the patent license agreement is usually how royalties will be paid. There are many considerations regarding how to structure royalty payments, including whether you should request a minimum or guaranteed payment, and whether royalties will be calculated based on profits or net proceeds.
  • License term. Some products have a longer shelf life than others, so determining how long the license agreement should last can make a big difference in your royalties. You may consider including a clause that allows for the termination of the contract with certain triggering events (low sales, for instance) or having the agreement cover only a certain period of time with the option of renewal.
  • Annual license fee for patent agreement. This provision provides that the licensee must pay the patent owner a certain amount yearly to retain the license. The amount may remain the same, or the agreement may also stipulate, for instance, that the amount increases when certain triggering events happen.
  • Dispute resolution. Should things go awry, your agreement should provide how disputes will be resolved, whether through arbitration or litigation, as well as which state's laws will govern.

Provisional Patent License Agreement

If you have a provisional patent—meaning that you have a patent pending, rather than granted to you—it is possible to begin negotiating with licensees, although reduced royalties are likely to be a condition of the contract. In any event, with provisional patents, the inventor should consider licensing the invention as a "trade secret" or at least including a provision in the agreement that also covers trade secrets so that the licensee cannot turn around and use the invention if a patent isn't eventually granted.

Overall, because patent license agreements can be complicated and you want to make sure all the issues are appropriately covered, you may want to consult with an attorney to guide you through this tricky area of intellectual property law.

If you still need to patent your intellectual property and you have a good understanding of how to apply for a provisional patent, or to file your design patent or utility patent, you may choose to work with an online service provider so that you'll be ready to initiate future patent license agreements.

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Michelle Kaminsky, Esq.

About the Author

Michelle Kaminsky, Esq.

Freelance writer and editor Michelle Kaminsky, Esq. has been working with LegalZoom since 2004. She earned a Juris Docto… Read more