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.
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.
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.