Collecting Payments Even If Your Patent Application Never Issues as a Patent

The patent application examination process is unpredictable, wherein the grant or denial of the patent rests within the subjective determination of the patent examiner. Accordingly, a licensor should negotiate alternate payment provisions into the licensing agreement to ensure payment notwithstanding the denial of the patent.

The licensing agreement is a contract between the licensor (usually inventor) and the licensee (usually the manufacturer) and as such is governed by contract law even though the subject of the contract relates to intellectual property which may or may not be subject to patent protection. Accordingly, as long as the parties to the contract reach a mutual understanding of what their agreement entails, and as long as the subject matter thereof is not unlawful, then the agreement can still be enforced even if the patent does not issue.

Therefore, when negotiating the licensing agreement, the licensor should always incorporate a provision that contemplates the complete and final rejection of the patent application by the United States Patent and Trademark Office (USPTO). The licensee will often insert a provision in the agreement that the licensor has a certain amount of time to obtain a patent. To insure payment of royalties in such a situation, the licensor must insert a de-escalating royalty clause into the agreement. A de-escalating royalty clause basically states that the licensor shall receive royalties at an agreed upon rate during the pendency of the application or after the issuance of the patent; however, should the patent not issue the royalty rate shall be reduced to a predetermined amount.

The reasoning behind the governing contract law is that the early access to the invention, which is the subject of the agreement and the patent application, provides the licensee the opportunity to be the first to market to the detriment of the licensee's competitors as a result of the disclosure of the trade secret information embodied within the patent application. In addition, should a patent issue, the monopoly granted by the patent laws will allow the licensee to prevent others from manufacturing the product and competing in the relevant market for twenty (20) years. The reduced royalty rate in such a situation, the law has determined, is just compensation for the advanced opportunity received by the licensee by disclosure of trade secret information contained in the patent application.

The terms "know-how" and "trade secrets" are sometimes used interchangeably, but they do have distinct differences that would allow a licensor to receive payments should the patent application not issue. Trade secrets should be regarded as "confidential know-how," whereas there may be "know-how," such as engineering or consulting services or related data, which do not involve confidential matter.

Although the patent statutes demand the disclosure of the best mode of the invention in a sufficiently detailed level to allow one skilled in the art to practice the invention, there is still "know-how" information that is not disclosed in the patent application that will contribute to the successful commercialization of the invention. If the inventor has done his homework, it will undoubtedly be faster for the inventor to inform the licensee of the most efficient way to manufacture or practice the invention than for the licensee to begin from scratch. Accordingly, if the inventor has accumulated technical data related to the engineering drawings, circuit diagrams, manufacturing procedure, evaluation procedure, or the like, that "know-how" becomes an independent and valuable asset that the inventor can license to the licensee. As a result, the personal services and "know-how" can form the basis of an alternate income to the licensor should the patent ultimately not issue.

In the competitive business environment, business owners want to be the first to market and accordingly enter into licensing agreements for inventions that are patent pending. In negotiating such licensing agreements, the inventor needs to negotiate certain protections to ensure that the inventor will receive monetary compensation for helping the manufacturer to be first to market even if the patent application never issues as a patent. Therefore, the licensing agreement should contain a de-escalating royalty clause and a clause regarding the "know-how" information to protect the licensor from the uncertainty of the patent prosecution process.