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Patent Profit FAQ

Here are the most commonly asked questions about making a profit from your patent by either licensing it or selling it.

How does an inventor make a profit from his patent?

There are generally two ways that an inventor can make a profit from his invention. In rare circumstances, the inventor will start a new business to make, market and sell his invention. However, this is pretty rare as there are more inventors that would rather invent than run a business.

What happens more often is that an inventor that gets a patent on a new idea will license or assign the rights to his invention to another person or company. The license is most often in the form of a contract that gives the company developing the invention the right to make, use and sell the invention in exchange for giving the inventor a license fee and royalty payments. Royalty payments are normally calculated as a percentage of the net revenues from the invention, or they can be payments for each unit sold that uses the invention.

In some situations, the inventor will choose to "assign" his rights in the patent to another party (giving over all rights to the invention) for a lump sum payment.

What does it mean if I "license" my patent?

When an inventor licenses his invention to another party, he generally gives the other party the authorization to utilize and exploit the invention. This is generally contained in language such as "Inventor X gives Company Y a license to make, use and sell invention Z in exchange for royalty payments set out below."

There are many different types of licenses. A license can be an exclusive license (a license where the inventor agrees that he will license the invention to only one party) or a non-exclusive license (a license where the inventor retains the right to license the invention to more than one party). In addition, the license agreement can be for a set period of time (often the life of the patent or shorter), or it can be for an indefinite period of time, perhaps renewing month to month. The license agreement normally also states the geographical limitations of the license. For licenses on patents issued by the United States Patent and Trademark Office (USPTO), the license will often only allow the licensee to practice the invention within the United States.

Depending on the terms of the license, the licensee may be able to turn around and issue more licenses on the invention to other companies. How much the inventor can benefit from these "sub-licenses" really depends on the license agreement that he has with the first licensee.

There are other situations in which a company or inventor can "trade" licenses with other companies and inventors. This is called "cross-licensing" and often occurs when a new product requires several patented inventions to be functional. For example, suppose that one company holds a patent on a new type of bicycle frame, and that another company holds a patent on a new type of bicycle wheel. If a bike consisting of the new frame and the new wheels is very desirable in the marketplace, the two companies could decide to cross-license their patents in order for them to make the most money possible.

Are inventors that are employed by a company allowed to profit from their inventions?

The answer to this question will often depend upon the employment contract that the inventor is subject to. In most situations, an inventor that develops an invention in the normal course of his employment may be required by his employment contract to assign all rights to the invention to his employer. However, most companies try to hold onto their inventors by giving out bonuses and other financial rewards for new patents and inventions.

If, by some chance, an employee is not subject to an assignment clause under his employment contract, the employer may still be able to demand an assignment of rights to an invention under the "employed to invent" doctrine. Under this doctrine, if an employee is employed (even without an employment contract) to accomplish a task or set goal, or is hired with the intent to develop a new invention, the employer will still own all rights to the subsequent invention. This doctrine was developed from a case decided by the United States Supreme Court.

However, even with the "employed to invent" doctrine in place, there are still circumstances in which an employer will not acquire full rights to an invention created by an employee. There are situations where an employer will only receive a "shop right" to an invention.

If an employer is only granted a shop right to an invention, this means that the employee-inventor retains ownership rights to the invention itself, but the employer gets the right to use the invention without paying the employee. Shop rights result only when the employee-inventor uses an employer's resources (shops, materials, time) to create an invention.

For example, suppose that Frank is not under any employment contract, but creates a new and patentable invention while in the machine shop at his work. Although Frank will keep ownership rights to his patent (and will be free to license and sell it how he likes), his employer, under its shop right, will be able to use Frank's invention without paying Frank any royalties.

Next Steps
Contact a qualified business attorney to help you identify
how to best protect your business' intellectual property.
(e.g., Chicago, IL or 60611)

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