As we settle into 2014 and think about tackling our holiday expenses, I thought this would be a good time to address how intellectual property can get the money train rolling. Be it in the form of patents, trademarks, or copy – right, intellectual property can be sold, licensed or bequeathed just like physical property. The two most common ways of transferring rights stemming from intellectual property are through assignments and licensing agreements. Just like a house can be sold pursuant to a purchase and sale agreement, or leased by way of a rental agreement, intellectual property rights can be assigned (“sold”), or licensed (“leased”).
The most straightforward way to produce income from your intellectual property would be to find an interested buyer for the technology covered by a patent. In such a scenario, the owner of the patent (the “assignor”) simply sells all of the rights in the patent to the buyer (the “assignee”) for the agreed upon sum. Once the rights in a patent have been assigned, the original owner (such as an inventor) no longer has any rights to the patent and could be sued for patent infringement if he or she attempted to use the invention. Depending on the technology, patent portfolios can have significant value; one need look no further than the $4.5 billion sale in 2011 of Canadian telecom giant Nortel Network Corp.’s patent portfolio to a consortium that included Microsoft and Apple.
Licensing agreements are another common way of transferring rights in intellectual property. A licensing agreement between the owner of a patent (the “licensor”) and a party inter – ested in utilizing the patented technology (the “licensee”) can be structured however the parties wish. If the licensor wants to be paid in Snickers bars, there is nothing in the law to stop this. Unlike assignments, licensing agreements often only transfer a portion of rights in a patent. For example, a patent that claims 10 different polymers could be licensed to 10 different licensees, each allowed to use only one specific polymer.
Generally, licensing agreements include provisions related to upfront payments, ongoing royalties and/or milestone payments. The magnitude of such payments usually depends on how advanced the patented technology is in its life cycle. An upfront payment paid by a licensee to a licensor is generally in recognition of the costs involved in the development of the technology, such as research and development or protection of the intellectual property. Milestone payments are generally paid when the licensor meets a specifically defined goal. For example, a milestone payment may involve a drug successfully proceeding through Phase II clinical trials. A patented drug that has not proceeded through clinical trials will command a much lower premium compared with a drug that has completed such trials. From a negotiation standpoint, a licensor would prefer large upfront payments to finance future research and development and other business costs, while a licensee would prefer milestone payments for greater certainty that the product will eventually come to market. Finally, royalty payments are typically a percentage of net sales once the patented technology has come to market. In a pharmaceutical licensing agreement, the licensee may be a large pharmaceutical company that markets and sells the licensor’s patented drug, with the licensee paying a percentage of sales to the licensor.
These are just some of the ways that one can use their intellectual property to get the money rolling in. Like a purchase and sale agreement or a rental agreement of a house, every situation is unique; there are no standard agreements to deal with complex business issues. However, working diligently to develop your technology and ensuring it is suitably protected is the best way to kick-start the cash flow.
Mike Fenwick is a patent lawyer with Bereskin and Parr LLP in Toronto and holds a master’s degree in organic chemistry.