The patent licensing business model is not a new phenomenon in the commercialization of patented innovation in the marketplace. Many people do not know that Thomas Edison was an exemplar of the patent licensing business model, and he certainly meets the definition of an “NPE” employed in the patent policy debates today. Edison sold and licensed his patents, especially in his early invention-intensive career. As discussed in one recent article, he conveyed at least 20 of his early patented inventions to third parties in order to fund his full-time research and development efforts. But Edison is admittedly a mixed example because he also directly engaged in the manufacture and sale of some of his patented innovations, such as the electric light bulb and the phonograph.
The twentieth century witnessed significant innovation activity in the development of advanced forms of corporate structure, as well as equally innovative development of complex legal and financial mechanisms, that allow for commercialization of patented innovation in ways that would have been impossible (or at least inefficient) in the nineteenth century. Just three decades ago, patent licensing was still a relatively niche strategy, primarily used by large corporations to extend the life cycle of their inventions. Today, it has become a common driver of business growth and innovation across industries. The real challenge is that today the legally oriented patent system imposes significant transactions costs on licensing inventions: Most patent owners and users cannot bear the costs or risks associated with enforcing and licensing their patents. As a result, a substantial portion of the two million-plus patents granted, and thus the knowledge and technology they embody, is not commercialized or used to benefit others. The potential cost of this unused IP to the American economy has been estimated to be as large as $1 trillion annually over the last decade, representing a five percent reduction in potential GDP.
Strategic Advantages of Patent Licensing for Innovation and Market Expansion
Understanding patent licensing involves recognizing it as a mutually beneficial arrangement. For the patent holder, it provides a new revenue stream without the need to manufacture or market the product themselves. For the licensee, it offers access to cutting-edge technology or processes that can improve their product offerings or operational efficiencies.
The strategic benefits of patent licensing are manifold. It can create substantial revenue streams by allowing other companies to use patented technology, thus earning royalties without the capital expenditure associated with production and marketing. Licensing can help a business enter new markets or expand its presence in existing ones. For example, a company with a patented technology can license it to firms in different geographical regions, thereby gaining global reach.
By licensing patents, companies can leverage external innovations to complement their internal R&D efforts. This symbiotic relationship can accelerate product development cycles and bring new products to market faster. Licensing can help mitigate the risks associated with new product development. By sharing the burden with licensees, patent holders can reduce their financial and operational risks.
Licensing proprietary technology can create barriers to entry for competitors. This exclusivity can solidify a company’s market position and provide a sustainable competitive advantage.
Four key elements that licensing parties can embrace to improve their success in today’s market
These are some features of a licensing model that licensors and licensees can embrace to increase their chances of success in today’s market. These elements appear simple to understand in concept, but they are often difficult to execute in practice.
1. Seek Out High-Value Products
As a licensee, it is critical to identify and pursue patent portfolios that hold significant value and relevance to your business. The most advantageous portfolios are those with substantial numbers of open patent families that apply to high-value industries such as wireless communication, IoT, imaging, smart-teach, AI, healthcare, and finance. The broader the portfolio’s diversification across multiple technologies and industries, the better your chances of finding patents that can be repeatedly leveraged for various applications and use cases. You can check if the portfolios you consider have been validated by previous patent license agreements with major companies and are continually strengthened by new patent prosecutions.
2. Negotiate Reasonable and Attractive Licensing Terms
Recognize the importance of negotiating terms that are fair and sustainable. As a licensee, avoid overpaying for patent rights by understanding the market realities and what is a reasonable royalty rate. Look for licensors who value long-term relationships and are willing to build sustainable business partnerships rather than extracting maximum value from a single deal. This approach ensures that both parties benefit and creates opportunities for ongoing, repeatable patent licensing agreements.
3. Look for Added Value Beyond Basic Licensing
Licensing agreements can be more attractive when they include additional value beyond mere freedom to operate and relief from liability. Seek licensors from the best patent licensing companies (marketplaces, NPEs) who adopt a partnership approach and are willing to offer extra benefits. This might include high-value patent transactional or advisory services, patent purchases, or other forms of value transfer. For example, Intellectual Frontiers’ IP marketplace can provide real-time assessments of patent portfolios, helping you understand their legal quality and innovation value relative to other patents in the same technology space as well as help you map the technology for your specific use cases. This added intelligence can be instrumental in identifying the most lucrative licensing opportunities and making informed decisions. Also prefer those companies who are ready and capable of providing technology deployment guidance as well post licensing.
4. Ensure Rigorous Due Diligence in the Licensing Process
A thorough due diligence is essential in the current market environment. As a licensee, you must ensure that the licensor has conducted comprehensive research and presents a robust business case for the license. Don’t accept claim charts and assertions without critical evaluation and mapping of the use cases. Instead, look for licensors who utilize high-level analytics and subject matter expertise to provide data-driven insights and demonstrate the value of their patents for your business.
The strategy of thorough, data-backed due diligence is a departure from the aggressive, litigation-focused approaches of the past, where licensors often pursued litigation to pressure licensees into settlements. Today, focus on licensors who ask, “What value can we offer you?” rather than “What will it cost you to defend against us?” This customer-focused strategy ensures that the licensing agreement is built on a solid foundation of mutual benefit and trust as opposed to threat.
During the early 2000s, patent licensing often involved acquiring patents of questionable quality and aggressively pursuing litigation. There was no medium to buy patents online or at least evaluate ad conduct prelim scanning. This model aimed to make litigation uncomfortable for the licensee, resulting in settlements that were less costly than litigation itself. In contrast, today’s environment demands a more prudent, customer-focused approach that is value-based and not threat-based. As a licensee, prioritize partnerships with licensors who are committed to demonstrating the tangible value they provide, ensuring that your licensing agreements are beneficial and strategically sound.
Patent licensing is more than just a legal mechanism; it is a strategic tool that can drive business growth and innovation. By understanding its benefits and following a structured approach, companies can leverage the full potential of their patents. In an era where innovation is a key differentiator, patent licensing offers a blueprint for sustainable success and competitive advantage.
Strategically leveraging patents not only safeguards innovations but also creates new avenues for growth, collaboration, and market expansion. The blueprint for business growth and innovation through patent licensing is clear: identify, strategize, negotiate, and manage. If companies embrace this approach, they’ll be well on their way to transforming their intellectual property into a powerful engine of business success.