Licensing

What does licensing a patent mean?

Licensing a patent application or a patent is a – usually – mutual agreement between the patent owner and a third party. Under a patent license agreement, the patent owner permits another individual/organization to commercially use, make, sell, import (etc.) the invention to which the patent or patent application relates for an agreed period of time in return for royalty payment(s). The parties can agree on the specifics (limitations, field of use, geographical territory, exclusivity, structure of payments, etc.) of the license agreement as they wish. 

A European patent application may be licensed in whole or in part for the whole or part of the territories, it does not necessarily needs to be licensed in all of the Contracting States.*

You – the patent owner – have the exclusive right to make, use, sale and import your product in the country in which the patent was granted. Therefore you can decide who may – or may not – also use the patented invention. The invention cannot be commercially made, used, distributed, imported, or sold by others without your consent. By licensing your patent application or patent, you agree with other companies that they can also manufacture, use and sell your invention – according to the specific agreements between you – generally in return for continuous payment, i.e. royalties.

Reasons to license your patent

A patent owner may grant a license to a third party for many reasons:

1. Make money from your patent

   Most importantly, licensing is a great way – probably the best – to generate profits from your invention. If you would like to keep owning an exclusive right over your invention and you are willing to let others to use, make or sell your invention, you should think about licensing your patent, since a license can become a significant source of income. In exchange for giving someone (i.e. the licensee) the ability to use, make and sell the invention, you take "royalties', i.e. a fee and/or percentage of the profits for every sale that the licensee makes (depending on how the parties agreed).

   Studies show that more than 50% of patent licenses include partial lump sum fees. The size of this down payment can depend for example on the number of potential licensees who are bidding. Royalty rates generally vary from 0.1 to 25 percent depending on the type of industry and the invention.

2. Make your product widely available

   For most companies, it is difficult to work on the mass production of a product individually, because a single company usually doesn't have the necessary resources to make the product available in a large number of countries at the same time because of the lack of necessary distribution system, or may not be large enough to cover market demand. Licensing your patent can help overcome this difficulty and you can be present on the global market.

3. Enter foreign markets easily

   Patent licensing can help in introducing your product in foreign markets as well, where yo do not have any connections or experience.

4. Launch your product quickly

   Launching a new product costs a lot, and you have to work for years for the launch of a new product. By licensing your patent, your product can get on the shelves in a shorter period of time, since the licensees will work on that too.

5. Provides you with a competitive advantage

   This follows from the previous points. Due to the large market and the huge number of customers, your product will be widely known, thus providing you, the owner with a competitive advantage.

6. To settle infringement suits

   Another reason for granting licences is to settle disputes about validity or infringement. Granting licences may be part of the settlement.

7. The cost of manufacturing cost is allocated to the licensee

   Licensing is also advantageous if you don't have the necessary manufacturing facilities. Enjoy receiving the royalties but do not stress about the manufacturing.

Please remember that you – as a licensor – will remain the owner of the patent. Thus, you are responsible for maintaining the patent, paying the related fees (e.g. annuity fees) and monitoring the actions of any potential infringing parties.

Different types of licenses

The specifics of a licensing agreement depend on the agreement between the patent owner and the licensee. The patent owner can decide in which geographical territory and for how long he offers the license. Accordingly, the parties can agree on terms that benefit both sides. A patent license agreement will last as long as the parties agree; in the territory as the parties agree. 

In some cases, the parties will decide upon an exclusive patent license agreement, which means that the licensee is the only party who is allowed to commercially use, make and sell the invention. It is also up to the parties to decide whether the licensee has the right to sublicense the invention (if it is an exclusive license, he does not). Generally, a licensee cannot grant more rights to the sub-licensee than it owns. In a non-exclusive patent license agreement, a license can be granted to more than one party and the patent proprietor also remains entitled to use the patent itself. 

There are other types of licence agreements as well, such as sole license (the patent owner has the right to use the patent, but is not permitted to grant further licences), cross-license (when both parties are licensors and licensees at the same time, because the parties both grant each other licences), compulsory license (national patent law may oblige a patentee to grant licences in his patent against his will), group license (granted to a group of affiliated companies in order to facilitate the flexible use of a patent within a group of companies without the need to make individual licence agreements with each company of the group).

License agreement

Do not forget that you will need a well-written – preferably by a qualified lawyer – licensing agreement tailored to the patent owner's and the licensee’s specific situation. The agreement should describe each party's rights and obligations under the agreement, include information about the patent (or patent application) in question, details of the patent owner and licensee, the duration and geographical territory the license agreement covers, and the structure of the royalties to be paid in exchange (percentage of sales, a fixed amount on a periodic basis, milestone payments, etc.). Make sure that the agreement is clear and accurate and includes all the necessary details.

Should you register a license with a patent office?

Since the licensor remains the patent proprietor (unlike when transferring your patent), the patent office does not necessarily needs to be informed about the existence of license agreements. (There are some countries, where this is different, and not registering a license may have consequences.) For the patent office, the goal is to know whom to inform at the different stages of the patenting procedure. The person they will contact is the patent applicant/proprietor or his representative, if one is appointed.

How to register your license at the European Patent Office (EPO)?

Although not compulsory, you can request the EPO to record your license in their register. You have to file a request and a pay a small administrative fee (link to the EPO's current fee schedule).

It is important that you can only register a license while your European patent application is pending. After grant, the European patent becomes a bundle of national patents in the countries where the European patent has been validated. Consequently, the recording of the licenses becomes the responsibility of the national patent offices, and you have to request them to accord your licenses. Requesting the recording of a license at national patent offices usually requires the payment of official fees and the filing of prescribed forms.

What is the difference between license and transfer?

Both license and transfer generate income for the patent owner from his patent and both actions can be initiated by the patent owner by locating interested third parties. However, unlike when selling or transferring a patent to another party, the licensor continues to have property rights over the patented invention, because the licensor remains the patent proprietor. So, licensing provides you with more rights, hence benefits. Furthermore, while transferring your patent usually means a lump sum payment at the time of the transfer, by licensing you can receive continuous royalty payments (e.g. the percentage of the licensee's sales).

For more information on licensing, read the following article: “How To Market And License Your Technology”

* This is defined in Art. 73 EPC:
”A European patent application may be licensed in whole or in part for the whole or part of the territories of the designated Contracting States. ”
See the full legal text here.

Author: Zsofia Pintz
Published: August 2020
Updated: July 2023