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Licensing of patents

A licence is a permission to use software, a trademark, a patent or other intellectual property rights. The licensing of patents is normally documented in the form of an agreement between the owner of the right (licensor) and one or more licensees on the right to use the patent.

Payment can be made in various ways, but commonly used methods are as a single payment, as royalties (which are payments related to sales of the product made by use of the patent), or combinations of these.

Patents can form the basis for licensing in various ways

  • One-way licensing (in or out)
  • Licence as basis for sub-licences
  • Cross-licensing: Businesses that hold patents in adjacent areas of technology can licence to one another, resulting in better utilisation of technology.

Negotiating the licence conditions is a complex and often protracted process. The licence is a binding legal document, so it is important that the contents are well thought through. It is appropriate to involve a lawyer, patent attorney or other legal advisers with a knowledge of patents and licensing in the proceedings.

What should a licence agreement contain?

The list below is not exhaustive, but these are elements that are commonly addressed in the agreement.

  • Parties to the agreement
  • The scope of the licence: the whole or only parts of the area of application of the patent
  • Degree of exclusivity: exclusive, not exclusive, may also have conditions for maintenance of exclusivity over time
  • Is the right to grant sub-licences given, and if so subject to what restrictions?
  • For what geographical area is the licence to apply?
  • What kind of information is the licensor to obtain?
  • Who meets the costs in the event of infringements?
  • Who has the right to make improvements/changes?
  • Is the licensor responsible for technical assistance?
  • What is the situation regarding payment and terms (single payment/instalments/royalties)
  • Right of access to accounts?

Advantages of licensing

  • By licensing, the patent holder can extend use of a patent beyond their own business, and in that way gain increased revenue.
  • Licensees can gain competitive advantage by licensing patent rights attached to products or processes.

The principal reasons for this are:

  • It may be difficult for businesses without adequate financial "muscle" to fully exploit an idea with great market potential. Licensing may nevertheless result in increased utilisation.
  • Licensing means that the costs and risk in production and marketing are shared by the parties.
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