Thursday, December 22, 2011

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

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.

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