Tuesday, May 28, 2013

What's the Right Patent Royalty?

Dear Rich: I have a patent pending product line. The patent was filed in January, 2011. A company has approached me and showed interest in licensing the technology. I had them sign an NDA. I shared all the info, production sheets, gave them actual samples, provided them with copies of my marketing material, approved their production sample. They want to use my three trademarks, as I am considered an expert in this particular technology. All of a sudden they are telling me that they want to produce the product, use my trademarks, but pay the royalty only once the patent is issued. I know that royalties are up to 8%. I like your approach of a tiered royalty. Although my products are still patent pending, and they want to use three of my trademarks, I feel a 5% royalty is what I should ask for. What do you think? Choosing the right royalty is a business decision, not a legal one, so we leave that one up to you. As for the rest of it, here's some info that may point you in the right direction.
The trademark licenses. When a company wants to license trademarks and patents, it's not unreasonable to set separate royalty rates for the trademarks. That way, if the trademark goodwill outlives the life of the patent -- for example, as with a product such as Scotchgard -- the trademark owner will still receive revenues, despite the lack of patent protection.
Two tiers.  In previous entries and in our licensing book, we have suggested a two-tiered royalty for patent-pending products: one rate if the invention acquires patent protection; the other rate if the USPTO won't issue a patent. This often works when a product's success is tied to a first-to-market strategy.
Will your NDA protect you?  If the company wants a single royalty -- they're saying that they will only license the product if the patent is granted -- then you need to re-group.  If the product doesn't get a patent and it still has commercial potential, can the company go ahead with production and cut you out of the picture? Will your NDA protect you if, during the patent process, your patent is published as typically happens after 18 month -- and it's no longer a trade secret? Does your NDA prohibit the company from selling your product if it doesn't enter into a licensing deal? These are issues where an attorney's analysis may prove helpful.