Profiting From Your Patent FAQ

Once you have a patent, it's up to you to make it profitable by licensing it or selling it.

How can an inventor make money with a patent?

Some inventors start new companies to develop and market their patented inventions. This is not typical, however, because the majority of inventors would rather invent than run a business. More often, an inventor patents the invention but makes arrangements with an existing company to develop and market the invention. This arrangement usually takes the form of a "license," a contract under which the developer is authorized to commercially exploit the invention (for a period of time) in exchange for paying the patent owner royalties. The royalties may be a percentage of the net revenues or may be a payment for each invention sold. Alternatively, the inventor may sell all of the rights to the invention for a lump sum or royalties (known as an assignment).

What does it mean to "license" an invention?

A license is written authorization to exploit an invention. An inventor usually authorizes a manufacturer (the licensee) to make and sell the invention in exchange for paying the inventor royalties.

A license may be exclusive (if only one manufacturer is licensed to develop the invention) or non-exclusive (if a number of manufacturers are licensed to develop it). The license may be for the duration of the patent or for a shorter period of time. The territory is usually limited to the geographic extent of the patent protection. For example, the owner of U.S. patent will license the rights for the U.S. but will not be able to exploit beyond that patent territory.

The licensee may in turn license other companies to market or distribute the invention. The extent to which the inventor will benefit from these sub-licenses depends on the terms of the main agreement between the inventor and the licensee.

In some cases, an inventor or a company may trade licenses with other companies -- called cross-licensing -- so that companies involved in the trade will benefit from each other's technology. For example, assume that two computer companies each own several patents on newly developed remote-control techniques. Because each company would be strengthened by being able to use the other company's inventions as well as its own, the companies will most likely agree to swap license to use their respective inventions.

Can inventors who are employed by a company benefit from their own inventions?

Typically, employee-inventors who invent something in the course of their employment are bound by employment agreements that automatically assign all rights in the invention to the employer. While smart research and development companies give their employee-inventors bonuses for valuable inventions, this is a matter of contract rather than law.

It is possible that even without a written employment agreement, an employer may own rights to an employee-created invention under the "employed-to-invent" doctrine. How does this rule apply? If an inventor is employed -- even without a written employment agreement -- to accomplish a defined task, or is hired or directed to create an invention, the employer will own all rights to the subsequent invention. This doctrine is derived from a Supreme Court ruling that stated, "One employed to make an invention, who succeeds, during his term of service, in accomplishing that task, is bound to assign to his employer any patent obtained."

Generally, most companies prefer to use a written employment agreement because it is more reliable and easier to enforce than an implied agreement. However, the issue of "employed to invent" still arises when there is no written agreement. For example, in one case, an engineer had no written employment agreement with his employer and was assigned as the chief engineer on a project to devise a process of welding a "leading edge" for turbine engines. A court held that the company owned the patent rights because the engineer was hired for the express purpose of creating the process.

The previous two situations (written employment agreements and the "employed-to-invent" rule) allow the employer to become the owner of all patent rights. There is another situation in which the employer may not acquire ownership of the patent or trade secret, but may acquire a limited right, known as a "shop right," to use these innovations. Under a shop right, the employee-inventor retains ownership of the patent, but the employer has a right to use the invention without paying the employee-inventor. A shop right can occur only if the employee-inventor uses the employer's resources (materials, supplies, time) to create an invention. Other circumstances may be relevant, but use of employer resources is the most important criterion.

For example, Robert is a machinist in a machine shop and, using his employer's resources, invents a new process for handling a particular type of metal. If Robert hasn't signed an employment agreement giving his employer all rights to the invention and if Robert was not employed to invent, Robert can patent and exploit the invention for himself. His employer, however, would retain the right to use the new process without having to pay Robert.