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Patent Royalty License Agreements

How to negotiate a robust
invention royalty license contract


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Invention royalties (sometimes called patent royalties) are at the heart of any patent licensing agreement.

Although the % RATES for invention royalties are considered BOTH on my patent royalties page and in a lot more detail in my FREE eReport (please use the signup form on the right to get it) .. this article looks at what ELSE should go into a good patent royalty agreement.

Negotiating Patent Royalty Agreements

As well as the actual rate of your invention royalties, your license agreement should cover many other issues, including:

Downpayments ..when the deal is signed, you should aim to get a substantial downpayment, even though it is likely to be against future royalties. Normally, it should at least cover your development costs to date.
This shows good faith on behalf of your licensee.
Minimum invention royalties .. if you are negotiating an exclusive patent licensing deal, be sure to agree minimum invention royalty payments, in case actual sales fall below projected sales.
Territory definition .. always be sure to define the geographical territory that your licensee has the rights to sell into. This can be most important, as you may well want to license your invention to several companies each having their core market strength in different parts of the world.
Duration .. you must define when the license deal will end (and may relate to your patent expiry date). You may also want to include options for renewal on the same or renegotiated terms.
Failed patent grant .. Most often, your licensee will begin selling your invention when your patent is still pending. If the patent office do not then grant your patent, your invention royalties agreement should ensure you continue to get royalties, though at a reduced rate (e.g. by 50%). The actual reduction will vary according to competitor barrier to entry.
Ownership of improvements .. this can get tricky. Say one of your licensees comes up with an improvement to your invention. Then who owns it? Do they have the right to file a separate patent, a joint one with you, or none at all? And if you have competing licensees, do they have the right to the improvement also?

Clearly, this can get complicated, and alas there isn’t a hard-and-fast rule; each negotiation is different ... but do think over your preferred position ahead of time.
Currency fluctuation .. consider the effects of foreign exchange fluctuations with any foreign licensees. I always try to negotiate invention royalties for my clients in their home currency, NOT that of the licensee country if different.
Vertical market application .. if your patent enables sales of more than one specific product and/or into more than one market, your invention royalty agreement should carefully define the particular product and/or market.

This can be very important in terms of how much money you make, so do be sure to read the further discussion about exclusive vs non-exclusive patent licensing deals
Payments of invention royalties .. the agreement should specify WHEN you get paid (usually quarterly), and what happens in the event of late payments.
Proof of sales .. obviously you need some kind of
documentation that verifies you are being paid the correct amount, although the sad truth is that if a company wants to “cook the books”, there is often little you can do about it. However, you can negotiate a clause that allows you to periodically send in an accountant to examine the records - though this will normally be at your expense.
Ongoing patent maintenance fees .. During the life of your patent you will incur ongoing maintenance fees.
These can be most considerable, especially if you have patents covering more than one country. If you are negotiating an exclusive invention royalties agreement, you may be able to share or even pass on these costs to the licensee.

Use a patent lawyer or agent

While the above is by no means exhaustive, it does clearly show that as well as negotiating the actual rate of your royalties, a good and robust invention royalties agreement must also clarify and define a host of other important considerations.

In my view therefore, it is essential to use the services of a professional patent lawyer or patent agent skilled in specifically this type of contracts law. Yes, they can be very expensive, so you may choose to use them only at the end of your negotiations, just before you sign ... but DO use them at least then.

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