Selling The Invention
The developer of a new idea may have sufficient funds to undertake direct manufacture and distribution, but most private individuals, or even small companies, may consider that the cost of development is well beyond their means. Even for a small company it has to be realised that the cost of taking a new development to the market may be 100 times as much as the actual original costs in going from concept to proving that it works.
There is, therefore, always a continuing interest in licensing as a means of development. However, the problem with new ideas as distinct from licensing of established technology is that one has to convince the potential licensee of the possible benefit without strong commercial evidence which will support the arguments.
It is vital that confidentiality be maintained even if a patent application has been filed. It is also important the inventor appreciates the most general rule in business that there is no return unless effort is put into the business.
Despite the old saying about better mousetraps, the innovator has to sell the idea and be prepared to invest not only time and effort but possibly significant financial resources.
It is important that one first determines precisely the available protection for the development. Patent protection is only available for industrially applicable developments, usually machines or processes, and is not available for say business plans, ingenious television game shows, etc. If your idea is in the latter direction, you may have to rely on copyright or depend on the law of confidentiality.
If your creativity does run to television programmes, plays, books, etc, then simple vague ideas as to a new scheme will not be sellable. The project must be worked out in detail. For example, an idea for a new television series would have to have specific details of the characters to be involved, rough indication of location, at least one episode fully worked out and outlines of the first five or seven episodes.
Iain C. Baillie
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An ingenious advertising scheme or business promotion scheme has equally to be worked out in considerable detail.
For the more common instance of mechanical devices, products or processes, the first step, therefore, is to show that the invention is at a stage at which it is commercially practical. There must be some effort to manufacture a prototype, or at least to have a very detailed analysis of the technical features of the invention. As this website indicates, there are various means by which, if you are without technical resources, individuals or companies can be found who can assist in taking an invention to a prototype. A scrappy piece of paper with a rough drawing and some generalisations as to value are unlikely to be sellable.
The investment in a patent application is vital. Most larger companies are not prepared to accept submissions except in the form of a patent application, since this can form a clear determinant of the rights of the parties.
Just as important, however, as the technical description and possible prototype, is the identification of likely licensees. There are, of course, skilled professionals who undertake both the identification of licensees and developing approaches to the ones with the real potential. As with any skilled professional, however, this involves reasonably substantial fees. However, considerable self-help is possible. Always beware of an entity which initially appears to be providing services for virtually nothing. Many of these agencies in the end charge substantial fees, give extremely bad advice both legally as to the patentability and commercially as to the likely application of the invention.
Accordingly, therefore, the inventor has to:
• Take an inventory of the intellectual property protection available in order to protect the idea. This is best done by consulting a professional in the field of intellectual property, for example, a Chartered Patent Agent.
• Identify the types of company who manufacture or distribute similar products. If the product is so new that there is no present distributor of a similar product, then who is at least in the same commercial field for the intended market?
Using Companies House
Having identified some potential licensees, try and identify the names of persons in these companies to whom a letter could be addressed personally. In this connection use of the information in Companies House and its various branches can be very helpful.
A specific business plan should be developed. Where would the new development fit into the existing lines of the identified potential licensees. For example, writing to a screwdriver manufacturer, to be able to point out that your new development fits neatly into their line and solves a problem not solved by some of their existing screwdrivers will create interest.
At this stage it is best to try and concentrate on a limited number of potential licensees. Also, even if you think the market might be in another country it is more practical to try and sell to a manufacturer in your home territory. With a detailed analysis of the development and its commercial practicability, one can then prepare the submission. Normally we hope you have patent protection or at least an application which can be used as the attachment to the submission.
If, however, the submission relates to something which is unpatentable, e.g. a business plan, then it is vital that any submission should be in confidence. The letter of submission should indicate that it is being submitted in confidence for evaluation only and that the recipient must not disclose the invention nor make any use without an agreement. It must be emphasised that not all companies will accept such a submission, and you have to make a judgement as to whether you are prepared to risk proceeding solely on good faith (or a patent application if available).
In creating a confidential submission, one must be prepared to accept that confidentiality will not apply to something which proves not to be confidential, i.e. already known, or that the receiver already has in its possession. More sophisticated forms are available but legal advice should be taken on these.
If financial resources are already strained, then submission to a more limited number or even only one party together with an offer of an option, for say three months, on payment of a modest sum may be a helpful approach. Normally option agreements have, as an attachment, the full licence agreement, but one can simply have an option that the invention will not be offered to any other party within these three months or that the receiver will have the right to the development if they are prepared to match any other offer and this would be legally binding.
The danger for most newcomers to licensing is greed, and it is more desirable to sell that first invention for a reasonable return than to hope to make one's fortune for the rest of one's life. One has to be practical that the small private inventor rarely makes an earth-shattering invention. One also has to remember that the company which is going to make the product and distribute it has a very large investment in taking something which is at best a prototype to market. They will not be prepared to add to that investment risk (large upfront sums), until there is some more indication of the likely success of the invention. Initial payments, therefore, for its rights tend to be modest, although it is useful always to negotiate a situation in which legal costs, particularly for patent protection, are covered by the licensee.
One may wish to maintain a limited territory for the licensee, but there is much to be said for the simplicity of granting world-wide exclusive rights to a single licensee with perhaps the capacity to cancel the exclusivity for part or parts of the territory.
At this point the innovator may receive an offer to purchase the invention on the basis that payment will be made over a number of years based on sales. Always remember that such an assignment of the invention destroys the control the inventor has over the rights in the event that the purchaser defaults. This is the whole reason for licensing as distinct from selling inventions.
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Should the licensor send a draft licence at the beginning?
This is probably both inappropriate and unnecessary and it is only rarely that there is such a thing as a 'form licence' which will fit all situations. It is far better to negotiate some commercial considerations first and then embody these in the licence agreement with the advice of an appropriate lawyer. The licence agreement may, however, be a relatively simple document simply identifying the development and its protection, granting world-wide rights (subject to the incentive to continue working), identifying the sums to be paid up front (although its nature should be specified since different reasons for lump sum payments have different tax and accountancy implications), and then identify royalty.
Most simple mechanical inventions, despite the various elaborate articles on the subject, tend to wind up with a royalty of approximately 5% of the licensee's original sales price.
Royalties are always related to the licensees sales, not the final market price of the retailer. It is important, however, that there may be some review of the basis for the payments. The phrase 'net sales' is a bear trap. Avoid elaborate exchange rate clauses if the licensee pays in a different currency. The licensor is better advised to take the payment and see how the market goes in currency. If a royalty is based on unit sales, i.e. price per unit, one must take account of inflation.
The seller of an invention should never warrant that the invention or the patent protection for it is valid, nor that it does not infringe other rights. These are all risks which should be taken commercially by the licensee. Accordingly, therefore, the less that is said as to what the licensor warrants the better.
On the other hand the licensor should ensure that, even if the licensee is paying the expenses of legal protection, this is routed through the licensor so that it can always ensure that these rights are being maintained.
It is also important that the agreement sets out very clearly the conditions on which it terminates, either by reason of the efflux of time or by default by either party. There are a number of other technical areas such as a choice of law, but these can be best left to a discussion with the legal adviser.
Not all licence agreements are lengthy complex legal documents and, providing you understand the risks, a request to a legal adviser to produce a simple agreement will be respected although clearly the simpler the agreement the greater the potential that some issue may be omitted. A straight forward relatively simple agreement drafted by a legal adviser will be better than a layman's attempt at a complex legal structure prepared by copying chapters and sections from a text book on licensing.
The closer an agreement is kept to the actual subject matter of IP rights, for example registered patents, registered designs, copyright or even trade marks rather than confidential information, the easier it will be to define and to police.
In entering into a discussion with a potential licensee it is important that it is made clear that the discussion is only for the purpose of establishing basic commercial terms, and that the agreement will only be binding once a final agreement has been approved by the legal adviser and signed by the parties. However, if negotiating in another country, you may find the law of that country creates a legal obligation out of what first might appear to be only outline thoughts. Certainly before negotiating outside of the United Kingdom any licensor would be extremely well advised to secure sound legal advice.
Names of Solicitors can be obtained through the Law Society.
Who Can Advise?
Many Chartered Patent have long experience in licensing can be very helpful. Normally one does tend to think of a solicitor as the legal adviser in licensing, but here it is important to be sure that the solicitor is, in fact, knowledgeable in the licensing of technology, and one should be quite ruthless in examining the knowledge and commercial experience, for example of a local solicitor whose main practice is obviously real estate and wills.
A list of Chartered Patent Agents is obtainable from:
Chartered Institute of Patent Agents
Unfortunately legal advisers are perhaps not the best people to help with the purely commercial side of both developing the invention and submitting it and assessing the likely return. Professional advisers on licensing can be found through:
The Institute of International Licensing Practitioners
The Licensing Executives Society