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Intellectual Property Licensing

Intellectual Property (IP) License Agreements are based on two bodies of law — the law of contracts, that is meant to enforce the promises of people, and the law of torts, that is meant to enforce the reasonable conduct of people.  IP License Agreements enable an inventor or an owner to commercially exploit a product or other creative work.

Advantages of an IP License Agreement include:

  • A cost-effective way to gain entry into various markets in a comparatively shorter time.
  • Enable an inventor to maximize the full potential of his/her invention.
  • Enable an inventor to share risk of manufacturing, promoting and selling of products.
  • Competitive advantages through technology transfer and cross-licensing.
  • Prevent costly legal issues relating to infringement/validity.
  • Allows the manufacturing , selling, importing and exporting of patented products.
  • Enables an inventor to maximize returns on an invention.
  • Minimize Research and Development expenditures.

Anatomy of an IP License Agreement

The IP License Agreement is a common way of commercialization the invention or product and typically include the following:

  • Introduction
  • Recitals Background
  • Definitions
  • Rights owned
  • Grant Clause & Commercial Efforts
  • Royalties
  • Payment of Royalties
  • Records & Reports
  • Duties of Parties
  • Infringement
  • Improvement of Licensor
  • Improvement of Licensee
  • Joint Improvements
  • Patent Markings
  • Indemnification
  • Publishing & Advertising
  • Confidentiality
  • Arbitration
  • Force Majeure
  • Other Obligations of Licensee
  • Disclaimer of Agency
  • Insolvency of Licensee
  • Waivers and Modifications
  • No Warranties
  • Transfer of Interest
  • Compliance with Law
  • Entire Agreement
  • Final Provisions
  • Execution of Agreement
  • Term & Termination
  • Notices and Addresses
  • Miscellaneous
  • Signatures

Attachments to an IP License Agreement

  • Registration of IP Asset
  • Prosecution History of IP Asset
  • Relevant Forms and Documentation
  • Prior Art Search Report (if applicable)
  • Cease and Desist Letter (if any)
  • Freedom-to-Operate Report
  • Due Diligence Report
  • Sales Reports(if any)

Other Considerations

The following topics frequently come up in patent license negotiations. They are best dealt with by separate agreements.

Know-How & Technical Assistance

Licensee may wish certain services, or materials, from you in addition to the patent rights conveyed above.

Trade Secrets

Licensee may wish certain trade secret rights in addition to, or in place of, the patents rights conveyed above.


Licensee may wish some time before executing the final agreement. This can be covered in an option agreement, attaching the license agreement. In return for some consideration, you give them an option, for a specified time, to acquire the license.


As a general rule of thumb, at least as a starting point, you can expect a royalty of about 5% of net sales. Be aware that this varies considerably across industries — it’s certainly not 5% in the auto industry.

Recognize that you are trying to combine your rights and the Licensee’s resources in a way that will benefit both of you. The Licensee is looking at profitability. It’s trying to balance its risk against its potential gain. In negotiations, try to quantify this. The general feeling is that the Licensor should get about 25% of the pre-tax profitability and the Licensee about 75%.


The key to successful negotiation is thorough preparation. Know your own (reasonable) goals, and understand, as best you can, where the other party is coming from.

During negotiations, remember that your objective is a win-win resolution. Be flexible. Control your impatience, your anger. Listen. Watch for communication gaps, and resolve them. And above all, maintain a sense of humor.


Note that the main difference between a license and an assignment is that the “Licensor” retains legal title of the property whereas an “Assignor” does not retain legal title – that is, the “Assignor” gives title to the intellectual property asset free and clear.

Last Modified: December 5th, 2009