Patent Licensing: Another Way to Enhance Return on Investment
Diversification applies not only to stock holdings but to revenue streams as well. Increased competition, rising sales costs, research and development costs, and the recent economic slowdown may underscore the need for your company to diversify its revenue streams beyond product sales alone. Receiving royalties for use of your company's intellectual property may be an overlooked possibility. More specifically, creating a patent licensing strategy, which this article will examine, may be an avenue worth pursuing.
Although many companies already license their software or sell products that are covered by patents, these same companies may not take advantage of all the opportunities offered by an effective patent licensing strategy. Some companies, however, have made licensing their patents an important and integral part of their business model. For example, last year IBM reportedly received licensing royalties for its patents and other technologies of over $1.6 billion; this year the total may approach $1.7 billion. Texas Instruments reportedly has received over $3 billion in cumulative patent royalties since the 1980s, and cash flow from royalties was able to help the company weather financially troubled times. Of course, not every company has a patent portfolio the size of IBM's (which was granted almost 3,000 patents last year alone), but even a small company is not precluded from adopting patent licensing as a business strategy. Moreover, generation of royalty revenues, in comparison to other revenue-generating activities, often have higher rates of return. Capitalizing on the efforts of third parties to generate revenues, if possible, is an effective component of any company's business strategy.
If you believe your company could profit by making patent licensing part of its business model, a number of steps should be taken to ensure that the licensing is a viable business strategy:
Obtain corporate support. The strength and success of a patent licensing strategy will only be as successful as the willingness of your entire company to pursue and support this strategy. Establishing a licensing strategy will require up-front costs, the corporate will to undertake litigation to protect your company's intellectual property, and the possibility of defending against litigation from other companies while pursuing this strategy. To determine whether patent licensing is a good fit for your company, consider issues such as your company's core business and its willingness to (i) capitalize on its patents both in a defensive (such as cross-licensing) and offensive mode (such as conducting litigation to stop infringement), and (ii) license patents to potential competitors. Finally, and perhaps most importantly, consider how patent licensing fits into your company's overall vision.
Conduct an intellectual property audit. Intellectual property audits can be conducted in many different ways and for different goals, but for licensing purposes, the audit should identify the patents and potential patentable technologies of your company, the markets and companies to which those patents would apply, the strategic value of the patents to the core competency of your company, and the industry environment for accepting licenses. In order to build a strong patent portfolio to license, the audit should also include an analysis of how your company identifies and protects its intellectual property. In many cases an intellectual property audit may need to be undertaken in order to provide the data necessary to obtain corporate support.
Create a centralized intellectual property licensing group. The group is needed to identify which inventions should be patented and which patents should be licensed. The group should help formalize your company's approach to licensing to third parties. This approach may include how to value your patents and how to select potential licensees. As a result, your company's patent licensing efforts will be concentrated within a set of individuals who can work across all business units, add continuity and consistency to the patent licensing process, protect your company against agreeing to questionable licensing deals, and present a unified front to all licensees.
Ensure access to licensing expertise. There is no one-size-fits-all license agreement or deal. There are a myriad of issues to consider not only for each patent, but for each deal. For instance, should a patent be licensed on a per product royalty or on a per use basis? What is the "product" upon which the royalties are based on? What is a fair royalty? What is the scope of use? Can you maximize revenues by licensing geographically? By narrow fields of use? By time?
In addition to these business and financial considerations, your license agreement will also need to take into account many other legal considerations. For instance exclusive licenses can raise the specter of antitrust issues and may require Federal Trade Commission (FTC) filings and approval under the Hart-Scott-Rodino Act.
Another consideration is the structure and characterization of royalty payments. Many licenses include obligations by both the licensor and licensee which are implicated in the event of a bankruptcy by the licensor. Careful structuring of payments and obligations will help ensure that a licensor will continue to receive royalty payments and that a licensee will continue to have the right to utilize the licensed patents.
An effective patent licensing strategy can augment your company's revenue stream, but to fully exploit your company's patents, you must first create a strategy for licensing, aggressively identify and pursue protection of your intellectual property, and methodically execute the implementation of this strategy. The rewards in doing so can be great.