Profit From Your Idea

How to Make Smart Licensing Deals

Profit From Your Idea

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Profit From Your Idea

New Edition!

, 9th Edition

Get everything you need to protect and profit from your invention with this all-in-one guide. You'll learn how to show your invention to potential investors, all while protecting your rights. Find out how to: 

  • find potential licensees
  • draft a comprehensive licensing agreement
  • craft a nondisclosure agreement to protect your interests

Includes all the legal forms you need!

Product Details

Everything you need to license your invention

You’ve got a great idea and are ready to strike it rich. But finding a company you can trust, hashing out a fair licensing deal, then watching your idea hit the marketplace—well, you’ll need help.

Profit From Your Idea will help you negotiate and draft a licensing agreement that best protects your interests. With this all-in-one guide you'll understand how to:

  • navigate the licensing landscape
  • protect resolve inventor-employee property rights
  • work with licensing agents
  • protect confidential information
  • finding potential licensees
  • license overseas
  • reveal your invention safely, and
  • negotiate and update your agreement

The 9th edition is completely updated with current licensing law and patent rules, and covers the implications of the Defend Trade Secrets Act of 2016.

 

“Tells prospective entrepreneurs how to move an idea ‘from thought to bought’—and roughly what inventors can expect to get in a licensing deal.” - Los Angeles Times

“Tells inventors everything they need to know to enter into a solid licensing agreement.” - Electronic News

“Gives detailed instructions on working with manufacturers, marketers and distributors...” - Baton Rouge Advocate

ISBN
9781413324525
Number of Pages
440
Included Forms

  • Agreement Worksheet
  • Assignment of Rights: Patent
  • Assignment of Rights: Patent Application
  • Assignment of Rights: No Patent Issued or Application Filed
  • Letter Confirming Employee's Ownership of Intellectual Property Rights
  • Joint Ownership Agreement
  • Agent Letter Agreement
  • One-Way Nondisclosure Agreement
  • Mutual Nondisclosure Agreement
  • Contract Worksheet
  • Letter of Intent
  • Option Agreement
  • Terms Sheet
  • License Agreement
  • Escrow Agreement
  • Checklist for Reviewing a License Agreement
  • License Dates Chart
  • Audit Request Letter

*Audio files are not available with the ebook

Table of Contents

1. Gearing Up to License Your Invention

  • Licenses
  • Assignments
  • The Licensing Process
  • Avoiding Conflicts Among Multiple Agreements
  • Challenges to Your Ownership
  • Transferring Ownership of Your Invention to Your Business
  • Disclosing Information About Your Invention
  • Keeping Your Records
  • No False Hopes! Reviewing Your Invention’s Commercial Potential

2. Intellectual Property Protection

  • General Rules for Legal Protection of Inventions
  • Utility Patents
  • Trade Secrets
  • Trademarks
  • Design Patents
  • Copyright Law
  • Sorting Out Nonfunctional Features: Design Patents, Product Configurations, and Copyright

3. Ownership Issues for Inventor Employees

  • What Type of Intellectual Property Is Involved?
  • Employer/Employee: Patent and Trade Secret Ownership
  • Inventions Covered by Copyright
  • Special Employment Situations
  • Working Out Ownership Issues With Your Employer

4. Invention Financing and Joint Ownership

  • How Much Money Do You Need to License Your Idea?
  • Sources of Funding
  • Joint Ownership
  • How Payments, Loans, or Investments Can Create Joint Ownership
  • The Joint Ownership Agreement

5. Licensing Agents and Representatives

  • Agents
  • Completing the Agent Agreement
  • Attorneys as Agents
  • Invention Marketing Scams

6. Soliciting Potential Licensees

  • Before You Begin Your Search
  • How to Find Potential Licensees
  • How to Overcome a Licensee’s Bias Against Submissions
  • What’s the Best Way to Solicit a Potential Licensee?
  • Product Presentations
  • Should You Solicit Foreign Licensees?

7. Protecting Confidential Information

  • Confidential Information and Nondisclosure Agreements
  • Proceeding Without an Agreement
  • Waiver Agreements
  • When You Have Sufficient Bargaining Power
  • Disclosing to Employees and Contractors
  • Disclosing to an Attorney

8. The Key Elements of Your Agreement

  • From Handshake to License
  • Identifying the Parties
  • Describing Your Invention and the Licensed Products
  • Specifying Which Rights Are Granted
  • Defining the Territory
  • Setting the Length (Term) of the Agreement

9. Money: It Matters

  • Some Basic Royalty Definitions
  • Ways to Get Paid
  • The Mysteries of Net Sales and Deductions
  • How Much Do You Get?
  • Royalty Provisions

10. Negotiating Your Agreement

  • What, Me Negotiate?
  • Documenting the Important Contract Elements
  • Letter of Intent
  • Option Agreements
  • What If the Licensee Wants to Proceed Without a Written License Agreement?

11. Sample Agreement

  • License Agreement
  • Optional License Agreement Provisions
  • Modifying the Sample Agreement for Your Needs

12. Warranties, Indemnification, and Proprietary Rights Provisions

  • Promises, Promises … Warranties, Representations, and Covenants
  • Indemnity: The “Hold Harmless” Provision
  • Licensee Warranties and Indemnity
  • Proprietary Rights
  • Commercialization and Exploitation
  • Samples and Quality Control
  • Insurance

13. Termination and Posttermination

  • Termination and Posttermination
  • Termination Based Upon a Fixed Term
  • Termination at Will
  • Termination Based on Contract Problems
  • Termination and Bankruptcy
  • Posttermination: What Happens Afterwards?
  • Survival of the Fittest

14. Boilerplate and Standard Provisions

  • Paying the Lawyer’s Bills
  • Dispute Resolution
  • Governing Law
  • Jurisdiction
  • Waiver
  • Severability
  • Entire Understanding
  • Attachments and Exhibits
  • Notices
  • No Joint Venture
  • Assignments
  • Force Majeure
  • Headings
  • Establishing Escrow Accounts

15. Service Provisions

  • Service Provisions Versus Separate Service Agreements
  • Training the Licensee’s Personnel
  • Installation of Equipment
  • Technical Support for the Licensee or for End Users
  • Improving, Modifying, and Delivering the Invention

16. Handling the Licensee’s Agreement

  • Dealing With Suggested Changes
  • Evaluating an Agreement Presented to You
  • Evaluating the Provisions and Suggesting Changes

17. After You Sign the Agreement

  • Create Your Contract Calendar
  • Dealing With Royalty Statements
  • Resolving Licensing Disputes
  • Avoiding Patent Misuse and Illegal Agreements
  • The Taxman Cometh
  • Quality Control

18. Help Beyond This Book

  • Licensing and Intellectual Property Resources
  • Working With an Attorney

Sample Chapter

Chapter 1:
Gearing Up to License Your Invention

Eureka! You’ve developed an invention and believe it has commercial potential. What’s next? For many inventors, the best way to profit from an invention is to have someone else—usually a company that already specializes in similar products—develop, manufacture, or market the invention. However, since an inventor holds ownership rights (sometimes called title) in an invention, another company cannot do these things unless the inventor gives permission. Broadly speaking, this permission is called a license.

This chapter will give you an overview of the licensing process and help you screen out potential problems that could hinder your ability to license your invention. Review this chapter if you answer “yes” to any of the following questions:

Would you like an explanation of the difference between a license and an assignment?

Do you want a brief description of the legal rights related to your
invention?

Have you signed any documents regarding your invention?

Would you like a clearer understanding of who might own your invention besides yourself?

Have you shown your invention to—or discussed it with—anyone?

Do you want some help in keeping track of your business transactions?

Would you like more information about how to assess what your invention may be worth in the marketplace?

 

What We Mean by an Invention

The term “invention” as used throughout this book refers to any innovation, device, or process that can be commercially used or developed. Although the strongest form of protection for your invention is a patent, this book does not deal solely with patented or patentable inventions. Many inventions may not qualify for patent protection but can be protected under some other legal principle, such as trade secret or copyright. If your invention has commercial potential and is protectable under some form of intellectual property law, you can use this book to help you license it to others. See Chapter 2 for an overview of the different ways your invention may be protected.

 

Licenses

A license is an agreement in which you let someone else commercially use or develop your invention for a period of time. In return, you receive money—either a one-time payment or continuing payments called royalties. Your power to make this kind of agreement is based on the premise that you control the right to make and sell your invention. Your right to make and sell your invention depends upon whether your invention is protected under intellectual property laws. (See Chapter 2.)
If your invention cannot be protected under intellectual property laws, it is unlikely you will license your invention. Why? Because if your invention is not protected, anyone can make and sell it. Therefore, why should they pay you?

If your invention is protectable, you can stop others from making or selling it. In other words, a company can make and sell a “protected” invention only if you give them permission. By negotiating a license, a company can make, sell, or use your invention without fear of a lawsuit. In other words, a license gives the company a right to do something it would otherwise be prohibited from doing.

 

You Are the Licensor,
They Are the Licensee

For purposes of this book, you, as owner of the invention, will always be the licensor and the party receiving the license for your invention is called the licensee. In law, the person who is the source of the activity gets an “er” or “or” suffix (such as employer, lessor, discloser). The person who is the recipient of the activity gets an “ee.” So, an employer provides employment, while a person who is employed is called an employee. Similarly, a lessor leases property to a lessee and a discloser discloses information to a disclosee. Since you’re licensing your invention, you’re the licensor and the party receiving the license is the licensee.

 

When You License, You Are Leasing Your Legal Rights

A license for an invention is similar to a lease for a house or an apartment. A tenant makes periodic payments to an owner of property for the right to use it. If the tenant fails to honor the terms of the lease or rental agreement, the owner can reclaim possession and make the tenant leave. Similarly, a licensee pays you royalties (similar to rent) for the right to manufacture, sell, or use your invention for a period of time. If the licensee fails to pay you or otherwise breaches your agreement, the agreement may terminate and you can license your invention to someone else (provided the license is drafted properly).

It is also important to realize that you do not license your invention, per se. Rather, you license your legal rights to
the invention. This distinction causes confusion for some inventors. Legal rights
—patent, copyright, trademark, or trade
secret rights— are what give you title or ownership of the invention, much like a deed to a house gives you title to the
property. When you license your invention,
what you are really transferring to the licensee are your legal rights, such as your rights to manufacture, sell, and use the invention. These legal rights will be explained in more detail in Chapter 2. However, it is beyond the scope of this book to assist you in securing intellectual property protection. In Chapter 18, Help Beyond This Book, we refer you to other resources for protecting intellectual property.

For now, keep in mind that the primary goals in licensing are to determine what legal rights you have, acquire the appropriate protection for those rights, and license those rights to others who can make you money.

Licenses Can Be Flexible

A license agreement can be drafted according to the specific needs of the licensor or licensee. For example, you can limit the license of your invention for a period of time, such as one year. You can limit the license to a certain area, such as Canada. You can even license your invention to more than one manufacturer at one time.

Example: Joe invented a patented flotation device. Two companies are interested in it: a toy company and a company that makes boating products. Joe can sign two license agreements and earn royalties for both uses.

Because a license can be as flexible as the parties wish it to be, the task of drafting a license typically involves much more than simply agreeing to standardized language often found in legal agreements. That is what this book is all about—teaching you how to draft a license agreement that is just right for you. Drafting a license agreement is covered thoroughly in Chapter 8.

Licenses Can Be Written or Oral

Most licenses involving technology are written. However, a license doesn’t have to be written to be valid. An oral license may also be enforceable as long as it qualifies as a contract under general contract law principles. However, there are limits on oral agreements. For example, in most states, an oral agreement is only valid for one year. Because of these limitations and because it is usually more difficult to prove an oral agreement than one set out in writing, we strongly recommend against relying on an oral licensing agreement.

Assignments

Unlike a license, an assignment is a permanent transfer of ownership rights. When you assign your invention, you are the assignor and whoever purchases the rights is the assignee. An assignment is like the sale of a house, after which the seller no longer has any rights over the property. As the assignor, you may receive a lump sum payment or periodic royalty payments.

Even though they have different legal meanings, the terms assignment and license are sometimes used interchangeably. Indeed, these two types of agreements sometimes seem to have the exact same effect. This is true in the case of an unlimited exclusive license, in which a licensee obtains the sole right to market the invention for an unlimited period of time. Since in this situation the licensor is not keeping any rights that could be made the subject of another license, the license really has the same effect as an assignment. Because the two terms may overlap, it’s important to examine the specific conditions and obligations of each agreement rather than simply to rely on terms such as assignment and license.

See “Assignments, Licenses, Termination, and Reversions,” above. The categorization can affect tax treatment of income from the agreement. See Chapter 17 for more information on taxes and licensing agreements.

The Licensing Process

Licensing is a union between the inventor (the licensor) and the company that licenses the right to manufacture or distribute your invention (the licensee). It begins with a meeting and disclosure period followed by a proposal and negotiation stage. If you agree on the major principles, a formal relationship is created. After entering into the agreement (often called executing the agreement), there is a continuing review by both parties called monitoring. If either party breaches (fails to honor) the agreement, the agreement may be terminated.

The following sections describe the various stages in the licensing process.

Meet and Greet the Potential Licensee

The most difficult step you will face is finding a company to license your invention. For a shy, introverted inventor, meeting marketing people and displaying work at trade shows can be a jolting and frustrating experience.

Sometimes, an inventor who is so relieved to find a receptive company fails to properly evaluate the opportunity. Once you find a prospective licensee, you should thoroughly research it; this book will explain how. Every business opportunity is not a great opportunity. Sad as it may seem, you may be better off with no license at all than a license with a company that has a reputation for acting unethically. In addition, you must be careful during the disclosure process to properly protect confidential information. Disclosing your invention requires a balancing act: presenting the best aspects of your invention while protecting the confidential aspects of your work. We’ll discuss confidentiality and disclosure in further detail in Chapter 7.

It is beyond the scope of this book to inspire you to make great sales pitches or presentations, although we will offer some tips and guidelines in Chapter 6. We will also help you locate appropriate trade magazines and trade shows at which you may find prospective licensees. (See Chapter 6.) And we’ll help you identify and avoid scam marketing companies that will rip you off.

Negotiating the License

Negotiation skills are learned, not inherited. The simple rule is that the best approach to negotiating your licensing contract is to educate yourself and to set goals. Good negotiators are well prepared and have a realistic knowledge of the marketplace. Chapter 6 provides information about researching industries and markets. Also important in any negotiation is flexibility, being willing to adapt your goals to match the situation. We will provide an overview of common negotiating strategies in Chapter 10.

Execution and Monitoring

The signing (execution) of the licensing agreement is usually accompanied by an advance payment and an exchange of information or technology. For example, upon executing a licensing agreement, an inventor may receive an advance payment and have to provide the specific methods of efficiently manufacturing the invention.

The execution of a licensing agreement is the climax, but not the end, of the licensing process. It may also be the beginning of a services or consulting agreement between you and the licensee. For example, you may be hired to supervise the making of the initial molds or manufacturing prototypes. Service agreements are covered in Chapter 15. Plus, as a licensor you have to monitor your payments and the performance of the licensee. Chapter 17 offers information on postsigning activities.

Avoiding Conflicts Among Multiple Agreements

As an inventor, you may enter into various agreements, each of which may have an impact on your ability to license in the future. Before you license your invention, review your current signed commitments to make sure that none of them conflict with your ability to license. The easiest way to manage this review is to create and maintain a record of all signed documents. For the most part, you should be concerned with documents that affect your ownership, financial interest, or control over the rights to your invention.

Agreements That Can Impact Licensing

When examining other agreements, first determine what kind of agreement it is. The name of the document will probably help you classify it (although titles are not always conclusive proof). If you are not sure of the type of document, the first or second paragraph often describes the document’s purpose. If you are still not sure, try comparing the document’s provisions with the provisions of the sample agreements in this book.

Below is a brief description of some common documents an inventor may execute and the effect they may have on the inventor’s ability to license an invention.

Co-Ownership or Joint Inventor Agreements

This agreement is executed between the owners—usually the creators—of an invention. It establishes the rights and obligations of each party in respect to the invention.

Impact on Licensing: A co-ownership agreement may establish which owner has the right to enter into licensing agreements and may require a mutual decision when it’s time to decide upon a licensee. See Chapter 4 for more information.

Corporate and Stock Agreements

Have you created a corporation to exploit your invention? Corporate agreements are executed as part of the state incorporation process. Stock agreements formalize sales of corporate stock to investors.

Impact on Licensing: Corporate and stock agreements establish who makes decisions about licensing or whether such decisions require a vote of the board of directors (the group that is elected by stockholders to make the important corporate decisions). See Chapter 4 for more information.

Employment Agreements

Employment agreements define your employment obligations and responsibilities.

Impact on Licensing: An employment agreement may limit your rights to inventions created during your employment. See Chapter 3 for more information.

Loan Agreements

A loan agreement is an agreement to lend money, services, or supplies in exchange for a promise of repayment, usually with interest.

Impact on Licensing: If a loan agreement uses your legal rights to an invention as collateral to secure repayment of the loan, it may prevent you from licensing the invention. See Chapter 4 for more information.

Nondisclosure Agreements

A nondisclosure agreement is an agreement to keep confidential certain information identified in the agreement.

Impact on Licensing: An improperly drafted nondisclosure agreement may mean that you have lost the right to consider your invention a trade secret—which could, in turn, impact your ability to license the invention if the licensee considers trade secret protection an important part of the transaction. See Chapter 7 for more information.

Option Agreements

An option agreement gives one party the right to enter into a license (or another type of agreement) at a later date.

Impact on Licensing: An option agreement may establish terms to be used in a license and may prevent you from licensing to anyone other than the option owner. See Chapter 10 for more information.

Evaluation Agreements

An evaluation agreement is a mixture of a nondisclosure and an option agreement. With an evaluation agreement, a company acquires the right to evaluate an invention and then, if desired, to enter into a license agreement.

Impact on Licensing: An evaluation agreement with one company may prevent you from signing a licensing agreement with a different company. See Chapter 10 for more information.

Outsourcing or Manufacturing Agreements

An outsourcing or manufacturing agreement authorizes a company to manufacture—but not necessarily sell—goods embodying your invention.

Impact on Licensing: Your failure to include a confidentiality provision in an outsourcing or manufacturing agreement may result in the loss of trade secret rights, which could have an impact on your ability to license. See Chapter 7 for more information.

Partnership Agreements

A partnership agreement is an agreement in which two or more persons join together in an enterprise. The partnership agreement establishes the contributions, liabilities, and shares of profit for each contributing partner.

Impact on Licensing: Your partnership agreement may define which partner can execute a license, and it may require participation by all partners in the negotiation process. See Chapter 4.

Representation Agreements

A representation agreement (sometimes referred to as a rep agreement or an agency agreement) is an arrangement with an agent or a representative who will attempt to license your invention for you. In return, an agent usually seeks a portion of the profits or royalties.

Impact on Licensing: A rep agreement may require you to pay the rep percentages for a license which the rep did not even negotiate. See Chapter 5 for more information.

Keeping Track of Agreements

After you identify your agreements, make sure you have copies for your records. Then list each agreement along with any appropriate dates for activity (for example, due dates for loan payments) on a worksheet (we provide a sample below). If you believe that one of these agreements will have an impact on your ability to license, it is important to identify these potential obstacles now, before the licensing process begins.

We suggest you use the following worksheet to keep track of each agreement. Some agreements terminate by a certain event or date. Some agreements can be renewed on a specific date. You should review your agreements for the relevant information and plug it in your worksheet. You should keep your worksheets and other important documents—including the copies of the agreements themselves—in a special notebook. We discuss record keeping later in this chapter.

Challenges to Your Ownership

Is anyone likely to challenge your claim to ownership of your invention? Of course, if someone has already asserted an ownership claim, then the answer to this question is yes. But even if there has been no actual assertion, an informal conversation may have alerted you to this possibility. The ownership issue may have been raised in several different contexts:

Someone you worked with believes that he or she is entitled to be considered one of the inventors.

Another inventor has already alerted you to his or her belief that your invention infringes a previous invention that is protected by a patent or some other intellectual property device.

You know about an active (in-force) patent which describes an invention very similar to yours.

A Licensee Can Challenge Your Patent

Don’t presume that a licensee can’t challenge your patent. Just because a company is paying you to use your invention doesn’t prevent that company from challenging the validity (and your ownership rights) of your patent. Under a Supreme Court ruling in January 2007, a licensee can challenge the validity of the patents it has licensed without having to break the license agreement. In addition, the Supreme Court did not limit this holding to patents—indicating that perhaps a trademark or copyright licensee can also challenge the validity of a title. (MedImmune v. Genentech,  549 U.S 118 (2007).)

 

Types of Ownership Challenges

The first type of claim (“I worked for/with you, or you worked for/with me, and I own part or all of that invention”) usually occurs when a former employer, employee, or coworker claims rights to your invention. If you are not familiar with principles such as joint ownership, joint authorship, work for hire, or shop right rules, then you should read Chapters 3 and 4.

The second and third types of potential challenges to your rights are based on a doctrine known as patent infringement. Patent infringement claims are usually brought by inventors who believe your invention is the same as theirs (that is, “I created this invention first and you ripped me off”). Under patent law, an infringement may be exactly the same invention or it may be a similar or “equivalent” invention.

Dealing With Ownership Challenges

You may have difficulty licensing your invention in any of these situations. Since a potential licensee will want to make sure that you own the rights you are licensing, the agreement will inevitably contain a warranty clause which guarantees that you do, in fact, have the right to license. Many licensees will also insist on an indemnity clause, which basically holds you financially responsible for damages suffered by the licensee if your warranty proves false. If you don’t have ownership rights or if those rights are challenged in a lawsuit, you may have to pay to defend yourself and the licensee.

What do you do if there is an ownership issue? You’ll need to determine if the challenge is valid. Do you really own your invention to the extent you thought you did? If you don’t, you will have to settle the dispute. If the challenge is bogus, you can disregard it. Either way, you should consult with an intellectual property attorney experienced in your type of intellectual property, because you will most likely need an expert legal opinion regarding the validity of the challenge. See Chapter 2 for more information about types of intellectual property.

When Others Infringe Your Invention

If you think that someone may have ripped off your invention, review your rights under intellectual property laws. You may not have been “ripped off” in a legal sense. If you are unsure, you will need to consult with an intellectual property attorney. (See Chapter 18, Help Beyond This Book.) If you have been ripped off, you must determine whether you can handle the dispute yourself or whether you need an attorney. Dealing with infringers is especially important if your licensing agreement requires you to defend the invention against thieves. See Chapter 2 for more information about intellectual property laws.

 

Transferring Ownership of Your Invention to Your Business

Every business has a structure (sometimes known as a “business form”). There are five common business forms:

sole proprietorship

general partnership

limited partnership

limited liability company, and

corporation.

For legal or tax reasons, you may have formed a business to exploit your invention. For example, you and several investors formed a corporation to license your invention. Why form a corporation? Perhaps your accountant recognized a tax advantage, or perhaps the investors wanted a corporate business form to shield them from any personal liability.

Often, if you form a business to exploit your invention, you must share ownership of your invention (for example, in the case of a partnership, you may share it with your partners), or you must assign invention rights to the business (for example, you form a corporation and assign your rights to the corporation, which then becomes the owner). If you assign all rights to your business, then that business, not you, will enter into the license agreement with the licensee.

Descriptions of the common types of business forms follow.

Sole Proprietorships

If you are the sole inventor and owner of your invention, then you are probably a sole proprietor (explained below). A sole proprietorship is an unincorporated business owned by one person. You, as sole proprietor, make all business decisions.

The advantages of a sole proprietorship are freedom to make decisions (no pesky partners to contradict you) and simplicity (no filings with the state government; no double taxation of income). The disadvantages are that sole proprietors are personally liable for all business debts. This means that if your business gets into financial hot water for reasons such as poor sales or an expensive lawsuit, your creditors can sue you and go after not only your business assets but your personal assets as well. If you have personal property that you want to protect from liability, you may want to incorporate. Unlike sole proprietors, owners of corporations are not personally liable for business obligations.

 

Fictitious Business Names

If you operate your sole proprietorship under a fictitious name, you are required under most state laws to file a fictitious business name statement with your county government. This filing does not create your business; it only provides a public record of the names of the individuals who own the business. Many sole proprietors don’t bother with this filing until they begin receiving revenue under the fictitious business name, at which point the bank will require the filing before cashing company checks.

 

As a sole proprietor, you may create a name for your business and do business under that name. For example, if Joan Smith operates a sole proprietorship under the name SmittyCo, she would execute a license agreement as “Joan Smith, an individual doing business as SmittyCo.”

General Partnerships

A general partnership is basically a sole proprietorship with more than one owner. If you’re in business with one or more other people and haven’t incorporated, you’re engaged in a partnership. Each partner contributes something to the partnership, and each receives a percentage of the profits. You don’t have to go through a formal procedure or even a written agreement to start a partnership. In fact, partnerships are often created by the actions of the parties. For example, say a friend of yours offers to help you promote an invention. You agree to give him a percentage of the profits, and in return he agrees to devote 20 hours a week to promoting your invention. He is contributing services and will be receiving a share of the profits. He is now your partner or joint venturer. (There is no difference between a partnership and a joint venture except that joint ventures are usually limited to two partners.)

The advantage of a partnership is simplicity. It is not necessary to register with the state government, although your partnership must file a partnership tax form. The partnership’s income is not taxed until it is distributed to the partners, who declare this income on their personal tax returns. The disadvantage of a partnership is that partners are personally liable for business debts. In addition, each individual partner can be liable for the entire debt of the business. That is, a person who sues the partnership can recover all of the damages from any one partner’s personal property. This rule cannot be altered by the partnership agreement (although the agreement can obligate partners to repay such debts). To protect your personal assets from partnership debts, you should incorporate or form a limited liability company, discussed below.

Accepting money from someone does not necessarily create a partnership. As explained in this chapter, some payments may be characterized as loans, some as gifts, and some as investments. However, if someone gives you cash or property with the understanding that it buys a share in the profits and ownership of the business, then you have formed a partnership. For example, you invented a fruit slicer and a friend agreed to contribute $25,000 to help manufacture prototypes, with the understanding that she would share in the profits. You and your friend are partners.

 

What Is Your Relationship
With an Agent?

When you enter into an agreement with a product agent or anyone else who will represent you to a licensee, you are entering into an agency relationship, not a partnership. An agency relationship is similar to hiring an independent contractor to perform services for you. You are the principal and the agent’s job is to act on your behalf. In return for performing the services, you agree to pay the agent a percentage of the profits. For more information on product reps and agents, review Chapter 5.

 

Limited Partnerships

A limited partnership is a partnership with one or more general partners and one or more limited partners. The general partners manage the business, make contributions or perform services, and share in the profits. Limited partners, however, do not participate in business management; they only invest money. In return for giving up any say in management, their liability is limited to the amount of their investments.

The advantage of a limited partnership is that limited partners are not personally liable for business debts. Using this system, you can obtain investment income from a limited partner who does not have to worry about being personally liable. The disadvantage is that you must abide by legal formalities, such as filing with the state government, and you must also have a written partnership agreement, as required by your state law. The other disadvantages are that limited partners cannot contribute to the business decisions and general partners can be personally liable for all business debts.

Corporations

A business corporation is a legal entity, created by law, which has an existence separate from its owners. Unlike other business forms, it can exist perpetually—that is, it does not end with the death of the investors or owners. In order to obtain capital (money), you sell shares in the corporation. Purchasers of these shares are called shareholders. These shares create an ownership interest for the shareholders. The shareholders invest in the hopes that the invention will become successful and the shares become more valuable. Shareholders generally acquire voting rights and use their votes to influence decisions about licensing. Those shareholders who maintain a controlling interest (that is, they have the most shares) will have control over what happens to the licensing of the invention.

Shareholders in a corporation are not personally liable for debts of the corporation. For example, if a corporation licensed an invention and that invention injured someone, the injured person could sue the corporation to the extent of the corporation’s assets—but not the personal assets of the shareholders. There are a few exceptions to this rule, however, known as piercing the corporate veil, when shareholders may be held personally liable. This usually happens when a corporation is insufficiently capitalized or if the shareholders act in violation of the law.

The advantages of a corporation are its limited liability for shareholders. The disadvantages are the formality and expense. A corporation must file documents with the state government and receive a certificate of incorporation. Forming a corporation is a big step, particularly in states like California, where the formation fees can exceed $1,000. Certain legal formalities must be observed on a regular basis, such as creating a board of directors, establishing bylaws, and issuing shares of stock.

How Do You Transfer Ownership of Your Invention to Your Business?

If you are the sole inventor and owner of your invention and you operate as a sole proprietor, you don’t need to do anything. If you have formed a corporation, general partnership, limited partnership, or limited liability company for the purpose of licensing, you will probably assign your invention rights to the business. In that case, the business—not you—owns the invention and any licenses are granted by the business (not you). All assignments should be in writing. If the invention is patented, any such assignment must be recorded with the U.S. Patent and Trademark Office (PTO). In order to record it, you must send a copy of the signed assignment with a cover sheet and fee to the PTO. If you assign invention rights before filing a patent, you can record the assignment by sending it in with your patent application. (For more information on recording an assignment, visit the PTO website or see the patent resources in Chapter 18, Help Beyond This Book.)

Three sample assignments are provided below. The first is for the assignment of an invention for which a patent has been issued. The second assignment should be used if a patent application has been filed. The third assignment can be used if no patent application has been filed.

 

CAUTION

Never assign your invention for the “promise” of future payments. Always get the money before signing the assignment. That’s because if the assignee (the person who owes you the money) fails to pay you, you will be trapped in litigation, fighting to get your patent back. If the assignee insists on a series of payments, there are several solutions, such as establishing an escrow account, transferring partial assignments per payment, or setting up a license agreement that allows for ownership transfer after the final payment. You should consult with an attorney to best protect your interests.

Having a Spouse Sign an Assignment

If you conceived of your invention at the time you were married, your spouse may claim a portion of your invention income. To make sure your assignment is complete and your spouse will not later dispute the assignment, you may want to include a provision in your assignment similar to the one below. This provision protects the assignee (person acquiring the rights to the invention) from later being sued by the spouse of the inventor. This provision is not required in license agreements. When used in assignments, it usually appears below the signature line for the inventor.

 

 

download forms

You can download this form (and all other forms in this book) from this book’s companion page on Nolo.com; see the appendix for the link.

Sample Provision for Spousal Assignment

I am the spouse of Assignor and I acknowledge that I have read and understand this Assignment agreement. I am aware that my spouse agrees to assign [choose one] his/her interest in the Invention, including any community property interest or other equitable property interest that I may have in it. I consent to the assignment and agree that my interest, if any, in the Invention is subject to the provisions of this Agreement. I will take no action to hinder the Agreement or the underlying assignment of rights.

Spouse’s signature

Assignment of Rights: Patent

[Insert name of person or company assigning rights] (“Assignor”) is owner of U.S. Patent Number:  , dated  , titled [insert name of invention] (the “Patent”). [Insert name of person or company to whom rights will be assigned] (“Assignee”) desires to acquire rights in and to the Patent.

Therefore, for valuable consideration, the receipt of which is acknowledged, Assignor assigns to Assignee [insert percentage of interest that is being assigned—it can be less than 100%, but it cannot be more than 100%]% of Assignor’s right, title, and interest in the invention and Patent to Assignee for the entire term of the Patent and any reissues or extensions and for the entire terms of any patents, reissues, or extensions that may issue from foreign applications, divisions, continuations in whole or part, or substitute applications filed claiming the benefit of the Patent as well as any priority rights resulting from patent application filings. The right, title, and interest conveyed in this Assignment is to be held and enjoyed by Assignee and Assignee’s successors as fully and exclusively as it would have been held and enjoyed by Assignor had this assignment not been made.

Assignor further agrees to (a) cooperate with Assignee in the protection of the patent rights and prosecution and protection of foreign counterparts; (b) execute, verify, acknowledge, and deliver all such further papers, including patent applications and instruments of transfer; and (c) perform such other acts as Assignee lawfully may request to obtain or maintain the Patent and any and all applications and registrations for the invention in any and all countries.

Assignor:   Date:

[To be completed by notary public]

On this  day of  , before me,  , the undersigned Notary Public, personally appeared  , ASSIGNOR, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument, and acknowledged to me executing the same. WITNESS my hand and official seal in  County of  on the date set forth in this certificate.

Notary Public

[In California, include the following statement.] I certify UNDER PENALTY OF PERJURY under the laws of the State of California that the foregoing is true and correct.

Assignment of Rights: Patent Application

[Insert name of person or company assigning rights] (“Assignor”) is owner of [insert name of invention] as described in the U.S. Patent Application signed by Assignor on [insert date application was signed], U.S. Patent and Trademark Office Serial Number:  , filed [insert filing date], (the “Patent Application”). [Insert name of person or company to whom rights will be assigned] (“Assignee”) desires to acquire all rights in and to the Patent Application and the patent (and any reissues or extensions that may be granted).

Therefore, for valuable consideration, the receipt of which is acknowledged, Assignor assigns to Assignee [insert percentage of interest that is being assigned—it can be less than 100%, but it cannot be more than 100%]% of Assignor’s right, title, and interest in the invention and Patent Application (as well as such rights in any divisions, continuations in whole or part, or substitute applications) to Assignee for the entire term of the issued Patent and any reissues or extensions that may be granted and for the entire terms of any and all foreign patents that may issue from foreign applications (as well as divisions, continuations in whole or part, or substitute applications) filed claiming the benefit of the Patent Application and any priority rights resulting from the Patent Application.

Assignor authorizes the United States Patent and Trademark Office to issue any Patents resulting from the Patent Application to Assignee according to the percentage interest indicated in this assignment. The right, title, and interest is to be held and enjoyed by Assignee and Assignee’s successors and assigns as fully and exclusively as it would have been held and enjoyed by Assignor had this assignment not been made.

Assignor further agrees to: (a) cooperate with Assignee in the prosecution of the Application and foreign counterparts; (b) execute, verify, acknowledge, and deliver all such further papers, including patent applications and instruments of transfer; and (c) perform such other acts as Assignee lawfully may request to obtain or maintain the Patent for the invention in any and all countries.

Assignor:    Date:

[To be completed by notary public]

On this  day of  , before me,  , the undersigned Notary Public, personally appeared  , ASSIGNOR, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument, and acknowledged to me executing the same. WITNESS my hand and official seal in  County of  on the date set forth in this certificate.

Notary Public

[In California, include the following statement.] I certify UNDER PENALTY OF PERJURY under the laws of the State of California that the foregoing is true and correct.

Assignment of Rights: No Patent Issued or Application Filed

[Insert name of person or company assigning rights] (“Assignor”) is the owner of all proprietary and intellectual property rights, including copyrights and patents, in the concepts and technologies known as [insert name of invention] and more specifically described in Attachment A [attach a description of the invention to the Assignment and label it “Attachment A”] to this Assignment (and referred to collectively as the “Invention”) and the right to registrations to the Invention; and [insert name of person or company to whom rights will be assigned] (“Assignee”) desires to acquire the ownership of all proprietary rights, including, but not limited to, the copyrights, trade secrets, trademarks, and associated goodwill and patent rights in the Invention and the registrations to the Invention.

Therefore, for valuable consideration, the receipt of which is acknowledged, Assignor hereby assigns to Assignee [insert percentage of interest that is being assigned—it can be less than 100%, but it cannot be more than 100%]% of all right, title, and interest in the Invention, including:

(1) all copyrights, trade secrets, trademarks, and associated goodwill and all patents which may be granted on the Invention;

(2) all applications for patents (including divisions, continuations in whole or part, or substitute applications) in the United States or any foreign countries whose duty it is to issue such patents;

(3) any reissues and extensions of such patents; and

(4) all priority rights under the International Convention for the Protection of Industrial Property for every member country.

Assignor warrants: (a) that Assignor is the legal owner of all right, title, and interest in the Invention; (b) that such rights have not been previously licensed, pledged, assigned, or encumbered; and (c) that this Assignment does not infringe on the rights of any person. Assignor agrees to cooperate with Assignee and to execute and deliver all papers, instruments, and assignments as may be necessary to vest all right, title, and interest in and to the intellectual property rights to the Invention in Assignee. Assignor further agrees to testify in any legal proceeding, sign all lawful papers and applications, and make all rightful oaths and generally do everything possible to aid Assignee to obtain and enforce proper protection for the Invention in all countries.

Assignor:    Date:

[To be completed by notary public]

On this  day of  , before me,  , the undersigned Notary Public, personally appeared  , ASSIGNOR, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument, and acknowledged to me executing the same. WITNESS my hand and official seal in  County of  on the date set forth in this certificate.

Notary Public

[In California, include the following statement.] I certify UNDER PENALTY OF PERJURY under the laws of the State of California that the foregoing is true and correct.

Disclosing Information About Your Invention

If you invented something new and exciting, then you have a natural desire to share your discovery. Unfortunately, sharing your invention without proper precautions may cost you your legal rights. For example, public disclosures prior to filing a utility patent application will likely prevent you from obtaining a patent. (There are exceptions; see the section on prior art in Chapter 2.) Public disclosure will also prevent you from obtaining trade secret protection, because any authorized public disclosure ends trade secret protection. A trade secret is confidential information which gives you a competitive advantage over other inventors or their licensees. Trade secrets are valuable because they are not known to the public. Trade secret laws will protect your invention so long as you do not disclose information about it indiscriminately. Unrestricted disclosures about an invention protected by trade secret will usually terminate the protection.

Trade secret protection isn’t a concern for all inventions, however. An invention that has received a patent no longer needs trade secret protection. Disclosures about a patented invention will not affect your patent rights. However, as explained below, if you have applied for a patent that has not yet been issued, the only protection you might have is trade secret protection. In that situation, you should not disclose confidential information about your invention. Finally, if you have trade secrets that complement the patent but are not part of the patent (for example, an efficient way to construct the invention), you must treat these with confidentiality, as well.

Summing up, there are four major concerns regarding disclosing information about your invention:

If you have not applied for a patent, the disclosure may prevent you from obtaining a patent. (See Chapter 2.)

A disclosure may affect your claim of trade secret rights.

A disclosure may affect your ability to compete, because the information could become available to makers of similar or related inventions.

A disclosure may affect your ability to contract, because a company may not want to enter into an agreement if the information is available to competitors.

If you have made disclosures regarding
your invention to anyone, you should determine how trade secret law might affect your situation. If you disclosed information about your invention in printed materials, such as journals, financial agreements (such as loan documents), or advertisements, you will also need to determine if the timing or disclosure will impact your ability to obtain patent protection. (See Chapter 2.) If you entered into a disclosure or confidentiality agreement, you should compare its provisions with those in the sample agreements in Chapter 7.

 

CAUTION

Beware that your patent rights will be lost if you file your application after public disclosure of the invention. This may include publications in journals or even on the Internet. (There is an exception: any disclosure that came from the inventor, and was not made over a year before the filing date, is not considered prior art to the inventor—that is, it won’t be used to prevent the patent—but it is prior art to anyone else. Even so, patent practitioners discourage prefiling public disclosures by inventors because it terminates foreign patent possibilities and because of the possibility it will somehow be used against the inventor when seeking a U.S. patent.)

Keeping Your Records

There is a Chinese proverb that says the palest ink is better than the best memory. This is certainly true in law and science, where a written document is the best way to authenticate facts. Although agreements
and scientific claims can be based upon oral conversations or implied by the actions of the parties, as a general rule: GET IT IN WRITING! The best legal and scientific protection is documentation. This rule is repeated throughout this book and should be immediately applied in the following ways.

Keep an Inventor’s Notebook

Every inventor should keep a notebook documenting the creative process. This notebook is necessary to record the steps involved in creating the work and to deflect claims by others that they are the true inventors.

Use Nondisclosure Agreements

If someone wants to learn technical details about your invention, review Chapter 7 to determine if a written nondisclosure agreement or similar document is necessary. It probably is. Information about your invention should be disclosed only on a need-to-know basis and under a guarantee of secrecy. This includes disclosures to coworkers, contractors, suppliers, and persons who evaluate your work.

Maintain a Business Notebook and Files

Poor record keeping is a roadblock to success. You must maintain a central depository, such as a notebook or binder, of files for all paperwork. Besides maintaining your signed agreements and other records, you should document business discussions, including phone calls and business-related conversations. Your file should have a section for contacts, a log of meetings and phone calls, a method of tracking money, and a listing of business documents. This is also a good place to store registration certificates or any proofs of ownership.

Insist on Written Agreements

If you are in a discussion regarding licensing, even if you are positive about the deal, you should preface your comments with a disclaimer such as, “This sounds fine, but I can’t commit until I see a written agreement.” Make it a part of your business vocabulary, and avoid taking actions that are contrary. For example, don’t claim you need a written agreement and then subsequently permit someone to invest money or begin production of your invention without something in writing. Similarly, don’t contract for design of a prototype or model without a signed contractor’s or outsourcing agreement. Even a one-page signed summary of the contract terms is better than nothing at all. See Chapter 10 for information about letters of intent and contract summary sheets.

No False Hopes!
Reviewing Your Invention’s Commercial Potential

For many inventors, the process of pitching an invention is heartbreaking and fruitless. After thousands of hours of work on an invention and hundreds more attempting to license it, an inventor may sadly conclude that there is no market for this product.

One way to avoid this problem is to make an effort to determine how marketable your product is before attempting licensing or even beginning the patent process. Two or three out of every 100 new inventions succeed in the marketplace. What good is investing thousands of dollars and weeks of work into the patent or licensing process without some expectation of a return? Although there is no foolproof method of determining commercial potential, there are a few ways to figure your odds of success and to act accordingly.

The SBA’s Four Tests for Commercial Potential

The U.S. Small Business Administration (SBA) poses four tests for an invention to pass to show that it will have commercial potential. These are:

Is it original, or has someone else already come up with it? You may be surprised to learn that someone else has already thought up something similar to your invention and that the invention has already been rejected in the marketplace. You can get a rough notion of whether your invention has already been tried by checking trade directories or Internet services or by performing an abstract search of the U.S. Patent and Trademark Office at its website—all of which are free and are explained in Chapter 18.

Is there a likely distributor? As you will learn (or may have already learned), very large companies are generally not interested in unsolicited ideas from outsiders. It is difficult to penetrate these companies and convince them to take a chance on manufacturing and distributing your product. Smaller or midsized companies may be more receptive, but they will still view your invention from a bottom-line mentality. Their approach will be, “What’s the cost to make it, and what is the likely return?” If the profit margin is small, it will be difficult to convince anyone to take a chance. As an alternative, you may consider forming your own company and manufacturing your invention yourself. This tactic—known as creating a venture—is risky. (See “Should You Manufacture and Market Your Invention Instead of Licensing It?” above.)

Is it a moneymaker? This is the question that is most difficult to answer. Below, we suggest some methods of testing the marketability of your invention.

Does your invention qualify for legal protection? Unless you have some legally protectable invention, you won’t be able to stop others from copying it. Without legal protection you can rely only on the forces of strong marketing to gain a position in the marketplace.

The Innovation Center Factors for Commercial Potential

Many years ago, the University of Oregon’s Innovation Center developed a list of 33 areas and factors that should be considered when determining the commercial potential of an invention. These factors are:

Legality. Will there be legal problems commercializing your invention?

Safety. Are there safety issues (for example, a potential for consumer injuries) that may scare away licensing companies?

Environmental impact. Will your invention have a positive or negative effect on the environment, and how will this affect the commercial potential?

Societal impact. Will your invention have a positive or negative effect on society, and how will this affect the commercial potential?

Potential market. Who will buy your invention?

Product life cycle. Does your invention’s usefulness diminish over time?

Usage learning. How long does it take to learn how to use your invention?

Product visibility. Will your product have a distinctiveness so as to stand out in the marketplace?

Service. Will your product provide a valuable service?

Durability. How sturdy is your invention? Will it require frequent maintenance?

New competition. What is the likelihood of new competitors appearing once your invention is commercialized?

Functional feasibility. How workable are the functional aspects of your invention?

Production feasibility. How practicable is it to produce your invention for sale?

Stability of demand. Will the demand for your invention die off?

Consumer/user compatibility. Will consumers find that your invention is compatible with their needs or lifestyles?

Marketing research. What does marketing research indicate?

Distribution. How can your invention reach consumers? What types of distribution are available?

Perceived function. What do you perceive as the invention’s primary function? Will consumers perceive this as its function as well?

Existing competition. What competition exists now?

Potential sales. Have you any way of estimating the potential sales?

Development status. In what stage of development is your invention?

Investment costs. What type of start-up expenses do you anticipate in order to manufacture the device?

Trend of demand. What do consumer trends indicate for the demand for your invention?

Product line potential. Is there a potential to expand your invention into a line of products?

Need. Is there a need for your invention?

Promotion. What type of promotion is needed to sell your invention?

Appearance. Does your invention’s appearance add to its commercial appeal?

Price. Is your invention affordable to the relevant market?

Protection. What forms of legal protection are available for your invention?

Payback period. How long will it take to receive a payback on your invention?

Profitability. What is the margin between the cost and the sale price?

Product interdependence. Is your invention dependent on or related to another device or product?

Research and development. Is further research and development necessary before you sell the invention?

It may be difficult for you to assess each factor, particularly at the beginning of the invention process. In addition, the importance of each factor may vary. However, it becomes obvious when you view all of the factors cumulatively that the brilliance of your invention may pale under the light of commercial scrutiny. For example, an invention that has fluctuating demand, an unfeasible production system, and a slow payback period will be very difficult to license.

The Pressman Factors for Commercial Potential

In his book Patent It Yourself (coauthored with Thomas J. Tuytschaevers; Nolo), David Pressman provides excellent explanations for 55 positive and negative factors which can help you determine whether your invention has commercial potential—in other words, whether someone will be interested in licensing or buying your invention.

One factor is an easy starting point: cost. How much will it cost to make your invention? How much will the parts cost? How much will the assembly of the parts cost? How much will the packaging cost?

Other factors that may be equally important include:

Competition. Are opposing products firmly entrenched? Is the field crowded with competition? Is the market too small to merit the promotional effort?

Ease of use. How easy is it to obtain results from your device?

Demand. Is there a need for your device?

As to the final factor—demand—you may wish to pursue your own research with family and friends, as described below.

 

The Bag of Parts Analysis

One successful toy representative explained that when presented with a prospective toy idea, the first thing he does is isolate the parts and imagine the parts were in a bag. How much would this bag of parts cost? He then multiplies the cost of the parts by five to get an idea of the retail price (referred to as the “price point”). Finally, he compares the potential retail price with the competition. If the price point is above the range of competing toy items, the rep will not handle the toy. No matter how brilliant the toy idea, the rep believes that it will be too difficult to convince companies and stores to handle an item that is not priced competitively. The same is true for most industries. The buying public is price conscious and will forgo a brilliant invention if its price is prohibitive.

 

Testing the Waters Yourself

One of the simplest methods of determining marketability is to conduct your own personal market research. In his book Pressman also provides a methodology for performing focus group research. This is a system in which you present your invention to groups of people and get their responses. Conducting such a market survey may reveal whether potential consumers will have any interest in the device.

This type of research requires organization. You will need to prepare your presentation. If you don’t have a prototype, you’ll need to find some way of showing or describing your creation so that the viewers can evaluate it. You will also need to pinpoint the right questions to ask (for example, “Would you buy it? What is the most you would pay?”) and to be able to compile the responses. Even if the research convinces you not to proceed, this method is excellent practice for making presentations to licensees or potential business partners.

Since you might be disclosing certain information that should be maintained as a trade secret, you may need to take precautions. Rather than have each guest sign a nondisclosure agreement (an unfriendly method of getting opinions), David Pressman suggests a logbook or a page in the inventor’s notebook that evaluators can sign which states something such as:

The following understand, have witnessed, and agree not to disclose any confidential information regarding the invention known as [insert the name of your invention—for example, “the Purple Plunger”] on the dates indicated below.

 

Although this is not as protective as a disclosure agreement, it puts the evaluator on notice that the invention is confidential.

 

CAUTION

Testing your idea on friends or family. Using friends or family for opinions can create uncomfortable situations. You may be offended by their comments. They may be hesitant to tell you the truth. Here are four tips to help deal with this issue:

Create an atmosphere where your viewers are comfortable expressing their opinions.

Avoid taking criticism personally. It’s hard, but it will help you in business.

Do not interrupt or argue when others are making criticisms.

Don’t disclose your invention to someone if you don’t trust them.

Getting an Expert Opinion

The opinions of a test group may be helpful, but they may not be

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