To assist our clients in negotiating patent license agreements, we have developed a patent license agreement term sheet questionnaire. This questionnaire was originally intended to provide inventors (or potential licensors) with a framework for their discussions with potential licensees, but the questionnaire may also serve as a reference for potential licensees. This questionnaire may not be reproduced without permission and is reproduced in its entirety below:
First, make sure you are talking about a license and not an assignment. With a license, you retain ownership of your patent rights and give the other party permission to make, use or sell your invention for a period of time. With an assignment, you are transferring ownership of your patent rights.
1. Is the license exclusive or nonexclusive?
2. What is the territory?
3. If the territory covers more than one country, will the obligation to pay royalties apply only to sales in those countries where the licensor has either an issued patent or a pending patent application? (This is not usually an issue the licensor raises.)
4. What products are covered by the license? Is the license only for certain markets?
5. What is the term of the agreement? Will the obligation to pay royalties be tied to the term of the patent? (Ordinarily the answer is yes, but the term of the agreement can be shorter than the term of the patent.)
6. Do you want the agreement to renew automatically unless either side gives notice of non-renewal? If so, what is the renewal term?
7. If the license is an exclusive one, what performance standards do you want to impose on the licensee? These standards may include minimum sales, minimum royalties, or a "best efforts" clause.
8. What happens if the licensee does not meet these standards? Do you want the ability to terminate the license altogether or, if the license is exclusive, convert it to a nonexclusive license?
9. How will royalty payments be structured? Will there be an up-front lump sum payment? If so, will that payment be in addition to royalties or an advance on royalties? Will the royalty percentage be based on gross or net sales? If net, how will you define net sales? What will the percentage be? Do you want a tiered royalty rate where the percentage changes with increased sales?
10. How often will royalties be paid–monthly, quarterly or annually?
11. Do you want to include audit rights? If the licensee is found to have underpaid the licensor by a certain percentage, ordinarily the licensee will have to reimburse the licensor for the costs of the audit. What should that percentage be?
12. If the license is exclusive, and if the patent application is still pending, who will be responsible for prosecuting the patent application–the licensor or the licensee? What rights, if any, will the other party have with respect to prosecution (for example, the right to provide input, be informed of status, etc.)?
13. If the license is exclusive, who will be responsible for paying maintenance fees–the licensor or the licensee?
14. If the license is exclusive, who will have primary responsibility for enforcing the patent–the licensor or the licensee? How will any proceeds (from judgment or settlement) be split between the parties? (Proceeds are usually split after the party enforcing the patent is reimbursed for costs and expenses.)
Although there may be additional issues that arise in the context of patent licensing negotiations, we find that if the licensor and licensee can come to terms on the above issues, the process of preparing the license agreement is greatly facilitated.
