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A patent license agreement has become a valuable and trusted technique for companies to share knowledge in a protected way. No company wants to invest time and money in an invention, only to give it away without the prospect of compensation. Thus, the patent license agreement was created. It is an agreement in which a licensor grants to a licensee for consideration the revocable right to perform an act that would otherwise be illegal without the licensor's permission. Here, in contrast to other types of license, the act is to use the licensor's invention, which is patented for the protection of the licensor. The grant of permission, which may be exclusive or non-exclusive, is embodied in a document called the license.

There are a number of reasons why companies use patent license agreements. Perhaps the licensor stumbled upon the invention and has no desire to develop it, lucrative though it may be. Or perhaps the licensor has the desire to develop the invention but not the capabilities to do so. Only with another company's money or knowledge can the invention be advanced. On the other side of the coin, maybe the licensee needs the invention as a vital cog in a bigger business operation. Finally, the licensee could well have the ability and the desire to further the invention that the licensor lacks.

Ideally, both parties benefit from the agreement. The licensee receives the benefit of using the licensor's invention, and the licensor gets a royalty fee for this use. Generally, a licensor can expect to get a fee of five percent of the licensee's net sales. But this five percent is only a starting point and is certainly not consistent from industry to industry.

A license is necessarily limited, both in scope and in duration. The licensor grants certain rights in the invention while retaining others, namely ownership. However, the licensor may transfer all of its rights in the invention completely and without limitation. This type of transfer, to be distinguished from a license, is called an assignment. When the patent license expires or is revoked, the right to use the material reverts back to the licensor.

Patent License agreements have several key elements. The most important is the license grant, which talks to scope of the license: what is being licensed? To whom? For how long? In what capacity? May the licensee turn around and sublicense the invention to a third party? A second clause addresses payment terms, including how much the royalty fee will be and which party will maintain the patent. The licensee will usually be required to keep records of its use of the invention; the licensor will be allowed to view these records for a time. Unique to patent license agreements are the improvements and infringement provisions. What happens if the licensee, in using the invention, actually improves it? From time to time, a third party may infringe upon the licensor's patent, and this scenario may involve the licensee to some degree. Will the licensee be obliged to defend the licensor's patent? Bear in mind that if the licensor and licensee are competitors, it may be in the interests of the latter to let the former's patent fail. Finally, these agreements address patent markings-if products can be marked and if they should be-and whether the licensee is entitled to receive not only rights to the invention but also certain of the licensor's know-how and technical assistance.