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.

Business Planning and IP: A Practical Example

Jane Lambert

Yesterday I wrote Why every business plan should take account of intellectual property 3 Apr 2016 4-NIPC News.  I explained:

"Every business no matter how small nor how simple owns some kind of intellectual asset that is vital to its trade. It may simply be the name or reputation of its owner in the case of a retailer or a tried and trusted recipe for making sponge cake in the case of a tea shop or sandwich bar but if it attracts customers to the business it is an asset which needs protecting, managing and exploiting."

I added:

"Conversely, a business may need to use the assets of somebody else's assets. A photo on the internet perhaps for the company website or maybe some software for the computer. It needs to plan how it is to acquire the right to use or even buy that asset and how much it is prepared to spend. All of these matters are at least as important to the start-up as the lease to an office or the purchase of a delivery van."

I promised to blog about the topic and this is the first of my promised articles.

What is Intellectual Property?

Intellectual property is simply the collective name for the bundle of laws that protect investment in generating intellectual assets.  They include patents, copyrights, trade marks, registered designs and unregistered design rights as well as judge made rules that prevent one trader from supplying goods or services under a name or trading style that is the same as or similar to someone else's or the unauthorized use or disclosure of secret and sensitive technical commercial information.   Intellectual assets are the brands, designs, technologies and creative output that tend to give one business a competitive advantage over others.

Not all Intellectual Assets are Equal

Not all intellectual assets are of equal value. There are, for example, inventions that no one want such as the three legged tights in the European Patent Office's Seven Deadly Sins of an Inventor.   There is no point in spending thousands of pounds on patenting them.   Similarly, there are distressed brands and designs that are so pedestrian or so ugly that they put consumers off the products rather than attracting them.  It would be a complete waste of money to apply for trade marks or design registrations for them.

Needing a Plan

Intellectual property rights - particularly patents - are expensive to obtain, manage and enforce. Not even the biggest companies try to protect every intellectual asset they possess. Experience teaches them which intellectual assets are worth protecting and which are not.  By definition, those launching new businesses, including many inventors, will lack that experience.  They need a plan to identify the intellectual assets that require legal protection and to tailor such protection to each asset's requirements.

A  Simple Five-Point Plan

Here is a simple five-point strategy for start-ups and other small businesses.

1. Identify the main revenue streams for your business over the business planning period. List the profitable products or services that you supply or for which your receive royalties or licence fees.
2. Consider the likely threats to those income streams. In most cases these are going to be commercial. Competitors will launch new products, reduce their prices or maybe consumer buying behaviour may change. Only in a minority of cases will you have reason to fear copying of your designs or technology or adoption of similar branding.
3. Devise appropriate counter measures.  In many cases these will be commercial too even if you fear copying or passing off. In some circumstances, launching a new model, re-branding, reducing your prices or finding new markets can be as effective and often cheaper and  more certain than litigation. However, a commercial option is not always available or attractive. For those cases where it is not you may need to plan a legal response.
4. Choose the optimum legal protection.  Put yourself in the position of your customer and consider why he or she is likely to find your product attractive. Is it its appearance, the way it works or the reputation of your business? If it is the appearance of your product you should see whether you can register its design either for the UK alone or the whole EU. If its your reputation you should think about registering your business name or logo a trade mark. If it is the way the product works or is made a patent may be the best option. If it cannot easily be reverse engineered you could keep it under wraps as a trade secret. Maybe unregistered design right will be enough. Factors to take into account will include the shelf life of your product, the size and value of the market, whether you want to sell it abroad and all sorts of other matters.
5. Make sure you can enforce your legal protection.  Although bootlegging, counterfeiting and piracy are crimes as well as torts primary responsibility for enforcing your intellectual property rights rests with you. That means bringing infringement proceedings in the civil courts. In England and Wales the costs of a High Court action can exceed £1 million. In simpler cases that can be brought in the Intellectual Property Enterprise Court recoverable costs are capped at £50,000 for determining liability and £25,000 for assessing damages or other profits to be disgorged. There is a small claims track where costs are limited at a few hundred pounds for certain types of IP claims under £10,000. If you cannot afford such costs out of revenues then you should consider intellectual property insurance or other kinds of funding.

All of those matters, particularly funding, should be in your business plan. If you want to discuss this article or intellectual property strategy generally, call me on 020 7404 5252 or contact me through this form.