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Considering product licensing? What the licensor should know

For inventors focused on research and design, aspects of manufacturing and marketing can be an unwelcome challenge. Product licensing can be a way for an inventor to launch an idea and bring their product to market. For many, product licensing offers an ideal balance of potential risks and return on investment.

Once the inventor has created an idea and then protected it by securing any patents or trademarks through the United States Patent and Trademark Office (USPTO), the idea can be licensed out to another company, often a manufacturer. The original owner becomes the licensor and the company purchasing the rights evolves into the licensee. The licensee pays royalties to the licensor, a tradeoff for the ability to increase their sales.

Advantageous to all parties

A product licensing relationship can be advantageous to both parties. The licensor has already done the time consuming research and development process but might not have capital to start a full scale production line. The licensee can start producing the product with limited medications to their existing production lines without needing to spend money on innovation. As the licensee begins making sales, they will pay royalties, but if the product is not successful they will not be out as much money as when trying to launch a new product.

Potential drawbacks

As with any business agreement, there are disadvantages to consider. A licensing agreement is often for a lengthy period of time, which is problematic when parties do not get along or sales are stagnant. Inventors sacrifice a certain level of control over their invention; for entrepreneurs who want to handle the process from start to finish, licensing might not be the right choice. The inventor might need to approach many companies before finding one willing to license the product. Also, some products are not good for licensing and the inventor would be better off selling the intellectual property rights outright.

What is included in a typical licensing agreement?

A licensing agreement typically includes any information about registered intellectual property, such as patents, trademarks and copyrights. The agreement will need to outline what rights are being licensed. Any royalties, whether or a lump sum or a percentage of the proceeds should be outlined in detail, including when payment is due. If either party, but typically the licensee, is responsible for any product guarantees or warranties the details should be specified. The agreement should also include the length of the license. It is also standard practice to provide termination options for both parties in case the agreement sours.

Both parties generally have obligations to the other party specified in the agreement. For example, the licensor might be required to provide training and support to the licensee. The licensee will likely be obligated to cover financial requirements and maintain a level of secrecy.

Deciding to license your invention carries both rewards and risks. Before committing, make sure to understand all aspects of the agreement. A hasty decision can have lasting consequences.

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