License vs. Assignment

The assignment vs. license distinction is the most important legal line in patent transactions: PATENT ASSIGNMENT: a patent assignment transfers TITLE (ownership) of the patent to the assignee; the assignor no longer owns the patent; the assignee becomes the new patent owner; assignments are recorded at the USPTO; the assignee has full rights: can sue infringers; can license others; can sell or assign the patent again; EXCLUSIVE LICENSE: an exclusive license grants specific rights (make; use; sell in a specific field; specific territory; for a specific term) without transferring title; the licensor retains title (ownership) to the patent; the exclusive licensee has the right to exclude others within the licensed scope but does not own the patent; the patent continues to exist as the licensor's property; ANALOGOUS TO REAL PROPERTY: assignment = deed (transfers ownership); exclusive license = long-term lease with exclusivity (you occupy and use, but the landlord still owns the building); KEY PRACTICAL DISTINCTION — WHAT HAPPENS AT THE END: ASSIGNMENT: the rights never revert; the patent is gone from the original owner's portfolio permanently (unless specific reversion rights were built in); EXCLUSIVE LICENSE: the rights revert to the licensor when the license expires or terminates; the licensor gets the patent back; IRREVERSIBILITY: assignments are generally permanent; exclusive licenses have defined terms and conditions for termination; WHEN ASSIGNMENT IS PREFERRED: university spinouts that need to show investors they 'own' the IP; transactions where the buyer wants full ownership without ongoing relationship with the original owner; M&A transactions (target company's patents are assigned to acquiring company); WHEN EXCLUSIVE LICENSE IS PREFERRED: university-to-startup technology transfer (university retains rights for research use; Bayh-Dole compliance; non-commercial use; sublicensing to others in other fields); transaction where the seller wants reversion rights if commercialization fails; seller wants ongoing relationship with the buyer (milestone reporting; diligence obligations).

Standing to sue is the most significant practical consequence of the license vs. assignment distinction: ASSIGNMENT GIVES FULL STANDING: an assignee who receives full title to a patent has complete standing to sue infringers in its own name; no need to join the original owner; EXCLUSIVE LICENSE AND STANDING — 'ALL SUBSTANTIAL RIGHTS' TEST: whether an exclusive licensee can sue without joining the patent owner depends on whether the licensee received 'all substantial rights'; this is an equitable standing doctrine (based on Waterman v. Mackenzie, S.Ct. 1891); WHAT COUNTS AS 'ALL SUBSTANTIAL RIGHTS': if the licensee received: the right to exclude all others; the right to sue for infringement without licensor consent; the right to sublicense freely; unlimited geographic and field-of-use scope; essentially the full bundle of patent rights → EQUIVALENT TO ASSIGNMENT; the licensee may sue alone; if the licensor retained significant rights (reversion; right to sue independently; limited field; limited term), the licensee does NOT have all substantial rights → must join the patent owner; PRACTICAL IMPLICATION: EXCLUSIVE LICENSEE WITHOUT ALL SUBSTANTIAL RIGHTS: must join the patent owner (licensor) as a co-plaintiff; the patent owner may be an unwilling party (especially universities that have policies against being parties to patent suits); if the patent owner refuses to join, the licensee CANNOT bring the infringement suit (lack of standing is a jurisdictional defect); UNIVERSITY LICENSE PROBLEM: university exclusive licenses almost never transfer all substantial rights (university retains: government use rights; academic research use; non-commercial use; right to license in other fields); therefore: university exclusive licensees often CANNOT sue infringers without the university's participation; this is a critical issue for university spinouts; SOLUTION IN DRAFTING: if the licensee needs to be able to sue without joining the licensor, the license must explicitly transfer all substantial rights OR the agreement must include an irrevocable obligation on the licensor to join any infringement action upon the licensee's request.

The tax characterization of the transaction significantly affects after-tax economics: TAX TREATMENT OF PATENT ASSIGNMENTS: SELLER: recognizes a capital gain (or loss) on the sale of a capital asset (the patent) if: the transfer is of all substantial rights to the patent; the seller is not the original inventor who created the patent primarily for sale; CAPITAL GAINS RATE: long-term capital gains rates (0%; 15%; 20% depending on income) apply to patent dispositions where the patent was held for more than 1 year and all substantial rights were transferred; IMPORTANT SELLER EXCEPTION — INDIVIDUAL INVENTORS: 26 U.S.C. § 1235: an individual inventor who transfers all substantial rights to a patent receives capital gain treatment; this preferential treatment applies even if the patent was created primarily for sale; NOTE: 1235 was amended; for patents acquired or created after 2017, the TCJA (Tax Cuts and Jobs Act) eliminated § 1235 preferential treatment for most individual inventors; BUYER/ASSIGNEE: treats the cost as an intangible asset; amortizes over 15 years (§ 197 intangible); TAX TREATMENT OF PATENT LICENSING INCOME: LICENSOR: royalty income from patent licenses is ORDINARY INCOME; taxed at the higher ordinary income tax rate (up to 37% federal); not capital gains; EXCEPTION — SECTION 1235 (PRE-TCJA): as noted above, § 1235 provided capital gains treatment for individual inventors; post-TCJA this is significantly limited; QUALIFIED BUSINESS INCOME DEDUCTION: patent royalties from an active licensing business may qualify for the § 199A QBI deduction (20% deduction for pass-through entities); LUMP SUM LICENSE FEE vs. RUNNING ROYALTIES: both are ordinary income for the licensor in the year received (or accrued); lump sum may have different accrual timing than running royalties; INTERNATIONAL TAX: patent royalties paid to a foreign patent owner are subject to US withholding tax (typically 30%; reduced under tax treaties); this is a significant consideration in cross-border licensing.

Recording at the USPTO has significant legal consequences for both assignments and licenses: 35 U.S.C. § 261 — RECORDING REQUIREMENT: 'An assignment, grant, or conveyance of a patent or application for patent shall be void as against any subsequent purchaser or mortgagee for a valuable consideration, without notice, unless it is recorded in the Patent and Trademark Office within three months from its date or prior to the date of the purchase or mortgage'; CONSEQUENCE OF FAILING TO RECORD: if a patent is assigned (or exclusively licensed) and the assignment is NOT recorded, a subsequent good-faith purchaser for value without notice of the prior transfer takes priority; EXAMPLE: Company A assigns patent to Company B on Day 1; Company B does not record; Company A also assigns the same patent to Company C on Day 30; Company C does not know about Company B; Company C records immediately; Company C may have priority over Company B despite the later date; this is classic notice recording act protection; WHAT SHOULD BE RECORDED: formal assignments; exclusive licenses (even though they are licenses, they should be recorded to protect the licensee's priority); security interests in patents (UCC + USPTO recording); RECORDING PROCESS: recordation at the USPTO (online at USPTO Patent Center); cover sheet with assignee info; $50-$100 fee; RECORDING FOR SECURITY INTERESTS: a security interest in a patent must be perfected by recording at the USPTO (not just a UCC-1 filing); Moldo v. Matsco (9th Cir. 1996) line of cases; security interests perfected only by UCC-1 may be defeated by a subsequent purchaser who records at the USPTO; TIMING: record within 3 months of the transfer date to get maximum protection; INTERNATIONAL RECORDING: each country has its own recording/registration system for patent assignments; EU countries: record with national patent offices; EPO: assignments can be recorded with the EPO; China; Japan; Korea: record domestically; failure to record internationally can affect enforcement rights.

Universities almost always use exclusive licenses rather than full assignments in TT deals: WHY UNIVERSITIES PREFER LICENSES OVER ASSIGNMENTS: BAYH-DOLE COMPLIANCE: for federally funded inventions, universities must retain certain rights (government license; march-in rights; US manufacturing preference); assigning full title to a startup could jeopardize Bayh-Dole compliance; RESEARCH USE RETENTION: universities must retain the right to use the invention for academic and non-commercial research; an exclusive license can carve out this right; REVENUE STREAM: licenses generate ongoing royalty income and milestone payments; assignments generate a one-time payment; universities are better off with royalty streams that can grow with commercial success; REVERSION IF COMMERCIALIZATION FAILS: if the startup fails to commercialize, an exclusive license with diligence requirements reverts the rights to the university; the university can then license again to a different company; TYPICAL UNIVERSITY EXCLUSIVE LICENSE STRUCTURE: field of use: typically the full commercial field (may limit to specific applications); territory: worldwide; term: life of the patents (all patents in the licensed technology expire); royalties: upfront execution fee (typically $50K-$500K) + milestone payments + running royalties (2-5% of net sales typical for life sciences; lower for software); sublicensing rights: typically allowed (university gets a percentage of sublicense income — typically 25-50%); diligence obligations: development and commercialization milestones; minimum annual royalties after first commercial sale; SPIN-OUT EQUITY ALTERNATIVE: instead of (or in addition to) cash royalties, universities often take equity in spinout companies; this aligns incentives and can generate significantly more return than royalties if the company succeeds; ASSIGNMENT AS EXCEPTION: universities will sometimes assign patents outright in: M&A transactions where the buyer requires clean title; situations where the university has no realistic commercialization path; transactions where the licensor cannot comply with ongoing diligence requirements.