10 Invention Licensing Secrets

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It happens to all inventors at one time or another. It’s a tough decision but one that you have to make to show your baby to the world.

You made the decision to license your invention and now you find yourself sitting across the table from the potential licensee who today seems to be much more of an adversary than a potential partner. You know you should have listened to more of the help for inventor’s information that you had access to.

You are getting the sinking feeling that you might not be as well prepared for this invention licensing agreement negotiation as you thought. Your attorney is good, but he doesn’t know all the intricacies of licensing.

Your potential licensee has a team member who was weaned on licensing negotiations and right now he seems to you to be the most nefarious person on the planet. You realize that you are an inventor. You love to tinker, experiment and develop but do not know or enjoy the business aspects of the invention process.

Hopefully, that narrative doesn’t bring back bad invention licensing agreement negotiation flashbacks. We would rather this article be a cautionary tale to help you avoid the sweaty palms and the broken promises associated with a bad invention licensing agreement.

Andy Levinson, a Philadelphia area attorney who focuses on invention licensing agreements and relationships, in a recent speech to the Inventors Network of the Capital Area, highlighted some major invention licensing agreement negotiation points to consider.

Negotiating a licensing agreement involves a significant number of variables, and as in all negotiations – for it to succeed it must be based on a certain level of trust. There are variables that affect the forecasts, the manufacturing process and schedule, and the sales and marketing plan – just to name a few. Through all of these variables, nuances and contingencies we can craft an invention licensing agreement that is a win-win for both the licensor and the licensee.

The 10 Invention Licensing Secrets that must be considered and factored into every good invention licensing agreement are:

1. A license grants permission. Be sure that you have the authority to grant permission for both the intended invention use and the appropriate geographic location.

2. Define minimum expectations in regards to best efforts to market and sale and annual manufacturing quantities. You can’t get revenue if the licensee doesn’t make it or try to sell it.

3. Agree on escape language that allows you to end the license if the licensee doesn’t perform per the agreement. Be specific here. Spend the time to analyze forecasts and understand how any fluctuations will impact your invention royalty revenue stream.

4. Be prepared for a complex royalty rate negotiation. Get a solid understanding of the definition of all the factors that impact the royalty calculations. Different terms mean different things to different people. Be clear! This is not place to guess or assume.

5. Know your potential licensing partners discounting policy and how it applies to your invention. Ask and listen. Common discounting policies can be based on a wide-ranging set of circumstances and factors including season, customer or volume. Find out when and why discounting will be used and negotiate a deal that allows business to transact smoothly without your discounting approval interruptions.

6. Establish a robust audit procedure so that you can monitor compliance with the terms of the invention licensing agreement. Plan to set up an independent service that will automatically perform the audits on a routine and predetermined schedule. Also, set up a procedure to allow audits for defined exceptions such as suspicion of gross errors, negligence or fraud.

7. Limit the length of time that returns can impact your royalty payments. It is best if returns are credited in the appropriate quarter. This may not always be the case, but get language that makes it the rule rather than the exception. Neglecting this key point can mean that the licensee can push high return and warranty costs on to you and deduct it from your royalty revenue stream.

8. Insert a very good indemnification clause. The best protection is the protection that you never have to use.

9. If you leave your invention with a potential licensee for more than a few days (for their review), get an option agreement with some type of compensation. If you cannot get this than do not leave the invention with them.

10. Make sure that the invention licensing agreement clearly defines the agreed upon responsibilities, authorities, expectations and milestones for each and all of the involved parties. The devil is in the details and there is no doubt that there will be plenty of details in your invention licensing agreement – just be sure that you spend the time and money to successfully negotiate the fine points that could mean the difference between happy cash flow filled royalty days or plenty of sleepless nights with high legal bills.

Follow these 10 points and you can rest assured that you will have a better, more productive invention licensing agreement. No licensing deal is perfect, it is always a compromise, but in the words of that ageless rocker – Mick Jagger – “You may not get what you want… you get what you need!”