When Is Licensing a Patent an Excellent Business Move?

In recent years, patent rights have been the subject of major disputes and deals between large technology companies. Companies are creating inventions and filing for patents at astounding rates, which has resulted in a marked increase in the number of patent infringement lawsuits. Some companies have begun to realize that patent licensing can help reduce the threat of lawsuit, by cross-licensing patent rights with competitors. For example, recently Google and LG recently cross-licensed the rights to their respective patents for this very purpose.

Due to the increase in the number of patents and patent stockpiling by major technology companies, many patents go unused by their holders. By some estimates, up to 80% of a large company’s patent holdings are unused. Therefore, some companies are turning to licensing as a way to derive additional revenue from underutilized patent holdings. Others are even licensing unused patents to nonprofits for nominal amounts or donating them as gifts.

Following these trends, it should come as no surprise that patent licensing is on the rise. Any patent-holding company can benefit from licensing unused or even under-used patents. Companies may benefit from patent licensing, especially in the following situations:

One of Your Competitors or Another Company Is Infringing on Your Patent(s)

Technically speaking, a patent right is simply “the right to exclude others from making, using, offering for sale or selling or importing the invention” that is patented, and “A patent licensing agreement is in essence . . . a promise by the licensor not to sue the licensee” for using the patent. But just because owning a patent gives one the right to keep another company from making products or services based on the patent does not mean that enjoining others from using the patent is a good business move.

Instead of bringing a lawsuit, negotiating with an infringer can be a better strategy, especially when the patent being infringed is not used by the company that owns the patent. If the patent is central to the infringing-company’s products or services, the infringer is likely to agree to pay royalties for the use of the patent. Patent licensing allows patent holders to avoid the costs of a lawsuit and reap the benefit of royalty payments. In contentious situations, it may also be advantageous to cross-license patents between the companies, thus increasing the possibility for product and service offerings and removing the possibility of future lawsuits.

Your Company Does Not Have the Resources to Make Use of a Patent

Once a company acquires a patent, making use of it requires capital, time, talent, and other resources. For smaller companies or companies engaged in specific niche markets, a patent that at first was a strategic investment might become impractical to incorporate into existing products or services. Sometimes, companies change strategic directions, rendering some patent holdings unnecessary to their new business models. In other situations, a patent created for use in one industry becomes very useful in another. Medium-sized companies often operate in specific geographic areas, so their patents are under-utilized in the larger, national market. And in technology development companies, sometimes R&D leads to new inventions that are slight improvements on existing inventions and patents.

In any of these situations, patent licensing can be a highly lucrative way to vicariously operate in an industry on a greater scale, in other industries, or in other geographic markets. Companies can find customers for patent licensing by conducting market research about competitors in their industries, considering both product offerings and geographic scopes. Especially when patents are going unused, companies should creatively consider the wide variety of applications for the unused patents and engage in outreach to potential licensees.

If your company is looking to engage in patent licensing, you should work with an attorney to structure the license in accordance your specific needs. This article was sponsored by Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.

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Four Issues to Consider When Signing an Indirect Procurement Contract

All businesses conduct indirect procurement. For some, indirect procurement consists of purchasing office supplies from an outside vendor. For others, indirect procurement involves the outsourcing of customer relationship management, order processing, and other services. Unlike direct procurement, which comprises the bulk of a business’ sourcing activities and involves purchasing raw materials needed for the production of certain goods and services, indirect procurement is the sourcing of goods and services that indirectly facilitate business operations.

Even though each company’s level of indirect procurement varies, each company can benefit from strategic language in indirect procurement contracts. After carefully assessing company needs in terms of quantity, quality, timing, price, and other variables, business leaders should negotiate with procurement providers (hereinafter “providers”) to ensure the contract terms protect production interests and ensure operational cohesion. To do so, business leaders should pay special attention to the areas of representations and warranties, indemnification and limitation of liability clauses, fulfillment terms, and termination rights.

Representations & Warranties

Representations are factual statements that a provider makes about the provider’s operations and include the provider’s capabilities, among other things. Most importantly, companies should ask for representations that affirm the provider’s ability to perform under the contract and any special promotional statements the provider made.

Warranties are like representations, but they are more like factual promises than statements. In the indirect procurement context, critical warranties include what form and state goods will arrive in or how services will be performed. Companies may benefit from warranties regarding cost savings plans (especially in outsourcing scenarios) and performance standards such as delivery/performance guarantees involving certain dates and times, speeds, etc. Warranties may also concern the performance of other third party vendors involved in the procurement process on the provider’s end. Warranties are crucial to a strong indirect procurement contract.

Indemnification and Limitation of Liability

What happens if the provider breaches the agreement or the company has to procure substitute goods and services? Indemnification clauses may provide for reimbursement to the company in the event of a contract breach or other scenario. Limitation of liability clauses, on the other hand, work to protect the provider in cases of breach. Business leaders must be careful in agreeing to wide limitation of liability and narrow indemnification clauses.

Fulfillment Terms

Fulfillment terms are the primary promises in a procurement contract. They spell out what goods or services will be delivered or performed as well as when, how, where, by whom, and everything in between. Carefully crafting clear and methodical fulfillment terms will help protect the company in cases of breach and also ensure a smooth procurement process between the parties. Business leaders will need to work with many internal stakeholders to map out a company’s own production process to craft optimal fulfillment terms. Although difficult to prepare for and draft, accurate and specific fulfillment terms are necessary not only to inform the provider how to perform, but also to hold the provider to the particularly-desired performance. The more elaborate the production process, the more costly the indirect procurement will be; however, providers can provide cost savings for the company (by providing the goods or services more cheaply than the company itself could). Cost savings incentive plans should be worked into the agreement in relation to fulfillment terms to encourage adherence.

Termination Rights

Lastly, business leaders may benefit by reserving broad or preemptive termination rights. Commonly, provider contracts include terms that allow the providers to cure any contract breaches, essentially allowing for second-chances. Although in some indirect procurement circumstances this may be acceptable and beneficial, in others, it may not. Depending on the importance of the indirectly-procured goods or services, business leaders may have significant reasons to reserve the right to terminate an agreement at the earliest instance of trouble, thus allowing the company to find a replacement provider before business operations are substantially interrupted and sales are lost.

If you are a business leader considering indirect procurement, you should work with an attorney to structure your contract in accordance your specific needs. This article was sponsored by Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.