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Patent Licensors: Be Mindful of What You Give Away

By Tennell Lockett

A few weeks ago, I posted a piece to this blog urging patent licensees to be mindful about the type of license that they entered.* Essentially, patent licenses differ largely according to the type and extent of rights granted by each license. A patent license should not be viewed as a one-size-fits-all solution to a technical or business need, but should rather be viewed as a uniquely-crafted solution for a particular business purpose. As discussed in my earlier blog entry, a patent licensee can suffer profound negative consequences, if it does not carefully analyze a potential license arrangement. As you might expect, there are serious pitfalls for licensors to consider as well. Unfortunately, many people are simply unaware of one of the more serious of these pitfalls, a pitfall that can be irreparably fatal.

One popular and potentially lucrative way to monetize patents is to license them to third parties.  In theory, the approach is fairly simple: grant third parties one or more rights to your patent and, in return, they provide you with some measure of value, e.g., royalties on product sales, a lump sum, a cross-license to one or more of their patents, etc. While the theory is simple, its real-world application can render a patent, or even an entire patent portfolio, effectively valueless if done improperly. Perhaps even more alarming, most patent owners will not have a clue that their licensing arrangement has damaged their portfolio value until well after the damage is done.

Patent owners must always keep in mind that a patent that cannot be enforced has very little, if any, value. It is the potential of enforcement that incents others to license patents. Patents do not have to be licensed on an all-or-nothing basis, but can be divided into many various different rights and the individual rights may be separately licensed in much the same way that a proprietor may slice up a whole pie and sell it by the slice. Theoretically, the more slices of the pie sold, the more money that can be made. This basic notion has motivated a lot of patentees to offer many different patent rights to many different licensees, including the right to use, the right to manufacture, the right to sell, the right to distribute, the right to import or export, the right to sub-license, and/or the right to sue on the patented invention.

While there is a significant profit-motive to enter into agreements with many licensees and to thinly slice the pie, doing so carelessly can yield the anomalous result that no one has the ability to enforce the patent. Importantly, a licensee can bring suit only where it holds all or substantially all of the rights to a patent, or where it is an exclusive licensee and the patent owner joins suit. A non-exclusive licensee that lacks all substantial rights is a “bare licensee” and cannot bring suit (i.e., it does not have “standing” to bring suit), even where its license contains an express right to sue. Consequently, where a patent holder grants non-exclusive licenses to several different licensees, but grants the exclusive right to sue to one of the non-exclusive licensees, that patent holder has potentially created a situation where no one can bring suit against an infringer.In this instance, the party that has the exclusive contractual right to bring suit lacks standing to bring suit.

As easily imagined, discovering that a patent or patent portfolio cannot be sued upon can create a messy situation. You should consult a qualified IP attorney before negotiating or signing any license agreement.

*Patent Licensees: Be Mindful of What You Ask, Posted April 26, 2010.


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