I was recently asked to present on the critical components in drafting patent licence agreements. Part of that presentation included a discussion regarding whether unregistered patents could be licensed and if so, what were some of the key issues to consider.
Clearly, there is no such thing as a “standard licence agreement” that contains generally accepted content. Patent licences are particularly variable given instability in technology, changes to business models and changes in the law. Under the Patents Act 1990 (Cth) (Act), a patentee has the right to deal with the patent as the absolute owner. This includes the right to grant licences.
An applicant for a patent which has not yet been granted has no present rights under the Act for which to grant a licence. An applicant for a patent can merely agree to licence a future patent to be granted. Obviously, there needs to be some intellectual rigour in drafting the agreement as licensees will be justifiably reluctant to invest in an unregistered patent, as that technology is not yet protected.
However, this is where it gets dangerous for lawyers, patent attorneys and their clients. Here are a few matters to keep in mind:
- A provisional patent application pending may not be sufficient for licensing. As a provisional patent is not disclosed to the public, a licensee would have few options in verifying what the patent actually is. Therefore, it is preferable that the inventor begins to approach prospective licensees about licensing that technology once the patent application enters examination phase.
- If a licence agreement is to be drafted at this point where no patent has been granted, alternative royalty payment provisions can be negotiated.
- If not drafted correctly, a licensee may be paying royalties for an invention disclosed in a patent application, even if it does not grant; meanwhile competitors are entering the market legally with the same product, without the additional cost of royalty fees. The licensee may also seek to limit financial obligations by having no royalty rate until the patent issues.
- The licensor could seek to negotiate royalties at an agreed rate during the patent application period. However, should the patent not be granted, a reduced royalty rate would then apply.
- The reason that a licensee may agree to a reduced royalty rate after the patent has been rejected, as opposed to terminating the agreement, is that the licensor is being compensated for the licensee having early access to the invention, which gives the licensee the opportunity to be market leaders to the detriment of their competitors.
- Where a patent licence has been granted for a future patent, enforceability of such an agreement will depend upon normal contractual principles and the ordinary rules of construction governing the implication of terms in contracts would apply. If the agreement is certain enough to be specifically enforceable, it will be treated in equity as a licence. If the parties have contracted under a mutual understanding of what that agreement entails, and the subject matter is lawful, then the agreement can still be enforced even if the patent does not issue. This occurred in the US decision in Aronson v Quickpoint Pencil Co 440 US 257 (1979).
- What is critical is that the patent licence agreement should include a provision that contemplates the complete and final rejection of the patent application by the patent office.
- Given the issues with licensing a pending patent, an alternative is for the licensor to licence inventions as “trade secrets” or “know how” while the licenced invention is still patent pending. So, if the patent is never granted on the invention, the licensee will still need to pay royalties (usually discounted) for the trade secrets they have received from the arrangement. Again, these clauses will need to be carefully drafted to avoid affecting the registrability of the patent.
Therefore, whilst it is not risk free, it is possible to licence a patent that is still pending. However, the parties need to think carefully about how the commercial arrangements might work and this would be reflected in royalty payments, termination provisions and in careful wording in the agreement.