Patent Licensing

The patent subject matter is written with expectation that the reader has at-least some basics about patent law in the United States. Below areas cover the patent topic very briefly before jumping into the issue of the page topic i.e., patent licensing.

Understanding the underlying patent subject matter is really important for some attorney trying to draft a license on patents. The below is a very brief outline first about patent law and then about licensing. Please contact us by email or phone, if you would like to discuss further about patent licensing.

Definition: A patent is a “private [and little public] property right granted by the government in exchange for certain public disclosures that provides the owner with the right to exclude others from practicing the claimed invention for a limited period of time.”

Patent for a general utility based patent is awarded for 20 years.

Patent eligible subject matter: “Whoever invents or discovers any new and useful process, machine, manufacture,
or composition of matter …may obtain a patent therefor.” 35 U.S.C. §101.

There is no protection for the below exceptions: 

a. Products of nature.
b. Natural Phenomenon.
c. Abstract Ideas. 

Important statutes for patents include the following:

Novelty: (35 U.S.C. § 102): “Something new,” is the shortest definition for novelty. The actual definition is one page long with several noted exceptions such as one (1) year requirement including statutory bars and disclosures.

Non-obviousness: “…differences between the claimed invention and the prior art are such that the claimed
invention as a whole would have been obvious before the effective filing date of the claimed invention to a Person having ordinary skill in the art to which the claimed invention pertains…”  (35 U.S.C. § 103). 

For non-obviousness analysis, Graham factors and K.S.R. Supreme Court ruling are considered when analyzing the non-obviousness of a patent.

Specification – (35 U.S.C. § 112): In short, it may contain drawings showing the patentability of the invention.

Written description: 35 U.S.C. § 112(a) require that: “[the] specification shall contain a written description of the invention ….” Purpose is to “ensure that the scope of the right to exclude, as set forth in the claims, does not overreach the scope of the inventor’s contribution to the field of the art as described in the patent specification.” Drawings in the specification may provide a satisfactory written description of the invention.

Indefiniteness: “(b) Conclusion.— The specification shall conclude with one or more claims particularly pointing out and distinctly claiming the subject matter which the inventor or a joint inventor regards as the invention.” 35 U.S.C. § 112 (b).

“[A] patent is invalid for indefiniteness if its claims, read in light of the specification delineating the patent, and the prosecution history, fail to inform, with reasonable certainty , those skilled in the art about the scope of the invention .” Nautilus, Inc. v. Biosig Instruments, Inc., 134 S.Ct. 2120 (2014).

Enablement requirement: Specification shall describe the invention in terms “…[that is] sufficient to inform those skilled in the relevant art how to both make and use the claimed invention.” 35 U.S.C. § 112(a). Enablement is another requirement separate from written description and definiteness.

Applicability of Pre-AIA or AIA: Understanding the difference between the applicability of Pre-AIA or AIA (America Invents Act) law to an application due to “priority date” of the invention is important. AIA changed the prior art law for US patent documents having had at any time at least one claim having an Effective Filing Date (E.F.D.) on or after March 16, 2013. E.F.D. has it’s own meaning with considerations for PCT filing etc, and not just filing date in United States.

Key provisions in a patent license

Licensed patent: The license must contain a list of issued patents with issue date and patent number. The license may also contain patent applications to related work of the licensee. Serial number of the application along with application date need to be included.

Licensed confidential know-how: Know-how can be anything from formula, technical information, trade secrets, results, research study data, processes, methods, machines, software, programs, drawings etc can be included in the licensed know-how from the licensor (the one granting the license). Know-how is confidential to the licensor organization. The licensee has the duty to maintain confidentiality.

Grant clause: The grant clause is the most important of all the clauses. It defines the meets and bounds of your license, although sometimes we refer to other clauses by reference.The grant clause include whether the license is transferable/ non-transferable, exclusive/ non-exclusive, royalty bearing or royalty free, sub-license/ non-sublicensable, field of use restrictions, geographical restrictions, sell, make, or have made rights etc.

Royalties: Determination of royalty is one of the key term of a patent license. There are many ways a royalty can be calculated such as depending on the net sales, manufactured product units, percentage (%) of net profit etc. There are three (3) major types of royalty measurement models. They include (i) earned royalty; (ii) minimum royalty; and (iii) reasonable royalty (which is the most important) measurement.

Earned royalty: In order to determine earned royalty, there are two (2) important terms in consideration. They are (i) Royalty base and (ii) Royalty rate. The multiplication of these two gives us the earned royalty.

(i) Royalty base: It can be determined based on sale price of goods/ services, percentage (%) of net profit, and any units of manufactured products.

(ii) Royalty rate: Factors such as demand and custom in the industry, and any field of use restrictions.

Minimum royalty: It is the minimum amount of royalty that licensee need to pay at regular intervals of time. It gives the licensor some return on their patent, irrespective of the end product sales that incorporated the patent. Minimum royalty provisions are unfavorable to the licensee. In such a case, both the parties can negotiate that licensee will pay lower minimum royalty. Then, after patent issuance the parties may increase the minimum royalty provision.

Reasonable royalty (Georgia-pacific factors):

“…[T]he court shall award the claimant damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs as fixed by the court…” 35 U.S.C. § 284.

Courts determine reasonable royalty based on a hypothetical negotiation between a willing licensor and licensee. The timing for reasonable royalty determination is based on just before the time infringement action started. The reasonable royalty is also determined based on the multiplication of royalty base and royalty rate.

There are 15 Georgia-pacific factors useful in determining the hypothetical negotiation. Georgia-Pacific Corp. v. U.S. Plywood Corp., 446 F.2d 295 (2d Cir. 1971).

Field of use: Licensor can restrict the patent grant clause to a field of use. The restricted field of use can be anything from manufacturing only, diagnostic purpose only, and medication in a particular form only etc.

Have made rights: The licensees implicitly are granted have made (make, use or sell) rights . The patent license can have a contract with third (3rd) party to manufacture the goods for the licensee to sell to consumer.

Sub-licensing rights: The licensee need explicit permission from licensor to third (3rd) party purposes for sub-licensing purposes. Explicit restriction on sub-licensing do not have any impact on have made rights that provide services to licesee for manufacturing purposes etc.

Patent Exhaustion

“Every patent [owner]…[has] the right to exclude others from making, using, offering for sale, or selling the invention throughout the United States or importing the invention into the United States….” 35 U.S.C. § 154. However, when the patentee sells its products containing patent without any restriction in the transaction, the patent is exhausted and enters public domain. The patentee no longer has the right to exclude anyone. Impression Prods., Inc. v. Lexmark Int’l, Inc., 137 S.Ct. 1523 (2017).

Need to avoid patent exhaustion by licensing: Patent exhaustion can be avoided by working around with careful drafting of licensing terms to make transaction containing patent something less than sale of a patent.