A patent grants the right to exclude others from making, using, selling, or importing the claimed invention. But exclusion is only one way to use that right. For many patent owners -- from individual inventors to universities to multinational corporations -- the primary value of a patent lies not in keeping competitors out but in granting controlled access through licensing. A well-structured license turns a patent from a defensive barrier into a revenue-generating asset, a tool for market expansion, or a foundation for collaborative innovation.
Patent licensing is a sprawling field. This chapter covers the fundamentals: the types of licenses available, how royalties are structured, when cross-licensing and patent pools make sense, how university technology transfer works, when governments can override patent rights through compulsory licensing, and how to value a patent for licensing purposes. The chapter closes with practical guidance on finding licensing partners and negotiating deals, drawing on recommendations from the EPO's Inventor's Handbook and WIPO's technology transfer resources.
Monetization Paths for Patent Owners
Before diving into licensing mechanics, it helps to understand the full range of options available to a patent owner who wants to extract commercial value from a patent. Licensing is one path, but not the only one.
| Monetization Path | How It Works | Best For | Key Risk |
|---|---|---|---|
| Self-practice | Patent owner manufactures and sells the patented product or uses the patented process | Companies with manufacturing and distribution capability | High capital requirements; market risk |
| Licensing | Patent owner grants permission to others to use the invention in exchange for royalties | Inventors, universities, companies lacking manufacturing capacity, or those wanting market reach beyond their own capabilities | Licensee underperformance; loss of control |
| Sale / Assignment | Patent owner sells all rights to the patent outright for a lump sum | Inventors or companies exiting a technology area; distressed portfolios | Permanent loss of rights; risk of undervaluation |
| Joint venture | Patent owner contributes patent rights to a new entity formed with a partner who contributes complementary assets | Technologies requiring significant capital or market access to commercialize | Complex governance; misaligned incentives |
| Spin-off | Patent owner creates a new company built around the patented technology | Universities and large corporations with technologies outside their core business | Startup risk; requires management team and funding |
The choice among these paths depends on the patent owner's resources, risk tolerance, strategic objectives, and the nature of the technology itself. A pharmaceutical compound with a clear regulatory pathway and established market demand may justify the investment required for self-practice. A software algorithm with applications across multiple industries may generate more total revenue through non-exclusive licensing to many players than through self-practice in a single market.
Types of Patent Licenses
A patent license is a contractual agreement in which the patent owner (the licensor) grants another party (the licensee) permission to practice the patented invention under specified terms and conditions. The scope of that permission varies substantially depending on the license type.
Exclusive License
An exclusive license grants the licensee the sole right to practice the invention within the defined scope. Not even the patent owner retains the right to practice the invention in the licensed field and territory. An exclusive license is the closest thing to a sale without actually transferring ownership -- the licensor retains title to the patent but cannot use it within the exclusivity scope.
Exclusive licenses command the highest royalty rates because the licensee receives the full competitive advantage of the patent. They are most common in industries where large upfront investment is required to commercialize the technology -- pharmaceuticals, biotechnology, and complex manufacturing processes -- because licensees need assurance that competitors will not receive the same technology after they have invested millions in development and regulatory approval.
Sole License
A sole license is a middle ground between exclusive and non-exclusive. The licensee is the only party licensed to practice the invention, but the patent owner also retains the right to practice it. No additional licensees will be granted. Sole licenses are less common than exclusive or non-exclusive licenses but can be useful when the patent owner wants to continue using the technology in its own operations while granting a single commercial partner the right to serve a specific market.
Non-Exclusive License
A non-exclusive license grants the licensee permission to practice the invention, but the licensor retains the right to grant the same permission to other licensees and to practice the invention itself. The licensee has no guarantee of exclusivity.
Non-exclusive licenses typically carry lower royalty rates than exclusive licenses because the licensee is not receiving a monopoly position. They are most common in technology areas where the patent covers a standard or widely applicable tool that many companies need access to -- software utilities, manufacturing processes, and connectivity standards.
Scope Limitations
Regardless of whether a license is exclusive, sole, or non-exclusive, its scope can be limited along several dimensions.
| Limitation | Description | Example |
|---|---|---|
| Territory | License is valid only in specified countries or regions | License for North America only; separate license for Europe |
| Field of use | License covers only specified applications or industries | License for automotive applications only; licensee cannot use the technology in aerospace |
| Duration | License expires after a fixed term, which may be shorter than the patent term | Five-year license with renewal option |
| Sublicensing | Whether the licensee can grant sublicenses to third parties | Licensee may sublicense to contract manufacturers but not to competitors |
| Quantity / Volume | License limits the number of units the licensee can manufacture or sell | License for up to 100,000 units per year |
Field-of-use restrictions are particularly powerful. A patent owner with a technology applicable to multiple industries can grant exclusive licenses to different companies in different fields -- one licensee for automotive, another for medical devices, a third for consumer electronics -- maximizing total licensing revenue while giving each licensee meaningful exclusivity in its own market.
Royalty Structures
How much should a licensee pay? Royalty structures define the financial terms of a license and can take several forms, often combined in a single agreement.
Running Royalty
A running royalty is a payment based on the licensee's actual use of the patent. It is typically calculated as a percentage of net sales of the licensed product or as a fixed amount per unit sold. Running royalties align the licensor's revenue with the licensee's commercial success -- if the product sells well, both parties benefit.
The standard benchmark in patent licensing is the "25 percent rule of thumb," which suggests that a reasonable royalty is approximately 25 percent of the licensee's expected operating profit attributable to the patented technology. While courts have moved away from using this rule as a litigation benchmark (the US Court of Appeals for the Federal Circuit rejected it as a litigation damages starting point in Uniloc v. Microsoft, 2011), it remains a useful starting point for business negotiations.
In practice, running royalty rates vary widely by industry.
| Industry | Typical Royalty Range (% of Net Sales) | Notes |
|---|---|---|
| Pharmaceuticals | 5-15% | Higher end for novel compounds with strong patent protection and clear clinical advantages |
| Medical devices | 3-8% | Depends on whether the patent covers the core device or an incremental improvement |
| Software | 2-10% | Wide range; depends on whether the patent is essential to the product or one of many features |
| Consumer electronics | 1-5% | Lower rates reflecting thin margins and high volumes |
| Industrial manufacturing | 2-6% | Depends on capital intensity and the contribution of the patented process to cost savings |
| Chemicals / Materials | 2-5% | Often tied to production volume rather than sales price |
Per-Unit Royalty
A fixed dollar amount per unit sold, regardless of the selling price. Per-unit royalties simplify accounting and protect the licensor from price erosion -- if the licensee discounts the product, the royalty stays the same. They are common in high-volume manufacturing where the patented technology contributes a specific, quantifiable cost saving per unit.
Lump Sum Payment
A single upfront payment in exchange for the license. The licensee pays once and owes no further royalties regardless of how many units are sold. Lump sum payments are attractive to licensors who want immediate cash and to licensees who want cost certainty. They are common in technology transfers involving mature, well-understood inventions where the commercial potential can be estimated with reasonable confidence.
Minimum Guarantees
A minimum annual royalty payment that the licensee must pay regardless of actual sales. Minimum guarantees protect the licensor from licensee underperformance -- a company that licenses a patent and then sits on it, making no effort to commercialize the technology, still has to pay. The EPO's Inventor's Handbook specifically recommends including minimum guarantees in licensing agreements to prevent licensees from acquiring a license and then doing nothing with it.
Milestone Payments
Payments triggered by specific development or commercial milestones. Common in pharmaceutical and biotech licensing where commercialization requires years of development and regulatory approval. A typical milestone structure might include payments upon completion of preclinical studies, initiation of each clinical trial phase, regulatory submission, regulatory approval, and first commercial sale.
Hybrid Structures
Most real-world licensing agreements combine multiple elements. A typical hybrid structure might include an upfront payment (compensating the licensor for the value of the technology at signing), running royalties (aligning ongoing payments with commercial success), minimum annual guarantees (protecting against licensee inaction), and milestone payments (rewarding progress toward commercialization). The mix depends on the risk allocation that both parties find acceptable.
Never accept royalties based solely on net profit. As the EPO's Inventor's Handbook warns, sales figures can be manipulated to show no profit through inflated cost allocations, promotional discounts, and inter-company transfer pricing. Royalties should be based on net sales (factory-gate price minus taxes and returns) or on a per-unit basis. If the licensee insists on a profit-based royalty, require audit rights and define precisely which costs are deductible.
Cross-Licensing and Patent Pools
In technology sectors where multiple companies hold patents that cover different aspects of the same technology, bilateral licensing between every pair of patent owners becomes impractical. Cross-licensing and patent pools provide more efficient solutions.
Cross-Licensing
A cross-license is an agreement in which two patent owners grant each other licenses to their respective patents. Cross-licenses are common between companies that each hold patents that the other needs -- a situation that frequently arises when two companies compete in the same technology space and inevitably develop overlapping innovations.
Cross-licenses can be royalty-free (each party simply grants the other access, with no money changing hands) or can involve balancing payments to compensate for asymmetry in portfolio value. If Company A's portfolio is worth more than Company B's, Company B may pay a balancing royalty to Company A in addition to granting the cross-license.
Cross-licensing makes sense when:
- Both parties hold blocking patents that the other needs for freedom to operate.
- Litigation between the parties would be mutually destructive.
- Both parties benefit from interoperability or compatibility between their products.
- The cost of negotiating a cross-license is lower than the cost of designing around each other's patents.
Patent Pools
A patent pool is an arrangement in which multiple patent owners contribute their patents to a single entity that then licenses the pooled portfolio to third parties on standardized terms. Patent pools are most common in technology standards where a product must implement patented technology from many different owners to comply with the standard -- wireless communication protocols (Wi-Fi, Bluetooth, LTE, 5G), video compression standards (HEVC, AVC), and optical disc formats (Blu-ray) are classic examples.
Patent pools reduce transaction costs by replacing hundreds of bilateral licensing negotiations with a single license from the pool administrator. They also reduce royalty stacking -- the problem that arises when a product requires licenses to many separate patents, and the cumulative royalty burden becomes commercially unviable.
| Aspect | Bilateral Licensing | Patent Pool |
|---|---|---|
| Negotiation complexity | Separate negotiation with each patent holder | Single license from pool administrator |
| Royalty transparency | Each license has different terms | Standardized royalty for all licensees |
| Royalty stacking risk | High -- cumulative royalties may exceed product margin | Controlled -- pool sets aggregate royalty |
| Entry cost for licensees | High -- must identify and negotiate with multiple patent holders | Lower -- single point of contact |
| Competition law risk | Generally low | Requires careful structuring to avoid antitrust concerns |
University Technology Transfer
Universities and public research institutions are prolific generators of patented inventions. Translating those inventions from the laboratory to the marketplace is the function of technology transfer -- a process that differs significantly from commercial patent licensing due to the unique institutional, legal, and cultural context of academic research.
The Bayh-Dole Framework (US)
The Bayh-Dole Act of 1980 (35 U.S.C. 200-212) fundamentally changed university patenting in the United States by allowing universities to retain ownership of inventions made with federal funding. Before Bayh-Dole, the federal government retained rights to federally funded inventions, and fewer than 5 percent were commercialized. By giving universities ownership (and the incentive that comes with it), Bayh-Dole triggered a dramatic increase in university patenting and licensing.
Key Bayh-Dole requirements include:
- Disclosure obligation. Inventors must disclose federally funded inventions to the university.
- Election of title. The university must elect to retain title within a specified period or title reverts to the government.
- Government march-in rights. The federal government retains the right to require the university to grant licenses if the invention is not being commercialized in a reasonable manner, if the licensee is not meeting public health or safety needs, or if the licensee is not satisfying requirements for public use.
- US manufacturing preference. Products using the invention that are sold in the US should be substantially manufactured in the US, though waivers are available.
- Revenue sharing. The university must share licensing revenue with the inventor(s).
European Approaches to University IP
European countries do not have a single Bayh-Dole equivalent. IP ownership rules vary by country, and in some jurisdictions the inventor (not the employer) holds initial rights to inventions.
Several countries -- including Germany, Austria, and the Nordic countries -- historically followed the "professor's privilege," under which university researchers owned their inventions. Germany abolished the professor's privilege in 2002, transferring ownership to the university (with mandatory inventor compensation, typically 30 percent of gross licensing revenue). Sweden notably retains the professor's privilege, meaning that Swedish university inventors, not their institutions, own their patentable inventions.
How Technology Transfer Offices Work
University technology transfer offices (TTOs) manage the process of identifying, protecting, and licensing university inventions. The typical workflow proceeds through several stages.
University technology transfer workflow from invention disclosure through licensing and revenue distribution. TTOs typically evaluate 100-200 disclosures per year and license 10-20 percent of the inventions they choose to patent.
University licensing terms differ from commercial-to-commercial licensing in several important ways. Universities generally expect lower upfront payments (recognizing that the technology is early-stage and requires significant further development), they retain the right to continue using the invention for research and teaching purposes (a non-negotiable carve-out), and they frequently require licensees to meet development milestones and diligence obligations -- demonstrating active efforts to commercialize the technology, not just sitting on the license.
Compulsory Licensing
Under normal circumstances, a patent owner has the discretion to license or not license. Compulsory licensing is the exception: a government authorization allowing a third party to use a patented invention without the patent owner's consent, subject to payment of adequate remuneration. Compulsory licenses are a safety valve built into the patent system to address situations where the public interest outweighs the patent owner's exclusive rights.
TRIPS Framework
The WTO's Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) sets the international framework for compulsory licensing. Article 31 permits member states to grant compulsory licenses provided they meet certain conditions:
- Authorization is considered on its individual merits.
- The proposed user has made prior efforts to obtain authorization from the right holder on reasonable commercial terms (this requirement can be waived in cases of national emergency, extreme urgency, or public non-commercial use).
- The scope and duration of the license is limited to the purpose for which it was authorized.
- The license is non-exclusive and non-assignable.
- Adequate remuneration is paid to the patent owner, taking into account the economic value of the authorization.
- The right holder has the right to judicial or independent review of the decision.
The Doha Declaration and Public Health
The 2001 Doha Declaration on the TRIPS Agreement and Public Health affirmed that TRIPS flexibilities, including compulsory licensing, can and should be used to protect public health and promote access to medicines. This was a direct response to the HIV/AIDS crisis, during which developing countries needed access to patented antiretroviral drugs at prices far below what patent owners were charging.
The 2005 amendment to TRIPS (Article 31bis, which entered into force in 2017) addressed a gap in the original framework: countries without manufacturing capacity could not effectively use compulsory licensing because they had no domestic factories to produce the medicine. The amendment allows member states to grant compulsory licenses specifically for the purpose of manufacturing and exporting pharmaceutical products to countries that lack manufacturing capacity.
Grounds for Compulsory Licensing
| Ground | Description | Notable Examples |
|---|---|---|
| Non-working | Patent owner fails to manufacture or sufficiently supply the patented product in the country | India has granted compulsory licenses on non-working grounds (Natco v. Bayer, 2012, for sorafenib/Nexavar) |
| Public health | Access to essential medicines or medical technologies | Multiple countries issued or threatened compulsory licenses for HIV/AIDS drugs; COVID-19 vaccine-related licenses discussed globally |
| Anti-competitive conduct | Patent owner uses the patent in an anti-competitive manner | EU competition law allows compulsory licensing as a remedy for abuse of dominant position |
| National emergency | Government declares an emergency requiring access to patented technology | Thailand issued compulsory licenses for several drugs in 2006-2008 |
| Government use | Government uses the patented invention for its own non-commercial purposes | 28 U.S.C. 1498 allows the US government to use any patented invention, with compensation determined by the Court of Federal Claims |
| Dependent patents | A later patent cannot be practiced without infringing an earlier patent, and the later patent represents an important technical advance | Available under TRIPS Article 31(l); rarely used in practice |
Compulsory licensing is politically charged. While TRIPS explicitly permits compulsory licensing, exercising this right can create diplomatic friction with countries whose pharmaceutical or technology industries are affected. Countries considering compulsory licenses often face significant pressure from trade partners and industry lobbies. In practice, the threat of a compulsory license is often more powerful than its actual use -- it motivates patent owners to negotiate voluntary licenses at lower prices rather than face a compulsory license with government-set terms.
Patent Valuation Basics
Before entering licensing negotiations, both licensor and licensee need a credible estimate of what the patent is worth. Patent valuation is inherently uncertain -- there is no liquid secondary market for patents that produces observable market prices -- but several established methodologies provide structured approaches to estimating value.
Cost Approach
The cost approach values a patent based on what it cost to develop the underlying invention and obtain the patent. This includes R&D expenses, filing and prosecution costs, maintenance fees paid, and the cost of any related regulatory approvals or certifications. The cost approach sets a floor on value -- a patent is presumably worth at least what it cost to create -- but it does not account for the commercial potential of the technology. A patent that cost $500,000 to develop may be worth $50 million if the technology addresses a large market, or it may be worth nothing if the technology has no commercial application.
Best used for: early-stage technologies with no licensing history and no market comparables; insurance and accounting purposes.
Market Approach
The market approach values a patent by reference to comparable transactions -- what have similar patents sold or licensed for? This is conceptually the strongest approach because it reflects what real buyers are willing to pay. In practice, it is limited by the scarcity of truly comparable transactions and the difficulty of adjusting for differences between patents. Two patents in the same technology area may have vastly different claim scope, remaining term, geographic coverage, and litigation history.
Sources of comparable transaction data include patent auction results (e.g., ICAP Ocean Tomo auctions), published licensing agreements (particularly those disclosed in SEC filings by public companies), and patent brokerage databases.
Best used for: mature technologies in active licensing markets where comparable transactions are available.
Income Approach (DCF)
The income approach values a patent based on the present value of the future income it is expected to generate. This is the most commonly used method for patents with identifiable revenue streams. The standard implementation uses a discounted cash flow (DCF) model.
The key inputs to a patent DCF model are:
- Projected revenue attributable to the patent. This requires estimating the incremental revenue or cost savings the patented technology generates compared to the next-best alternative.
- Royalty rate. If the patent is being licensed, the royalty rate directly determines revenue. If the patent is being self-practiced, a hypothetical royalty rate (what a willing licensor and willing licensee would agree to in an arm's-length transaction) is used.
- Remaining patent term. Cash flows are projected only through the patent's expiration date.
- Discount rate. Reflects the risk associated with the projected cash flows. Higher risk (early-stage technology, uncertain market, untested patent validity) requires a higher discount rate. Typical discount rates for patent cash flows range from 15 to 35 percent, depending on risk.
- Probability of commercialization. For early-stage technologies, the projected cash flows are risk-adjusted by the probability that the technology will be successfully commercialized.
Best used for: patents with identifiable, quantifiable revenue streams or cost savings; licensing negotiations; litigation damages calculations.
Real Options
The real options approach treats a patent as an option on the underlying technology -- analogous to a financial call option. The patent gives its owner the right, but not the obligation, to invest in commercializing the technology. This optionality has value, particularly for early-stage patents in uncertain technology areas where the upside potential is large but the probability of success is low.
Real options analysis uses modified Black-Scholes or binomial models adapted for patent valuation. The key inputs include the current value of the underlying technology (analogous to the stock price), the investment required to commercialize (analogous to the strike price), the remaining patent term (analogous to time to expiration), the volatility of the technology's commercial value, and the risk-free rate.
Best used for: early-stage patents in high-uncertainty technology areas (biotechnology, advanced materials, platform technologies) where DCF models undervalue the option to defer investment until uncertainty resolves.
| Valuation Method | Strengths | Weaknesses | Best For |
|---|---|---|---|
| Cost approach | Simple to calculate; objective inputs | Ignores market value; may understate or overstate true value | Floor valuation; accounting; insurance |
| Market approach | Based on real transactions; market-validated | Few truly comparable transactions; adjustment difficulties | Mature technologies with active licensing markets |
| Income approach (DCF) | Forward-looking; quantifies expected returns | Highly sensitive to assumptions; requires detailed projections | Patents with identifiable revenue streams |
| Real options | Captures optionality value; handles uncertainty well | Requires sophisticated modeling; inputs are difficult to estimate | Early-stage, high-uncertainty technologies |
Practical Negotiation
Valuation provides a framework for determining what a patent might be worth. Negotiation determines what the parties actually agree to. The gap between theoretical value and negotiated value can be substantial, influenced by bargaining power, time pressure, information asymmetry, and the quality of the relationship between the parties.
Finding Licensing Partners
The EPO's Inventor's Handbook offers practical advice on identifying and approaching potential licensees that applies to any patent owner, not just individual inventors.
Target the right-sized company. Major companies often reject unsolicited licensing proposals. They receive many such proposals, find it inefficient to deal with small licensors, and fear litigation if they later develop a similar technology independently. Smaller companies are often more receptive -- they are quicker to evaluate opportunities, their decision-makers are more accessible, and they may see the licensed technology as a way to compete against larger rivals. Additionally, smaller companies that supply larger companies can serve as an indirect route to major markets.
Identify candidates through patent databases. Search patent databases for companies active in the relevant technology area. Applicants and assignees of patents in related technology fields are, by definition, companies that invest in the technology and may need access to complementary patents. This approach surfaces companies you might not discover through conventional market research.
Prepare before approaching. The EPO Handbook emphasizes that inventors frequently approach companies too early, before they can demonstrate commercial viability. Before contacting potential licensees, you should have: detailed knowledge of the market for the technology, evidence (not just claims) of commercial advantages, a clear description of what the technology does (without revealing how it does it), and adequate IP protection in place.
The Licensing Negotiation Process
Licensing negotiations typically proceed through two stages: heads of agreement (a preliminary document outlining the key commercial terms in plain language) followed by a full legal agreement (a comprehensive contract drafted by lawyers).
Heads of agreement. This preliminary document identifies the key terms both parties are broadly willing to accept. It covers: what IP is being licensed, the type of license (exclusive, non-exclusive, sole), territorial and field-of-use scope, the basic royalty structure, minimum guaranteed payments, duration and renewal terms, sublicensing rights, improvement ownership, confidentiality obligations, and termination conditions. Heads of agreement are not intended to be legally binding -- they frame the negotiation before lawyers draft the full contract.
Full agreement. The comprehensive legal agreement converts the heads of agreement into a binding contract. This document should be drafted by experienced IP counsel and covers operational details including payment schedules, audit rights, dispute resolution mechanisms, representations and warranties, indemnification, and insurance requirements.
The goal of negotiation is agreement, not victory. As the EPO's Inventor's Handbook cautions, if one side "wins" the negotiation, the losing side may behave in ways that prevent the agreement from working properly -- underinvesting in commercialization, disputing royalty calculations, or simply failing to prioritize the licensed product. The most durable licensing agreements are those where both parties feel the terms are fair and the relationship is worth maintaining. Be prepared to compromise on individual terms to achieve an agreement that works for everyone over the long term.
Common Deal Structures
Different commercial contexts call for different licensing structures. The following table summarizes common patterns.
| Scenario | Typical Structure | Key Terms |
|---|---|---|
| Individual inventor licensing to a manufacturer | Exclusive license, running royalty, minimum guarantees | 3-8% of net sales; minimum annual royalty deducted from earned royalties; 3-5 year initial term with renewal |
| University licensing to a startup | Exclusive license, milestone payments, equity | Low upfront fee; milestone payments at development stages; 1-3% equity stake; diligence obligations on the licensee |
| Large company licensing to a competitor | Non-exclusive license, running royalty | 1-5% of net sales; field-of-use restrictions; sublicensing limited or prohibited |
| Cross-license between two large companies | Mutual non-exclusive license, balancing payment | Royalty-free or with balancing payment reflecting portfolio asymmetry; broad scope; long duration |
| Patent pool license | Non-exclusive, standardized terms | Standardized per-unit royalty; no negotiation on individual terms; administered by pool entity |
Protecting Yourself in Negotiations
Several practical safeguards drawn from the EPO Inventor's Handbook and standard licensing practice deserve emphasis.
Require guaranteed minimum payments. Without minimums, a licensee can acquire rights and then underperform or do nothing. The minimum should represent a meaningful fraction of the royalty income you expect based on reasonable sales projections -- typically 25 to 30 percent of the projected annual royalty.
Base royalties on net sales, not net profit. Net profit is easily manipulated through cost allocation, transfer pricing, and promotional discounts. Net sales (factory-gate price minus taxes and returns) is a more objective and harder-to-manipulate basis.
Insist on arm's-length pricing. Some licensees may attempt to reduce royalty obligations by selling products at artificially low prices to affiliated companies. Your agreement should require that royalties be calculated based on arm's-length transaction prices -- the fair market price that would prevail between unrelated parties.
Secure audit rights. The right to audit the licensee's books and records relating to licensed products is essential. Without audit rights, you have no way to verify that royalty payments are accurate. Standard practice is to allow annual audits by an independent accounting firm, with the licensee bearing the cost if the audit reveals an underpayment exceeding a specified threshold (typically 5 to 10 percent).
Include a sliding scale for high volumes. As sales increase, the licensee's profit margin per unit may decrease as large customers demand lower prices. Offering a declining royalty rate at higher volume tiers (for example, 7 percent up to $1 million in annual royalties, declining to 5 percent between $1-3 million, and 3 percent above $3 million) demonstrates flexibility and gives the licensee an incentive to maximize sales.
Document everything. Keep copies of all correspondence, especially any communications containing financial figures, projections, or commitments. As the EPO Handbook notes, some negotiating parties will alter facts and figures if they believe they can do so without consequence. A well-maintained paper trail is part of your IP protection.
Frequently Asked Questions
License Types and Structure
Royalties and Valuation
Technology Transfer and Special Situations
What's Next
This chapter covered the mechanics and strategy of patent licensing, from license types and royalty structures through university technology transfer and compulsory licensing. Chapter 21 examines a specialized and increasingly important area of patent licensing: standard-essential patents (SEPs), the FRAND commitment, and the intersection of patent law with industry standards development.