How to make Money from your Invention: Licensing

Jane Lambert

In How to make Money from your Invention 13 Sept 2017, I introduced readers to the EPO's Inventors Handbook. Readers will recall that the Handbook advised that there are basically four ways of exploiting an invention:

• A licensing agreement with a company
• A business start-up: get your idea to market yourself
• A joint venture 
• Outright sale of the idea.

In this article, I shall consider the first of those ways, namely licensing the invention.

The Handbook explains that a licensing deal is one that allows a party known as a "licensee" to use the invention in return for a periodic payment known as a "royalty". It adds that 

"The exact terms of the licence must be negotiated in a process that can be lengthy (often many months) and complex. The licence is a binding legal document, so it is usually essential to involve patent attorneys and other legal professionals."

The Handbook continues:

"For many inventors, licensing is the best way to benefit from an invention. The main reasons are:

• The licensee bears the costs and risks of production and marketing.

• Only established companies may have the resources to exploit an idea with major potential.

• Licensing can provide the inventor with an income over many years for relatively little effort."

However, it also warns that "only the strongest forms of IP will interest potential licensees" which in most cases means a patent.  Licensing is often seen as a soft option compared to setting up a new business to market the invention, but, in many if not most cases, the reverse is true.

For a start, unless you are answering an express invitation from a company to submit your invention, you are likely to spend a lot of time and effort looking for a company that could make money from your invention. Finding a company that can make money from your invention is not the same as finding a company that makes a product like your invention. If, for example, your invention renders obsolete a technology in which a company has invested heavily or threatens an income stream such as the supply of consumables or replacement parts, such a company may be the last business on earth to be interested in your product.

Once you have found a potential licensee you have to persuade that company that it can make money from your invention.  Sometimes, nothing short of a detailed business plan will do. That is bound to be a bit hit and miss as you are unlikely to have access to the financial, marketing and technical information that is available to the company's managers.  Even companies like Procter and Gamble and Henkel that invite submissions from inventors require those inventors to show how the invention will fit into their product range. They usually impose strict legal and technical requirements.

Except for companies like P & G and Henkel, you will have to give some thought as to whom you will contact and how you will present your invention. As I said in Finding a Route to Market for Your Invention - Unsolicited Approaches are not usually a Good Idea 25 Feb 2012, you are unlikely to get anywhere with an unsolicited submission. Your best bet is to find out as much as you can about your potential licensee through industry events like trade shows and seminars.  The inventors who are best placed to license an invention are those already in an industry or academics in a relevant discipline. Members of the public with no special connection with the industry will find it hard to sell their ideas.

As a licensee would take a licence under a patent or other intellectual property right, your intellectual property strategy must be one that works for your licensee rather than you.  Your invention must be protected not just in the United Kingdom but in all the countries where the invention is likely to be sold as well as those in which it can be made. Unless you intend to grant an express licence to your licensee you will have to take proceedings against infringers and resist revocation applications in each and every one of those countries. That can be very expensive for a private inventor or small business.

Finally, do not expect your licensee's management to be particularly kind to you.  Their job is to look after their shareholders and not to look after you.  They are likely to drive a very hard bargain in the licensing negotiations. After the licence is granted they will construe it in a way that suits them. Once they have learned how to make your product and developed a market for it they may try to challenge clauses they don't like or seek reductions in the royalty or other payments. When negotiating the licence you should think about dispute resolution and choose a method and governing law that works for you.

In negotiating your licensing agreement you are likely to need the services of a patent strategist who could be a lawyer with experience of licensing or a patent or trade mark attorney, an accountant with expertise in licensing and tax incentives for new technologies as well as a patent attorney.  Should you wish to discuss this article further, call me on +44 (0)20 7404 5252 during office hours or send me a message through my contact form.

So You've Invented a Mousetrap ....

House Mouse                                                                            Source Wikipedia

 ...... And you're waiting for the world's mousetrap manufacturers to beat a path to your door. Hate to mention it to you old chap but you may be in for a very long wait. You may have the best, cheapest, coolest mousetrap ever but that is not necessarily what the murine disposal industry is looking for.

What they are probably looking for are increased profits and your invention may not actually deliver that to them. In fact, it may reduce their profits - at least in the short term - as your product may require new tooling and a lot of marketing.  If customers are satisfied with an existing product it is not be in a manufacturer's interests to change it unless he is forced to do so to retain market share.

if you have invented a product that is likely to render everything else on the market obsolete then you may have to make (or have it made) and market it yourself as James Dyson did with his bagless cleaner. Despite its obvious advantages, no British manufacturer would take a licence for Dyson's invention because it would have undermined the market in replacement bags which was very profitable to the industry.

If for whatever reason self-manufacture and marketing is not an option, licensing your invention is not an easy option.  You have to sell not only your invention to your intended licensee but also the advantages of taking a licence from you as a business proposition.  And you can expect a "yes" only if the advantages of doing business with you clearly exceed all other available uses of the licensee's resources.  You are likely to do that only if you produce what is in effect a business plan for the licensing proposition backed up with the same sort of market research and financial forecasts that you would produce for your own start-up business.

If you do get a "yes" you have to negotiate and draft your licence agreement very carefully. Remember that the loyalties of your licensee's management lie not to you but to their shareholders who may often be themselves.  It is in their shareholders' interests to drive the hardest possible bargain with you and, if possible, cut you out altogether. You therefore need good professional advice from lawyers, patent attorneys and others in negotiating and drafting the licence agreement.  Make sure, for instance, that your intellectual property covers not just the technology but also (so far as possible) the business opportunity. Also negotiate clauses ensuring minimum royalties, regular information about costs, production, sales and marketing, cost-effective and speedy dispute resolution.  It is a sad fact of life that good professional advice does not come cheap.

Having set up and chaired inventors' clubs in Leeds, Liverpool and Sheffield, having run IP clinics throughout the North and having practised intellectual property law for many years I am very aware of the problems of licensing and how to avoid or mitigate them from the perspectives of both licensors and licensees.  If you want to discuss this article or any other issue relating to your invention or licensing give me a call during business hours on 020 7404 5252 or fill out my contact form.   You can also reach me on Facebook, G+, Linkedin, twitter and Xing,  Enjoy your weekend.