The Danger of One-Off Patent Licenses

The first opportunity to license your patent(s) can be exciting!  It can arise in a variety of scenarios:  resolving a pending litigation; in response to a new corporate interest in monetizing existing patents; opportunistically in a cross-licensing invitation. Whatever the triggering event, the value your patent portfolio commands over its life is affected by how it is valued in that very first transaction.

Why? Because comparable sales give us a sense of the value of what is being sold. We comparison shop all the time. Licensing patents is no different. In fact, in litigation, the value of a patent is determined primarily from what a willing buyer/licensee would pay and a willing seller/licensor would accept in a hypothetical negotiation.  A persuasive piece of evidence in that “reasonable royalty” analysis is what actual buyers paid to you, the actual seller, in an actual negotiation – effectively looking at comparable licenses.

So, a low-value first license sets expectations for later licensees that they will receive a similarly low price, unless there is a clear differentiation between the licensees and the rationale for that lower price that does not apply to later licensees.

The key is to have a deliberate, well-thought-out strategy for your licensing program. There is no one “right” licensing strategy. It can be crafted to reflect the stage your company is in, how aggressive your company is, and how you want to approach your market.

One strategy may be to give the best price to the first licensee – because they were the first to recognize the patent’s value. If that is your strategy, you’ll have to be ready to explain to licensee #2 why the price is higher for them. That strategy is not risk-free. It could reduce the value your patent commands in a later litigation, so should be carefully considered and the business rationale documented to avoid creating a low ceiling on licensing value.

Another strategy may be to price your licenses based on particular criteria.  Perhaps your licensing rate decreases based on the number of units of covered products sold, or increases with the covered product’s relevance to your own product’s market.

Yet another strategy may be to negotiate a high royalty rate from your first licensee (e.g., a small company with few sales who is willing to pay more on a per-unit basis because the total actual cost for the license is low), so that you can leverage your now more valuable – because it commands a high licensing value – patent with a bigger company with many sales who would generate significantly more licensing revenue.

There are many strategies your company could choose.  The key is to be deliberate, consistent, and choose your strategy before negotiating that first license.  Know what your strategy is, know what the value of your patent to the target market is, and approach potential licensees in a way, and in an order, that will accomplish your strategy.