The Costs of Licensing -- Part 11 in our IP and Patents Series

This is the eleventh in a planned 20-part series of articles on intellectual property.  In future posts, we will explore product commercialization.

In this posting, we will provide an overview of the costs of licensing a technology. 

A license is an agreement that allows the licensee to use a technology for some purpose – usually to create products based on the technology, in exchange for a license fee and/or a commission on revenues.

In other words, the licensee will take the idea and turn it into a viable product or otherwise create some kind of revenue stream off the technology.  The inventor will then see a portion of those revenues under the terms of the license.

There are several types of costs a licensee can expect to encounter associated with the license agreement.  These costs are separate from attorney’s fees.

Initial license fee

There will typically be an initial license fee which is designed for several reasons, not the least of which is to separate the wheat from the chaff.  The licensor needs to be able to determine which licensees are serious and the quickest way to determine the seriousness of a potential licensee is to demand a check up front, with the agreement. 

The initial license fee will vary depending on a number of factors, including:

• Exclusivity / non-exclusivity
• Field(s) of use
• Market size and
• Likelihood of attaining X% of market

Royalties

On-going fees will usually consist of royalties on sales of products based on the licensed technology.   These are usually paid periodically (e.g., quarterly or annually) and their amount will depend on a number of factors, including:

• Exclusivity / non-exclusivity
• Field(s) of use
• Market conditions

Typical royalties can vary from just a couple percent to 10% or 15% depending on the above factors and other influences.  Royalty rates are published and periodically updated by some and are available in book form and on websites, paid and unpaid.  While it is good to have an understanding of the market rates, however, the bottom line will be the potential market, the potential profits and the type of license agreed to.

Lump sum payment

Sometimes, in lieu of initial license fees and royalties, the parties might agree to a lump sum payment to transfer the rights of a technology.  In our experience, this is not a common as a royalty arrangement, but it certainly exists. 

Typically, a present value calculation is made, using certain assumptions relating to anticipated sales, profits, opportunity costs, etc. over the likely term of the license and a value is established.

Patent cost reimbursement

When a licensee is negotiating for exclusivity, many times that licensee will be expected to reimburse the licensor for the fees and expenses relating to the patent.  Sometimes, non-exclusive licensees will be required to pay for a portion of these costs.

These are some of the costs that could be part of a license agreement.  Keep in mind that this is not necessarily a comprehensive list -- other costs may be considered, depending on the type of license, technology and the terms.

Details on commercialization activities will be addressed in upcoming installments.

 

Congress Does Something Right: the SBIR Program is Reauthorized

What do  Symantec, Qualcomm, Genentech, DaVinci, iRobot and Enable IPC all have in common?

They have each benefited greatly from the US government's Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs.

Congress did a wise thing yesterday: they reauthorized the SBIR and STTR programs -- and even allowed for some expansion -- through 2017.

These programs, which began in 1982, provide funding for innovative ideas and products that can be used by the US government and/or for the direct benefit of its citizens -- e.g., military innovations, cures for diseases, advanced medical equipment, energy breakthroughs, etc.

In an age where Congressional approval hovers around 12% (and disapproval over 80%, according to the website Real Clear Politics), SBIR and STTR are examples of the US government doing something right. 

The idea is simple, and has been wildly successful: various government agencies identify needs they have, or needs they have seen in their respective areas.  Small businesses with ideas relating to the issues then submit proposals, which can turn into solutions for the government and products for the small business (e.g., the National Institutes of Health might provide funding for a small business that has a breakthrough in biomarkers for the early detection of cancer; or the Department of Defense might provide funding for a small business that has developed a lighter battery pack for soldiers).

Providing a relatively small amount of funding to develop these ideas is good for the government, which can then use them to its benefit, and it's good for the economy, because these ideas can become commercialized to benefit society as a whole.

Here's a good example: several years ago, the Department of Defense and the National Science Foundation provided about $1.5 million through several SBIR programs to a small company.  That company, Qualcomm, now has 17,000 employees and a market capitalization of $80 billion (read more about it here). 

Symantec, with 17,500 employees in 40 countries, also started with an SBIR grant.  iRobot started with SBIR funds from the Department of Defense.  SBIR success stories involving these companies, as well as Genentech, DaVinci, Balfour Technologies, Martek Biosciences and many others can be found at http://www.sbir.gov/success-stories. 

Here at Enable IPC, we have experienced the programs' success first hand as well.  SolRayo, Enable IPC's subsidiary, recently completed work under a Phase I STTR award and has applied for a Phase II.  The award could lead to a major breakthrough in battery technologies. 


The formula for SBIR/STTR awards is simple.  The government uses experts to analyze proposals and suggest awards for a proof of concept or initial investigation to determine its feasibility -- this is designated as "Phase I".  If the Phase I effort is successful, awardee can apply for additional funds under "Phase II" to bring the idea to commercialization. 


The SBIR and STTR programs had been on life support, funded by short-term extensions for the past several years, until yesterday when Congress passed a full reauthorization through 2017.  They also have provisions allowing for the expansion of the programs over the course of the reauthorization.

So, let's recap: a program that benefits everyone has been reauthorized through 2017 by Congress and even expanded a little. 

It sounds like they actually can do some things right after all!

Read more about this in an opinion column at CNBC.com written by Rep. Sam Graves, Chairman of the House Small Business Committee: http://www.cnbc.com/id/45697983

Sub-licensing, Audits and Other License Attributes - Part 10 in our IP and Patents Series

This is the tenth in a planned 20-part series of articles on intellectual property.  In future posts, we will explore licensing costs and commercialization of products.

In this posting, we will provide an overview of some additional facets of licensing agreements: including sub-licensing rights, auditing rights, early termination penalties and more.

A license is an agreement that allows the licensee to use a technology for some purpose – usually to create products based on the technology, in exchange for a license fee and/or a commission on revenues.

In other words, the licensee will take the idea and turn it into a viable product or otherwise create some kind of revenue stream off the technology.  The inventor will then see a portion of those revenues under the terms of the license.

Sub-licensing

Many licenses allow the licensee to sub-license the technology to another entity.  This can be useful in many circumstances; for example, where the licensee may want to take advantage of the use of distributorships or other means to market. 

Sub-licensing will generally only be permitted within the field(s) of use of the license and the licensor will maintain the same royalty structure as in the original license agreement.  So, if the licensor was being paid a 5% royalty on sales, the licensor will still be entitled to that royalty, despite whatever was negotiated between the licensee and sub-licensee. 

Auditing

The licensor will almost always have the right to audit the licensee’s books (or have them audited by a reputable firm) to ensure that the licensee is paying the appropriate license fee. 

As part of this effort, the licensee will be required to maintain appropriate records of sales as a condition of maintaining the license. 

Early termination

There are usually clauses for early termination in the event that the licensee fails to perform or if the market doesn’t materialize as planned.  The circumstances surrounding an early termination may, or may not, require the licensee to pay an early termination fee.

Other aspects of licensing

Most license require periodic reports (quarterly, semi-annually or annually) detailing and research efforts related to the licensed technology, the marketing effort, the number and amount of sales, etc.  These reports are designed to ensure the licensee is taking all appropriate actions to maximize sales of the licensed technology.

The license may also require that the product being sold is marked with the patent number(s) and/or other identifying marks that indicate the IP behind the technology is protected.

Licenses, as one can see, can contain a number of articles unique to the situation the licensors and licensees find themselves in.   As such, it is always good practice to consult an attorney that specializes in IP protection and licensing prior to negotiating a license agreement.

Additional details on a typical license fee structures and commercialization activities will be addressed in upcoming installments.

The License Term and Performance Milestones -- Part 9 in our IP and Patents Series

This is the ninth in a planned 20-part series of articles on intellectual property.  In future posts, we will explore additional aspects of licensing and commercialization of products.

In this posting, we will provide an overview of two more facets of licensing agreements: the license term and milestones.

A license is an agreement that allows the licensee to use a technology for some purpose – usually to create products based on the technology, in exchange for a license fee and/or a commission on revenues.

In other words, the licensee will take the idea and turn it into a viable product or otherwise create some kind of revenue stream off the technology.  The inventor will then see a portion of those revenues under the terms of the license.

In this post, we will look at the license term and milestones.  In upcoming posts, we will discuss other important license factors.

License term

The term of the license agreement can vary widely.  The license could be in effect for just a few years or for the life of the patent.  The decision to assign a term other than the life of the patent comes down to the expected useful product life cycle. 

The useful product life will vary widely from product to product.  The product life refers to the entire product cycle, from invention to the product’s replacement by a successor technology.  A good example of a complete product life cycle is the vacuum tube used in old radios and televisions.  Those of us of a certain age can remember going to the local store with a bag of tubes and using the tube tester to see which one(s) needed to be replaced.

The vacuum tube was invented in the early 20th century, but it enabled the explosive growth of electronics that was to come in subsequent years.  The tube was used in early radios and, as the radio was popularized as an entertainment medium during the 1920s and 30s, the vacuum tube market exploded as consumers bought and maintained radios.   During the 40s, the growth began to level off at a healthy rate as the market matured.

With the advent of the semiconductor, however, and despite the explosive growth of television in the 1950s and color TVs in the 60s, the vacuum tube saw decline in demand.  By the 1960s, most radios and TVs were solid state. 

So, when thinking about a license term, what needs to be asked is: how long will it be before a successor technology is likely to replace the licensed product?  Is it worth licensing the technology for the life of the patent (or as long as the technology can be protected), or should the license be limited to a shorter period of time?

The key is to not get stuck with a longer term than is needed; conversely, one doesn’t want to obtain too short of a term get too short a term or the licensee could risk having to re-negotiate the license at the height of the product demand, when the licensor could dictate terms more favorable to him. 

Milestones

Most licenses have built in performance milestone requirements.  These are generally put in place to protect the licensor from, say, a competitor licensing the technology, effectively tying up the technology and preventing its introduction in the market.

The usual terms dictate that certain monthly, quarterly or annual sales levels are to be met or certain minimum royalties are to be paid.  For example, the deal may call for royalties of 5% on sales revenues.  If the licensor expects the licensee to produce at least $100,000 in sales during a quarter, he would likely require a minimum quarterly royalty of $5,000 be paid.  So, if the sales are, say, $200,000, the licensee is required to pay 5% (or, $10,000) to the licensor.  But, if the sales are only, say, $50,000, the licensee still must pay the minimum $5,000 royalty. 

In this way, the licensee is motivated to make the sales level or risk paying a royalty despite a lack of sales and the licensor is assured that the licensee is motivated to make sales. 

Additional details on a typical license and its structure and terms will be addressed in upcoming installments.

Some interesting patent statistics . . .

Our IP attorney, Dr. Gary Schnittgrund, was checking on some outstanding patent activity we have dating back to September 2009.  We've received no word from the US Patent and Trademark Office (USPTO) since they acknowledged they received our application over 2 years ago.

In Gary's email to me, he also forwarded some interesting data and a link to a blog post[1] which published the following information:

• As of October 2011, the USPTO had 700,000 applications under review and a backlog of over 1 million more; by comparison, other reports state that in 1998, the backlog was a little over 100,000; by 2002, it was 350,000; and by mid 2009 it was 770,000 [2]
• The average time from the filing of a patent application to when the first office action is mailed from the USPTO is 26.9 months
• The average time from patent filing to final disposition (i.e., grant or denial of a patent): 33.9 months; to compare, reports state that in 1998 this process took about 18 months [3]

Of course, these numbers can vary widely depending on the type of patent application; for example, another report claims that simple design patents may only take a little over a year for the first office action, while utility patents relating to "interprocess communications" can take nearly four years. [4]

Now, Congress and the Obama administration recently passed legislation aimed at solving this issue (we've had some blog postings about this legislation [for example: click here]; we weren't that crazy about certain aspects of the legislation because it wasn't favorable to small businesses and individuals, in our opinion).  According to the blog post Gary sent us, the USPTO is working on reducing the time from application receipt to first action to 10 months, and the time to the grant of a patent down to 20 months, both by 2015.

We think we should watch the USPTO closely over the next few years and see if the changes passed by our leaders actually help the situation.  We certainly hope it does.

For reference:

[1] Patent Pipeline blog posting

[2] Invention Statistics Patent Office Backlog blog posting
[3] Ibid.
[4] patentlyo.com blog posting

Exclusivity and Fields of Use -- Part 8 in out IP and Patents series

This is the eighth in a planned 20-part series of articles on intellectual property.  In future posts, we will explore additional aspects of licensing and commercialization of products.

In this posting, we will provide an overview of two of the many facets of licensing: exclusivity and fields of use.

A license is an agreement that allows the licensee to use a technology for some purpose – usually to create products based on the technology, in exchange for a license fee and/or a commission on revenues.

In other words, the licensee will take the idea and turn it into a viable product or otherwise create some kind of revenue stream off the technology.  The inventor will then see a portion of those revenues under the terms of the license.

License terms can vary widely and can encompass many things, all of which can be very important to the parties involved.  In this post, we will look at exclusivity and fields of use.  In upcoming posts, we will discuss other important terms.

Exclusive vs. non-exclusive

One of the more important aspects of licensing is the question of exclusivity – that is, whether there will be one licensee or several. 

To the entity granting the license, factors in deciding whether to grant exclusivity will include the capability of the licensee to penetrate the markets, agreed-to minimum sales, the size of the market and other factors.  For example, if a technology is going to address a multi-billion dollar market covering multiple applications, several licensees might be in order.  However, for a much smaller market, the licensor might want to limit the licensees to one or two companies. 

The licensor will not want too few licensees or he may not be adequately covering the potential market.  However, the last thing either party wants is for there to be so many licensees that many are not successful, or the market is poisoned or confused. 

To the licensee, exclusivity is important from a competitive standpoint – they will want the market to themselves.  But, they will need to understand that, if the licensor is willing to consider exclusivity, the license fees will be higher and the licensee might be expected to pay the patent costs.

So, it becomes a negotiation that takes into account the size of the market, the penetration ability of the licensee and the willingness of the licensee to pay a premium for the exclusivity as well as meet certain performance goals to maintain the exclusivity.

Exclusivity can take on several forms, however.  They do not necessarily have to grant exclusivity or non-exclusivity for all applications or areas. 

Fields of use

Licenses will typically define fields of use.  The fields of use might be geographic, application-based a combination of the two.

The person granting the license might want someone with experience in certain fields to concentrate on those areas of expertise and leave other areas to more qualified people.  The licensee might also be interested in using the technology in a certain area, as opposed to all areas.

For example, let’s say a company is licensing a new kind of battery.  The company might be granted exclusivity for all applications in all areas throughout the world, or just for, say, batteries used in cell phones in the United States. 

Or the license could be granted for exclusivity in one or more fields and non-exclusivity in others.  For example, the battery licensee might have exclusivity for cell phones and non-exclusivity for batteries used in automobiles.

The license could also prohibit one licensee from participating in a certain application.  For example, a license could be exclusive in cell phones, and non-exclusive in all other fields of use except power tools, where a license may not be granted (or where someone else may have exclusivity).

Also, there could be strictly geographic limitations.  The licensee might have exclusivity in, say, Los Angeles County, non-exclusivity in the rest of the state of California, and be prohibited from selling in other areas.
  
Or the license could be a mixture of these factors.

It is important for both parties to understand and consider the market size and conditions, the experience and reach (or lack thereof) of the licensee and the expected impact in the various applications and geographic areas of the technology when deciding on the number of licensees and the granted fields of use.

Additional details on a typical license and its structure and terms will be addressed in upcoming installments.