Patent License Agreement

Defines exactly what rights are licensed: 'make, use, sell, offer to sell, import' under specific patents (or patent families) in specific territories. Ambiguities in the grant clause are common sources of litigation — courts construe ambiguities against the drafter. Be explicit about: which specific patents; all or some claims; whether divisionals, continuations, and CIPs are included; whether future patents are included.

Limits the license to specific commercial applications or markets. Example: 'solely for use in human therapeutics, excluding veterinary applications.' Field of use restrictions allow a licensor to retain rights in other fields or grant other parties licenses in different fields. They are generally enforceable. They must be unambiguous — unclear field definitions are frequently litigated.

Limits the license geographically. Example: 'United States and Canada only.' Worldwide licenses are available but cost more. Important for companies that plan to sell globally — a US-only license does not protect you from infringement claims in Europe or Asia if the licensor (or another licensee) holds foreign patents covering the same technology.

Defines how the licensee pays: (1) Running royalty — percentage of net sales (e.g., 3% of net revenue); (2) Lump sum — one-time payment regardless of sales; (3) Milestone payments — payments upon achieving development or sales milestones; (4) Minimum royalties — floor amount regardless of sales, preventing the licensee from shelving the technology. Royalty base must be clearly defined (gross sales? net sales? units sold?).

Does the licensee have the right to grant sublicenses? This is crucial for platform companies, distributors, or acquirors. Without sublicensing rights, a licensee cannot convey rights to customers, downstream distributors, or a future buyer in an M&A transaction. The licensor may want to approve sublicensees, receive a share of sublicensing revenue, or limit sublicensing to specific categories.

Licensor typically warrants that: it owns or controls the licensed patents; it has the right to grant the license; and there are no known encumbrances or third-party claims on the patents. What a licensor typically does NOT warrant (absent negotiation): that the patents are valid; that practicing the license will not infringe third-party patents; that the licensed technology will work as described. Sophisticated licensees negotiate stronger warranties — particularly in pharma and biotech deals.

Who pays if a third party sues claiming the licensed technology infringes? Standard: licensor indemnifies for claims that its ownership/authority representations were false; licensee indemnifies for claims arising from licensee's use beyond the scope of the license. Contentious: who handles patent validity challenges against the licensed patents (IPR, litigation)? Who pays for defense?

In exclusive licenses, the licensor often requires the licensee to actively commercialize (diligence obligations): minimum annual royalties, specific milestones (file IND, achieve first commercial sale), or minimum R&D spending. Failure to meet diligence obligations may allow the licensor to convert to non-exclusive or terminate. Common in university technology transfer.

Requires the licensee to license back to the licensor (or grant sublicenses to other licensees) any improvements the licensee makes to the licensed technology. Can range from a non-exclusive royalty-free license-back of improvements (standard) to an exclusive assignment of all improvements (problematic, anti-competitive). DOJ antitrust guidelines limit exclusive grant-backs; royalty-free non-exclusive grant-backs are generally acceptable.

Guarantees the licensee the best terms offered to any other licensee for similar rights. Commonly demanded by large licensees. Can be costly for licensors who want flexibility to negotiate different rates with different partners. Often triggered: licensor must offer the same rate if it later licenses to a competitor at a lower rate.

What is a patent license agreement?

A patent license agreement is a contract between a patent owner (licensor) and another party (licensee) in which the licensor grants the licensee the right to make, use, sell, offer to sell, or import an invention covered by the licensor's patent claims, in exchange for royalties, milestone payments, a lump sum, or other consideration. Key characteristics: (1) A license does not transfer patent ownership — the licensor retains title to the patent. The licensee receives permission to practice the patent without being sued for infringement. (2) Without a license, making, using, or selling a patented invention constitutes infringement under 35 U.S.C. § 271, regardless of whether the infringer knew about the patent. (3) A patent license can be as narrow or broad as the parties agree: exclusive (only the licensee can practice) or non-exclusive; limited to specific fields of use; limited to specific geographic territories; limited in time; limited to specific claim sets or patent families. (4) Patent licenses are governed by both federal patent law (for scope issues: is the license within the patent's claims?) and state contract law (for interpretation, breach, remedy issues). (5) A license can cover future patents — 'improvement patents' or 'all patents filed by licensor during the term covering subject matter within the field of use' are common grant formulations in technology company licenses. (6) Standing to sue for infringement: an exclusive licensee typically has standing to sue for infringement (with or without the licensor, depending on the license terms). A non-exclusive licensee generally does not have standing to sue for infringement without the licensor joining the suit.

What is a running royalty and how is the royalty base calculated?

A running royalty is a per-unit or percentage-of-revenue payment made by the licensee to the licensor based on the licensee's sales of licensed products. It is the most common royalty structure in patent licenses. How the royalty is expressed: typically as a percentage of 'net revenue' or 'net sales' — e.g., '3.5% of net sales of licensed products.' The royalty rate is applied to the royalty base. What the royalty base includes matters enormously: 'Net sales' must be carefully defined. A licensor wants a broad base; a licensee wants a narrow base that excludes as much revenue as possible. Common deductions from gross sales to arrive at 'net sales': returns and allowances; trade discounts; freight and insurance; sales taxes; customs duties. What the royalty base should NOT include — the Entire Market Value Rule (EMVR) controversy: under patent damages law (relevant if royalties are later disputed), the royalty base should be limited to the smallest salable patent-practicing unit (SSPPU) — not the entire product if the patent covers only one component. Courts have restricted EMVR application in litigation: a patented feature that is just one component of a multi-feature product cannot form the base for a royalty on the entire product unless that feature drives demand for the product. This matters in license negotiations: a licensor may push for 'net revenue from the entire product' while a licensee correctly limits the base to the value attributable to the patented feature. Stacked royalties: if your product requires licenses from multiple patent holders, the combined royalty rates (stack) can erode margins. FRAND (fair, reasonable, non-discriminatory) licensing rules for standard-essential patents address stacking by limiting what any single SEP holder can demand.

What is the difference between an exclusive and non-exclusive patent license?

An exclusive patent license grants the licensee the right to practice the patent to the exclusion of all others — including, potentially, the licensor itself (though licenses often expressly reserve the licensor's right to practice). No other parties can receive a license in the same field, territory, or scope covered by the exclusive grant. A non-exclusive license grants permission to practice the patent, but the licensor can grant the same rights to any number of other licensees. The licensee cannot exclude competitors who also hold a non-exclusive license. Key legal differences: (1) Standing to sue: an exclusive licensee (who holds the licensee's 'entire right, title, and interest' within the licensed field) typically has standing to sue infringers — often required to join the patent owner as a co-plaintiff. A non-exclusive licensee generally cannot sue infringers — only the patent owner (or exclusive licensee) can sue. (2) Assignment: exclusive licenses are often treated more like property interests; non-exclusive licenses are typically not assignable without the licensor's consent (see Rite-Hite Corp. v. Kelley, for context on exclusive licensee rights). Sublicensing: unless expressly granted, neither an exclusive nor non-exclusive licensee can sublicense. This is an express provision to negotiate. When is exclusive appropriate? When the licensee needs market exclusivity to justify its R&D investment (common in pharma, biotech, medical device); when the licensor wants to commit to a single commercialization partner; when negotiating a technology transfer for a startup spin-out. When is non-exclusive appropriate? When the licensor wants to maximize licensing revenue; when the technology is a platform that benefits from widespread adoption; for standards-essential patents (SEPs) which must be licensed on FRAND terms — always non-exclusive.

What happens to a patent license in a merger or acquisition?

Patent licenses in M&A transactions are complex, and IP diligence specifically focused on patent licenses is critical before any acquisition. Key issues: (1) Is the license assignable? Most non-exclusive patent licenses contain non-assignment clauses requiring the licensor's consent before the license can be assigned or transferred. This means that if the licensor has licensed a non-exclusive license to Company A and Company B acquires Company A, the license may not automatically transfer to Company B — the licensor's consent may be required. Violation of a non-assignment clause can trigger breach and termination. (2) Change of control: many patent licenses specifically address what happens upon a change of control (merger, acquisition, sale of substantially all assets). Common scenarios: automatic termination upon change of control (hostile to licensee); right for licensor to terminate upon change of control; license survives change of control to the acquiror. (3) Exclusive licenses in acquisitions: if Company B acquires Company A's exclusive license, Company B acquires the exclusivity — potentially blocking competitors from getting the same license. This is a significant asset in certain industries. However, the exclusive license may have been granted with anti-assignment clauses that prevent even M&A transfers. (4) Asset acquisition vs stock acquisition: in a stock acquisition, Company B becomes the same legal entity as Company A (just with new shareholders) — licenses typically survive because the legal entity is unchanged. In an asset acquisition, Company A's licenses may need to be assigned to Company B — triggering consent requirements. Pre-acquisition diligence: every patent license agreement that is material to the target's business must be reviewed before closing. Acquirors should: identify all patent license agreements; confirm they are assignable or will survive change of control; obtain consent letters from licensors if required; and understand what rights the target actually holds.

What is a FRAND license and how is it different from a standard patent license?

FRAND stands for Fair, Reasonable, and Non-Discriminatory — it is a licensing commitment made by holders of standard-essential patents (SEPs) when they contribute their technology to a standard (e.g., 4G LTE, 5G NR, Wi-Fi, Bluetooth, H.264 video, HEVC/H.265). When a patent holder participates in a standard-setting organization (SSO) — such as ETSI (European Telecommunications Standards Institute), IEEE, or ITU — and their patent is declared essential to implement the standard (a SEP), the patent holder typically must commit to license their SEPs on FRAND terms. Why FRAND matters: if you manufacture a product that uses a standardized technology (any smartphone, computer, TV, modem, etc.), you may be required to take FRAND licenses from dozens of SEP holders. FRAND rules prevent any single SEP holder from demanding excessive royalties, blocking licensing to manufacturers, or discriminating among similarly-situated licensees. Key FRAND rules: (1) Must be offered to all who implement the standard — no ability to exclude legitimate implementers; (2) Terms must be 'reasonable' — what 'reasonable' means is heavily contested in courts (US, European, UK, Chinese, and Japanese courts have all issued different rules); (3) Non-discriminatory — similarly-situated licensees must be offered comparable terms; (4) No injunctions: courts in many jurisdictions are reluctant to grant injunctions for FRAND-committed SEPs since an injunction effectively allows the SEP holder to block any implementation of a standard. Key distinction from a regular patent license: in a regular license, the patent holder chooses whether to license at all and can demand any price the market will bear. For FRAND-committed SEPs, the patent holder cannot refuse to license (to willing licensees), cannot demand royalties that would price out any licensee, and cannot discriminate. FRAND rates are highly disputed in litigation involving major technology companies (Apple, Samsung, Qualcomm, Ericsson, Nokia, Interdigital, and others).